Canacol Energy Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2024

There are 5 speakers on the call.

Operator

Good morning, and welcome to the Canaccol Energy Second Quarter 20 24 Financial Results Conference Call. All participants will be in a listen only mode. 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.

Operator

Please note this event is being recorded. 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 2nd quarter 2024 financial results conference call. This is Carolina Orozco, Vice President of Investor Relations. I am with Mr. Charle Gamba, President and Chief Executive Officer and Mr. Jason Bettner, Chief Financial Officer.

Speaker 1

Before we begin, it is important to mention that 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 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 for the Q2 of 2024. 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, we will have a Q and A session. We will now turn over the conference call to Mr. Charle Gamba, President and CEO of Canacol Energy.

Speaker 2

Thanks Carolina and welcome everyone to Canacol's Q2 2024 conference call. In the Q2 of 2024, we achieved record breaking performance across multiple financial metrics. We realized record natural gas sales with prices of $6.84 per 1,000 standard cubic feet, which were 33% higher compared to the same period in 2023. Additionally, we generated record netbacks of $5.34 per 1,000 cubic standard feet, which were 36% higher compared to the Q2 of 2023. These factors contribute to a record quarterly EBITDA of $73,000,000 This outstanding performance highlights the strength of our business and ensures a robust near and mid term outlook.

Speaker 2

These strong results were driven by a high price market, largely due to the uneven phenomena that affected Colombia until the beginning of Q2. The resulting low reservoir levels led to increased electricity prices, driving strong interruptible natural gas prices. Furthermore, and currently, as the large mature producing fields in Colombia operated by Ecopetrol continue to decline, the country has been shown consistent robust gas market dynamics. Since mid-twenty 21, we have seen gas sales prices consistently increasing quarter over quarter. Consequently, for the 2nd consecutive quarter, we achieved historical record natural gas sales prices and netbacks, and we continue to we expect that to continue for the remainder of this year.

Speaker 2

Our commercial strategy adopted at the beginning of the year to enhance our exposure to the interruptible market proved successful under these conditions and has been a key factor in achieving our record performance. During the quarter, our realized natural gas sales averaged 159,000,000 standard cubic feet per day, marking a 6% increase from the previous quarter. Our production capacity has been gradually increasing, thanks to successful drilling, workover and facilities activity throughout the year. It's important to note that our exploration and development programs have experienced a 100% success rate so far this year. We continued our near field low risk drilling program with successful Chantadura 1 exploration well located on our BIM-twenty 1 block.

Speaker 2

Chantadura 1 encountered 123 feet of net gas pay with an average per asset 21% and tested up to 12,000,000 standard cubic feet per day. Following this discovery, we drilled the Chantaduro 2 appraisal well, which encountered 88 feet of natural gas day and also tested up to 12,000,000 standard cubic feet per day. Both wells were tied into production and are producing to the Jobo gas facility. We've also completed the acquisition of the Macauro program, marking our 3rd new 3 d seismic deliveries since 2022. This allowed the recently acquired Mayupa and Red Bullante program significantly enhance our drilling portfolio with a range of large exploration prospects.

Speaker 2

Success in any of these areas could potentially unlock a new production area for Canacol, adding reserves and production capacity supporting the growth of our gas business in the Lower Magdalena Basin. During the quarter, we published our 2023 ESG Integrated Report, which reflects our commitment to meeting energy demand while protecting the environment and local communities. We firmly believe that focusing on natural gas ensures long term sustainability while delivering enhanced value to our shareholders. Our ESG strategy is crafted to identify risks, implement solutions and create long term value. In 2023, we achieved scope 1 and 2 GHG emission intensities that were over 45% lower on average than our gas focused peers and more than 75% lower on average than our oil focused peers in North and South America.

Speaker 2

These accomplishments highlight our dedication to sustainability and our leadership in the industry. This commitment has been acknowledged by 3rd party ESG and sustainability rating agencies, where we retained an A rating in MSCI for the 2nd consecutive year and we're included in the 2023 S and P Sustainability Yearbook. We also ranked as the best company in corporate governance in the Oil and Gas Upstream and Integrated segment and among the top 10% in our industry overall. We invite you to read our full 2023 ESG report and TCFP report, which are located on our website. I will now turn the presentation over to Jason Bednar, our CFO, who will discuss our Q2 financials in more detail.

Speaker 3

Thanks, Sharol. As you mentioned, the Q2 of 2024 was another very good quarter with strong record pricing and netbacks from our producing operations. Our realized gas price of $6.84 per Mcf in the 3 months ended June 30, 2024, yet again was the highest we've ever achieved in a quarter and represents a 33 percent increase from the 3 months ended March 31, 2024. This increase in our realized gas price is twofold. Number 1, it's due to a 19% increase in the average sales price of our firm fixed price take or pay contracts to an average net price net of transportation of $6.04 per Mcf in 2024, up from $5.09 in 2023 and secondly, as Shar already mentioned, due to the high interruptible prices.

Speaker 3

Driven by the strong pricing, we achieved record operating netback of $5.34 per Mcf in the 3 months ended June 30, 2024, representing a 36% increase from the same period in 2023 and a 9% increase from the 3 months ended March 31, 2024. In addition to the robust pricing environment, our financial results were further bolstered by our ongoing commitment to operational efficiency and at reducing costs and capital expenditures while maintaining strong operational and financial performance. Despite inflation, our operating expenses for the 3 months ended June 30, 2024, stood at $0.41 per Mcf, representing a 9% decrease from the Q1 of 2024 and a 34% decrease from the 3 months ended December 31, 2023. Also, our G and A expenses for the 3 months ended June 30, 2024 were $0.47 per Mcf compared to $0.57 per Mcf for the Q1 of 2024 and $0.62 per Mcf for the 3 months ended December 31, 2023, representing a 17% 24% decrease, respectively. With respect to capital expenditures, our accrued capital expenditures for the 3 months ended June 30, 2024 was $34,000,000 representing a 6% decrease from the 3 months ended March 31, 2024 and a 53% decrease from Q4 20 23.

Speaker 3

As we mentioned during our last conference call, we have been focusing on enhancing efficiencies to reduce operational costs and capital expenditures. With these improved efficiencies, we are anticipating finishing the year with capital expenditures of approximately 125,000,000 dollars which is down from our originally announced CapEx budget of $138,000,000 without cutting any of our planned activities. This reflects our commitment to maintaining financial discipline while ensuring operational performance. Despite 14% lower realized natural gas sales volumes during the Q2 of 2024 compared to the same period in 2023, During the Q2 of 2024, we generated record total revenues, net of royalties and transportation expenses of $88,300,000 representing an 18% increase compared to $74,600,000 for the same period in 2023. We also generated record adjusted EBITDAX and funds from operations.

Speaker 3

Adjusted EBITDAX increased 21 percent to $73,200,000 for the 3 months ended June 30, 2024 compared to $60,700,000 for the same period in 2023. And adjusted funds from operations increased 70 percent to $57,100,000 for the 3 months ended June 30, 2024, compared to $33,700,000 for the same period in 2023. As mentioned, these increases were primarily driven by higher average sales prices net of transportation expenses. The corporation realized a net loss of $21,300,000 for the 3 months ended June 30, 2024 compared to a net income of $40,000,000 for the same period in 2023. The decrease is net in net income is driven by a non cash deferred income tax expense of $42,600,000 for Q2, which resulted from an 8% Colombian peso devaluation of our peso denominated tax pools.

Speaker 3

While on the topic of taxes, Canacol ended 2023 with a net tax payable amount of $29,000,000 relating to its 2023 profitable operations. During Q1 of 2024, we paid $20,000,000 of taxes to the DN. And during Q2, we paid an additional $13,300,000 of taxes to total $33,300,000 in taxes paid at June 30, 2024. I'm pleased to report that we are in good standing and compliant with the DN with respect to taxes. I'd also like to briefly mention our current tax expense, which can be found on our statement of operations and comprehensive income.

Speaker 3

Canacol recorded a current tax expense of $11,200,000 in Q2, bringing the 6 months total to $28,400,000 In the aggregate, we do not anticipate any further material current taxes to be recorded for the last 6 months of the year ending December 31, 2024. The recent financial performance led a return on capital employed to a significant upward trend, reflecting our strategic investments in operational efficiencies By maintaining a focused approach on the high return projects and prudent capital management, we have successfully enhanced our return on capital employed, delivering superior value. As announced on a press release during the quarter, we paid our scheduled semiannual interest coupon of US14.4 million dollars on our November 20 28 senior notes. With respect to Canacol's November 20 28 notes and February 20 27 revolving credit facility, we are in compliance with all of our debt covenants and our leverage ratio has indeed fallen this quarter. Our net debt to EBITDA leverage ratio was 2.7x on a trailing 12 months basis as at June 30, 2024, down from approximately 2.9x at both year end 2023 and Q1 2024.

Speaker 3

To refresh everyone's memory, our bond leverage covenant is at 3.25x, incurrence based, and the revolver is at 3.5x maintenance covenants. As such, we're well inside those covenant restrictions. Also, our consolidated interest coverage ratio was 4.7x on a trailing 12 month basis at June 30, 2024, which is well above the 2.5x minimum interest coverage ratio required. I would like to emphasize we continually actively manage our liquidity position with Prudence and Foresight. 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.

Speaker 3

To provide a refresher on our position with Arrow, holding shares in a publicly traded oil company was clearly a non core asset for us. Out of the 60,000,000 shares we held, 55,000,000 were acquired in October 21 during their secondary listing on AIM with an initial cost basis of approximately US4.8 million dollars including the associated warrants we later exercised. This position resulted in a fully tax sheltered gain of approximately US7.5 million dollars At June 30, 2024, we had a healthy cash position and cash equivalent position of US42.6 million dollars dollars and a positive working capital surplus. I think the $42,600,000 cash is very notable given the March 31 cash balance is $25,000,000 and there appeared to be concerns about our ability to pay the semiannual $14,500,000 bond coupon payment in May, which of course we paid, yet we still ended up Q2 with nearly $43,000,000 of cash. I'm also pleased to report that as of today, we still have approximately $45,000,000 of cash.

Speaker 3

Given the cash balances and leverage ratios I just went through, once again, I'd like to respond to any possible rumors in the markets. I can unequivocally state Canacol has not hired a financial advisor nor have we even spoken to 1 at any time during 2024. We have not ever contemplated a restructuring. That concludes my comments. I will turn the presentation back to Charle.

Speaker 2

Thanks, Susan. As we discussed during our last conference call, exploration drilling activities in 2023 met with limited success due to several factors, primarily a portfolio consisted of opportunities identified from legacy 3 d seismic data acquired over 10 years ago with the most promising prospects such as Nelson, Clarinete and Pandereta, our large pursuit fields, having already been drilled many years prior. The last major find we've made in fact was Auguste, just in 2021. This led us to drill increasingly smaller exploration prospects and riskier as well in recent years. The objective of revitalizing our exploration portfolio, we invested approximately $70,000,000 in 2022 in acquisition of 3 new 3 d seismic programs.

Speaker 2

On the 4 69 Square Kilometer Rede Blante 3 d seismic program located on the northern part of our 100 percent operated VIMFEM block. We have identified 14 large independent prospects and have just applied 1 of the

Operator

Ladies and gentlemen, thank you for your patience. I'll now hand it over back to the management.

Speaker 3

Hi, everyone. Sorry, it appears that Charles is struggling to get back on the line. So I will finish the remainder of his presentation and hopefully he can join us for the Q and A session. So having said that, with the objective of revitalizing our exploration portfolio, we invested approximately $70,000,000 since 2022 in the acquisition of 3 new large three d seismic programs. On the 4 69 Square Kilometered Red El Bloate 3 d seismic program located on the northern part of our 100% operated BIM-five block, We have identified 14 prospects that have just spud on one of the largest prospects, Cardamomo-one, from which we anticipate results in early September 20 24.

Speaker 3

Secondly, on our 157 Square Kilometre Mayupa program located on our 100% operated SS Jan 7 block. We have identified 10 prospects in Leeds and we plan to drill the largest prospect Netea in the Q4 of 2024. Finally, last quarter, we completed the Macau 3 d seismic consisting of 85 square kilometers of seismic located in the southwestern part of our 100 percent operated BIM-five block. We are now in the process of identifying and interpreting the new data from this program. With respect to our 2024 drilling activity, during the first half of the year, we prioritized near field smaller low risk exploration opportunities in the vicinity of our Jobo facilities identified from the legacy 3 d seismic data.

Speaker 3

We achieved 100% exploration development success rate in 2 of the discoveries of Pomelo and Chontoduro, allowing us to maintain relatively stable production from our core area. In early 2024, we successfully completed the Chontaduro 3 2020 Trontaduro 3 development well, which is currently on production. As we entered the second half of the year, we are starting the drilling program for one of our new portfolio of exploration prospects of the new three d seismic programs. Yesterday, we spud the Cardamomo 1 exploration well located on our new Red ABLonte 3 d seismic program on our VIM-five block. This prospect is a well defined structure targeting the Cianaro d'Oro sandstone reservoir, which is the main producing reservoir in our current producing fields in the Lower Mag Basin.

Speaker 3

This prospect holds similar reservoir characteristics to our current producing area, including ABO, which is a direct indicator of the presence of gas within the CDO reservoir. We expect that it will take 3 to 4 weeks to drill and complete Cardamomo 1 and anticipate having results in early September 2024. If successful, we will immediately appraise the discovery with up to 3 additional wells and plan to have the field on production by mid November 2024. Success at Cardamomo could also add substantial reserves to our portfolio and potentially unlock a new gas producing area for Canacol as we have identified 13 nearby look alike prospects to drill given success. We also plan to return to redrill the Natia prospect on our 100% operated SSJN-seven block in the Q4 of 2024 after having mechanical related drilling issues with NETIA-one last year, which prevented us from reaching the target zone and completing the well.

Speaker 3

Success at NETEA 2 could also open up a new producing area as we have identified 9 additional NETEA look alike prospects to drill. On the gas sales front for the month of July, we averaged 161,000,000 cubic standard feet per day. And for the month of August to date, we have averaged 168,000,000 cubic feet per day of gas sales. In summary, we remain focused on the following objectives. Number 1, continue executing a comprehensive development exploration program on core assets in the Lower Magdalena Valley Basin to maintain growing Canacol's natural gas reserves and production.

Speaker 3

Number 2, maintain a low cost of capital, cash liquidity and balance sheet flexibility to invest for the long term. Thirdly, secure government approval of a 4th E and P contract in Bolivia that covers an existing gas fuel reactivation to begin development operations with a view to adding reserves in production, committing gas sales in 2025 and fourthly and lastly, continue with the corporation's commitment to our environmental, social and governance strategy. Thank you for attention, and we will look forward to updating you on our progress in the coming months. That ends the presentation. We'll probably take a minute and get gathered up on questions here.

Speaker 3

Thank you.

Speaker 4

Jason, I'm back on the line as well.

Operator

We will now begin the question and answer You may submit questions by connecting to the webcast and then placing your question in the Ask a Question field.

Speaker 1

Thank you. The first question that we received is from Joseph Schafter. Can you provide information on the size of the target at Cardamomo 1? What do you see as the timing for landing the 4th contract in Bolivia and starting activity over there?

Speaker 4

Hi, it's Camille. Can you hear me back on the line?

Speaker 1

Yes, we can hear you, Charles.

Speaker 4

Thanks, Joseph. Cardenomol on a 100 basis is targeting approximately 50, 50 Bcf of gas reserves and we expect to reach TD Cardamom 1, first one in Quebec by the end of August. With respect to Bolivia, we expect that Congress will approve the 4th and final contract by the end of August as well or early September. And we expect to be signing the 3 other contracts along with current contracts prior to year end.

Speaker 1

Thank you, Charles. We have another question from Joseph Shafter as well. Can you go into the reasons for the large increase in crude production?

Speaker 4

Yes. We have been successfully working over several of the existing yards at Rancho de Nocin. The last one of the areas we entered into this year was Rancho Rimosa's 12 mile, where we conceded that in the Bosque reservoir and that well came on at about 1300 barrels per day of oil. We're going to continue working over some additional wells here through the remainder of the year to keep production levels high as possible in nature.

Speaker 1

Thank you. The next question is from Joao Nelco from Caminario. Good morning. For how long will the company proceed $6 per Mcf in contracted average prices?

Speaker 3

Go ahead, Charles. Okay. I'll start with Can

Speaker 4

you repeat the question?

Speaker 3

Yes, Charles.

Speaker 1

The question is for how long will the company proceed $6 per Mcf in contracted average prices?

Speaker 4

Yes. 70% of our production is fully sold through take or base with average pricing at close to $6 Also, we looked at the interruptible market and we see quite strong performance with respect to pricing. We expect that to strengthen over the short to near term as supply continues to dwindle, our strategic and tech controls feel declining in production. So we expect pricing in the spot market and the intra flu market to be very robust, not only through the remainder of 2024, but into 202520 26. The regulator here in Colombia is predicting a deficit of 77,000,000 cubic feet per day in the gas market next year for 2025.

Speaker 4

That's about 8% deficit with respect to demand. In 2026, the regulator is forecasting a a deficit of 180,000,000 cubic feet per day, so almost 20% of shortfall domestic supply. So we expect gas pricing to remain very robust and strengthened over the near to mid term.

Speaker 1

Thank you, Charles. Please give us a couple of minutes while we assemble our roster of questions. We have a question from Alejandra Andre from JPMorgan for Cardamomo. Do you need to develop additional infrastructure?

Speaker 4

Given success, Cardamomio is located approximately 14 kilometers from our nearest connection point, which would be the Avoca field, require us to lay a 6 inch flow line, which will take approximately 2 months. But that's the only thing we need to do is lay a flow line to connect it into our main gathering system and transport the gas to cobalt processing.

Speaker 1

Thank you, Charles. Please give us another 2 minutes please. Just one more minute please. Okay. We have one question from Francisco Schumacher from Bank Trust.

Speaker 1

At what price are you seeing natural gas spot prices currently considering electricity prices have reduced following the end of El Nino phenomenon?

Speaker 4

Yes. Current stock pricing for the month of August is close to $7.50 wellhead plus transportation to the coast. So we're realizing approximately $9 to $10 delivered at the clients.

Speaker 1

Thank you, Charles. We have another question, just a second,

Speaker 4

from

Speaker 1

Rafael Ordonez from Valle Valores. Hello, Charles. Would you explain why the transportation cost went up during the quarter?

Speaker 3

Sure. I can take this question. So I'm sure you've noted that we only speak of gas prices net of transportation. The transportation expense that you see on our income statement is a bit of a red herring. Very simply, some off takers pay the transportation price themselves, and it's embedded in the contract.

Speaker 3

Hence, we received the price net of transportation. And on other ones, they'd pay us the gross price and we then pay the transportation expenses to get to that net of of for us, we have to show those transportation expenses that we paid on a separate line on the income statement. So as such, it can vary from quarter to quarter or year to year depending on which contracts are interruptible sales pay the transportation themselves or whether we pay it. So to avoid any confusion or noise, that's why we only speak of prices net of transportation, thus putting both those scenarios in an apples to apples comparison.

Speaker 1

Thank you, Jason. Again, please give us a couple of minutes as we're going to check if we have any additional questions in our roster. Okay. It seems we don't have any more questions today. Thank you again for your attention, and we look forward to updating you on our progress in the coming months.

Speaker 1

And please join us in our next conference call. Have a great day. You may now disconnect.

Operator

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

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Canacol Energy Q2 2024
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