Canacol Energy Q3 2024 Earnings Call Transcript

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Provided by Quartr
November 8, 2024

There are 4 speakers on the call.

Operator

Hello, and welcome to the Canacol Energy Third Quarter 2024 Financial Results Conference Call and Webcast. All participants will be in listen only mode. Call. Please note this event is being recorded. I would now like to hand the call to Carolina Orozco, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Good day, and welcome to Canacol's Q3 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 Bettnor, Chief Financial Officer.

Speaker 1

Before we begin, it's 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.

Speaker 1

Dollars. We will begin the presentation with our President and CEO, Mr. Charles Gamba, who will summarize highlights for our Q3 2024 results. 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. I will now turn the call over to Charles Gamba, President and CEO of Canacol Energy.

Speaker 2

Thanks, Carolina, and welcome, everyone, to Canacol's Q3 2024 conference call. We're pleased to report that this past quarter was another record breaking one for Canacol with EBITDAX reaching a new high of $86,000,000 driven by interruptible pricing, interest in operations and the ruling in favor of the company in an arbitration process Promigas, gas transportation company here in Colombia, which Jason will discuss in more detail later. Our realized natural gas prices for the quarter were $6.69 per Mcf, 24% higher compared to the same period in 2023. Additionally, we generated netbacks of $5.25 per Mcf representing a 27% increase compared to the Q3 of 2023, maintaining strong operational margins of 78%. Our strong performance continues to be supported by robust natural gas prices, which early in the year were driven by the impact of El Nino weather phenomenon in Colombia.

Speaker 2

While El Nino ended in May, reservoir levels have been recovering slower than anticipated, keeping electricity prices high and driving up interruptible natural gas pricing and demand. Additionally, Colombia's gas supply is tightening due to the continued production decline of Ecopetrol's large 30 plus year old gas fields, Bayena on the Caribbean coast and the Kousiana Cupahua complex in the interior. This supply challenge has led to increasing reliance on imported LNG to meet national gas demand. This market environment combined with our focus on cost reduction, production stabilization and increased exposure to the interruptible gas market have been essential to maximize our response to market dynamics and achieve these results. Our commercial strategy introduced at the beginning of the year to increase our exposure to the interruptible market has been effective.

Speaker 2

During the quarter, we averaged 169,000,000 standard cubic feet equivalent per day of gas and oil sales, which include average realized natural gas sales of 160,000,000 standard cubic feet per day and 9,000,000 standard cubic feet equivalent of oil sales. Throughout 2024, our gas production capacity has been gradually recovering, thanks to successful exploration drilling activities and our maintenance programs, which include ongoing workovers of existing wells and the installation of additional compression. This last quarter, we drilled the Chantadura III appraisal well on our VIM-twenty one block, continuing with our strategic approach of low risk near field drilling, targeting drilling prospects close to existing infrastructure and utilizing legacy 3 d seismic data. Chantadura 3 successfully produced gas into our existing infrastructure. We also drilled the 1st exploration well in our new Riedo Lante 3 d seismic program located in the northern part of the VIM-five block.

Speaker 2

The Cardewomo 1 exploration well encountered 203 feet of net poured sandstone within the Cienaga de Oro formation with non commercial amounts of natural gas encountered. Despite not resulting in a commercial discovery, it provided valuable data confirming that an active petroleum system exists in a largely undrilled area of the basin on our block. With over 200 feet of reservoir encountered and the presence of gas, Cardamomo results have significantly reduced reservoir and source risk for future prospects we plan to drill in this lightly explored area. I'll now turn over the presentation to Jason Bednar, our CFO, who will discuss our Q3 financial results in more detail.

Speaker 3

Thanks, Charles. As we already mentioned, the Q3 of 2024 was another very good quarter with record EBITDAX and strong pricing and netbacks from our producing operations. Also, our financial results continue to be further strengthened by our ongoing commitment to operational efficiency aimed at reducing costs and capital expenditures while maintaining strong operational and financial performance. Our realized natural gas prices net of transportation of $6.69 per Mcf during the 3 months ended September 30, 2024, represents a 24% increase to the $5.40 per Mcf during the same period in 2023. This increase shows both the 19% increase in the average sales price of our firm long term fixed price contracts, which reached $604 per Mcf for the 9 months ended September 30, 2024 compared to $5.09 per Mcf for the same period in 2023.

Speaker 3

And secondly, it reflects high interruptible prices, which averaged approximately $9 per Mcf during this quarter. As Charles mentioned, this favorable pricing environment is mainly driven by tight natural gas supply in Colombia, which ratifies our contracting strategy for this year by maintaining a relatively higher exposure to the interruptible market. Driven by the strong pricing and by maintaining cost efficient operations, we achieved a natural gas operating netback of $5.25 per Mcf during the Q3 of 2024, which is 27% higher than the same period in 2023, maintaining a strong operational margin of 78%. Despite 10% lower realized natural gas sales volumes during the Q3 of 2024 compared to same period in 2023, we generated total revenues net of royalties and transportation expenses of $87,900,000 which is 15% higher compared to the $76,600,000 for the same period in 2023. Adjusted EBITDAX rose significantly by 38 percent, reaching $85,800,000 for 3 months ended September 30, 'twenty 4 compared to $62,100,000 for the same period in 'twenty 3.

Speaker 3

This increase was driven primarily by higher operating netbacks for natural gas, alongside a $14,200,000 arbitration ruling in favor of Canacol associated with the natural gas transportation company in Colombia Promigas over disputed transportation costs. During the quarter, the arbitration tribunal ruled in our favor, ordering Promigas to reimburse Canacol for overcharge amounts plus interest totaling the 14,200,000 dollars This settlement was recorded as other income for the period. And on November 6, we received the funds in full. Adjusted funds from operations also increased by 18% to $57,900,000 for the quarter from $49,000,000 in the same quarter in 2023, mainly attributed to the increase in EBITDAX, but partially offset by higher income taxes. The corporation also reported a net income of $10,300,000 for Q3, a substantial improvement from the net loss of $500,000 in the same period of 2023.

Speaker 3

This increase was driven by higher EBITDAX and the absence of nonrecurring asset impairment recorded in Q3 2023. However, the growth was partially offset by a noncash deferred income tax expense of $5,300,000 in Q3 2024 due to FX changes compared to a deferred income tax recovery of $15,700,000 in the prior year. Our capital expenditures for the 3 months ended September 30, 2024, were $23,900,000 down from $43,800,000 in Q3 2023. This reduction reflects lower operating spending on warehouse inventory and facilities and equipment aligning with the corporation's commitment to capital efficiency. Our strategic investments have allowed us to achieve a record return on capital employed of 21% for the 3rd quarter, a significant improvement compared to the 3% reported in the same period in 2023.

Speaker 3

This reflects our disciplined approach to prioritizing high return projects and optimizing capital allocation, ensuring that each investment contributes meaningfully to our financial performance. At September 30, 2024, the corporation had $67,100,000 in cash and cash equivalents, marking its strongest cash position since Q1 2023, along with the working capital surplus of $62,100,000 highest recorded since Q3 2022. This robust liquidity well positions the corporation to meet both ongoing and future operational needs, providing the financial flexibility required to capitalize on strategic opportunities and support sustained growth. On September 3, 2024, we announced the successful closure of a 24 month $75,000,000 senior secured term loan facility with the Macquarie Group, which strengthened the corporation's financial position and offered the flexibility required to sustain growth and accelerate operational investments as needed. To date, we have drawn a total of $50,000,000 The facility, which carries an interest rate of sulfur+8 percent on drawn amounts, is set to mature in September 2026 and includes a 12 month grace period for principal payments.

Speaker 3

This new facility aligns well with our existing covenants and supports Canacol's long term financial strategy. At the end of the Q3, we were fully compliant with all financial covenants, which include the following. Firstly, a consolidated leverage ratio of 3.25 in current space and 3.5 times maintenance. Our current leverage ratio is 2.55x, well inside these covenant restrictions. The second covenant is a minimum consolidated interest coverage ratio of 2.5x.

Speaker 3

Our current coverage ratio is 4.85x, which is well above the minimum required. And finally, a consolidated current ratio minimum requirement of 1 times and where it currently stand at 2.02 times. As such, we're well inside all of our covenant restrictions. Lastly, I'll make a few comments about income taxes. The current tax expenses found on the income statement totaled $54,600,000 for the 1st 9 months of 2024.

Speaker 3

However, we do still expect the 2024 full year amount to total approximately $30,000,000 post the recording of an anticipated recoveryreversal in Q4. With respect to cash taxes paid as outlined in the MD and A, we paid the final installments and prepayments of taxes relating to the 2024 year during this quarter. This $36,000,000 of cash taxes paid in Q3 brings the 9 month total cash taxes paid to $66,000,000 and leaves us with minimal monthly tax payments during the Q4. Due to these disproportionately high payments during 2024, we do expect to end 2024 with a sizable tax receivable balance. And as such, we don't expect to have any tax installments due in 2025, but for the nominal amount taken off our monthly revenue checks in favor of our tax accounts.

Speaker 3

That concludes my comments. I'll now hand it back to Charles.

Speaker 2

Thanks, Jason. In September, we revised our 2024 capital program to further enhance our drilling activities through the remainder of this year. The updated plan adds 4 additional wells for a total of 11 wells with an estimated capital expenditure of CAD138 1,000,000 which is the original low end CapEx estimate for the year. This revised program includes 5 exploration wells and 6 development and appraisal wells. We're able to increase our drilling activity and maintain our original CapEx for 2024 largely due to the cost efficient initiatives enabling the corporation to maximize operational output while maintaining disciplined capital management.

Speaker 2

To date Canacol has drilled 7 wells, which includes 6 successful wells those being Clarinete 10, Pomelo 1, Chantadura 1, 2 and 3 and recently Nispro 2. For the remainder of 2024, we plan to drill 3 exploration wells, those being Natiya 2, Kite I and Pibe I along with 1 appraisal well. The Natia II exploration well is a high impact prospect located on our SSJN-seven E and P contract and is targeting sandstones of the Cianario formation with additional potential in the overlying Porcaro formation. We spud the well on November 2 with an estimated 2 month timeline for drilling and evaluation. Success in the Tia could be particularly exciting given that it's a sizable prospect with potential to add substantial reserves as well as unlock a new gas producing area for the company.

Speaker 2

Additionally, it will help derisk 9 similar prospects we have identified in the recently acquired Mayupa 3 d seismic area. We are also drilling the Kite 1 and PB1 exploration wells, which are near field prospects positioned on a productive structural trend extending from our Palmer gas field to the south through to our recently discovered Pomelo and Chantadura gas fields to the north. Both wells are targeting the same Cienaga de Sandstorm reservoir targets. We spudded Kite yesterday with results anticipated by late November and PVA1 should spud later in November with results anticipated in mid December. If successful, both wells will be placed immediately on production and flow into our Jobo facility for sales.

Speaker 2

Finally, throughout the remainder of the year, we will be drilling 1 additional appraisal well, which if successful will also be placed on production immediately. The corporation also this quarter secured approval of our 4th E and P contract in Bolivia, Tita, that includes an existing gas field reactivation. The next steps will be to sign all four contracts and begin development operations at Tita with a view to adding reserves and production commencing gas sales in 2025. As Colombia's largest independent natural gas producer with approximately 16% of market share, we are confident in the strong foundations we built here and the resilience that has carried us through our recent challenges. Our high operational efficiency and profitability with annual operational margins consistently above 75% have kept us agile and well prepared to capture new opportunities.

Speaker 2

We're also pleased to lead in low emissions with an intensity that is 75% lower than our oil focus peers and 45% lower than our gas focus peers, aligning growth with a commitment to environmental responsibility. As we look forward, we see great potential for exploration here in Colombia with over 20 Tcf of unrisked prospective resource on our existing acreage, all located close to existing transportation and production infrastructure. We're confident about the path forward as we continue developing our plans for next year, which we look forward to sharing in January of 2025. Our focus remains on derisking our exploration portfolio, particularly in the lower and middle Magdalena Bisons of Colombia. This will help strengthen Canacol's position in Colombia's dynamic gas market.

Speaker 2

Additionally, our recent strategic entry into Bolivia opens up further opportunities to expand our regional presence, creating strong foundations for sustainable growth. Thank you all for your attention and we're now ready to take questions.

Operator

We will now begin the question and answer

Speaker 1

Thank you. We will begin with the first question from Augusto Rive from Macquarie Asset Management. Can you please give us some question on the firm gas contract terms for 2025 being negotiated into year end? Do you still foresee a contracted volume of 70% for next year?

Speaker 2

Yes, thank you. Approximately 20,000,000 cubic feet per day of our existing firm contracts will be falling off at the end of this month, November 30. Gas demand remains very strong, projecting into next year, and we're currently negotiating potential new firm contracts at this point in time. But at this moment, we have not made a decision with respect to executing additional firm contracts. Our thinking is to keep as much volume as we can available to the interruptible market where we expect pricing to be robust next year.

Speaker 2

Thank you.

Speaker 1

Thanks, Charles. The next question comes from Peter Puchenko from DoubleLine. You mentioned another successful well that will start adding production in a few weeks. Was this previously reported or this was a new development discovery?

Speaker 2

Yes, that's referring to the Nisborough 2 well, which is an appraisal well of our Nisborough discovery that we made in 2019. We completed the drilling of that well fairly recently and are currently completing the well in order to bring it on to production, which we anticipate to occur next week.

Speaker 1

Thank you, Charles. We have another question from Kevin Salisbury from 91. Can you please give a little context around the mentioned working capital surplus? Why has this developed now? Do you expect it to unwind and over what period of time?

Speaker 3

Thanks Carolina. The strong working capital balance this quarter is essentially related to the very strong EBITDAX quarter and free funds from operations as compared to a very small CapEx number of $23,000,000 so $85,000,000 in EBITDA, dollars 23,000,000 in CapEx. Once again, that $85,000,000 in EBITDA does include the $14,000,000 of the Promigas settlement, so that also helped. Looking forward, no, I don't expect it to unwind. Given the robust EBITDA projections, the tight gas market, etcetera.

Speaker 3

Even though the Q4 CapEx will be higher, I don't expect the working capital position to unwind.

Speaker 1

Thank you, Jason. Next question is from Alejandro Andrade from JPMorgan. When should the company start investing in Bolivia, timing and amounts first? Thanks.

Speaker 2

Yes. We expect with the execution of the contracts this year, by the end of this year, we expect to begin investing primarily within the TETA contract, which is an existing gas field that's been shut in since the year 2000. And we expect investment of up to relatively minor investment next year of up to around $12,000,000 aimed primarily at the work over of existing wells, the testing of those wells and the construction of some gathering infrastructure in order to commence production and sale from those wells.

Speaker 1

Thank you, Charles. We have another question from Alejandra Andrade from JPMorgan. She said, under student taxes, is the withholding level close to 7% of top line?

Speaker 3

Yes. We broke out withholding taxes separate from income taxes in our MD and A. I assume that's what she's referring to. So what's labeled there as withholding taxes has to do with intercompany transactions and withholding amongst those different jurisdictions. Not to be confused with, we do get 4% of our revenue check is withheld and paid monthly to the DN in favor of our tax account.

Speaker 3

But the what's labeled as withholding taxes relating to intercompany transactions has no set relation to revenues.

Speaker 1

Thanks, Jason. We have a question from Sergio from UBS Asset Management. Do you expect to reach a reserve replacement ratio in excess of 100 percent for full year 2024?

Speaker 2

Yes. The 11 wells that we're going to be drilling this year, exploration and development of appraisal wells, along with the workovers we have done and the installation of compression, we're targeting a reserve replacement ratio of approximately 120% with this year's program.

Speaker 1

Thanks, Charles. The next question comes from Stephane Choline. What are the conclusions or observations following Cardamomo 1 results?

Speaker 2

Cardamomo 1 was the first exploration while we drilled off the newly acquired Redo Boulante 3 seismic program that we collected last year on the VIM-five block. Cardamomo-one, although disappointing in that it's not encountered commercial quantities of gas, did encounter a much thicker section of poor sandstones within the target reservoir, the Cienaga de Oro, just over 200 feet, which is very positive for the rest of the prospects we've identified in that block. And some of the sandstones did indeed contain gas. However, it seems that there was an issue with fault seal along one of the faults defined in the Cardamomo prospects. So we're currently evaluating the offsetting prospects.

Speaker 2

We've identified 11 other prospects on that new three d. We're currently reevaluating the false seal analysis, which appears to be the main cause of failure at Cardamomo on those other 11 prospects in order to prepare for drilling 1 or 2 of those prospects next year.

Speaker 1

Thank you, Charles. We will now take an additional moment to review any remaining questions. Please stay with us and we'll resume shortly again. Okay. We have one last question today from Hisham Alwani from Magellan Capital.

Speaker 1

Can you please give us a rule of thumb of the relationship between peso devaluation and additional tax incurred? Can you give guidance for reserves based on current exploration?

Speaker 3

The second reserve question, Charles has already answered with respect to peso devaluation. Every 1% move in the peso would be good for plus or minus $4,500,000 So essentially, since our tax pools are devalued are recorded in pesos, if they devalue if the peso devalues by 1%, you'll see an additional $4,500,000 of deferred tax expense, not current tax.

Speaker 1

Thank you, Jason. We actually received another question from Augusto Uribe. Can you please give us more precise timing for the EUR 12,000,000 CapEx in Bolivia, first half or second half twenty twenty five?

Speaker 2

Yes, it would be second half of twenty twenty five would be the planned timing for that capital expenditure.

Speaker 1

Thank you, Charles. I think this was the last question that we received. So that concludes our call for today. Thank you all for joining us and for your questions. We appreciate your time and interest, and we look forward to connecting with you again on our next call.

Speaker 1

Have a great day.

Operator

The conference has now concluded. You may now disconnect your lines.

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Earnings Conference Call
Canacol Energy Q3 2024
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