Canacol Energy Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 12, 2023

There are 8 speakers on the call.

Operator

Good morning, and welcome to the Canacol Energy First Quarter 2023 Financial Results Conference Call. All participants will be in listen only mode. Followed by 0. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.

Operator

I would now like to turn the conference over to Carolina Orozco, Vice President of Investor Relations. Please go ahead.

Speaker 1

Good morning, and welcome to Canacol's First Quarter 2023 Financial Results Conference Call. This is Carolina Orozco, Vice President of Investor Relations. I am with Mr. Charles Gamba, President and Chief Executive Officer and Mr. Jason Bednar, Chief Financial Officer.

Speaker 1

Before we begin, it is important to mention that the comments on this call by Canacol Senior Management can include projections of the corporation's future performance. These projections neither constitute any commitment as to future results nor take into account risks or uncertainties that could materialize. As a result, Canacol assumes no responsibility in the event that future results are different from the projections shared on this conference call. Please note that all finance figures on this call are denominated in U. S.

Speaker 1

Dollars. We will begin the presentation with our President and CEO, Mr. Charles Gamba, who will summarize highlights from our Q1 results. Mr. Jason Bednar, our CFO, will then discuss financial highlights.

Speaker 1

Mr. Gamba will close with a discussion of the corporation's outlook for the remainder of 2023. At the end, we will have a Q and A session. I will now turn the call over to Mr. Charles Gamba, President and CEO of Canacol Energy.

Speaker 2

Thank you, Caroline, and welcome, everyone, to Canacol Energy's 1st quarter 2023 conference call. In the Q1 of 2023, we realized natural gas sales of 184,000,000 standard cubic feet per day, which is just above the midpoint of our annual guidance of 160,000,000 to 206,000,000 standard cubic feet per day. Our relatively stable production and operating conditions allowed us With respect to our drilling activity, we were largely focused on production testing of the Saxophone 1 and Divi Divi 1 gas With saxophone 1 testing at a combined rate of 15,000,000 standard cubic feet per day and DBDV testing at a rate of 5,000,000 standard cubic feet per day. Saxophone is currently being tied into the whole facility and a commercialization plan is currently being worked up for the DiDiDiDi discovery. Subsequent to the Q1, we announced the discovery at Loulo-1, which is located on a 100% operated VIM-twenty one exploration and production contract.

Speaker 2

Lula 1 encountered 207 feet of net gas pay within the primary Cienaga de Oro sandstorm at the reservoir. And once we finalize production testing, which commenced last night in various zones, the well will be tied into permanent production directly to the Vogtle gas treatment facility located only 50 meters from the well. Lula 1 is part of our 2,003 exploration program and has opened an area of deeper potential in and around our main producing area that we're planning to pursue aggressively in the short term. I'll now turn the presentation over to Jason Bednar, our CFO, who will discuss our Q1 financials in more detail.

Speaker 3

Thanks, Charles. The Q1 was another very good quarter with strong netbacks from our producing operations. Our gas operating netback was $4.01 per Mcf in the 3 months ended March 31, 2013, which is 12% higher than in the same period in 2022, 8% higher than the prior quarter and approximately 5% above our guidance of $3.81 to $3.84 on average for 2023. These high netbacks can be attributed to spot market pricing that was As such, our total realized gas price of $5.13 per Mcf was relatively strong. We're encouraged by the persistence of robust pricing for interruptible gas sales despite somewhat subdued demand in terms of volumes.

Speaker 3

Recall that the majority of our guidance is based on sales under fixed take or pay contracts with an average fixed price of $5.09 per Mcf. OpEx was $0.25 per Mcf in Q1, down from $0.30 in the 4th quarter as we were undertaking less maintenance. In terms in percent terms, our gas royalties increased slightly to 17% of revenue due to higher production at the VIM-five Block, which is subject to higher royalties. I'll also note that our recent Loulo discovery as well as its Return on capital employed was 17% for the quarter on an annualized basis and 12% on a trailing 12 month basis. We reported $74,000,000 of revenue net of royalties in transportation, which represents 12% increase from Q1 of 2022.

Speaker 3

This increase was driven by a 3% increase in sales volumes combined with a 10% increase Realized prices, slightly offset by higher royalties $33,000,000 in adjusted funds from operations, which represents a 3% decrease from the same period in 2022 EBITDAX of $61,000,000 which represents a 23% increase from the same period in 2022 And finally, net income of $17,000,000 being 31% lower than the same period in 2022. The significantly different trend in adjusted funds flow from operations and EBITDAX is mainly attributable to an increase in cash taxes relative The $26,000,000 of current taxes this quarter has several factors impacting that relatively large number. First of all is the increased sales increased taxes on the company's record EBITDAX, which was $11,000,000 higher than in the same quarter of 2022. Secondly, the recent tax reform made royalties non deductible beginning in 2023 and also added and additional surtax on a relatively modest oil operations. And lastly, as you may recall, in Q4 of 2022, we initiated Corporate reorganization in order to better optimize our business alongside of which we also increased our deferred tax asset by $202,000,000 which is still expected to provide benefits over the next 10 years.

Speaker 3

The final steps of that reorg are currently being completed And as such, this quarter's tax provision recognizes some associated trailing costs. As mentioned, EBITDAX of $61,000,000 was the highest we have ever reported, and I think the long term trend of Steadily growing EBITDAX over the last 7 plus years is worth highlighting briefly. We do not we do anticipate this trend continuing And as such, our high case 2023 EBITDAX guidance of $263,000,000 remains unchanged. This concludes my comments. I'll now hand it back to Cheryl.

Speaker 2

Thanks, Jason. Our results for the 1st quarter once again demonstrated high and stable operating margins as well as a very respectable rate of return on capital employed. Our guidance and plan for 20 23, which I discussed on our year end results conference call in March, remain largely unchanged. Forecast realized contractual gas sales for 20 3, which include downtime, are anticipated to range between $160,000,000 $206,000,000 standard cubic feet per day. Our gas sales averaged 185,000,000 standard Cubic feet per day for the Q1 and 180,000,000 standard cubic feet per day during April of this year.

Speaker 2

So we have started the year around midpoint of our guidance. The corporation's firm 20 23 take or pay contracts alone averaged 160,000,000 standard cubic feet per day, net of 20 23 contractual downtime. We're optimistic we will continue to see demand and related sales volumes and pricing remain strong, particularly heading into what is expected to be a very strong El Mino the second half of this year, allowing us to report continued growth in sales volumes, revenues and funds from operations. We therefore expect to remain well Our capital program has flexibility to adjust spending as new information is obtained And opportunities present themselves. An example of this is our decision to immediately drill the Lugo II well following discovery of Lugo I to appraise the extent of this important discovery.

Speaker 2

We're now ready to take questions.

Operator

Our first question is from Orianna Kowal with Balance. Please go ahead.

Speaker 4

Hi. Thanks to all Canacol team for the materials and congratulations for the quarter. This is Elena Coles with Valens and I had 3 questions. If I may go 1 by 1, that would be great. The first one has to do with this lower maintenance activity that you recorded during the quarter and that actually drove lifting costs down.

Speaker 4

So if maybe you could mention how should we think of upcoming scheduled maintenance activities And in terms of lifting cost impact, should we think these are some new sustainable levels? That would be the first one.

Speaker 3

Yes, I can answer that question. Due to various timing issues, etcetera, The maintenance or the OpEx by quarter sometimes gets a little lumpy. I would not consider this $0.25 is the new go forward norm. Our budget is for $0.32 on average for the year and we Still do expect to see $0.32 on average for the year.

Speaker 4

Perfect. Thank you. And maybe just moving on to the follow-up, the second one. In terms of the RCF, we noticed that you used $75,000,000 during the quarter, dollars 40,000,000 additional on the $35,000,000 you had initially used for debt repayment. So just to understand if this $40,000,000 is in connection with the tax payment that you had already anticipated that you had already mentioned during your last earnings call and if you're seeing perhaps revisions in the additional amount that you plan to tap from this RCF in the following quarters.

Speaker 3

Yes, I'm going to tie that in with A written question I already have from Christian Calderon, where he's basically asking the similar schedule of the Tax payments. So these financial statements show that we paid $18,000,000 of tax cash payments Physically out the door during Q1. Of course, that initial tax restructuring Bill, if you will, of $65,000,000 that will be paid the balance of that will be paid this quarter. With respect to the use or how much we may use of the 200,000,000 I will say that today we are drawing $130,000,000 of that. That amount of course It has been upsized from the $75,000,000 to the $130,000,000 amount in order to pay that last $65,000,000 of the restructuring costs.

Speaker 3

But I will also state at this point in time, as of today, we do have $85,000,000 in the bank. We do not intend anticipate to draw any more of that revolver during the remainder of the year. And on the debt to EBITDA ratio, we expect to end the year at approximately 2.4 I think this quarter we ended at 2.31 times. And to refresh everyone's memory, our bond Covenant is at 3.25x and the revolver is at 3.5x. So we're well inside those covenant restrictions.

Speaker 4

Perfect. That's very clear. Thank you. And just one last one with regards Sales that are coming from Tesorito. So just to maybe if you could provide additional colors in terms of availability, if you saw any Improvement during the quarter and how much of the total sales that you're reporting are coming in from Tesarito?

Speaker 4

That would be helpful. Thank you.

Speaker 3

Charles, would you like me to answer that?

Speaker 2

Sure. Go ahead, Jason.

Speaker 3

Sure. So during Q1, Included in our numbers was 21,900,000 cubic feet a day on average for the 90 days of Q1 that were sold to Taserito at a healthy price of $5.66

Speaker 4

Okay. That's very helpful. Thank you very much guys and again congratulations for good results during the quarter.

Speaker 3

Thank you.

Operator

The next question is from Joseph Schachter with SER. Please go ahead.

Speaker 5

Good morning, everyone, and thanks for taking my questions. Jason, back to you. With the increase, as you mentioned, on the RCF to 130, Is that for our modeling going to be the high point for debt and that you expect debt to be lower by the end of 2023?

Speaker 3

That will be the high point for the year. At this stage, according to the budget, which could conceivably have some upside left on them. But according to the budget, we would also end the year at that $130,000,000 Now I said earlier and I'll re note here that our current cash balance is $85,000,000 So it's It's been adding to the current cash position, not just simply being spent or drilled into the ground at this stage.

Speaker 5

Just to follow-up, Net debt at the end of December 2022 was USD573 1,000,000 Do you expect to be below that at the end of this year?

Speaker 3

Let me just look on the screen here. The net debt at the end of the year, we anticipate to Just over $600,000,000

Speaker 5

Okay. Super. And Charles, you mentioned in your $600,000,000 $600,000,000 Okay. Yes, I made that note. Thanks very much.

Speaker 5

Charles, you mentioned in your commentary about El Nino. Is that going to affect the hydro and is that I'm going to open up the ability for more spot sales. Maybe if you can give us your thoughts of how El Nino might affect operations in Colombia, so that we can get an idea of the impact of that.

Speaker 2

Yes, two things. El Nino the forecast from Noah El Nino is now at 93% probability according to the last update this week from Noah, starting in July of this year and extending potentially through mid year 2024. So typically, that would indicate that by Q3 this year, we'll start to see reservoir levels here in Colombia at very low levels. And that, of course, will require the use the addition of spare one moment. And that will essentially necessitate the use of thermoelectric power plants So that will translate into 2 factors related to us.

Speaker 2

First, We will increase overall volumes. We have a productive capacity now, fairly healthy productive capacity To meet anticipated demand. And the second factor will be pricing. So typically, we tend to see much higher pricing on the spot market during El Ninos. If we go back to 2016, during the last El Nino, we saw spot pricing in the $12 to $14 per MMBtu.

Speaker 2

We also anticipate the Tesorito, the 200 megawatt power plant that we're connected to will be dispatching at 100% And the capacity of that plant is 40,000,000 cubic feet per day. So yes, we expect higher volumes and better pricing on interruptible prices and Tesorito pricing.

Speaker 5

Okay. Super. That will be fabulous with that occurs and really help cash flow and maybe knock that debt down a little further. You mentioned in the that you're following up on the exploration success. Does that mean that Polo now gets moved into Polo 1 gets Moved into 2024, maybe if you can give us some guidance on how you see the exploration program and any issues related to And if all that needs to be pushed further into the future.

Speaker 2

Yes, two things. With respect to the success at Loulo, which is a deep Ciena de Oro play in and around our production facilities, We've identified several other prospects to drill in the area. It's about a 5 kilometer square area in and around our producing facilities. So after we drill Loulo II, we're going to be drilling the Pina I and the Saracer I exploration prospects, which are very similar, identical to Loulo, And then possibly a 4th exploration prospect. With respect to Polar, we're currently negotiating a 3,000 horsepower rig.

Speaker 2

We expect that if we successfully negotiate that rig, we will be spudding Pola mid September to mid October of this year. With that date in mind, we could possibly have results by year end, but it's likely we would have results in the first

Speaker 5

Okay. That does it for me. Thank you so much for taking my questions and congratulations on the improved quarter.

Operator

While we wait, I'd like to turn the call back over to Carolina Orozco for some web questions. Please go ahead.

Speaker 1

Thank you. We have one question from Ricardo Sandoval from Bancolombia. Can you explain how did you accomplish a reduction of 27% in operating cost? Can we expect the margins like 1st year 2023 for the whole year?

Speaker 3

Yes, I think I partially answered that. I mean, our operating expenses as a quantum are relatively low. This quarter it was $5,000,000 which equaled the $0.25 So even an additional $1,000,000 of maintenance activities, which would have been in the original budget, We'd bring that $0.25 up to the $0.30 So as I think I already stated earlier, we do expect to catch up on those maintenance Activities, whether they occur in Q2 or Q3, with those quarters having higher than The annual budget of $0.32 But overall as a whole, our look through till the end of the year, we still believe the year will average approximately $0.32 of OpEx.

Speaker 1

Thanks, Jason. We have another question from Cesar Orozco. Which one is your expectation of net sales according to the dry climate is coming in Colombia? Do you keep expecting to make investments outside Colombia according to the new political risk? And how are they going, especially in Bolivia or other locations?

Speaker 2

Okay. I think I covered our expectations with To El Nino and the increase we expect in volumes and interruptible pricing, another question with Joseph. With respect to our activities outside of Colombia, we continue to negotiate several exploration and production contracts in Bolivia. We expect that process to conclude shortly, at which time we'll be making a decision with respect to proceeding in Bolivia. That of course Would be gas as well.

Speaker 3

Yes. Carolina, I'll just note here also the numbers that I gave out With respect to net debt at the end of the year and net leverage ratios at the end of the year, we're based on there is 0 upside put into those numbers with respect to El Nino. Those are simply just based on Our actual quarter to date and the remainder of the year averaging that $206,000,000 number.

Operator

Thank you. Our next question is from Nikos Mounauskas with Ingalls and Snyder. Please go ahead.

Speaker 6

Good morning and congratulations. I have some more exploration related questions. The DB1 well, what was the drilling cost And what are the potential development costs for the options you are considering, the pipeline connection or a CNG plant? And also could you give us an update on the status of the Kymela-one well that you drilled back in January and

Speaker 2

With respect to Divi Divi, That was a very shallow well, 5,600 feet vertical depth. I believe the final drilling completion cost came in at about $3,000,000 Because it's quite shallow, of course. With that particular discovery, we're looking at a plan. In that area, we are unable to shoot seismic, 3 d seismic, it's a fairly wet area. So the first thing we're going to do later this month is commence a very long term production test Of the zone, the Secupu limestone we encountered, to see what the potential reserves might be associated with that.

Speaker 2

A long term production test can give us some idea. Upon the completion of that long term production test, we will formulate a commercialization plan, which has two options, Either tie it into the TGI pipeline, 35 kilometers to the east, if it's sufficiently large, or to install a liquefaction plant At Divi Divi and sell liquefied natural gas to some of the surrounding population centers. 1 of the largest ones would be the city of Cuputa on Any pipeline system so that consumers in Kuputha are using compressed natural gas at fairly high cost. So we should have a commercialization plan worked out for Divi Divi after that long term production test. With respect to Chamila, We plan to initiate production testing here at the end of this month.

Speaker 2

We're testing several of the oil zones we encountered there. And if the test results are good, we will immediately commence temporary production of those wells and truck the oil To local transportation points. And with respect to NETGEA, we do not have an update to provide at this point in time. I see.

Speaker 6

One more follow-up on the DB DB, what would be the minimum reserve size to justify a pipeline connection? Would we be looking at something At least a minimum of 50 Bcf to justify a pipeline connection?

Speaker 2

Given the distance And the cost of the pipeline connection, probably 25 Bcf would be sufficient to construct a 6 inches flow line, 6 inches flow line, which would be capable of transporting about 20,000,000 to 25,000,000 cubic feet per day. So that's the transportation option via pipeline. The LNG option based on the production test that we currently have completed, the LNG option is commercial at this point in time.

Speaker 6

Okay. Thank you very much.

Operator

The next question is from Chen Lin with Lin Asset Management. Please go ahead.

Speaker 7

Hi, Chao. Congratulations for the good quarter. I did probably missed a little bit. I think a lot of people were asking about Alnino. I know we Got that.

Speaker 7

Last time we were in Bogota. So, the question is what right now you're producing about The 185,000,000 cubic feet a day. So what's the like actual maximum capacity you can provide Intermed Almeno and I understand that right now the $160 is the contract price, but the rest will be at the spot price, is that Correct.

Speaker 2

That's correct, Chen. So anything above 160 is essentially offered a spot price. And our current productive At the moment is about 240,000,000 cubic feet per day. Loulo and Loulo 2 should boost that significantly.

Speaker 7

With Lulu already in time of this amino season, this surge of the natural

Speaker 2

Loulo is already connected into the Jobo production facility. We're flowing the well as we speak into the Jobo production facility.

Speaker 7

Okay, great. Thank you, Chen.

Speaker 2

Great. Thank you, Chen.

Operator

At At this point, I'd like to turn the call back over to Carolina Orozco.

Speaker 1

Thank you. We have a question from Agustin Bonasuraco from Pine Bridge. Can you provide some update on the next auction for new thermal capacity? If you can share the strategy and update on time line? Many thanks.

Speaker 2

Yes. The Ookmei has initiated a new bid round Energy, both thermal and renewable. We are currently evaluating A couple of projects with respect to that, those would both be thermal projects Very similar to the Tesarito project, we're currently partnered with Celsia and Prolectricon. With respect to The timing, that bid round bids will be due in mid August currently. So we are working with a number of different parties To look at participating in that bid round with the objective of participating in at least 1 or 2 new power projects.

Speaker 2

And these projects would come online in 2026 or 2027.

Speaker 1

Thank you, Charles. We have one more question from Till Knowles from Schroders. In the light of your strong exploratory activity, if you were to keep the current pace, how many years of

Speaker 2

On our current eleven E and P licenses that we currently have under contract with the regulator, we've identified about 100 and 75 remaining exploration prospects that we could drill under the current contractual So that's probably at least 10 years of portfolio on the exploration side.

Speaker 1

Thank you, Charles. With this, we don't have any questions any more questions. Thank you all for participating in Canacol's first Quarter Conference Call. We hope you all have a great day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Canacol Energy Q1 2023
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