CA - Alvopetro: A Look At Its Performance In Brazil's Energy Market

2023-06-08 18:30:32 ET

Summary

• Alvopetro, a Canadian exploration and production company, has shown strong financial performance and growth in its Brazilian natural gas projects, leading to increased dividend payments for shareholders.
• The company's balance sheet strength and focus on organic growth opportunities have positioned it well to handle potential risks and fluctuations in the oil and gas industry.
• Despite potential challenges such as competition and foreign exchange rate risks, Alvopetro appears to be a promising investment opportunity for those interested in the energy sector.

Introduction

Alvopetro ( ALVOF ) acts as an exploration, production, and development Canadian company and focuses on resources in Brazil. Specifically, the company is a pioneer in the development of Brazil’s independent onshore natural gas industry, anchored by the company’s core Cabure upstream and midstream projects.

Financial and business structure

Alvopetro has been productive throughout recent years. As a result, the company’s natural gas, oil, and NGL sales were on average 1960 boepd during the last three years , while they could accelerate their sales levels to 2557 boepd at the end of 2022. One of the major production resources is driven by the Cabure natural gas field, which was constructed in 2020. We all remember the downturn of 2020 and the following crash of oil and natural gas prices. During that year, Alvopetro could generate a sales price of $32.88 per boe, which resulted in $3.1 million in operating activities. However, their expenditures on the new natural gas field led to $3.8 million of capital expenditures, which was translated into a negative amount of free cash flow. After the downturn of 2020, the company could have a full year of operations from the Cabure natural gas field in 2021. The management wisely focused on the Murucututu project, which was related to the connection of a specific well to the Cabure transfer pipeline.

As a result, a considerable surge in their average natural gas, oil, and NGL sales of 2,358 boepd brought a year of $24.3 million in operating cash flows, which was translated into $19.8 million of free cash flow. This ample amount of free cash flow paved the way for initiating the first quarterly dividend of $0.06 per share. Overall, a total of $4.1 million of dividends were declared in 2021. Alvopetro can be a notable option for growth investors as the company delved deeper into production levels from the Cabure natural gas field and made capital spending of $24.8 million devoted to investments in their exploration assets. The well on the Murucututu field started production in 2022 and caused an annual average natural gas, oil, and NGL sales of 2,557 boepd. As a result, $47.5 million of cash from operations led to $22.7 million of free cash flow and encouraged the management to announce a 33% increase in their quarterly dividend payments to $0.08 per share and again another 50% increase to $0.12 per share in the last months on 2022. The total amount of dividends declared in 2022 was $12.7 million, which could be completely self-funded. Their strategy is to reinvest approximately 50% of their cash flow in organic growth opportunities, and the rest 50% is distributed to shareholders and debt repayments. It is worth noting that the surge in oil and natural gas prices in 2022 assisted the company to improve its balance sheet considerably. Like other businesses in this market, their revenues, and cash structures are highly dependent on international commodity prices and fluctuate by worldwide supply and demand factors like weather and economic conditions.

ALVOF financial results

Alvopetro is not a leading company in oil and natural gas production. However, its cash and capital structures show that the management has done everything to increase its balance sheet strength. During 2022, the company fully paid and canceled the balance under the Credit Facility, which included a 3% payment in kind interest. As a result, their total debt remained at $9.3 million during the first quarter of 2023 . As the CEO mentioned, In the previous quarter, ALVOF achieved outstanding results, with a record-breaking operating netback of $66.61 per boe and funds flow from operations reaching $15 million. These impressive figures underscore the profitability of their operations. Although there was a decrease in production allocations from the Caburé Unit in April and May, ALVOF's capital program for 2023 is geared towards increasing production from both the Murucututu natural gas field and the Bom Lugar oil field. The final stage of 197(1) well at Murucututu will be finalized by the end of this month, and other drilling developments will be over until the third quarter of 2023. Thus, raising the production levels during this year. Alvopetro could generate a cash balance of $24.6 million in this quarter, which is 24% higher than $19.8 million at the end of 2022 and 93% higher year over year compared with $12.7 million in 1Q 2022. Additionally, their equity level surged by 10% to $84.4 million throughout the previous quarter. When looking ahead, Alvopetro’s negative net debt balance brings the opportunity for financing more efficiently in case of less favorable commodity prices during 2023 and 2024 (see Figure 1).

Figure 1 – ALVOF’s capital structure (in million)

Spending on the final well, 197(1), of Murucututu field, test and facility expansion at Cabure unit, and other long-lead purchases led to $3.3 million in capital expenditures in 1Q 2023. However, higher operating cash of approximately $14 million as compared to $12.4 million at the end of 2022 led to $10.6 million in free cash flow, which is the highest amount during the last year. This amount of free cash flow paved the way for increasing dividend payments by 17% to $0.14 during the first quarter of 2023 (see Figure 2).

Figure 2 – ALVOF’S capital structure (in million)

The commodity prices in the next few years

Natural gas prices are expected to increase during the summer . It is due to a slight curtail in production, while demand for air conditioning increases the use of natural gas in the electric power sector. Additionally, for the rise in global demand and economic reopening in China, it is forecasted that commodity prices will remain at high levels until 2024. Although natural gas prices are expected to increase, their prices will be well below the last year’s prices due to the high inventory levels.

A few days ago (on June 4th, 2023), OPEC+ countries agreed to extend crude oil production cuts until the end of 2024, one year beyond the original expiration date. Despite this, global fuel production is expected to rise by 1.5 million b/d in 2023 and 1.3 million b/d in 2024 due to increased output from major non-OPEC producers such as the United States, Norway, Canada, Brazil, and Guyana. However, the OPEC+ cuts will still lead to a decline in global oil inventories from Q3 2023 to Q3 2024, which is expected to drive up oil prices. (see Figure 3).

Figure 3

Risks

Despite the company's strong financial position, there are several risks that could potentially harm its operations and profitability. One of the main challenges is the highly competitive nature of the oil and gas industry. Alvopetro will face stiff competition from numerous other companies with larger technical teams, greater financial and operational resources, and better access to capital. Many of these companies not only engage in acquiring, exploring, developing, and producing petroleum reserves but also refine products and market them. Additionally, Alvopetro is exposed to foreign exchange rate risks that could directly impact its revenues and cash balance. Furthermore, most of Alvopetro's current production comes from the Caburé natural gas field, which spans four blocks - two owned by Alvopetro and two by their partner. While Alvopetro currently holds a 49.1% working interest in the field, this split is subject to redeterminations that could affect its future cash flows.

Conclusion

After conducting a thorough analysis, I have examined Alvopetro's business and financial structures. Based on my findings, the company's performance and conditions are robust, and it is well-equipped to handle future risks. While Alvopetro could have capitalized on the high commodity prices of the past year to bolster its balance sheets, it is important for investors to recognize that oil and natural gas prices are unlikely to remain at those levels. Taking into account market conditions and the company's financial outlooks, I believe that Alvopetro has the potential to be a strong investment. However, as with any investment opportunity, it is crucial for investors to conduct their own due diligence and carefully consider all relevant factors before making a decision.

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