Canacol Energy Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 11, 2023

There are 6 speakers on the call.

Operator

Please note this event is being recorded. I would like now 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 2nd 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 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. Dollars.

Speaker 1

We will begin the presentation with Mr. Charles Gamba, President and CEO, Who will summarize highlights for our 2nd quarter results? Mr. Jason Bednar, our CFO, will then discuss financial highlights and Mr. Mr.

Speaker 1

Charle 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. Charle Gamba, President and CEO of Canacol Energy.

Speaker 2

Thanks, Caroline, and welcome, everyone, to Canacol's 2nd 2020 3 conference call. In the Q2 of this year, we realized natural gas sales of 185,000,000 standard cubic feet Just above the midpoint of our annual guidance of $160,000,000 to $206,000,000 cubic feet per day. Continue to report strong and stable financials, which With high sales prices, netbacks and operating margins, EDDAX of $61,000,000 and relatively high return on capital employed On an annual basis of 16%. Last week, we announced our July sales average of 197,000,000 standard cubic feet per day, Which is the highest monthly average so far this year. On the drilling front, we announced a successful test of the Chemelo oil discovery in the Mid Mag That we had previously announced in January with an average rate of 353 barrels of oil per day from the base of Lisama.

Speaker 2

With this test data now in hand, we're progressing development plans for this This is in addition to the testing of the Sakscor and David EBITDA Gas discoveries, which was also announced in early May and which was discussed in our last With respect to our drilling activity for 2023, we've been primarily focused on exploration of the Cienaga de Oro prospects Situated close to our Jobo gas processing facility, which can be commercialized very quickly. We announced the discovery of Lula 1 Located on our 100 percent operated VIM-twenty one E and P contract, which encountered 2 0 7 feet of net gas pay within the primary Cinagliot sandstone reservoir and tested 17,000,000 standard cubic feet per day. We followed this up by drilling the Lugo II appraisal well, which encountered 230 feet in net pay and tested 24,000,000 standard cubic feet per Both Loulo wells have been tied into our facilities and are currently on production. Last week, we announced that we had plugged and abandoned the Pina Norte 1 exploration well located on our 100 And the M21 E and P contract after encountering an over pressured zone in a very shallow reservoir. Fortunately, we were able to Move very quickly to drill a twin offset well, which we are now completing and preparing to bring on production next week.

Speaker 2

With a total of 3 drilling rigs, we're planning to continue our drilling activity with the Malthidine and Ceres exploration wells and the Agua's 4 Development well all located on the VIM-twenty one E and P contract. The Malfordin exploration well is situated approximately 1 point 5 kilometers to the northwest of our Hohu production facility and the Cereza exploration well, which spud 2 days ago, is located approximately I anticipate we will be providing results for our drone activity in a regular monthly updates. Here at Canacol, we understand the crucial role of natural gas in addressing climate change and global challenges and remain committed to supporting Colombia's objective of Achieving a 51% reduction in emissions by 2,030. In line with this, we have published our 2022 ESG report And long term decarbonization goals, whereby we aim to achieve 0 methane emissions by 2026 And reduce Scope 1 and 2 emissions by 50% in 2,035 and achieve carbon neutrality by 2,050. For 2022, we reported Scope 1 and 2 GHG emission intensities that are on average 80% lower than our oil producing peers And 50% lower than our gas producing peers in North and South America.

Speaker 2

Our emissions intensity is lower than the average for many broad equity indices, including some with constituents selected for having low carbon emissions. Our progress has driven us to the top 10th percentile Upstream oil and gas companies in the CSA S and P assessment, and we have received an A rating from MSCI Affirming Canaccord's leadership in ESG. I invite all of those interested about our ESG achievements during 2022 to read our report, I'll now turn the presentation over to Jason Bednar, our CFO, who will discuss our Q2 financial results in more detail.

Speaker 3

Thanks, Sheryl. The second quarter was another very good quarter with strong netbacks from our producing operations. Our gas operating netback was $3.94 per Mcf in the 3 months ended June 30, 2023, Which is 8% higher than in the same period of 2022 and slightly above our guidance for $3.81 to $3.84 on average for 2023. As was the case in the Q1, these high netbacks can be attributed to stock strong pricing under our firm contracts At $5 per Mcf on average during Q2, combined with interruptible market pricing that was significantly stronger during quarter than we had assumed it would be for the whole year of 2023 on average. Our realized gas price of $5.13 per Mcf net of transportation was exactly the same as we reported for the Q1, demonstrating a new stable and higher level for our realized prices.

Speaker 3

We remain encouraged by the persistence of robust pricing for interruptible gas sales. Recall that the majority of our guidance Based on sales under fixed price take or pay contracts with an average price of $5.09 per Mcf for 2023. OpEx was $0.35 per Mcf in Q2, up from $0.25 in the Q1 as we had previously indicated that we would likely return to do more maintenance spending in the second quarter. This brought the first half of twenty twenty three OpEx to $0.30 which is slightly less than our internal budgets of $0.32 for 2023 on average. In percentage terms, our gas royalties were roughly in line with prior quarters at 16.5% of revenue.

Speaker 3

Return on capital employed was 16% for the 2nd quarter on an annualized basis and 12% on a trailing 12 month basis. We reported $75,000,000 of revenue, net of royalties in transportation, which represents a 6% increase from Q2 of 2022. This increase was driven by an 8% increase in realized prices, slightly offset by 2% decrease in sales volumes combined with Slightly higher royalties. Dollars 34,000,000 in adjusted funds from operations, which represents 14% decrease from the same period in 2022. This $5,400,000 decrease in adjusted funds flow from operations is solely attributable to a 9% increase in current taxes relative to the same quarter in 2022.

Speaker 3

We also reported EBITDAX of $61,000,000 which represents a 10% increase from the same period of 'twenty two. And finally, we reported net income of $40,000,000 with the change from a net loss in the same quarter of 2022 being due to a deferred tax recovery this year When we had deferred tax charges in Q2 of last year. As you hopefully recall, in Q4 2022, we initiated a corporate reorganization in order to better optimize our business, alongside of which we also increased our deferred tax asset by $202,000,000 The most important steps of that reorg as it relates to our ability to make use of our tax assets were completed by the end of the second quarter. As a result, our expectation is that the relatively high current tax expense in the 1st two quarters of 2023 We'll not continue going forward, so I expect significantly less current tax expense going forward than we have reported for the 1st 2 quarters of 2023. EBITDAX of $61,000,000 in the second quarter was just a few $100,000 short of the new record we set in the Q1.

Speaker 3

So I will again highlight the long term trend of steadily growing EBITDAX over the last 8 years. We do anticipate this trend $263,000,000 remains unchanged. Before I hand the call back to Charles, I'll make some comments on Capital spending to date and the outlook for the remainder of the year as well as debt levels. Our cash capital expenditures of $99,000,000 for the 1st 6 This month represents approximately 60% of our unchanged high case capital budget guidance of $163,000,000 for 2023. The $99,000,000 of first half CapEx does include $17,500,000 of warehouse inventory at June 30 as required under IFRS, including a wellhead and casing materials for Pola and other upcoming wells.

Speaker 3

If we adjusted for these amounts as traditional inventory items, The CapEx levels for the first half of twenty twenty three would be exactly 50% of the annual $163,000,000 budget. As such, I do anticipate that we can continue significant drilling activity despite anticipated lower spending in the second half of twenty twenty three. During the Q2, we drew an additional $70,000,000 on our revolving credit facility such that we've now drawn $145,000,000 in total on this 200,000,000 Facility as at June 30. As a reminder, the main reason for the additional draw during the quarter was to pay a $65,000,000 one off cash tax and Curt is part of the corporate restructuring that we had discussed earlier and in detail on prior calls. Our net debt to EBITDA leverage ratio was 2.7 times on a trailing 12 month basis at June 30, with the increase from prior quarters caused mainly by Structuring tax payments.

Speaker 3

How this ratio evolves going forward will depend on a host of factors, including gas demand as a key driver of revenue and Also EBITDA levels. With our one off cash tax payment now behind us, my expectation continues to be That our leverage ratio will decrease to approximately 2.4x to 2.5x at year end. To refresh everyone's memory, our bond covenant is at 3 point 2.5 times and the revolver is at 3.5 times. As such, we're well inside those covenant restrictions. That concludes my comments.

Speaker 3

I'll now hand it back to Charles.

Speaker 2

Thanks, Jason. Our results for the quarter once again demonstrate high and stable operating margins as well as a very respectable return of capital employed. As Jason just outlined, our guidance and plan for 2023 remains unchanged and we're continuing We're doing this in order to build productive capacity to meet the anticipated high demand of natural gas associated with the upcoming El Nino phenomena. Forecast realized contractual gas sales for 2023, which include downtime, are anticipated to range between 160,000,000 to 206 1,000,000 standard cubic feet per day. Our gas sales averaged 185,000,000 standard cubic feet per day for the first half of this year And we're 197,000,000 standard cubic feet per day during July.

Speaker 2

The corporation's firm 2023 take or pay contracts alone averaged 160,000,000 standard cubic net for 2023. We are optimistic that we will continue to see strong demand in related sales volumes and pricings, Allowing us to report continued growth in sales volumes, revenues and funds from operations. We therefore expect to remain well positioned to continue returning capital to shareholders

Operator

Our first question comes from Ariana Kowalz of Balanci. Please go ahead.

Speaker 4

Hi, good morning. Thanks for taking my question. This is Regina Gold with balance. I have three questions. If we may go 1 by 1, that would be great.

Speaker 4

First, with regards to drilling for Pola-one, just wanted to confirm on how If you could share any insights on how our negotiations going to bring the rig for Pola-one drilling and when do you expect this to begin?

Speaker 2

Hi, Mariana. Thanks. With respect to drilling Polar 1, we are planning to target the drilling wells for the last quarter of this year. Rig availability is very good. Rig availability in Colombia has been increasing as drilling activity has decreased about is very good.

Speaker 2

So we're again targeting to spot that well sometime in Q4 this year.

Speaker 4

Perfect. And just following up with additional traders for the next quarter. Just thinking of the Medellin pipeline, I just wanted to confirm on what are the next steps or the steps that are missing To continue on with to start construction works and what are the strategies that might be On the table for Canacol to avoid being exposed to spot markets, if there are any delays with the pipe?

Speaker 2

The next step in the process for Medellin would be the receipt of the environmental permit, the EIA, which will allow for construction. So we're waiting for the Administrative environment to issue the EIA.

Speaker 4

And sorry, just one follow-up there. What is expected timeline for this?

Speaker 2

This year.

Speaker 4

Okay. And just one last one. You had mentioned in the last earnings call the UPME bidding process That had started in the potential of having something similar to Alticeorito. So just wanted to confirm now and how is this process ongoing And if there are any updates that you could share in this regard?

Speaker 2

Yes. With respect to The Suwasta, the bid round for the Cargo de Compiler, which is the additional standby Power generation, the original date proposed by the UP May was August 24, I believe, to submit bids And the OOP may delayed that process by 3 months to November 24. So we remain very actively engaged In planning our proposal with our consortium members and we await the November 24 date

Operator

Our next question comes from Josef of Schachter Energy Research. Please go ahead.

Speaker 5

Good morning, Charles and Jason. Jason, a question For you, I see the nice bump up 10% on the adjusted EBITDA. Cash flow though down negative $24,000,000 versus 35 1,000,000 comparable quarters, is that related to that restructuring in tax? And can you kind of walk through the a little bit more detail of and Give us some more color on that.

Speaker 3

Yes, sure, Joseph. So the restructuring plan is Quite complicated as things of this magnitude are. It includes close to 20 steps. And although the major steps such as Transfer of the blocks, etcetera, were done by year end. Some of the trail on steps that have tax impacts Did not get done until the end of Q2.

Speaker 3

As such, we do see that additional $9,000,000 in income tax and thus the free funds flow was down by 5,400,000 Once again, as I said, directly as a result of the additional $9,000,000 in tax. So now that the bulk of those things are And envision things like, you need to get the company's December 31 audited and that typically Takes till March, then you do the paperwork, post that, etcetera. Now that those are largely completed, we do anticipate Seeing the decrease in our current taxes beginning in Q3 and trailing downwards from there, I'll reiterate as I think I did in whether it was the year end call or the Q1 call. We do anticipate Seeing the benefit of the $202,000,000 of the new deferred tax asset to be realized At approximately $40,000,000 a year for the next 5 years and then some additional trailing benefits beyond that.

Speaker 5

So when we get into Q3 data when we have the next conference call, cash flow should be very close to funds flow going forward?

Operator

Carolina Orozco to read questions from the web.

Speaker 1

Thank you. We have one first question from Roberto from Casa Agua. Please give us a deeper explanation of the increases in financial expenses and the deployment of this $105,000,000 in debt.

Speaker 3

Okay. So the first one, if I understood it correctly regarding financial expenses, I assume it's the financing costs, I. E, interest, etcetera, Which would be largely attributable to the increase in the revolver balance, right? So We would have started the year at 0 ish and of course now have $145,000,000 drawn, hence the extra interest expense. The second question, the increase in the debt was $70,000,000 The revolver, as I alluded to, he's probably including a change in cash on that to get to $105,000,000 if I assume you did the math right.

Speaker 3

The first $65,000,000 of that related to, of course, the $65,000,000 that we paid in May relating to the restructuring. The other components to that would be working capital changes. Our Payables ended in Q2 less than they did in Q1. I think off the top of my head, dollars 8,000,000 less Despite us having increased CapEx of approximately $4,000,000 those would be the major components Related to the change in net debt.

Speaker 1

Thank you, Jason. The second question from Roberto Paniagua is, has Canacol perceived an increase in gas demand by thermoelectric plant due to the El Nino?

Speaker 2

We're seeing overall demand in Colombia for gas has remained relatively stable. El Nino is the full effect of El Nino is anticipated to start in October In November of this year, so El Nino is still a little ahead of us here. But so far, overall gas demand in Colombia has been very stable To this point, in normal, but we expect that to see an uptick in gas demand as El Nino the effects of El Nino settle in here October, November, later this year and that will last for between 6 to 9 months depending how strong El Nino will be.

Speaker 1

Thank you, Charles. We have one last question from Roberto Paniagua, which is, are you expecting to keep the average gas price over 1.50 dollars per Mcf in the second half of twenty twenty three and the operative netback near the $4 per Mcf?

Speaker 2

Yes. So 160,000,000 cubic feet per day of our gas sales are sold under take or pay, which was prices fixed. So there'd be no Change in price related to the majority of our production and the variable in increased price occurs in the interruptible spot Sales, we do. We did about 37,000,000 cubic feet per day in July of spot above that, and we expect to see pricing remain very strong For the rest of the year and building in terms of value through the last part of the year in the El Nino.

Speaker 1

Thank you. We have now a question from Ricardo Sandoval from Bancolombia. Could you please give us the Henry Hub price, dollars 2.48 Per MBTU, equivalency in MCF, please to compare with the 5.30 you reported?

Speaker 2

I don't understand that question and we have nothing to do with respect to Henry Hub pricing. Yes.

Speaker 3

I'll take a stab at it because I have it on my screen. It's BTU compared to MCF, so it's right around a one to one level. BTU just has the energy content in it. So depending on how rich Your gas, it might be 101%, but it's essentially 1 to 1 equivalent. Meaning, of course, that we get more than double the Henry Hub price.

Speaker 1

Perfect. Thank you. We also have a question from Diego Espinosa from Betahepak 12. I believe you already answered, Charles, but just in case you want to add something. Regarding El Nino effect, do you see any increasing demand?

Speaker 1

How will you face it?

Speaker 2

Yes. As I mentioned, we expect to see gas demand in general increasing, especially through October and the remainder of this year into next year. And as I mentioned in our presentation, we're very focused on drilling close to our producing facilities. All the exploration wells, the majority of exploration wells will be drilling for the next 2 months will be located within several 100 meters of our production facility. And the reason for that, of course, is to be able to bring those wells on stream very quickly in order to commercialize into the higher demand for gas in the Q4.

Speaker 1

Thank you, Charles. And a similar question coming from Aman Badhar From Panther Fund Capital Management, can you please elaborate on the potential for additional sales as a result of El Nino in second half 2023 and the potential higher price impact, if demand is for gas is much higher in the back half of the year, What is the cap in terms of access to market pipeline capacity and gas production capacity? How will you how will each of these trends into 2023?

Speaker 2

Yes, we expect, as I mentioned a couple of times, we expect to see increased demand for gas, certainly starting in October This year and we expect that to be all thermoelectric power driven and of course we have our Tesorito A 200 Megawatt project situated 7 kilometers from our Jobo facility, that 200 Megawatt Our plant consumes up to 40,000,000 cubic feet per day, it's running flat out and it's connected to our facility by a private Pipeline, so there's plenty of transportation capacity. So I expect we could see up to an additional 40,000,000 cubic feet Of sales related to sending gas to that project in order for that project to generate during the El Nino.

Speaker 1

Thank you, Charles. This was the last question we received. So with this, we finish our call. Thank you all for participating in Canacol's 2nd quarter conference call

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Canacol Energy Q2 2023
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