CNNEF - Canacol Energy Ltd. (CNNEF) Q2 2023 Earnings Call Transcript
2023-08-11 13:00:21 ET
Canacol Energy Ltd. (CNNEF)
Q2 2023 Results Conference Call
August 11, 2023 10:00 AM ET
Company Participants
Carolina Orozco - VP, IR
Charle Gamba - President, CEO
Jason Bednar - CFO
Conference Call Participants
Oriana Covault - Balanz Capital
Josef Schachter - Schachter Energy Research
Presentation
Operator
Good morning and welcome to the Canacol Energy Second Quarter 2023 Financial Results Conference Call. All participants will be in listen, listen-only mode. [Operator Instructions] 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
Good morning and welcome to Canacol's second quarter 2023 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 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 finance figures on this call are denominated in U.S. dollars. We will begin the presentation with Mr. Charle Gamba, our President and CEO, who will summarize highlights from our second quarter results. Mr. Jason Bednar, our CFO, will then discuss financial highlights. Mr. 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&A session.
I'll now turn the call over to Mr. Charle Gamba, President and CEO of Canacol Energy.
Charle Gamba
Thanks Carolina and welcome everyone to Canacol's second quarter 2023 conference call. In the second quarter of this year, we realized natural gas sales 185 million standard cubic feet per day just above the midpoint of our annual guidance of 160 million to 206 million standard cubic feet per day. Continue to report strong and stable financials, which allow us to continue to return capital shareholders via our quarterly dividend program. Our relatively stable production and operating conditions allowed us to report a quarter with high sales prices, net backs and operating margins. EBITDA of $61 million and a relatively high return on capital employed on an annual basis of 16%.
Last week we announced our July sales average 197 million 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 Chimela oil discovery in the mid-May that we had previously announced in January with an average rate of 353 barrels of oil per day from the base of Liama. With this test data now in hand we're progressing development plans for this discovery.
This is in addition to the testing of the Saxofon and Dividivi gas discoveries, which was also announced in early May and which was discussed in our last conference call. 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 Lulo-1 located on our 100% operated VIM-21 ENP contract, which encountered 207 feet of net gas pay within the primary Chimela sandstone reservoir and test the 17 million standard cubic feet per day.
We followed this up by drilling the Lulo-2 appraisal well, which encountered 230 feet of net pay and tested ‘24 million standard cubic feet per day. Both Lulo wells have been tied into our facilities and are currently on production.
Last week, we announced that we had plugged an abandoned the Piña Norte 1 exploration well located on our 100% VIM-21 EMP contract after an encountering an overpressure 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. With a total of three drilling rigs, we're planning to continue our drilling activity with the Mafaldine and Cereza exploration wells and the four development while all located on the VIM-21 EMP contract.
The Mafaldine exploration while is situated approximately 1.5 kilometers to the northwest of our whole production facility and the Cereza Exploration well, which Scope 2 days ago, is located approximately 500 meters to the north of --I anticipate we'll be providing results from our drone activity in our regular monthly updates.
Here at Canacol, we understand the crucial role of natural gas and addressing climate change in global challenges and remain committed to supporting Columbia's objective of achieving a 51% reduction in emissions by 2030. In line with this, we have published our 2022 ESG report and long-term decarbonization goals whereby we aim to achieve zero methane emissions by 2026 and reduced scope one and two emissions by 50% in 2035, and achieve carbon neutrality by 2050.
For 2022, we reported Scope 1 and 2 GHG emission intensities that are an average 80% lower than our oil producing piers and 50% lower than our gas producing piers in North and South America. 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 the top 10th percentile of upstream oil and gas companies in the CSA S&P assessment and we have received an A rating from MSCI, affirming Canacol's leadership in ESG. I invite all of those interested about our ESG achievements here in 2022 to read our report, which is now available on our website.
I'll now turn the presentation over to Jason Bednar, our CFO, who will discuss our second quarter financial results in more detail.
Jason Bednar
Thanks, Charle. 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 three 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 average for 2023. As was the case in the first quarter, these high netbacks can be attributed to strong pricing under our firm contracts, at $5 per Mcf on average during Q2, combined with the interruptible market pricing that was significantly stronger during the quarter than we had assumed it would be for the whole year of 2023 on average. Our realised gas price of $5.13 per Mcf net of transportation was exactly the same as we reported for the first quarter, demonstrating a new stable and higher level for our realized prices.
We remain encouraged by the persistence of robust pricing for interruptible gas sales. Recall that, the majority of our guidance is based on sales under fixed price take-orpay 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 first quarter as we had previously indicated that we would likely return to doing more maintenance spending in the second quarter. This brought the first half of 2023 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. Return on capital employed was 16% for the second quarter on an annualized basis, and 12% on a trailing 12-month basis.
We reported $75 million of revenue net of royalties and 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. $34 million in adjusted fund from operations represents a 14% decrease from the same period in 2022. This $5.4 million decrease in adjusted funds flow from operations is solely attributable to a 9% increase in current taxes relative to the same quarter in 2022. We also reported EBITDAX of $61 million, which represents a 10% increase from the same period of '22. And finally, we have reported net income of $40 million with 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 million. 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 expectations is that relatively high current tax expense in the first two quarters of 2023 will not continue going forward. So I expect significantly less current tax expense going forward than we have reported for the first two quarters of 2023. EBITDAX of 61 million in the second quarter was just a few hundred thousand dollars short of the new record we set in the first quarter. So I will again highlight the long-term trend of steadily growing EBITDAX over the last eight years.
We do anticipate this trend continuing and are optimistic with regards to the pricing and demand outlook for the second half of 2023. And as such, our high case 2023 EBITDAX guidance of 263 million remains unchanged. Before, I hand the call back to Charlotte, 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 million for the first six months represents approximately 60% of our unchanged high case capital budget guidance of 163 million for 2023.
The 99 million of first half CapEx does include 17.5 million of warehouse inventory at June 30th as required under IFRS, including a wellhead and casing materials for Pola and other upcoming wells. If we adjusted for these amounts as traditional inventory items, the CapEx levels for the first half of 2023 would be exactly 50% of the annual $163 million budget. As such, I do anticipate that we can continue significant drilling activity despite anticipated lower spending in the second half of 2023.
During the second quarter, we drew an additional 70 million on our revolving credit facility such that we've now drawn 145 million in total on this 200 million facility as of June 30th. As a reminder, the main reason for the additional draw during the quarter was to pay a $65 million one-off cash tax bill incurred, as part of the corporate restructuring that we had discussed earlier and in detail on prior calls. Our net debt to EBITDA leverage ratio was 2.7x on a trailing 12 month basis at June 30 with the increase from prior quarters caused mainly by the restructuring tax payments.
How this ratio evolves going forward will depend on a host of factors including gas demand as a key driver of revenue, and hence 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, 2.5x a year-end. To refresh everyone's memory, our bond covenant is at 3.25x and the revolver is at 3.5x. As such, we're well inside those covenant restrictions.
That concludes my comments. I'll now hand it back to Charle.
Charle Gamba
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 to progress a steady exploration drilling program targeting exploration prospects located close to hobo that can be commercialized very quickly. We're doing this in order to build productive capacity to meet the anticipated high demand with natural gas associated with the upcoming El Nino phenomena.
Forecast realized contractual gas sales for 2023, which include downtime are anticipated to range between one 160 million to 206 million standard cubic feet per day. Our gas sales average 185 million standard cubic feet per day for the first half of this year, and we're 197 million standard cubic feet per day during July. The corporation's firm 2023 take or pay contracts alone averaged 160 million standard cubic feet per day 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 while investing for growth.
We're now ready to take questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Oriana Covault of Balanz.
Oriana Covault
This is Erna Gold with Balanz. I have three questions, if we may go one by one, that would be great. First with regards to drilling for Pola-1, just wanted to confirm on how are if you could share any insights on how our negotiations going to bring the rig for Pola-1 drilling, and when do you expect activities to begin?
Charle Gamba
Yeah, with respect to drilling Pola-1, we we're planning to target the drilling of the well for the last quarter of this year. Rig availability is very good. Rig availability and Columbia has been increasing as drilling activity has decreased about 33% in terms of drilling activity this year. So rig availability for the 3,000 horsepower we need is very good. So, we're again targeting to, to spud that well sometime in Q4 this year.
Oriana Covault
And just following up with additional triggers for the next quarter, just thinking of the INE pipeline, I just wanted to confirm on what are the next steps or the steps that are missing to continue on with Canacol to start construction works and what are the strategies that might be in on the table for chemical to avoid being exposed to spot markets? If there are any delays with the pipe.
Charle Gamba
The next step in the process for mine 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.
Oriana Covault
And sorry, just one follow-up there. What is expected timeline for this?
Charle Gamba
This year?
Oriana Covault
And just one last one. You had mentioned in last earnings call, the -- UPME biding process that had started in the potential of having something similar to the Cereza. So just wanted to confirm now on how is this process ongoing and, and if there are any updates that you could share in this regard.
Charle Gamba
Yes, with respect to the --, the bid round for the cargo -- which is the additional standby power generation, the original date proposed by the UPME was August 24, I believe, to submit bids. And the UPME delayed that process by three months to November 24. So, we remained very actively engaged in planning our proposal with our consortium members, and we await the November 24 date to make any bids.
Operator
Our next question comes from Josef of Schachter Energy Research.
Josef Schachter
Good morning, Charle and Jason. Jason, a question for you. I see the nice bump up 10% on me adjusted EBITDA. Cash flow though, down negative $24 million to versus $35 million, comparable quarters. Is that related to that restructuring and tax? And can you kind of walk through a little bit more detail of -- and give us some more color on that?
Jason Bednar
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 the transfer of the blocks, et cetera were done by year-end, some of the trail-on steps that have tax impacts did not get done until the end of Q2. As such, we do see that additional $9 million in income tax and thus the free funds flow was down by $5.4 million.
Once again, as I said, directly as a result of the $9 million in tax. So now that the bulk of those things are completed, and envision things like, you need to get the company's December 31st audited and that typically takes till March, then you do the paperwork post that, et cetera. 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 will reiterate as I think I did in, whether it was year-end call or the Q1 call. We do anticipate seeing the benefit of the $202 million of the new deferred tax assets to be reazlised at approximately $40 million a year for neat five years and then some additional trailing benefits beyond that.
Josef Schachter
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?
Jason Bednar
Agreed.
Operator
[Operator Instructions] I will now pass it over to Carolina Orozco to read questions from the web.
Carolina Orozco
Thank you. We have one, first question from Roberto Paniagua from Casa Voca. Please give us a deeper explanation of the increases in financial expenses and the deployment of this $105 million in debt.
Jason Bednar
So the first one, if I understood it correctly regarding financial expenses, I assume it's the financing costs i.e. interest, et cetera, which would be largely attributable to the increase in the revolver balance, right? So, we would have started the year at zero-ish and of course now have $145 million drawn, hence the extra interest expense.
Second question, the increase in the debt was $70 million, drawn the revolver as I alluded to. He is probably including a in cash on that to get to $105 million, if I assume you did the math, right? The first $65 million of that related to, of course, the $65 million 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, $8 million less despite us having increased CapEx of approximately $4 million. Those would be the major components related to the change in net debt.
Carolina Orozco
Thank you, Jason. The second question from Roberto Paniagua is has chemical perceived an increase in gas demand by thermal electric plant due to the El Nino.
Charle Gamba
We're seeing overall demand in Columbia for gas has remained relatively stable. El Nino is the full effect of El Nino has anticipated to start in October and November of this year. So, El Nino is still a little ahead of us here, but so far, overall gas demand in Columbia has been very stable to this point and 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 six to nine months depending how strong El Nino will be.
Carolina Orozco
Thank you, Charle. We have one last question from Roberto Paniagua which is are you expecting to keep the average gas price over $1.50 per McF in the second half of 2023 and the operative net back near the $4 per McF?
Charle Gamba
Yes. So 160 million cubic feet per day of our gas sales are sold under take or pay, which was prices fixed. So there'll be no change in price related to the majority of our production. And the variable in increased price occurs in the interruptable spots. Sales we do -- we did about 37 million 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.
Carolina Orozco
We have now a question from Ricardo Sandoval from Bancolombia.
Could you please give us the Henry Hub price $2.48 per MBTU equivalency in McF, please to compare with this, with the 530 you reported?
Charle Gamba
I don't understand that question and we have nothing to do with respect to Henry Hub pricing.
Jason Bednar
Yes. I'll take a stab at it, because I have it on my screen. Its 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 one 101%, but it's essentially one to one equivalent. Meaning of course that we get more than double the Henry hub price.
Carolina Orozco
Perfect. Thank you. We also have a question from Diego [Espinoza] from [BTG Pactual].
I believe you already answered Charle, but just in case you want to add something. Regarding a linear effect, do you see any increasing demand? How will you face it?
Charle Gamba
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, well, the majority of the exploration mows are be drilling for the next two months will be located within several hundred 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 expected demand for gas in the fourth quarter.
Carolina Orozco
Thank you, Charle. And similar question coming from Aman Budhwar from PenderFund 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 each of these trends into 2023?
Charle Gamba
Yeah, we expect, as I mentioned a couple 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 200 megawatt project situated 7 kilometers from our Hobo facility that 200 megawatt power plant consumes up to 40 million cubic feet per day if 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 million cubic feet of sales related to sending gas to that project in order for that project to generate during the El Nino.
Carolina Orozco
This was the last question we received. So with this, we finish our call. Thank you all for participating in Canacol’s second quarter conference call, and hope you'll have a great day.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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Canacol Energy Ltd. (CNNEF) Q2 2023 Earnings Call Transcript