Canacol Energy Q2 2024 Earnings Report

Canacol Energy EPS Results

• Actual EPS: -C$0.85
• Consensus EPS: C$1.15
• Beat/Miss: Missed by -C$2.00
• One Year Ago EPS: N/A

Canacol Energy Revenue Results

• Actual Revenue: $129.40 million
• Expected Revenue: $119.69 million
• Beat/Miss: Beat by +$9.71 million
• YoY Revenue Growth: N/A

Canacol Energy Announcement Details

• Quarter: Q2 2024
• Date: 8/8/2024
• Time: N/A
• Conference Call Date: Friday, August 9, 2024
• Conference Call Time: 10:00AM ET

Canacol is a natural gas exploration and production company with operations focused in Colombia.

Canacol Energy Q2 2024 Earnings Call Transcript

Key Takeaways

• Achieved record natural gas sales price of $6.84/Mcf and netback of $5.34/Mcf, up 33% and 36% year-over-year.
• Generated record quarterly EBITDA of $73.2 M and funds from operations of $57.1 M, up 21% and 70% year-over-year.
• Reduced operating expenses to $0.41/Mcf and G&A to $0.47/Mcf, down 9% and 17% quarter-over-quarter.
• Reported a net loss of $21.3 M in Q2 2024 driven by a non-cash deferred tax expense of $42.6 M from Colombian peso devaluation.
• Maintained a strong balance sheet with $42.6 M cash, net debt/EBITDA leverage at 2.7x, and compliance with all debt covenants.

Presentation

[Operator]

...Good morning, and welcome to the Canacol Energy second quarter 2024 financial results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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. I would now like to turn the conference over to Carolina Orozco, Vice President of Investor Relations. Please go ahead.

[Carolina Orozco, VP of Investor Relations at Canacol Energy]

Good morning, and welcome to Canacol's second 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 Bednar, Chief Financial Officer. Before we begin, it is important to mention that the comments on this call by Canacol’s 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 financial figures on this call are denominated in US dollars. We will begin the presentation with our President and CEO, Mr. Charles Gamba, who will summarize highlights for the second quarter of 2024. Mr.

[Carolina Orozco, VP of Investor Relations at Canacol Energy]

Jason Bednar, our CFO, will then discuss financial highlights. 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&A session. We will now turn over the conference call to Mr. Charles Gamba, President and CEO of Canacol Energy.

[Charles Gamba, CEO at Canacol Energy]

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

[Charles Gamba, CEO at Canacol Energy]

These strong results were driven by a high gas market, largely due to the El Niño phenomenon that affected Colombia until the beginning of the second quarter. The resulting low reservoir levels led to increased electricity prices, driving strong interruptible natural gas prices. Furthermore, and currently, as the large natural gas producing fields in Colombia operated by Ecopetrol continue to decline, the country has been showing consistent, robust gas market dynamics. Since mid-2021, we've seen gas sales prices consistently increasing quarter over quarter. Consequently, for the second 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.

[Charles Gamba, CEO at Canacol Energy]

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 million 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 activities 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 the successful Chontaduro 1 exploration well located on our VIM-21 block. Chontaduro 1 encountered 123 feet of net gas pay with an average porosity of 21% and tested up to 12 million standard cubic feet per day.

[Charles Gamba, CEO at Canacol Energy]

Following this discovery, we drilled the Chontaduro-2 appraisal well, which encountered 88 feet of natural gas pay and also tested up to 12 million standard cubic feet per day. Both wells were tied into production and are producing to the Jobo Gas Facility. We also completed the acquisition of the Mukau program, marking our third new 3D seismic since 2022. This, along with the recently acquired Mayupa and Redoblante programs, significantly enhanced our drilling portfolio with a range of large exploration prospects. Success in any of these areas could potentially unlock a new production area for Canacol, adding reserves and production capacity and supporting the growth of our gas business in the Lower Magdalena Valley 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.

[Charles Gamba, CEO at Canacol Energy]

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. These accomplishments highlight our dedication to sustainability and our leadership in the industry. This commitment has been acknowledged by third-party ESG and sustainability rating agencies, where we retained an A rating in MSCI for the second consecutive year, and were included in the 2023 S&P Sustainability Yearbook.

[Charles Gamba, CEO at Canacol Energy]

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 TCFD report, which are located on our website. I will now turn the presentation over to Jason Bednar, our CFO, who will discuss our second quarter financials in more detail.

[Jason Bednar, CFO at Canacol Energy]

... Thanks, Charles. As you mentioned, the second quarter 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 three months ended June 30, 2024, yet again, was the highest we've ever achieved in a quarter, and represents a 33% increase from the same period in 2023, and a 6% increase from the three months ended March 31, 2024. This increase in our realized gas price is twofold. Number one, 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.

[Jason Bednar, CFO at Canacol Energy]

And secondly, as Char already mentioned, due to the high interruptible prices. Driven by this strong pricing, we achieved record operating netback of $5.34 per Mcf in the three months ended June 30, 2024, representing a 36% increase from the same period in 2023, and a 9% increase from the three 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 our reducing costs and capital expenditures, while maintaining strong operational and financial performance. Despite inflation, our operating expenses for the three months ended June 30, 2024, stood at $0.41 per Mcf, representing a 9% decrease from the first quarter of 2024, and a 34% decrease from the three months ended December 31, 2023.

[Jason Bednar, CFO at Canacol Energy]

Also, our G&A expenses for the three months ended June 30, 2024, were 47 cents per Mcf, compared to 57 cents per Mcf for the first quarter of 2024, and 62 cents per Mcf for the three months ended December 31, 2023, representing a 17% and 24% decrease, respectively. With respect to capital expenditures, our accrued capital expenditures for the three months ended June 30, 2024, was $34 million, representing a 6% decrease from the three months ended March 31, 2024, and a 53% decrease from Q4 2023. As we mentioned during our last conference call, we have been focusing on enhancing efficiencies to reduce operational costs and capital expenditures.

[Jason Bednar, CFO at Canacol Energy]

With these improved efficiencies, we are anticipating finishing the year with a capital expenditures of approximately $125 million, which is down from our originally announced CapEx budget of $138 million, 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 second quarter of 2024, compared to the same period in 2023, during the second quarter of 2024, we generated record total revenues, net of royalties and transportation expenses of $88.3 million, representing an 18% increase compared to $74.6 million for the same period in 2023. We also generated record adjusted EBITDAX and funds from operations.

[Jason Bednar, CFO at Canacol Energy]

Adjusted EBITDAX increased 21% to $73.2 million for the three months ended June 30, 2024, compared to $60.7 million for the same period in 2023. Adjusted funds from operations increased 70% to $57.1 million for the three months ended June 30, 2024, compared to $33.7 million 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 $21.3 million for the three months ended June 30, 2024, compared to a net income of $40 million for the same period in 2023.

[Jason Bednar, CFO at Canacol Energy]

The decrease in net income is driven by a non-cash deferred income tax expense of $42.6 million for Q2, which resulted from an 8% Colombian peso devaluation of our peso-denominated tax pools. While on the topic of taxes, Canacol ended 2023 with a net tax payable amount of $29 million relating to its 2023 profitable operations. During Q1 of 2024, we paid $20 million of taxes to the DIAN, and during Q2, we paid an additional $13.3 million in taxes, to total $33.3 million in taxes paid at June 30, 2024. I am pleased to report that we are in good standing and compliant with the DIAN 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.

[Jason Bednar, CFO at Canacol Energy]

Canacol recorded a current tax expense of $11.2 million in Q2, bringing the six-month total to $28.4 million. In the aggregate, we do not anticipate any further material current taxes to be recorded for the last six months of the year, ending December 31st, 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 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 $14.4 million US on our November 2028 senior notes.

[Jason Bednar, CFO at Canacol Energy]

With respect to Canacol's November 2028 notes and February 2027 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 2.7 times on a trailing 12 months basis as at June 30, 2024, down from approximately 2.9 times at both year-end 2023 and Q1 2024. To refresh everyone's memory, our bond leverage covenant is at 3.25 times in current space, and the revolver is at 3.5 times maintenance covenant. As such, we're well inside those covenant restrictions. Also, our consolidated interest coverage ratio was 4.7 times on a trailing 12-month basis at June 30, 2024, which is well above the 2.5 times minimum interest coverage ratio required.

[Jason Bednar, CFO at Canacol Energy]

I would like to emphasize, we continually actively manage our liquidity position with prudence and foresights. On April 26, 2024, we announced the sale of over 60 million common shares of Arrow Exploration at a price of GBP 0.185 per share, for a total of $13.3 million net of fees. 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 million shares we held, 55 million were acquired in October 2021 during their secondary listing on AIM, with an initial cost basis of approximately $4.8 million, including the associated warrants we later exercised. This position resulted in a fully tax-sheltered gain of approximately $7.5 million.

[Jason Bednar, CFO at Canacol Energy]

At June 30, 2024, we had a healthy cash position, a cash equivalent position of $42.6 million and a positive working capital surplus. I think the $42.6 million cash is very notable, given the March 31 cash balance was $25 million, and there appeared to be concerns about our ability to pay the semiannual $14.5 million bond coupon payment in May, which of course we paid, and yet we still ended up Q2 with nearly $43 million of cash. I'm also pleased to report that as of today, we still have approximately $45 million of cash. 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.

[Jason Bednar, CFO at Canacol Energy]

I can unequivocally state Canacol has not hired a financial advisor, nor have we even spoken to one at any time during 2024. We have not ever contemplated a restructuring. That concludes my comments. I will turn the presentation back to Charles.

[Charles Gamba, CEO at Canacol Energy]

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

[Charles Gamba, CEO at Canacol Energy]

On the 469 sq km Redoblante 3D seismic program, located on the northern part of our 100% operated VIM-5 block, we have identified 14 large independent prospects and have just bought one of the first one.

[Operator]

Pardon me. We seem to have lost connection with our speaker. Please wait while we reconnect. Ladies and gentlemen, thank you for your patience. I'll now hand it over back to the management.

[Jason Bednar, CFO at Canacol Energy]

Hi, everyone. Sorry, it appears 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&A session. So having said that, with the objective of revitalizing our exploration portfolio, we invested approximately $70 million since 2022 in the acquisition of three new large 3D seismic programs. On the 469 sq km Redoblante 3D seismic program, located on the northern part of our 100% operated VIM-5 block, we have identified 14 prospects that have just spot on one of the largest prospects, Cardamomo 1, from which we anticipate results in early September 2024.

[Jason Bednar, CFO at Canacol Energy]

Secondly, on our 157 square kilometer Mayupa program, located on our 100% operated SSJN-7 block, we have identified 10 prospects and leads, and we plan to drill the largest prospect, Natia, in the fourth quarter of 2024. Finally, last quarter, we completed the Mukau 3D seismic, consisting of 85 square kilometers of seismic located in the southwestern part of our 100% operated VIM-5 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 3D seismic data.

[Jason Bednar, CFO at Canacol Energy]

We achieved 100% exploration development success rate in two of the discoveries of Pomelo and Chontaduro, allowing us to maintain relatively stable production from our core area. In early 2024, we successfully completed the Chontaduro 3 development well, which is currently on production. As we entered the second half of the year, we're starting the drilling program for one of our new portfolio of exploration prospects of the new 3D seismic programs. Yesterday, we spud the Cardamomo 1 exploration well, located on our new Redoblante 3D seismic program on our VIM-5 block. This prospect is a well-defined structure targeting the Ciénaga de Oro sandstone reservoir, which is the main producing reservoir in our current producing fields in the Lower Mag Basin.

[Jason Bednar, CFO at Canacol Energy]

This prospect holds similar reservoir characteristics to our current producing area, including AVO, which is a direct indicator of the presence of gas within the CDO reservoir. We expect that it will take 3-4 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 lookalike prospects to drill, given success.

[Jason Bednar, CFO at Canacol Energy]

We also plan to return to redrill the Natia prospect on our 100% operated SSJN-7 block in the fourth quarter of 2024, after having mechanical-related drilling issues with Natia 1 last year, which prevented us from reaching the target zone and completing the well. Success at Natia 2 could also open up a new producing area, as we have identified 9 additional Natia lookalike prospects to drill.

[Jason Bednar, CFO at Canacol Energy]

On the gas sales front for the month of July, we averaged 161 million cubic standard feet per day, and for the month of August to date, we have averaged 168 million cubic feet per day of gas sales. In summary, we remain focused on the following objectives: Number one, continue executing a comprehensive development exploration program on our core assets in the Lower Magdalena Valley Basin to maintain growing tangible natural gas reserves and production. Number two, maintain a low cost of capital, cash liquidity, and balance sheet flexibility to invest for the long term. Thirdly, secure government approval of a fourth E&P contract in Bolivia that covers an existing gas field reactivation to begin development operations with a view to adding reserves and production, commencing gas sales in 2025.

[Jason Bednar, CFO at Canacol Energy]

Fourthly and lastly, continue with the corporation's commitment to our environmental, social, and governance strategy. Thank you for your 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. Thank you.

[Charles Gamba, CEO at Canacol Energy]

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

[Operator]

We will now 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.

[Carolina Orozco, VP of Investor Relations at Canacol Energy]

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

[Charles Gamba, CEO at Canacol Energy]

Hi, Carolina, can you hear me? I'm back on the line.

[Carolina Orozco, VP of Investor Relations at Canacol Energy]

Yes, we can hear you, Charles.

[Charles Gamba, CEO at Canacol Energy]

Great. Thanks, Josef. In Cardamomo, on an annual basis, we're targeting approximately 50 BCF of gas reserves, and we expect to reach TVD on Cardamomo-1, the first one, to TVD by the end of August. With respect to Bolivia, we expect that Congress will approve the fourth and final contract by the end of August as well, or early September. We expect to be signing the three other contracts along with the current contract prior to year-end.

[Carolina Orozco, VP of Investor Relations at Canacol Energy]

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

[Charles Gamba, CEO at Canacol Energy]

Yes. We have been successfully working over several of the existing wells at Rancho Hermoso. The last one of the earlier well we did this year was the Rancho Hermoso 12 well. We completed that in the Ubaque Reservoir and that well came on at about 1,300 barrels per day of oil. We're gonna continue working over some additional wells here through the remainder of the year to keep production levels high as possible in Rancho Hermoso.

[Carolina Orozco, VP of Investor Relations at Canacol Energy]

Thank you. The next question is from Johanna Alcocer from Seminario & Cía. Good morning. For how long will the company receive $6 per Mcf in contracted average prices?

[Jason Bednar, CFO at Canacol Energy]

Go, go ahead, Charles.

[Jason Bednar, CFO at Canacol Energy]

Okay. I'll start with,

[Charles Gamba, CEO at Canacol Energy]

Can you repeat the question please?

[Jason Bednar, CFO at Canacol Energy]

Oh, sorry.

[Carolina Orozco, VP of Investor Relations at Canacol Energy]

Yes.

[Jason Bednar, CFO at Canacol Energy]

The question was?

[Carolina Orozco, VP of Investor Relations at Canacol Energy]

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

[Charles Gamba, CEO at Canacol Energy]

Yeah, 70% of our production is forward sold through take-or-pay, with average pricing at close to $6. Also, we look 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 or as you can see controls here to declining production. So we expect pricing in the spot market and interruptible market to be very robust, not only through the remainder of 2024, but into 2025 and 2026. The regulator here in Colombia is predicting a deficit of 77 million cubic feet per day in the gas market next year for 2025. That's about 8% deficit with respect to demand.

[Charles Gamba, CEO at Canacol Energy]

In 2026, the regulator is forecasting a deficit of 180 million cubic feet per day, which is almost 20% of shortfall of domestic supply. So we expect gas pricing to remain very robust and strengthen over the near to midterm.

[Carolina Orozco, VP of Investor Relations at Canacol Energy]

Thank you, Charles. Please give us a couple of minutes while we assemble our roster of questions.... Okay, we have a question from Alejandra Andrade from J.P. Morgan: For Cardamomo, do you need to develop additional infrastructure?

[Charles Gamba, CEO at Canacol Energy]

Given success, Cardamomo is located approximately 14 kilometers from our nearest connection point, which would be the Alboka field. Require us to lay a 16 flow line, which would take approximately 2 months. But that's the only thing we need to do, is lay a flow line to connect it into our, our main gathering system and transport the gas to Jobo for processing.

[Carolina Orozco, VP of Investor Relations at Canacol Energy]

Thank you, Charles. Please give us another two minutes, please. Just one more minute, please. Okay, we have one question from Francisco Schumacher from BancTrust. At what price are you seeing natural gas spot prices currently, considering electricity prices have reduced following the end of El Niño phenomenon?

[Charles Gamba, CEO at Canacol Energy]

Our current spot pricing for the month of August is close to $7.50 wellhead, plus transportation to the coast. So we're realizing approximately $9-$10 delivered at the client.

[Carolina Orozco, VP of Investor Relations at Canacol Energy]

Thank you, Charles. We have another question... Give me just a second. From Rafael Ordoñez, from Valor & Valores. Hello, Charles. Would you explain why the transportation cost went up during the quarter?

[Jason Bednar, CFO at Canacol Energy]

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 offtakers pay the transportation price themselves, and it's embedded in the contract, hence we receive the price net of transportation. And on other ones, they pay us the gross price, and we then pay the transportation expenses to get to that net of transportation gas sales price. And it's on that second category, where under IFRS, we have to show those transportation expenses that we paid on a separate line on the income statement.

[Jason Bednar, CFO at Canacol Energy]

So as such, it can vary from quarter to quarter or year to year, depending on which contracts or interruptible sales pay the transportation themselves or whether we pay it. So, you know, to avoid any confusion or noise, that's why we only speak of prices net of transportation. Thus putting, you know, both those scenarios in an apples to apples comparison.

[Carolina Orozco, VP of Investor Relations at Canacol Energy]

Thank you, Jason. Again, please give us a couple of minutes as we're gonna 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 month. Please join us in our next conference call. Have a great day. You may now disconnect.

[Carolina Orozco, VP of Investor Relations at Canacol Energy]

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

Participants

Executives

• Carolina Orozco, VP of Investor Relations
• Charles Gamba, CEO
• Jason Bednar, CFO