Canacol Energy Q1 2024 Earnings Call Transcript

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May 10, 2024

There are 4 speakers on the call.

Operator

Good day, and welcome to the Canacol Energy First Quarter 2024 Financial Results. All participants will be in listen only You may submit questions throughout the event by connecting to the webcast. When in the webcast, place your question in the Ask a question field. Questions will be addressed after the formal presentation has ended. Please note this event is being recorded.

Operator

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

Speaker 1

Good morning, and welcome to Canacol's 1st Quarter 2024 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 Petnard, 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. Charle Gamba, who will summarize highlights from our Q1 2024 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 2024. At the end, management will be responding to written questions received through the webcast. I will now turn the call over to Mr. Chau Gamba, President and CEO of Canacol Energy.

Speaker 2

Thanks Carolina and welcome everyone to Canacol's Q1 2024 conference call. During the Q1 of 2024, we achieved historic record natural gas sales prices and netbacks. Canacol's gas sales prices have consistently increased quarter over quarter since mid-twenty 21. In the Q1 of 2024, we realized prices 29% higher than the same period in 2023 and 9% higher than the previous quarter. This is due mainly to tighter supply and demand conditions in Colombia coming from declining rates in the country's main producing fields exacerbated by the recent El Nino phenomenon, which has led to increased demand from thermal generators, influencing prices in the interruptible market.

Speaker 2

Additionally, we reported a record quarterly netback of $4.90 per Mcf with an EBITDA of $61,000,000 Realized natural gas sales averaged 150,000,000 standard cubic feet per day, marking an 11% decrease from the previous quarter. Our production capacity has, however, been recovering, thanks to successful drilling and workover activities during this year. As a result, our sales gas at the end of April were approximately 169,000,000 standard cubic feet per day and our current productive capacity stands at 177,000,000 standard cubic feet per day. Regarding drilling activity, we have drilled 2 successful Ciena Avior exploration wells, Pumelo-one and Chantaduro-one, which are located close to our Jobo Gasco facilities and have been rapidly placed into permanent production. We also had success in infill drilling with the clarinet day 10 development well and the Trantaduro 2 appraisal well, the latter of which tested at a rate of 12,000,000 standard cubic feet per day and is also being tied into permanent production.

Speaker 2

With respect to capital expenditures, our accrued CapEx during the Q1 of 2020 4 was $36,000,000 50 percent lower than the previous quarter and almost 25% lower than the same period in 2023 as we focus on enhancing efficiencies to reduce operational costs and capital expenditures. These improved efficiencies were anticipating finishing the year with capital expenditure within the lower range of our initial guidance and even below it. This underscores our commitment to maintaining financial discipline while ensuring operational performance. 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 of 2024 was another very good quarter with strong record pricing and netbacks from our producing operations. Our realized gas price of $6.60 per Mcf in the 3 months ended March 31, 2024, was the highest we've ever achieved in a quarter and represents a 29% increase from the same period in 2023 and a 9% increase from the 3 months ended December 31, 2023. The increase in our realized gas price is due to a 19% increase in the average sales price of our firm fixed price take or pay contracts and higher interruptible prices. To refresh everyone's memory, most of our sales consist of 124,000,000 standard cubic feet per day under fixed price take or pay contracts with an average price of $6.04 per Mcf as compared to the 2023 basket of $5.09 per Mcf.

Speaker 3

Driven by the strong pricing, we achieved record operating netback of $4.90 per Mcf in the 1st 3 months ended March 31, 20 24, representing a 22% increase from the same period in 2023 and a 12% increase from Q4 2023. Our operating expenses for the 3 months ended March 31, 2024 were $0.45 per Mcf, being $0.06 higher than the 2023 average operating costs. However, operating expenses for the Q1 of 2024 was 0 point 1 six lower compared to the last quarter in 2023, given reduced maintenance and water treatment costs as well as the absence of a one time service cost associated with the compressor unit at the Jobo gas processing facility. Gas royalties slightly increased to 18.9 percent of revenue driven by higher production on the VIM-five block, which is subject to higher royalties. Despite 19% lower realized natural gas sales volumes during the Q1 of 2024 compared to the Q1 of 2023, total revenues net of royalties and transportation expenses increased 5% to $77,700,000 and adjusted EBITDAX increased slightly to 61,000,000 dollars which was mainly attributed to higher average natural gas sales prices.

Speaker 3

With similar adjusted EBITDAX of $61,000,000 for the Q1 compared to the same Q1 in 2023, adjusted funds from operations increased 29% to $42,200,000 for the 1st 3 months compared to $32,700,000 for the same period in 2023. This increase is mainly attributed to a reduction in current tax expense of approximately $9,000,000 resulting from the corporate restructuring previously disclosed. I'd also like to reiterate despite recording $17,200,000 of current income tax expense for Q1, the corporation still expects 2024 annual current tax expense to total approximately $35,000,000 The corporation realized a net income of $3,700,000 for the 3 months ended March 31, 2024 compared to a net income of $16,900,000 for the same period in 2023. The decrease in net income for Q1 is driven by a noncash deferred income tax expense of $5,000,000 as compared to a deferred income tax recovery of $17,400,000 in 2023. The 2023 recovery was FX related whereas the Q1 2024 FX was essentially flat throughout the quarter.

Speaker 3

Net capital expenditures for the 3 months ended March 31, 2024 was $35,900,000 compared to $47,100,000 in Q1 2023 and compared to $72,200,000 for Q4 of 2023. As Charles previously mentioned, the corporation has been focused on operational efficiencies with the objective of reducing costs and maintaining strong financial results. With respect to our low case guidance CapEx budget of $138,000,000 I'd like to state that our current working model During this

Speaker 2

call, I

Speaker 3

During this call, I'd like to address the short term liquidity concerns that have surfaced in the markets. 1st of all, we want to emphasize that we are actively managing our liquidity position with prudence and foresight. Any speculation suggesting that we may not meet our next bond coupon payment is completely false, and we reaffirm that we are well positioned to meet all of our future financial obligations. As at March 31, 2024, our cash position was $25,000,000 Subsequently, on April 26, 2024, we announced the sale of over 60,000,000 common shares of Arrow Exploration at a price of $0.185 per share for a total of US13.3 million dollars net of fees. As at April 30, 2024, the corporation had a cash balance of approximately share sale proceeds as the trade settled on May 3.

Speaker 3

So effectively an April 30 cash balance of $43,000,000 While speaking about April, I'm also pleased to state that April's EBITDA, buoyed by high interruptible prices, was approximately $26,000,000 which of course is $6,000,000 higher than the average of January to March of roughly $20,000,000 EBITDA each month. Of course, April revenues aren't received on April 30, thus these additional amounts are not included in the $43,000,000 cash balance I just discussed, once again affirming ample liquidity for bond coupon payments and future obligations. To comment solely on the Arrow share sale, the holding of shares in a publicly traded oil company was obviously a non core asset for us. $55,000,000 of the $60,000,000 share position we held was acquired in October 2021 upon their secondary AIM listing at a cost basis of approximately US4.8 million dollars including associated warrants we later exercised. That position netted a fully tax sheltered gain of approximately $7,500,000 once again in U.

Speaker 3

S. Dollars. With respect to Canacol of November 2028 notes, since February 2027 revolving credit facility, we are in compliance with all of our debt covenants. Our net debt to EBITDA leverage ratio was 2.9x and interest coverage ratio was 4 point 6 five times at March 31, 2024. To refresh everyone's memory, our bond leverage covenant is at 3 point 25 in current space and the revolver is at 3.5 times maintenance covenant.

Speaker 3

Our interest coverage covenant is a minimum of 2.5 times. As such, we're well inside those covenant restrictions. Further, and a point I have not previously discussed, the bond indenture allows for certain additional credit facility baskets, which effectively raises the leverage ratio allowed under that covenants. Given the cash balances and leverage ratios I just went through, I'd like to respond to rumors in the markets. I can unequivocally state Canacol has not hired a financial advisor nor have we ever spoken to 1 at any time during 20 24, and we have not ever contemplated a restructuring.

Speaker 3

I will now turn the presentation back to Charles.

Speaker 2

Thanks, Jason. In our 2023, our exploration drilling activities met with limited success due to several factors. Primarily, our entire exploration portfolio was built upon opportunities identified from legacy 3 d seismic data acquired approximately a decade ago, with the most promising prospects having already been drilled years prior and yielding discoveries such as Nelson and Clarinete, Agua's, Vieques and Pandereta. This led to a diminished pool of large and or low risk drilling targets in the recent years with the last substantial discovery Aguas Vivas made in 2021. Additionally, the failure to reach the target of the high impact in the Tier 1 exploration well on our SSJN7 contract due to mechanical issues contributed to setbacks experienced in 2023.

Speaker 2

Since 2022, we have invested approximately $70,000,000 in the acquisition of 3 new large seismic programs, one located in our SSGN-seven block, another in the northern part of the BIM-five block and the last one at the west side of our BIM-five block, which opens a whole new portfolio of exploration prospects. During the first half of twenty twenty four, we've been prioritizing smaller, low risk exploration opportunities in the vicinity of our Jobo facilities identified from the legacy 3 d seismic data with a 100% exploration success rate with the discoveries of Pomelo and Chantadura. Furthermore, in mid summer, we are planning to drill the high impact Cardamomo-1 exploration well, the first exploration well to be drilled off the new 3 d seismic acquired in the northern part of our VIM-five exploration contract in 2023. Success in this prospect could have substantial impact in reserves additions and potentially unlock a new producing area for Canacol. In summary, for the remainder of 2024, the corporation is focused on the following objectives.

Speaker 2

In line with maintaining and growing Canacol's reserves and production in its core gas assets in the Lower Magdalena Valley, the corporation is executing comprehensive development exploration programs. The corporation's aim is to optimize its production and increase reserves by drilling up to 5 development wells and 4 exploration wells, install new compression and processing facilities and work over operations on producing wells in the corporation's key gas fields. The corporation to date has completed the drilling of 2 successful exploration wells, Mello-one and Chantaduro-one and 2 successful development wells, Clarinet A10 and Chantaduro-two. The Chantaduro 2 well was recently completed and tested at a rate of 12,000,000 standard cubic feet per day and is currently producing into the Jobo gas treatment facility. Through these above mentioned activities, the corporation managed to stabilize its gas sales at an average rate of 150,000,000 standard cubic feet during Q1 of 2024 and lifted gas sales to approximately 169,000,000 standard cubic feet by the end of April 2024.

Speaker 2

As I mentioned earlier, our current gas production potential stands at approximately 177,000,000 standard cubic feet per day. On the exploration front, the corporation expects to drill the high impact and potential material Cardi Momo-one exploration well in mid summer of 2024. Cardamomor 1 will be the 1st exploration well drilled off its newly acquired Ruito Blante 3 d seismic survey acquired on the northern part of the VIM5 E and P contract in 2023, where the corporation has identified 15 new gas prospects in the Cinaga de Oro sandstone reservoir, the same reservoir that produces 15 kilometers to the south in the majority of the corporation's gas fields. The Cardamomo prospect exhibits well defined ABO, which is a direct indicator of gas within the prospect, identical to that exhibited by all of the corporation's major gas discoveries such as Nelson, Clarinete, Pandereta and Agua's U. S.

Speaker 2

Fields. Secondly, maintaining a low cost of capital, cash liquidity and balance sheet flexibility to invest for the long term. In a year of expected highly supportive gas market dynamics, the corporation is tactically prioritizing investments in the Lower Magdalena Valley and has therefore decided to postpone the drilling of the Polo I exploration while locating the middle of Magdalena Valley to 2025. On April 26, 2024, the corporation sold its non core investment in Arrow for gross proceeds of $13,800,000 to add additional liquidity. Thirdly, Bolivia achieved the government's approval of a Fort E and P contract that covers an existing gas field reactivation to begin development operations with a view to adding reserves and production and commencing gas sales in 2025.

Speaker 2

And lastly, continue with corporation's commitment to its environmental, social and governance strategy. I'm pleased to announce the release of our 2023 ESG Integrated Report in the coming weeks, highlighting our dedication to corporate responsibility and sustainable operations. Canacol's inclusion in the S and P Global Sustainability Yearbook 2024 reflects our excellence in sustainable practices, particularly in corporate governments within the Oil and Gas Stream and Integrated segments. The report will comply with the United Nations Global Compact's communication on progress requirements utilizing GRS standards and SASD indicators for the oil and gas sector. We'll also integrate metrics from the IPIECA and will align with TCFD recommendations, the UN Agenda 2,030 and the S and P's Global CSA.

Speaker 2

Canacol emphasizes the importance of integrating ESG strategies into our business model to meet shareholder and stakeholder expectation, striving for continuous improvement in ESG performance. And finally, with that we have had no discussions whatsoever with Ecopetrol concerning a corporate transaction or any other transaction. Furthermore, we have had no discussions with any other company or any other banks regarding any corporate transaction or any other transaction whatsoever. Ecopetrol's public statements do, however, reflect the strategic importance and value of Canacol's role as the largest independent gas producer in Colombia as well as a critical shortage of gas reserves in this country. It's not unexpected that there is a great deal of interest in our gas reserves in Colombia, which are second only to those of Equitrol and were recently evaluated by our 3rd party auditors as having a 2 pmbb10 after tax value of US1.8 billion dollars We'll now respond to some questions sent via the platform.

Speaker 1

Operator, can you please give instructions to receive questions while we process any questions that we're receiving?

Operator

Absolutely. Thank you. We will begin the question and answer session. You may submit questions by connecting to the webcast and then placing your question in the Ask a question field. The questions will be read and management will answer.

Operator

Carolina, please go ahead.

Speaker 1

Thank you. We have one question from David Lee from Alliance Global Investors. Could you please speak to current trends in gas price realizations in April?

Speaker 2

Yes. With respect to April, we saw very high interruptible gas pricing due to very severe El Nino effect, which is a very dry weather phenomenon. We were selling gas into the interruptible market at $17 an Mcf, up to 40,000,000 cubic feet per day, all through thermal generators who were covering the shortfall of electricity in the market. So April was a very strong month, very dry month, very low levels of hydroelectric electrical generation and very high thermal generation.

Speaker 1

Thank you, Charles. We have another question from Julio Del Gal. What is the current participation of contracted gas sales and what is the projection towards year end?

Speaker 3

I can answer that I guess. If I understand the question properly and I did touch on the script. So we have our current take or pay baskets that runs until December 1, 2024, which is the start of a new contracting year annually in Colombia. The current basket is 124,000,000 cubic feet a day at an average price of $6.04 I did also mention that compares it's up 19% compared to the prices compared to 2023. And looking forward, of that 124,000,000 cubic feet a day, only 12,000,000 cubic feet a day drops off for next year, thus leaving the price relatively unchanged.

Speaker 1

Thanks, Jason. Please give us a couple of minutes and we are processing questions received. We have a question from Alejandra Andre from JPMorgan. With El Nino easing, are you seeing gas prices easing as well?

Speaker 2

Yes. With El Nino starting to ease, there have been higher levels of rain fall and the reservoirs, the hydroelectric reservoirs are starting to fill. So we've seen a decrease in gas demand, particularly in the coast, as well as pricing. So it seems that we are coming out of the El Nino period now for the next 2 months and we'll regress to sort of normal type conditions here in Colombia.

Speaker 1

Thank you, Charles. Please give us a couple of minutes again. We have a question from Albert Chang from Santander. What is modeled for Cardamomo 1 contribution to output?

Speaker 2

Cardamomo is a typical Cienaga, the oral target. It's a little deeper than our producing fields, about 1,000 feet deeper. So we expect that the well, if successful, will IP at a rate between 12,000,000 15,000,000 cubic feet per day. Given success at Cardamomo 1, there are 3 or 4 follow-up locations drilled in that field to develop as well.

Speaker 1

Next question is from Diego Espimosa from Betege Pactual. What is the current average duration of your take or pay contract? Just to understand how contracted prices could be in the second half of twenty twenty four when El Nino fade away?

Speaker 3

Yes. The weighted average life of our take or pay contracts is 4.5 years. And once again, that's 124,000,000 cubic feet a day. So it's roughly 75% of our total sales.

Speaker 1

Thanks, Jason. We are posting more questions. Please hold with us. We have one question from David Mittsai from SP Angel. How do you think about your and capital allocations policy ahead of taking on a higher risk exploration led strategy versus last year's infrastructure led strategy?

Speaker 2

I don't view the strategy as higher risk. The exploration as our exploration activities over the past 10 years have always been very consistent. As you know, we've enjoyed a very high rate of success, 82% chance of success. And this year's program is no different. We've already scored 2 for 2 on our first two exploration wells.

Speaker 2

And the remaining exploration wells we drilled this year, we'll have a fairly high chance of success as well. So I don't view we've not shifted to anything higher risk. Last year, we spent quite a bit of money in infill drilling into the existing fields. So I think the strategy remains the same, particularly with respect to exploration, fairly conventional exploration risk that has historically generated very high chances of success.

Speaker 1

Thanks, Charles. The next question comes from Daniel Guardiola from Bethelia Pactual. What is the expected CapEx associated with drilling the high impact well Cardamomo 1

Speaker 2

I'm sorry, could you repeat that question?

Speaker 1

Yes, of course. What is the expected CapEx associated with the drilling of the high impact well Cardamona 1 exploration well?

Speaker 2

It's a typical vertical exploration well. So it's about 1,000 feet deeper than our typical wells. So with respect to the civil works, we have to build a road into the location and a platform and the drilling of the well. We're out looking around $6,000,000 as opposed to $4,500,000 to $5,000,000 for a typical exploration well.

Speaker 1

Thank you. Give us a couple of minutes. We're processing any further questions received. We have one question from Diego Espinoza from Betege Pazlal. At what price have you been renewing your contracts during this year?

Speaker 3

As I mentioned, the contract year for long term contracts is December 1. So typically, the contract renewals are in the fall and not during this time. So I'm unaware of any contracts that have been renegotiated or extended heading into next year as it's a little bit early.

Speaker 1

Thanks, Jason. We have one question from Daria Lemma from Bloomberg Intelligence. Your funding position appears to be solid in 2nd Q. Will you be looking at postponing some of the exploration program in the next year to improve your cash position in 3Q?

Speaker 2

Our funding position is solid for the rest of the year basically and we're going to continue with our exploration programs in the lower Mag Valley. So we're going to go ahead and drill. We're currently preparing the rig to mobilize the Cardamomo 1 location, which we anticipate studying in July, followed by another high impact well in the Q4. We did, as I announced, as I mentioned a little earlier, we did defer the drilling of the Polo 1 exploration well, which we were planning to drill sooner rather than later in the middle Magdalena Valley. We're deferring that till next year so that we deploy our capital this year into the lower MagValley where we can commercialize our reserves very quickly into the existing market.

Speaker 2

So, no, we're continuing with our aspiration programs against a very solid financial background.

Speaker 1

Thanks, Charles. We have a question from Diego Espinoza from Betege Pactual. From where you expect the growth in reserves will come during 2024 considering the important decrease in CapEx for 2024?

Speaker 2

We expect the 4 exploration wells we're drilling this year. The smaller ones we drilled, Mello and Trantadura, are decent reserve adds. We're looking at 5 to 10 Bcf each on those. And the 2 large ones, Cardamomo and the second one we're going to be drilling in the latter half of the year are 60 Bcf targets. So we expect a return off the new seismic for those 2 big exploration wells are going to be drilled off the new three d seismic required.

Speaker 2

We expect the return to fairly robust reserve replacement ratios well above 100%.

Speaker 1

We have a question from Carlo Alberto Fracado from MainFirst. Would import of gas from Venezuela puts downward pressure on prices in Colombia? Any idea on potential impacts?

Speaker 2

The concept of importing gas from Venezuela is a fairly complicated one, but I suppose aside from the issues of timing in that, it will certainly not be happening anytime soon. Certainly, a 5 year plus type of outlook in terms of timing. It all depends what that price of the gas is, I suppose. I don't know that there have been any formal discussions with anyone concerning the price of that exported Venezuelan gas. I don't imagine PDVSA will be giving the gas away into the Colombian market, I would think.

Speaker 2

But it's a very difficult question to answer. However, you're looking the outlook for any potential Venezuelan gas to enter the Colombian market is in the 5 year plus timeframe.

Speaker 1

Next question is from Alex Marucho from Lord Abbot. Regarding new take or pay contracts, what is your expectation of prices for such?

Speaker 2

This year, well, going from 2023 to 2024, the average increase in our take or pay contracts was approximately 20%. We're now moving into moving out of El Nino, but we are, however, moving forward into a very tight supply scenario. Ecopetrol's fields continue to decline in terms of production. There are very few other operators adding significant reserves of any sort. So we expect supply to be increasingly tight going into 2025, which should drive pricing in a very positive way for us.

Speaker 2

The only other potential source of gas entering Colombia would be LNG through spec. So I expect that the ceiling for gas prices next year would be parity with spec landed gas in the $10 to $12 range would be sort of the absolute ceiling. But we do expect the tightness to increase in terms of supply and that's have a positive effect on our negotiating of new contracts going into next year. So I would expect a 10% to 15% increase in terms of outlook.

Speaker 1

Thank you, Charles. Next question is from Juan Cruz from Morgan Stanley. Given the reduction in CapEx and the average production Okay. So a couple of things in that. As

Speaker 3

Okay. So a couple of things in that. As I mentioned, the reduction in CapEx is for the exact same drilling program that was originally envisioned. So there's no change aside from efficiencies. Q1 was indeed 150,000,000 cubic feet a day, but as Charles stated, our current productive capacity is 100 and 77,000,000 cubic feet a day.

Speaker 3

As such, our guidance remains unchanged.

Speaker 1

Thanks, Jason. Give us a couple of minutes as we process any further questions. With this last question, we now conclude the Q1 2024 conference call. Thanks everyone for joining us in this quarter and we hope you join us again in the Q2 conference call.

Operator

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

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