PetroTal Corp. (TAL) Earnings Call Transcript & Summary

Hello, and welcome to the PetroTal Q2 2024 Results Webcast. Your presenters today will be Manolo Zuniga, CEO; and Camilo McAllister, CFO. [Operator Instructions] I will now hand over to our presenters. Please take it away, Manolo and Camilo.

Thank you, Jimmy, and good day, everyone, and thank you for joining PetroTal's Second Quarter 2024 webcast, where we will provide a brief summary of the financial and operational results that we released this morning before market open. If anyone would like further information on the company, please see our website for additional materials. My name is Manolo Zuniga, and I am the President and CEO of Pecora. I am joined today by Camilo McAllister, our Executive VP and Chief Financial Officer. If you have click on the link in last evening's press release, you should hopefully see our slide presentation on your screen. But if you are having issues viewing the presentation, please contact [email protected], and they will be able to assist you. Before I begin, I should mention that there are some disclaimers towards the end of the main presentation on our website, which I would urge you to read our own leisure. As you can see in Slide 2, PetroTal is focused on the exploration and development of onshore oil opportunities in Peru, and we are now Peru's largest crude oil producer. Our company is listed on London's AIM Market, in Toronto Stock Exchange and the U.S. OTC. And this morning, our market cap is approximately USD 470 million. PetroTal's flagship asset is a 100% working interest in the Bretana oil field, which we have expanded from first production in mid-2018 to a take of more than 20,000 barrels of oil per day during the past 2 months. This helped us maintain production near record highs in the second quarter of 2024, when we delivered average sales and production volumes of 18,050 barrels and 18,290 barrels of oil per day, respectively. During the first 7 months of 2024, we produced 25% more oil than during the first 7 months of 2023. Though I should point out that our year-to-date production would have been slightly higher if not for an 8-day river blockade relocate against our transportation company during the last quarter. As a reminder, we booked 100 million barrels of 2P reserves at the Bretana field as of year-end 2023. We had after-tax and PV10 valuation of $1.80 per share. We would now like to go through our Q2 2021 results by providing some updates on our recent drilling and production results, transportation and marketing initiatives, our Block 131 acquisition and guidance adjustments. Please turn to Slide 3, where we have summarized recent results from our ongoing development drilling campaign at Bretana. We successfully completed two new production wells in the recent quarter, the 18H and 19H wells with the latter racing among the 5 base wells we have drilled at the field to date. Well 19H averaged 6,860 barrels of oil per day over its first 30 days on stream, allowing this well to achieve payout in approximately 40 days. One of the major positive attributes of our drilling program at Bretana is how quickly our wells pay back our investment. As shown in Slide 3, all of our wells had on well 18H, which has only been producing for 3 months have already paid back our initial investment. Most of our wells have already returned more than 2.5x of our original investment. And in fact, the average payout for our producing portfolio of wells is now 3.4x. We are pleased to report that with the support of these new wells, our production volume averaged more than 20,000 barrels per day in the month of June and July. We recently completed drilling our fourth water disposal well at Bretana, which should allow us to increase water injection capacity at the field to approximately 170,000 barrels per day by year-end. This is a necessary investment as we look to maintain our oil production plateau above 20,000 barrels per day over the medium term. The Bretana field now has 20 oil wells and 4 water disposal wells. The number of oil wells online vary depending on formation water handling capacity has the importance of properly sizing plant capacity and oil transportation capacity. Our -- is now drilling the 21H. We hope to complete this well and bring in oil production in late September. This well is expected to cost $13.7 million, in line with recent wells at the Bretana field. I'm going to start with Slide 4. At the end, I was mentioning that for us, the offtake optionality remains a key strategic priority of the company as we continue to pursue reliable, cost-effective transportation routes for our product. As shown in Slide 4, PetroTal currently has visibility towards active evacuation capacity of 50,000 barrels per day by 2025 with potential to expand to 70,000 barrels per day. Now turning to Slide 5, where we have provided some additional color around our pending acquisition of CEPSA's Block 131 in Peru's on onshore Ucayali basin. And Ucayali Los Angeles for 40 API gravity oil field is located. This acquisition continues to proceed in line with our expectations. We recently received a key interim accrual from Perupetro and await final approval into Supreme Decree in the fourth quarter of 2024. PetroTal's technical team continues its valuation of the asset with visibility to start optimizing production during 2025. The Los Angeles Field continues to produce approximately 900 barrels per day of light oil from 4 wells. We believe the field's existing infrastructure is sufficient to support growth to up to 5,500 barrels per day, providing PetroTal with a minimum growth opportunity over the near to medium term. As we wrap up my portion of the conference call, we have summarized PetroTal's updated financial guidance on Slide 6. As I mentioned previously, the results of our recent development drilling program has pushed for pre production to more than 20,000 barrels per day in June and July. However, dry season has already begun in the month of August, and we're expecting production to decline in the coming months as is typical for this time of the year. With that in mind, we're maintaining guidance of Q3 average production of approximately 13,000 barrels per day and for average annual production guidance of 16,500 to 17,500 per day. Despite the recent correction in global benchmark oil prices, Brent crude remains on track to average $22 per barrel in 2024, which is higher than our original budget assumption of $77 per barrel. As a result, PetroTal now expects full year 2024 EBITDA to fall within a range of $200 million to $240 million, exceeding our original guidance of just $200 million. I would also like to address the changes to our capital program, specifically the inclusion of three additional production wells in the 2024 budget. As we disclosed in our press release this morning, we have elected to accelerate the drilling of these three horizontal development wells at Bretana from H1 2025 or first half of 2025 into Q4 2024. We estimate this change will save us more than $80 million in standby fees that we would have incurred to hold the drill at Bretana until the previously scheduled 2025 drilling program, we assumed in Q1 2025. The early completion of the development wells should also allow us to capitalize on our recent investments in water handling capacity, which by year end will be 170,000 barrels of water per day and also allow us to maximize production through the next wet season, which usually begins in December. We now plan to release our drilling rig once the 23 well is completed in early Q1 2025, and we do not plan to resume drilling at Bretana again until Q4 2021. Even with the increase to our budget, we continue to forecast adjusted after tax free funds flow of up to $55 million in 2024. Pre-return on capital initiatives, as shown on Slide 6 in front of you, I would like to point out that the increase to our capital budget from its original level of $135 million has substantially been offset by a corresponding increase to our EBITDA guidance. As usual, we're prepared to revisit our free cash flow guidance as the year goes on. And with that, I will now turn the call to our CFO, Camilo McAllister, who will provide a brief update on our Q2 2024.

Thank you, Manolo, and thank you to everyone who has turned into our webcast today. I would like to start off by highlighting some of the key items from the press release and financial statements that were issued earlier this morning with a visual support from Slide 7. So from an operational perspective, our production averaged 18,290 barrels of oil per day in the second quarter, with corresponding oil sales of 18,050 barrels per day, and we are pleased to report that the quarterly average production levels have remained within 4% of record highs, supported by the contribution from our two recent horizontal production wells and partially offset by an 8-day river blockade, as Manolo discussed earlier. PetroTal once again delivered strong financial metrics in the quarter. I would like to highlight the following notable profit and loss items. First, the net revenue of $103.1 million or $62.76 per barrel compared to $100.6 million last quarter as we benefited from an increase of $2.78 per barrel against last quarter. PetroTal has paid royalties of $10 million in the second quarter. This is up from 9.5% in the first quarter. This amounts to about $6.08 per barrel and includes provisions for our social trust initiatives. Royalty expense is calculated, as you know, as a percentage of net revenue and our unit royalty expenses have remained relatively stable for the past several quarters. Our total operating and transportation expenses were $13.1 million in the second quarter, and this compares to approximately $11.5 million in the first quarter. Our lifting costs on a per barrel basis were $6.10 in the second quarter, and this compares to $5.56 on a per barrel basis on the last quarter. Our unit operating costs were slightly higher this quarter due to expense facility maintenance charges, direct transportation costs have also increased slightly to an average of $1.86 per barrel, and this is mainly due to a combination of higher delivering costs and a reversal of a nonrecurring storage credit that we had received in the first quarter. Now consistent with prior years, we expect our unit cost to increase in the second half of the year due to the impact of the dry season on our sales volume. Our sales allocation were broadly consistent with prior quarters with 89% of our sales volumes directed through the Brazilian export route and 11% directed through the Iquitos refinery. Now our net operating income has reached a record high of $80 million in the second quarter of '24. This equates to $48.73 per barrel, and PetroTal continues to benefit from a combination of strong production volumes and favorable Brent oil pricing. Second quarter EBITDA came in at $69.5 million. Essentially, this is flat to the prior quarter. I would like to point out that PetroTal has already generated over $140 million in EBITDA in the first 6 months of 2024, putting the company well in its way to achieve our annual restated guidance of $200 million to $240 million. Now our net income has amounted to $35.4 million in the second quarter, which is a decrease of just over 100 -- sorry, $11 million compared to the prior quarter. However, our year-to-date net income of $83 million is consistent with the same period last year. Q2 '24 marks the 18th consecutive quarter of positive net income for the company. We invested $38.9 million of CapEx in the second quarter. This is nearly $29 million, of which was dedicated to our ongoing drilling campaign. We also invested $9 million in field infrastructure and fluid handling capacity at the Bretana field during the quarter and through the first 6 months of '24, our capital spending is tracking approximately $10 million ahead of last year's level, mainly due to the impact of a more active drilling campaign. Our free funds increased from $36.3 million -- sorry, our refunds flow have increased to $36.3 million. This is down from $41.7 million last quarter. And this is mainly due to the impact of a larger capital program this quarter. PetroTal has generated $78 million in free funds flow over the first 6 months of 2024 compared to $74.3 million over the same period last year. We are pleased to report that PetroTal maintains a strong balance sheet, having exited the quarter with $95.9 million of total cash, an increase of $10.7 million compared to the prior quarter. Importantly, our cash balance now includes $85.1 million in unrestricted cash, which increased substantially from $62.5 million at the end of last quarter. This change was partially driven by the release of $13.4 million to the social trust fund, of which $12.6 million came from restricted cash, but also from our strong free cash flow generation. Accounting for various working capital balances, we are in a $50 million net surplus position compared to just over $55 million at the end of last quarter. We have no long-term debt and 0 amounts drawn on our short-term credit facilities as of the end of the second quarter. Turning now to Slide 8 that summarizes our return of capital policy and amounts paid since inception. PetroTal continues to pay a base dividend of $0.015 per quarter. Since dividend was initiated in the first quarter of 2023, we have already returned a total of $89 million to shareholders, which amounts to basically $0.10 per share. We maintained optionality to issue top-up dividends in the quarters for which our 12-month liquidity forecast exceeds our internal targets. PetroTal also maintains the option to repurchase shares under our ongoing normal course issuer bid. Although the pace of our share repurchases has moderated somewhat in the second quarter of '24, we have still repurchased and canceled nearly 18 million shares since the end of 2022 from our total investment of just over $7 million. Our return of capital program currently prioritizes dividend sustainability, while balancing development capital requirements of our existing asset base. With that in mind, we will continue to monitor buyback levels. I thank you for your continued investor support and now turn back to Celicourt for the Q&A sessions.

Thank you Manolo and Camilo. First question, do you have any updates regarding the ONP. Is there any developments with Petroperu? And is there a possibility to use the ONP within 2024.

Yes. I can give you an update where we are with the ONP, we continue our conversations with Petroperu on how to optimize the transportation operations with the pipeline. And we have indicated to them that somehow they need to optimize the operations, so they may lower the tariffs. The pipeline is working. They recently pump oil from pump station 5 to the Port of Bayovar that will allow us to do another shipment of the auto that is being slowing that pipeline for a long time. Actually, it's Petroperu's oil, but keep in mind that they bought it a few years back. But we are not yet ready to put oil in the pipe given how long it takes to come out at the Port of Bayovar, and that will impact our cash flows. So we continue talking to them. We're expecting other operators to put oil in the pipe and that will also help. But for now, in 2024 and not even 2025, we're assuming the use of the pipeline. But we're still expecting to be able to eventually reach 70,000 barrels of transportation capacity, we will need to use the ONP.

In 5 years, including potential M&A, where do you hope PetroTal's production flow rates will be?

Well, the goal is to continue growing the company in the market versus initially mentioned that you need to have 50,000 barrels per day or plus to have a significant presence in the market. Investors really like, but we have been able to accomplish in the last 6 years. And our intent is to continue doing that. There is a small acquisition that we did of CEPSA of the Los Angeles field. We mentioned how we could increase production. We're looking at that. And we continue, as we develop our routes or routes in Bretana to continue growing production into the future. The fact that we are looking at establishing 50,000 barrels of transportation capacity and eventually 70,000, give you a hint of where we're heading.

When will CapEx spend reduce?

So this is Camilo. As we shared today, the drilling program has been accelerated. We are also ongoing facilities investments to upgrade water handling capacity. We are working on the erosion project. So there's multiple fronts that we're currently attending and therefore, the CapEx increased guidance. As you also heard from Manolo, we expect to finish this drilling campaign in the first quarter of next year. And then we should be focusing on what sort of investments we can do in Lote 131 and how to best distribute our funds for next year. So once the budget is prepared and we have a guidance for next year, we could be sharing these details.

Thank you. Will Peru consider the additional erosion and community protection investments in future royalty rate discussions.

Not in the royalty rate per se, but in Peru, they have a program called Work For Taxes, where you can commit your future income taxes to do these type of projects. And we are discussing this with the regional government of Loreto, where well located to be able to submit some of these initiatives to be paid for -- with our future taxes. And that will be a win-win for everybody. In Peru, they've been doing this now for a number of years, the large mining companies, for example, have taken advantage of that to provide support to the communities based on their own taxes. The concept, of course, is that the private companies can deliver projects better than the government entities.

What near-term potential in terms of improved production rates do you see at Block 131?

The Los Angeles field in Block 131 is actually quite an interesting case. It's light oil supported by an aquifer. So we're very familiar with that concept. It's almost like a college book petroleum engineering case. Our idea is we're looking at the possibility of doing horizontal wells that they could quickly increase production. But we also see potential in the deeper horizons that were penetrated by a couple of the wells driven by CEPSA that we've never tested, and we see a lot of potential there. So it's quite exciting but we're looking at in that relatively small field that I'm hoping to grow as we have done tenure.

Could you give us a rough time line about how PetroTal plans to pursue longer-term transportation goals once the 100,000-barrel pilot program with OCP of Ecuador is completed.

Well, we have now the Manaus, Brazil route as a good example of what we plan to do. Just to remind our investors, our first shipment via Brazil was that in December of 2020. I still believe that, otherwise, the reason we were able to raise the $100 million bonds in early 2021. The ones that we paid in 2 years even though they had a 3-year term. And then by the initial 140,000 pilot, we went up to 200, then 250, then 400. And lately, we've been doing 600,000 barrels per month to Brazil. That gives an idea what we could accomplish. Now just keep in mind that the Napo River comes from Ecuador is a much smaller river than the Amazon River. But interestingly, when it is dry in Peru, in Ecuador is the other side of the equator, and therefore, it's wet. So there are rains in Ecuador right now but it is dry in Peru, even though we are neighboring countries. And we could maybe benefit from that and take advantage of the Napo River. But very excited and we indicated in our presentations, maybe we can go to 150,000 per month, maybe more. And that's not only the only route you were looking at. We plan to, as we show in our presentation, having other possible routes. Again, the idea is to be at 50,000 by next year and then continue growing once the ONP comes back, and we can use it.

Are you looking at possibly building more storage capacity on Bretana for produced oil. So to accommodate low water -- sorry, to accommodate to water levels for barges in the dry season so that the produced oil can be transported to Manaus at a later date? And if so, how much do you expect to build and for which price?

The idea of building a storage capacity in Bretana is not really impactful. When you are producing 20,000, 25,000 as we can to do in the future or even more, you will have to have major times to do that. Keep in mind that we are adjacent to the Pacaya-Samiria National Reserve. So -- and that's why our footprint is small. We're going to eventually need to grow that footprint some, but not to add a time farms we are in a very sensitive area. And it will not have much of an impact because you may be able to store 100,000 or so, and that's in a matter of few days, it will be fully used. What we need to continue doing is expanding the barge fleet, which we have done. And eventually, the ultimate goal, especially if we find more oil in the leads that we have in Block 95 is to connect directly to the ONP, there really solution, and that's what we're looking at. And for that, of course, we want to do the seismic in Block 95, and then you see the potential that we believe we may have 2, 3 other Bretanas in Block 95, and that's why we are looking at expanding capacity to 50,000, 70,000. So everything is connected and we were very steadfast on our approach.

Do you have the option of using the ONP only in the dry season? Or do you have to use it all year round?

Maybe this question is more related to the OCP. The one in Ecuador that has -- in the past, when we were using the ONP, we were using it in most dry and wet season. We have not used the ONP again, the fact that it takes so long for the oil to arrive in the Pacific Coast. We cannot afford that from a cash flow point of view. While the OCP, we can quickly market the oil, and that's why we are doing this pilot on the OCP. And...

Can the company provide more details on the buyback program and why the buybacks have been put on hold. On the current suppressed share price, would this not be a good return for shareholders.

Sure. This is Camilo. So yes, indeed, in the second quarter, we have inserted some additional constraints on the buyback program to ensure we were prioritizing on the upcoming growing capital spend and dividend sustainability. But going forward, as always, we will continue to monitor the plan and make sure if there's any adjustments to be made that they are done. So to take advantage of the prices, our environment and the investments in the future.

Given the strong financial position of PetroTal why isn't the Board aggressively conducting M&A.

Well, we have already done the small Los Angeles field acquisition, and we continue to pursue opportunities looking but again, we are very technical oriented. We need to make sure that whatever we do will enhance the value of the company. It's always difficult when you have Bretana as a reference. We -- as you imagine buying the small closings field, but we see the opportunity of doing something similar to Bretana, not probably the same size. So those are the opportunities we're looking at, and we're hopeful that we may be able to do some more later probably by next year and maybe also expanding outside Peru.

You will pay about $7 million in diluent cost for 2024. How will this change once you close the Block 131 deal?

Well, that was one of the reasons that we actually -- I think the announcement we mentioned -- we had in our presentations, there are some synergies, and that's one of them, and there we could actually blend the oil, and of course, by increasing the production in the Los Angeles field, more blending and that's something we look at very carefully. Because if we don't have to use the other way to go to, for example, the Iquitos refinery, Iquitos refinery could become, again, our best market, which is very close by. So always, as you know, we have always optimized operations from day 1 that everything we do is to optimize as much as possible.

A question on the cost of erosion control project. We know that the project will cost around $70 million in total and 60% of this amount will be recognized under OpEx. I would like to understand if there will be any recurring impact from that spending into next year's under OpEx? Or will you be done completely once you spend the $70 million?

Thank you for that question and for conveying the message back to us in the way we have distributed, so great to hear you're listening. The erosion project was fun mainly through 2025. So in the future years, and that would be post completion of the project, there will be no significant recurring costs.

The nearby communities, for example, and looking at what we are doing in Bretana, and of course, they are asking the regional government to help. And that's where the idea of for taxes, they may come along, we can help some of the other communities. But for us, we don't plan to spend money on the future such.

Seismic on Block 95 expansion should start this Q3. What is the status at the moment?

Well, unfortunately, the project is not going to start in Q3, and we are still waiting for the permit, the EIA permit to do that. So we're going to have to defer the acquisition for next year. But now we're now having good sight on when the permit will be awarded we're getting ready to execute a contract with the survey -- seismic survey company, which then will start buying all of the materials that they will need for the acquisition campaign. And instead we'll then need to do all of this next year. So these delays is our possibility to see how much we may have in blockade. But as I would say, time clients, and we'll be ready to execute that next year.

Thank you, Manolo and Camilo. There are no further questions at this time. I will now hand back to both of you for closing remarks.

Well, as always, I want to thank all of our investors, we're very excited about what we're doing. And of course, I really enjoy having Camilo as our CFO, who's doing an outstanding job. Camilo, would like to say some final words?

No. Thank you. And then just to reiterate that the strong production and cash flow generation. It's a good track record of the company, and we'll continue to perform.

Well, thank you so much.