PetroTal Corp. (OTCQX:PTALF) Q3 2023 Results Conference Call November 13, 2023 10:00 AM ET
Jimmy Lea – Celicourt
Manolo Zuniga – President & CEO
Doug Urch – EVP & CFO
Conference Call Participants
Hello, ladies and gentlemen. Welcome to the PetroTal Q3 2023 Results Investor Webcast. Your hosts today will be Manolo Zuniga, CEO; and Doug Urch, CFO of PetroTal. There will be a Q&A session following the presentation. If you would like to ask a question, please submit it via the online platform and the team will do their best to answer it in the time allotted.
I will now hand over to Manolo and Doug. Please take it away.
Thank you, Jimmy, and good day everyone. Thank you for joining the PetroTal 2023 third quarter webcast. We will provide a brief summary of our third quarter 2023 operational and financial results. If anyone wants further information on the Company, please see our website for additional materials.
My name is Manolo Zuniga, and I’m the President and CEO of PetroTal, and I’m joined by my colleague, Doug Urch, Executive VP and CFO. If you have clicked on the link in last evening’s press release, you should hopefully have signed up to the webcast, so you may see the slides on your screen. But you are having issues seeing them please contact firstname.lastname@example.org, and they will be able to assist you.
Before I begin, I need to mention that there are some disclaimers towards the end of the presentation, which I would urge you to read at your own leisure.
As shown in Slide 2, PetroTal is an onshore Peru focused oil company that in just five years has become Peru’s largest crude oil producer. The Company is listed on London’s AIM market, the Toronto Stock Exchange and the U.S. OTC, having a market cap of approximately $500 million. We have a 100% working interest in the Bretana oil field, which we have expanded from minimal production to over 25,000 barrels of oil per day in late June 2022.
The third quarter of 2023 was a resilient quarter as we navigated through another severe drought dry season, which limited our Brazilian barge transport and tanker unloading capacity at Manaus. Despite this challenge, the Company delivered free cash flow in Q3 2023 that was on par with Q2 2023 due to prudent capital spending and high realized rent prices. This has allowed us to again top off our dividend payment, this time at $0.02 per share instead of the nominal $0.015 per share as that will later explain, but first a brief summary of our assets.
The Bretana field in Northeastern Peru delivered first commercial production in mid 2018 and has since grown from no production to over 20,000 barrels of oil per day in 5 short years. Currently, the 2022 year end 2P reserves our 97 million barrels, which have an after tax 2P NPV-10 per share of $1.75. The field currently has 16 producing wells and 3 water disposal wells capable of disposing approximately $50,000 per water per day each.
The Company is able to deliver all of these on just a tiny 30 acre surface field footprint with emissions of approximately 6.96 kilos per barrel of a Scope 1 carbon emission in 2022 as will be shown in the soon to be published 2022 sustainability report. We would like to cover our Q3 2023 in detail in this webcast and also showcase some of the critical sales route expansion work our commercial team has been doing.
Slide 3 summarizes key and selected Q3 2023 highlights. From our operational perspective, during the third quarter, we delivered 10,909 barrels of oil per day with corresponding sales of 11,553 barrels of oil per day in sales. The production level was highly constrained for the entire quarter as the dry season material impacted barge transport and tanker unloading capacity at Manaus.
During Q3 2023, we invested approximately $17 million of CapEx, mostly on continued infrastructure projects. It is important to note that the Company was not drilling during the quarter as the construction of the new L2 West Platform where we plan to drill an additional 9 wells was ongoing, while the rig was on standby.
For Q4 2023, we’re anticipating a very active and significant quarter with various fluid handling infrastructure projects concluding and the restart of the drilling campaign with well 16H that should occur later this week. Of course, 16H is another horizontal well.
The Company estimates its total capital spend for 2023 will still be between $120 million to $130 million as we have guided recently. From a per barrel perspective, lifting costs were $8.45 per barrel in the quarter versus $4.22 in Q2 2023 due to lower sales volumes and an additional $2 million from well servicing and erosion control costs.
Transportation costs were $4.64 per barrel versus $1.58 in Q2 2023 due to additional floating storage costs related to a Brazilian route. Note that these floating storage costs allowed the Company to quickly ramp up production, avoiding longer part normalization times when river levels improved.
All in, the Company delivered a total OpEx per barrel cost of $13.09 per barrel versus the prior quarter of $5.80 per barrel. The Company believes with higher sales volumes and the avoidance of one-time well servicing cost, we will be able to lower this total cost next quarter.
Slide 4 shows guidance. During the month of October, the Company had to fine tune its full year production and sales guidance to the lower-end of the previously guided 14,000 to 15,000 barrels of oil per day range. As the full impact of the dry season, which critical levels during that month are showing in the left graph.
As shown in the right picture, the drought also impacted frequent tariffs to the Amazon River in Brazil, which impacted operations at the Port of Manaus. The graph to the left also shows the historically high and low levels that occur in 2012 and 2010, respectively. I just saw this morning’s transportation report.
I noticed a large — we will level jump for the black line that shows the 2023 level now back at the 80 meters subsea level. It is important to highlight that, on average years, as shown with the green line, the Amazon River is a perfect highway to transport our crude oil and all types of merchandise, a year of river level difficulties have challenged our commercial team to further optimize the Brazilian route.
As shown in Slide 5, one of the things the team has been working on is the ability to avoid loan barge queues times for barges waiting to unload at Manaus. Our current unloading process is seen in the picture on the left. We are now solving that problem with a new commercial arrangement, recently approved by Transpetro.
Under the commercial arrangement, PetroTal will unload its crude oil barges directly to an available and dedicated tanker. This development will increase PetroTal’s monthly sales on the Brazilian route by reducing substantial barge queue time mandated by port terminal availability. It will also allow the Company to produce and sell more oil through the Brazil route, both during the dry and wet river seasons.
The Company produced 13,400 barrels of oil per day from October 17th to November 9th, 2023, at which time, it increased production to 15,300 barrels of oil per day, and estimated will ramp up back to around 20,000 barrels of oil per day by the end of this week, coinciding with rising river levels. With the new L2 West Platform completed and fully commissioned, the Company will commence drilling well in 16H shortly allowing us to maintain production at these levels.
As shown in this Slide 6, well 16H lies to the southern part of the field and is estimated to cost approximately $50 million. As mentioned before, if all the wells were allowed to produce and constraint, the field would easily be producing more than 20,000 barrels of oil per day. As with the prior quarter, we have updated our commercial sales route strategy as shown on a Slide 7. This slide summarizes where the Company’s short and long-term plan is around existing and new sales routes in Peru.
As previously mentioned, the Company is undertaking a 100,000 barrel pilot through Ecuador using the OCP, Ecuador’s heavy oil pipeline with the oil eventually ending up at the port of Esmeralda. This initial pilot will have a slightly lower net back compared to the Brazilian route. However, with larger volumes, with the Company estimates a very competitive net back with other current routes.
The Company is also diligently working to barge oil to Yurimaguas and then by truck on to buy over without using the ONP. This would involve a 750 kilometers Yurimaguas and just 1,000 kilometers to Bayovar. The operations team previously used this route in 2019 and is familiar with his corresponding logistics,0020safety protocols and infrastructure. Currently, the Company has advanced work on this route and is currently risk scouting and waiting for permits approvals.
This route will have approximately 5,000 barrels of oil per day of potential sales capacity. And given the differences seen at Bayovar should have a competitive netback after accounting for the increased trucking and barging costs required for this valve. Infrastructure upgrades are required for this route to be used regularly and are related to work to transfer portfolio. The Company estimates an initial pilot to be done in mid-2024.
I will now turn over the meeting to our CFO, Doug Urch, who will provide a brief financial update.
Thank you, Manolo. I’m Doug Urch, PetroTal’s CFO. I would like to start off highlighting a few select financial items from our recent press release and financial statements with visual support from Slide 8. From a balance sheet standpoint, PetroTal exited the quarter with over 113 million of total cash and is in an $87 million net surplus position considering all other working capital amounts.
The Company has no long-term debt and no amounts drawn on its $20 million short-term credit facility as at the end of Q3 2023. The Company delivered strong financial metrics in the quarter on 1 million barrels of oil sales in the quarter, representing 11,553 barrels of oil per day, compared to just 1.7 million barrels in Q2 2023, which represented 19,031 barrels of oil per day.
Following is a short summary of key P&L line items, net revenue of $69.1 million, $65.05 per barrel. Contracted Brent in the quarter was $84.31 per barrel compared to $77.88 per barrel in Q2 with the Brazilian transportation differentials and backwardation reconciling the realized net revenue per barrel amounts. Royalties for the quarter were $5.8 million or $5.49 per barrel inclusive of Social Trust provisions. This was up slightly on a per barrel basis from Q2 2023.
Total operating expenses in the quarter were $13.9 million, representing $13.09 per barrel compared to $9.7 million or $5.80 per barrel in Q2 2023. The Q3 2023 fixed operating costs included approximately 2 million in well servicing and erosion costs that were not present in previous quarters.
Q3 2023 net operating income of $49.4 million or $46.47 per barrel compared to $76.6 million or 45.53 per barrel in Q2 2023. Q3 2023 free funds flow was $36.9 million compared to $37.7 million in the prior quarter due to higher Brent prices and lower capital expenditure spending in the quarter and positive derivative realizations.
Net income for the quarter of approximately $25.4 million, representing $0.03 per share compared to 46.6 million in Q2, making it the 15th consecutive quarter of net income for the Company.
On Slide 9, the Company is guiding its 2023 production to the lower end of the 14,000 to 15,000 barrel of oil per day range as Manolo has already mentioned. EBITDA and capital expenditure guidance are still on trend with prior estimates with the Company still estimating between 80 million and 90 million of after tax free funds flow of which we have generated 82 million year-to-date ending September 30, 2023.
Ending cash in 2023 is estimated to exit in our minimum liquidity range of around 60 million, leaving it a small buffer for unexpected working capital needs. We encourage investors to view our free cash flow metrics on Slide 9 in our November investor presentation for production level and oil price free cash flow sensitivity.
Slide 10 summarizes our return of capital policy and amounts paid to date. During Q3 2023, PetroTal was very pleased to announce that a dividend of $0.025 per share based on the strong Q2 2023 results was paid on September 15th. That represented an additional $0.01 per share over the base $0.015 per share in accordance with the Company’s cash sweep policy.
The Company is also pleased to announce its Q4 2023 dividend. Based on Q3 2023 results and cash balances, PetroTal has approved a $0.02 per share dividend payable on December 15, 2023, representing an estimated 15% annualized dividend yield. This includes an additional $0.005 per share over the base $0.015 per share as a result of available cash and projected working capital requirements.
The Company views this amount as a strong indicator on its ability to maintain and increase its capital return policy under challenging operational conditions as we experienced in Q3. The key upcoming dividend dates are summarized as follows. The ex-dividend date November 29th, record date November 30th, and the payment of the dividend will be on December 15th.
The Company has also substantially increased its buyback program in Q3 versus Q2, buying back 5.6 million shares. Cumulatively, the Company has purchased over 7 million shares totaling $4.3 million to the end of October and has paid over $55 million in dividends including the December 15th amount, representing approximately 12% of our market cap.
To conclude, Slide 11, now in our corporate presentation, represents the immense value proposition that PetroTal can deliver to shareholders on a short- and long-term basis while maintaining a lucrative dividend and share buyback program.
According to this internal and unconstrained forecast, the Company will generate material short- and long-term discretionary cash flows at $80 Brent and after return of capital. PetroTal will have many exciting future projects to evaluate from both an exploration and external M&A perspective, inclusive of our return of capital policy is substantially or sustainably down to $60 per barrel Brent.
I thank you for your continuing investor support, and we’ll now turn the meeting back to Celicourt for the Q&A session.
A – Jimmy Lea
Thank you, Manolo and Doug. What sort of range do you expect for Bretana production in 2024?
Well, you know, we have yet to complete our 2024 budget. So we are constrained on providing that as we have shown in our talk, we are looking at different routes. So, we do expect to do better than this year, but we cannot yet give a number, we will do better.
Can you please discuss the reopening of the OMP?
Yes. We actually met with Petroperu last week with the head of the ONP. And that person that manager was indicating that the pipeline now is ready to flow. The issue right now is that all of the tanks, the poor are being used by crude oil that Petroperu purchased for the commissioning of the Talara Refinery, which they hope to have complete by the end of this year, at which time they will free some times and hopefully all could start flowing again.
Keep in mind that for oil to flow, someone has to inject oil on the other end of the pipeline. So we are proposing to overboard the idea of going back to the ONP that the old-fashioned way were not with the contract that we had before that created that derivative. So, it’s just putting oil and waiting for it to come out.
But we will see, in the meantime how things shape back with the — some of you may not be aware that last month, the National Police was able to capture a 29 band that was responsible cutting the pipe they make money with us repairs. Since then, there have been no more cut in the pack. So Petroperu is hopeful that things will normalize sometime next year. But we cannot provide a specific time.
What changes can be made to improve share liquidity? Is a U.S. listing a possibility in the future?
Well, we are looking for ways to generate additional liquidity in the stock. We are trying to target, generalist funds and additional retail investors, both in the UK and North America. To accomplish this and work with our brokers to address this, we currently trade on the OTC. However, there are no plans right now to expand on that U.S. listing.
Is there an update on the Petroperu receivable situation?
There have been no changes in the Petroperu receivable other than the — you’ll read in the original amount they owed us from the lifting in the prior year. The final payment was received on that in August. So July and August we represented the final payments of the $64 million from the prior year. At this point in time, Petroperu have not increased our credit facilities and nor have we been delivering any oil to the pipeline. All amounts that they owe us from deliveries to Ketos are current.
How long do you predict an increased demand for oil? In the guidance and the investor presentation, you have a forecast for plenty of years. Do you see a threat from the change to green fossil free resources or a possible a ban on fossil fuel energy?
I can answer that one. We’re bullish on both short term and long term for oil and gas demand. We believe there should be a long-term balance between green energy and legacy fossil fuels over the long range. We also believe the lack of investment in major oil and gas projects over the last three to five years, will have a significant impact on providing a strong macroeconomic conditions over the next five to seven years when investment levels could be higher PetroTal.
Thank you. Could you please quantify further the impact of the barge to ship optimization for the Brazil route?
Yes. We have been doing a lot of work on that, as I mentioned on my talk. Back of the envelope, I would say, about 10% to 15%, something in that range. To to-date, for example, in 2023, we have sent 3.75 million barrels to Brazil, to Manaus. So 10% will be the equivalent of 1,000 barrels per day on an average basis and the same for the 15%. So, it is significant.
What will total oil processing capacity be after the CPF three is installed in December?
The idea for us is to be able to maintain production in the order of 25,000 barrels per day. Keep in mind that we also need to be concerned about the water handling. So it’s both from bank, oil, water. And that’s why I have always said we’re building a large plant to process as much fluids as possible to squeeze as much oil and of course, on a very economic basis.
Put additional Venezuelan heavy crude oil entering the market depressed the price of Bretana crude.
Well, potentially, that could happen. This is — it’s currently difficult to know as our current deal with our Brazilian rote fluctuates based on volumes and not necessarily market differentials. We would need a sale at Bayovar to potentially obtain more data on that front.
Storage costs in Q4 2023 should be lower as they will not have as much of an impact with dead freight storage charges as they did for July, August and September. So what we’ll see is October and a little bit of November, so it should be substantially lower than what we saw in Q2 — sorry, in Q3.
We are currently finalizing commercial terms of the Ecuador route, and it is too early for us to comment on that at this point in time.
Based on well performance and depletion, should we expect 2023 year-end reserves to look similar to the 2022 year-end figures?
Well, yes. We’re targeting that. I have always said that I wanted to wrap some of the 3P, which in essence, you try to replace the 2P, you know. So it should be the same. On the 2P on the 3P, eventually, they need to converge. So, the 3P eventually is to come down.
Management has indicated in the past that they want to maintain a $60 million cash balance and that other moneys over and above will be available for distribution such as special dividend, et cetera. We have $94 million at the end of Q3. Why are we not receiving a larger special dividend above $0.015, we could very easily handle an additional $0.01 to $0.02?
Well, we stated our return of our capital plan and excess liquidity calculation and it needs to factor in the future working capital and CapEx needs over the next two to three months. Q4 will be a busy quarter for us technically and hence capital expenditures and payables will be higher versus Q3 2023. So all of that is factored into the liquidity test that we look at of $60 million and what’s available for the distribution to shareholders.
And we have always mentioned that we need to be careful with that concept of liquidity. We, as management, we need to look a year from now. So, I think whoever asked the question probably spoke to my wife, that of course, she also likes more dividends. We’re fully aligned, but we need to look for the health of the Company for the future.
Have any further testing results been confirmed with regards to oil reserves that are shaky.
Not yet. We have yet to drill that key well. A management is very excited about the potential. Permits take a long time, unfortunately. So things have been push late into the future. Now, we’re projecting in 2025 to be able to drill that well. And in the meantime, we continue to do more geologic work, seismic reprocessing and things like that, just to be a 100% sure. And then see if anyone would like to join us on this, I believe, great project.
Some of your peers have looked to broaden their Latin American portfolios into new countries. Is M&A outside of Peru also an option being considered by the Company?
Yes, absolutely. Now we have made it clear that we’re going to look for something that makes a lot of sense. I have always stated since I said that this company is almost six years ago. I have always liked Ecuador and so the team, a senior team that takes Oxy. So they know Ecuador, Colombia very well. Again, we always compare against Bretana and it’s difficult when you have such a wonderful feel like Bretana, but we are and — it has to be something that truly adds value.
It was previously mentioned adding storage downstream to prevent low water levels from impacting barging. Is this part of this year’s CapEx? And could this be completed by next summer?
We have been looking at that, but we don’t have yet any specific timetable. What we have done in the past is added to the barge fleet. We have 1.7 million barrels of back fleet. And as I showed, the way we are now unloading oil in announced, sort of fits into that question, that we are accelerating the move of the barges.
What is the M&A opportunity set in Peru, as you see it? Would you prefer to acquire cash flow positive production assets, or are you more interested in higher return exploration, appraisal and development assets?
You know, I believe that we could, and as Doug mentioned in his presentation, tackle both. You know, so, and, again, you know, maybe we bring a partner for Block 107. We can look at some M&A. We are managing and looking at everything.
Two questions. Can you hire more barges during the low season for the Amazon to keep production flat is the first question.
Well, the issue that that we have is that in the barges from Brazil, their draft is much higher than the ones in Peru. And in Peru, we have basically are using the entire fleet. So some of the local companies in Peru have offered to build more barges and hopefully they’re ready by next year. So that will improve quite a bit. So we’re looking at ways to optimize the entire transport highway that we have, as I mentioned in my presentation. That is so Peruvian barges, they need to build some more, because the Brazilian ones in the dry season, they have difficulty getting into Peru.
Is there any chance you will increase share buybacks?
Well, that’s unlikely at this point in time. We are currently near the maximum what we are allowed to buy back from the TSX rules for standpoint. We could potentially look at this once we’re able to increase liquidity of the stock over the longer term since that’s one of the key drivers.
Just a reminder, if you’d like to ask a question, please do so via the platform. This is currently the final question, on the list. Has PetroTal been hedging at these oil prices where Brent has been around $85?
No. We have not been hedging at this point in time. We had watched the oil prices closely and with our advisers, we’ll determine if we need to put some other hedging in place. You know, one of the key reasons we had hedges in place, and the prior year was because of the bond repayments and that were required. So not having any scheduled debt that needs to be covered, gives us a bit more flexibility, and of course, we have flexibility with our capital investment program as well. So that’s our perspective at this point in time.
Manolo, Doug, thank you. I’ll now hand back to you for closing remarks.
Well, I want to thank everyone listening to this presentation and for your questions, showed the interest on PetroTal. We’re extremely excited, try to finish this year, with increased production and saving ourselves to have a fantastic 2024.
Thank you so much.