PetroTal Corp. (TAL) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for joining the PetroTal Q1 2025 Results Webcast. Your speakers today will be Manolo Zuniga, President and CEO; and Camilo McAllister, CFO. [Operator Instructions] I will now hand the presentation over to the presenters. Please take it away, Manolo and Camilo.

Thank you, Jimmy, and good morning, everyone, and thank you for joining PetroTal's Q1 2025 webcast. My name is Manolo Zuniga, and I am the President and CEO of PetroTal. And I'm joined today by Camilo McAllister, our Executive Vice President and Chief Financial Officer. Today, we'll be working through the financial and operational results that we published overnight. Hopefully, you have also seen that we announced a term loan agreement with 2 Peruvian banks that we're very excited about. I will let Camilo tell you more about that in a bit. If you have accessed this webcast via the link included in today's press release, you should be seeing in our slide presentation on your screen. Before we get started, I'd like to point out that there are disclaimers located at the end of the main presentation and also on our website. We encourage you to review those after the prepared remarks. Turning to Slide 2. You will see our usual snapshot of key financial and operational highlights. On the left side of the slide, we have summarized some key production data for both 2024 and 2025. As we noted in our press release this morning, our production has averaged just over 23,000 barrels per day so far this year. This includes roughly 600 barrels per day from the Los Angeles field in Block 131, which we acquired in late November 2024. Our production guidance for 2025 which we originally released back in mid-January, remains unchanged. We are on track to deliver annual average production of 21,000 to 23,000 barrels of oil per day. The right-hand side of this slide reiterates our EBITDA and CapEx guidance, which we originally released in mid-January. I just want to note here that PetroTal is obviously paying close attention to the recent decline in oil prices. Our original guidance in mid-January was based on the assumption that Brent oil prices would average $75 per barrel this year. As of today, we're looking at oil prices in the low $60s per barrel range for the balance of the year. If this oil price plays out, our EBITDA will obviously be expected to come below $245 million. The main swing factor in our capital program this year is the Block 131 workover and drilling campaign. We currently expect to workover 3 wells at the Los Angeles field, to open bypass pay in the produce information and then drill a couple of wells starting in late August 2025 once our new drilling rig arrives. We will wait until we get closer to the cut date before we make any formal updates to our budget guidance for the remainder of the year. This is possible because Perupetro has agreed to lower royalties in Block 131 to incentivize such investments. We will provide details once we get Perupetro's official notification. We need to keep in mind that any such royalty change will require a supreme decree that usually takes about 6 months to approve. I would like to remind everyone that with our new drilling rig, we have complete flexibility to manage the pace of our drilling program. Moving to Slide 3. I wanted to share our production performance, which has steadily improved over the past 5 years. As of April 30, PetroTal has produced approximately 2.8 million barrels so far in 2025. That is exactly 25% ahead of our pace last year, putting the company in good shape to hit our full year production target of around 8 million barrels. Our team is constantly working to improve our operational performance. And so far this year, we have essentially been producing near the capacity of our facilities and transportation capacity. We mentioned in the press release this morning that we have experienced planned figures in 4 producing wells at Bretaña. Planned replacements occur in the normal course of business and the downtime has not impacted our ability to hit production guidance. Next month, we will be mobilizing a workover rig to Bretaña to replace the pumps around midyear. The new pumps would be expected to increase oil production capacity by close to 4,000 barrels per day in Q4 2025. On Slide 4, I wanted to highlight a key influence on our business, and that is the water level on the Amazon River. You have been following our story for a while, you know that our production and exports are strongly correlated with river levels. You may recall that last year was unusually dry across the Amazon Basin. But this year has been the exact opposite, and we are now experiencing record high river levels in parts of Peru. This is a bit of a double-edged sword because high river levels allow us to export as much production as possible. However, it also creates logistics problems, including flooding in the village of Bretaña. We have been using the Port of Pucallpa upstream of Bretaña as a staging point for our erosion control project. This is where our contractors are assembling the steel components for the project, which are going to be marked downstream to Bretaña. Unfortunately, the port and our yard in Pucallpa were flooded in late March and early April, which has delayed the project by a few weeks. As shown in the graph, river levels in Pucallpa are trending normal for this time of the year through -- though still in the high end. We are optimistic we can make up the delays as the projects move forward, but our current plan is to begin piling activities in front of Bretaña by early June. I will now pass the call over to Camilo who will run through some of our key financial results.

Thank you, Manolo. I would like to start by discussing some key highlights from our Q1 financials, which you have hopefully had time to review this morning. This table on Slide 7 -- sorry, Slide 5 summarizes key financial and operational data from the first quarter. As Manolo mentioned earlier, our Q1 production volumes were 26% higher than the same period last year and 22% higher than the prior quarter. Even though Brent prices have declined by approximately $7 per barrel compared to the first quarter of 2024, our EBITDA was flat at $72 million. We also recorded a substantial increase in EBITDA compared to the fourth quarter of 2024, and that was mainly due to higher production volumes, but also due to the lower erosion control expense. As you might have noticed, we only expensed $1.8 million for erosion control in the first quarter compared to $10 million in Q4 2024. However, I would expect erosion control expenses to begin picking up over the next few quarters as the project ramps up. Lastly, I wanted to point out that we generated just over $48 million in free funds flow in the first quarter. This is PetroTal's second highest quarterly free cash flow results since inception, exceeded only by a period in 2022 when oil prices were over $100 per barrel. Obviously, this number reflects the benefits of an active 2024 development drilling program, but I think it's still worth reminding investors that this asset has the potential to generate enormous amounts of free cash flow, even at relatively modest oil prices. Wrapping up with Slide #6, I would just like to talk about the term loan that we have announced this morning. As discussed in our press release, we have secured a credit facility with 2 Peruvian banks, which will be used to finance our erosion control project over the coming 12 to 18 months. These banks have made a total commitment to PetroTal of $65 million, which will be available in 2 tranches. The first tranche of $50 million is immediately available to PetroTal and we then have 18 months to draw on the second tranche of $15 million. I would also like to point out that our cost estimate for the erosion control project have not changed. We continue to budget $65 million to $75 million for erosion control between '25 and mid-2026. Now the terms of these loans are very advantageous compared to other available financing. Key features include a 4-year repayment schedule with a gradual principal reduction, is basically an amortizing loan and an annual interest rate of 8.65% and all standard fees of setting up a loan and for early repayment. Crucially, our ability to distribute dividends to shareholders remains unrestricted provided we adhere to all loan covenants. Now PetroTal was already very well capitalized before we entered into this loan, but we believe the unique nature of the erosion control project and the terms we were able to source, make this an appropriate time to introduce some financial leverage into our capital structure. Essentially, this loan will support liquidity in the event of further decline in oil prices. This will allow PetroTal to execute both the erosion control project and the company's ongoing development program without unduly burdening existing cash reserves. We have provided the key details of the term loan in our press release this morning, but we may issue a joint press release with the banks within the next few days. providing some additional background information on the loan. This loan agreement is somewhat unique in Peru as it is the first loan that the country's main development bank has offered to the extractive resource sector. We will leave PetroTal's long-standing commitment to the district of Puinahua and the long-term benefits of the erosion control project for the community of Bretaña were key factors in our ability to source this loan. That wraps up my prepared remarks, and I would now like to turn the call back to Jimmy for any questions.

Thank you, Manolo and Camilo. First question, is there any progress made in regards to the ONP as an article was recently published with Petroperu suggesting that by end of May 2025, they wish to have a new framework in place with PetroTal.

Yes. Indeed, we continue discussing with Petroperu, the opportunity to go back to the ONP. The terms are not there yet for us to do that. We want to make sure that the pipeline will be working. We will not suffer additional cuts and of course, the terms need to be such that allow us to monetize the oil as soon as we get into Pump Station 1. So we still have more work to do. I doubt that it will be by the end of May. But I mentioned before that we wanted to have something before the dry season or by the time the dry season started.

What quarter are most of the OpEx/CapEx costs falling due? Which months do you expect the majority of your OpEx costs to actually be paid?

We have a table in our corporate presentation under Page 33, that shows our quarterly CapEx. But basically, to quickly answer the question, our capital program is roughly $40 million per quarter, looking forward. And our OpEx is quite stable apart from the erosion control project, which will obviously depend on the pace of its execution. So that's probably the best answer.

Why have so many pumps failed all at the same time? Is this indicating an issue with the field and are all the pumps within the same region?

The pumps eventually will fail. We try to -- when we set up this company almost 8 years ago, the plan was to have them last about 3 years. And that's about the time they are lasting. And something important to highlight, we don't know exactly what went wrong with the pumps because sometimes the pumps are okay, it's just the cables, and that's quite easy to do. So it's not a complete -- we don't know for sure if the pump fails. But of course, the team is always trying to optimize and making sure that these pumps will last a long time, something that I have told investors in the past, they need to lower the frequency in the pumps, many times having to shut pumps is something that worries me. Nothing happens in the reservoir. Everything is okay. I always mention that. Sometimes people ask me the reservoir will be damaged because we shut the wells for any reasons. No, nothing happens to the reservoir, but it worries me when we have to turn on and off pumps. Just like you do with the light box. Eventually, they will give up. So as we now have not been suffering social issues and things are normalized, things will be much better in the future. But again, this is normal course of business in the oil industry, electric -- some reservoir pumps will eventually fail.

Assuming that oil prices remain in the $60 to $65 a barrel range, would you consider reducing drilling further, i.e., fewer wells at Los Angeles on top of no wells at Bretaña until year-end 2025 and secondly, given the new debt facility funds, the erosion work, the balance sheet looks very good. That should give more than enough firepower to keep the CapEx program unchanged even at $60 a barrel.

So as we mentioned in the webcast, we are able to have quite a bit of flexibility on our drilling campaign. This year, as we announced our CapEx several months ago, we were only going to possibly drill wells in the Los Angeles field. And we were working with Perupetro to reduce royalties that will make those wells very economic even at the current oil prices. So now I feel confident to say we will go ahead and drill those wells in Los Angeles, only 2 of them, because in Bretaña, as we have explained, we have to build the sellers to be able to drill additional wells. So we have timed things in such a way that we will be using just 1 rig in Los Angeles field, and then we will move the rig to Bretaña to start drilling again in Bretaña next year.

And I would only build on that, that the flexibility of the erosion control financing, it basically allows us to decide the pace of the program, the sequence of the program. And you may have noticed that we are actually beginning with the workovers in Block 131 precisely to allow oil prices to settle a little bit and see what will happen in the third quarter. Obviously, today's tick in the price is encouraging, but it's short term. So we need to think about this in the context of the full year.

What exactly is the long-term plan for the company right now? In 10 years from now, when Bretaña drops production to 5,000 barrels a day, what will the total production of PetroTal be and how? What's the plan to increase production for the far future, say, 20 years from now?

I'm glad that we have investors looking at PetroTal in such a long-term basis. But if you look at our presentation, I think it's Slide 18 that we show the Bretaña production forecast, in 10 years from now, Bretaña is going to be 15,000 barrels per day, not 5,000. This is the reason because field of Bretaña supported by a strong aquifer are the ones that have the slowest declines, they produce basically forever after the initial oil production from the flash production. These are fantastic wells and fields. So now looking into the future, this is the reason we bought the Los Angeles field. It's a small field. We are going to -- once we are able to announce the details on the Perupetro reduction in royalties, which I expect in the next couple of days or so, we will give you a better sense of what we're looking at, which is why also we have added a couple of technical evaluation agreements basically reconstituting what used to be the Block 131 in the past, because based on the results in Los Angeles, then the upside in that area is quite significant. And of course, we have Block 107 with this a large prospect that we hope to be able to drill in the next couple of years. So there's a lot of upside for us, and we continue to look at opportunities inside Peru and that could be quite attractive just like Bretaña.

Is the use of the loan confirmed? Or will it only be used in the event of low oil prices?

No, the use of the loan is confirmed. And as I mentioned in my remarks, tranche 1 equivalent to $50 million will be drawn down possibly this week.

This is a 3-part question. The first part, the discount for Bretaña oil was higher than usual at about $23 a barrel versus $20 to $21 a barrel historically. Why was this? Would we have expected the discount to be lower given the tariffs on Canada and Venezuela?

Okay. So in terms of the first part of the question, the discount for Bretaña oil was a little bit higher than in the historical levels because it's a 3-tier structure. So basically, the higher the volumes, the greater the discount. Now that was the former contract we had with our trader, we are shifting or transitioning to a new contract that has just 1 fixed discount fee, which will, in the future, be closer to what you have seen in the first quarter. In terms of the second question...

In terms of the second question, how is the company able to completely exclude diluent for its operations in Q1 for the first time?

For the last couple of years, we've been exporting via Brazil oil with no diluent. In the Iquitos refinery, unfortunately, the refinery required us to put diluent in our oil so they could use it with their pumps, and as the oil has too much of a high viscosity. Fortunately, we were able to procure margins that have their own pumps, so we don't require the Iquitos refinery pumps and that allow us to completely skip using diluent. The margins are, of course, a little bit more expensive. But at the end, we had a very good net benefit for the company.

And the final part of the question, why is tax payable in current liabilities up $18 million in the first quarter despite the tax losses available on Block 131? When is this tax likely to be paid?

So the tax is $18 million in the first quarter because we cannot still use the tax losses from Block 131. The only way -- time we can use that, it's when that particular company, Ucawa, starts on its own balance sheet, delivering profits. So we will have to wait until we begin our drilling campaign and start to see those profits come in before we can offset it against PetroTal Peru, which is the entity where Bretaña is under. Now when they will be paid, we typically pay all taxes in Peru in the first quarter of every year.

Considering the premise that PetroTal's stock is very undervalued, why not sacrifice part of the dividend in order to increase share buyback significantly? Would that not be a better use of capital?

An ongoing debate always, but we continue to and are committed to paying the dividend first with share buybacks being secondarily. But depending on oil prices and our cash flow, it's something we revisit every quarter.

Has the company made an offer for Block 64 and/or Block 192?

No. We have not -- and we've been reviewing both projects. The government officials will -- have asked us to please submit bid on those, but for Block 192, it's too rush. There's no time for us to submit an offer and Block 64 the offers are due later this week and we will see if we can present an offer.

Manolo, Camilo, to confirm there are no further questions at this time. So I will now hand back to you for closing remarks.

Thank you, Jimmy. And I would like to thank all of our investors and listeners and as you have seen and heard in our responses to your questions, PetroTal's team does a fantastic job always optimizing the issue of the diluent, the financing that we have obtained and the reduction in royalties, that is PetroTal at its best while creating value for all of our shareholders. And before I finish, I would like to wish happy birthday to my beautiful wife, and also to congratulate our Manager of Human Resources in Peru for having her first baby. We are all very happy for her and wish the best for both the mother and the baby. Thank you so much for everybody.