Canacol Energy Ltd (OTCQX:CNNEF) Q2 2022 Earnings Conference Call August 12, 2022 10:00 AM ET
Company Participants
Carolina Orozco – Director, IR
Charle Gamba – President and CEO
Jason Bednar – CFO
Conference Call Participants
Oriana Covault – Balanz Capital
Chen Lin – Lin Asset Management
Josef Schachter – Schachter Energy Research
Operator
Hello. And welcome to the Canacol Second Quarter 2022 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Vice President of Investor Relations, Carolina Orozco. Please go ahead.
Carolina Orozco
Good morning and welcome to Canacol’s second quarter 2022 financial results conference call. This is Carolina Orozco, Director 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’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 commitments as to future results nor take into account risks and 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 US dollars. We will begin the presentation with our President and CEO, Mr. Charle Gamba, who will summarize highlights for our second quarter. Mr. Jason Bednar, our CFO, will then discuss financial highlights. Mr. Gamba will close with a discussion of the corporation’s outlook for the remainder 2022. 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
Thank you, Carolina. Good morning or good afternoon to everyone and welcome to Canacol’s second quarter 2022 conference call. In the second quarter, we realized natural gas sales of 188 million standard cubic feet per day, which is above the midpoint of our annual guidance of 160 to 200 million standard cubic feet per day, 10% higher than the same quarter in 2021 and 3% higher than the first quarter of this year, thanks to the growing demand for gas in Colombia.
If you’ve been following our monthly updates, you’ll also know we sold 198 million standard cubic feet per day in both June and July. So we’re clearly trending towards the upper end of our guidance in terms of sales lines for the year. In line with what we said in our last conference call in May what we’ll be seeing this year here in Columbia gas markets is that the economy has started to grow again as the effects of the COVID pandemic wane, just translated into higher energy demand and hence higher demand for our natural gas.
Our stable production and operating conditions allowed us to report another quarter with high operating margins of 77% and relatively high return on capital employed of 16% annualized for the quarter. With respect to our current drilling activity, we continue with the execution of our drilling programs after this year with a total of six developments and exploration wells drilled to date from which three successful exploration wells have been realized. Finally, at the end of the quarter, we published our 2021 ESG report, in which we reported Scope and 2 GHG Emission intensities that are more than 50% lower on average than our gas focus peers and more than 80% lower on average than our oil focus peers in North and South America. Our emission intensity is lower than the average for many broad equity indices, including some which constants and select, we’re having low carbon emissions.
And I’ll turn the presentation over to Jason Bednar, our CFO who will discuss our second quarter financial results in more detail.
Jason Bednar
Thanks Charle. We continue to execute our plan to develop our natural gas business in the second quarter. Reported the following for the second quarter of 2022. $70 million of production revenue net of royalties and transportation which represents a 31% increase from Q2 of ‘21. The increase was driven by higher sales volumes and higher realized prices. $39 million in adjusted funds from operations which represents a 16% increase from the same period in 2021. We also reported EBITDAX of $55 million, which represents a 24% increase from the same period in 2021. And finally, a net loss of $6 million when we report a small net profit in the same period in 2021.
As I’ve explained on previous conference calls, a big driver of our net income each quarter is unrealized foreign exchange gains and losses that can impact the valuation of our tax pools which are in Colombian pesos. In the second quarter, we recorded a deferred tax charge of $12 million, the majority of which was due deterioration in the value of the Colombian peso versus the US dollar, and without which we would reported a healthy positive net income. In the event that the peso strengthens against the US dollar in the future, the corporation would realize that deferred income tax recovery. I’ll also note that in Q1 of 2022, we saw a stronger Peso and during that quarter, we booked a $12 million deferred tax recovery, almost identical in quantum to this quarter’s deferred tax expense that’s leaving the six month year-to-date balance essentially flat. Our operating netback was $3.66 per Mcf in the three months ended June 30, 2022, which is 17% higher than in the same period in 2021. Also 2% higher than the prior quarter, and slightly above our guidance for $3.60 on average for 2022.
In fact, this was the highest quarterly net back we’ve reported since the third quarter of 2019 prior to the COVID-19 pandemic. Our realized gas price of $4.73 was also the highest we’ve achieved since before COVID, and was at the upper end of our guidance for the year $4.61 to $4.74 per MCF thanks to a stronger interruptible prices. Recall that the majority of our guidance is based on sales under fixed price take or pay contracts, with an average fixed price of $4.74 per MCF. OpEx was $0.31 per MCF in Q2, down from $0.36 cents in Q1. On our last call, I stated that during Q1 we’re doing some maintenance work hence the onetime quarter increase. We expect the remainder of the year OpEx to be approximately $0.30. In percentage terms, our gas royalties were $0.16 of gross revenue, which is in line with the average for the preceding two years.
To further highlight the strength and stability of our natural gas business as well as the growth that we see in our business and financial results, we want to again highlight the return on capital employed, implied by our financial statements over the last 14 quarters averaging 16% over the last 12 months. That concludes my comments on our second quarter financial results. I’ll now hand it back to Charle. Thank you.
Charle Gamba
Thank you, Jason. Our results for the second quarter once again demonstrate high and stable operating margins, as well as a very respectable return on capital employed. While weather presents an important role in power generation and gas demand in Colombia. We’re hopeful that strength in electrical demand and economic recovery after the pandemic in Colombia will support continued demand growth for our gas through the remainder of 2022 and beyond. Our guidance for 2022 remains unchanged. And we anticipate production and cash flow to be near or high end for the guidance of 200 million standard cubic feet per day of average gas sales. We also continue to anticipate our CapEx spending will come in closer to the lower end of our guidance at $170 million. Our exploration drilling program will continue at an increased pace in the second half of the year, as we drill ahead with two rigs currently at Claxon 1 and Canaflecha 2 within our core area and we are planning to contract additional drilling rigs to drill some of our higher impact exploration wells plan for the later this year.
Cretaceous, our 200 megawatt thermal electric plant located 70 kilometers from our Jobo gas processing facility entered commissioning this summer and is anticipated to commence generating in September of 2022. I’d like to congratulate Celsia, our operating partner for the successful conclusion of the construction process of Cretaceous.
Finally, we are continuing to evaluate and clarify the bids received from the pipeline construction consortiums, and hope to be able to make a selection announcement soon in order to progress this important median pipeline project. In summary, we’re continuing to deliver financial results within our previously stated guidance allowing us to proceed with both returning capital to shareholders and also investing for growth, operating from a position of financial strength. We’re now ready to take any questions.
Question-and-Answer Session
Operator
[Operator Instructions]
Our first question today comes from Oriana Covault of Balanz.
Oriana Covault
Hi, good morning. This is Oriana Covault with Balanz. Thanks for taking my question and congratulations for the good performance over the quarter. I had three questions, if we may go one by one that would be great. And in my first one related to the Cretaceous entering commissioning, and just if you could share how many NTF per day are you expecting it to bring to your top line? Now that it started commissioning?
Charle Gamba
Yes, we’ve been throughout the summer, we’ve been selling between 8 to 12 million cubic feet per day to the plant during commissioning, so the plant is not dispatching or simply testing the motors in sequence. When the plant enters dispatch in September, dispatch of electricity, we anticipate up to 20 million cubic feet per day, we’ll be going through that plant, assuming the utilization of approximately 50% of the capacity, the 200 megawatt capacity.
Oriana Covault
Perfect. That’s very clear. And my second question in relation to your comments on contract in another drill to the high impact exploration just you could share, how are you preparing for the drilling in Pola-1, have you made any changes to the expected drilling date and preliminary work that need to be carried over in Pola-1?
Charle Gamba
Yes, Pola-1, we’ve contracted a 3,000 horsepower drilling rig, it’s a fairly deep well at 18,000 feet, which requires a very large rig which has been mobilized from the United States. We’ve commenced activity with respect to the construction of the civil works, the drilling platform that the rig will be located on. And we anticipate that a spudding of the Pola-1 well, in November, so this year, we’re hoping to get the well initiated in the fourth quarter of this year.
Oriana Covault
Perfect. And just one last one from a higher level standpoint, we’ve been reading or coming across some headlines that mentioned a possible revival of gas exports, from Venezuela to Colombia. So I understand this is purely speculative at this point. But if you could share any, what are your thoughts about this? And what have you heard in the country in this regard? Thank you.
Charle Gamba
Yes, there has been some discussion of importing gas from Venezuela, it has always been an option for a long time. Colombia, of course used to export 250 million cubic feet per day of gas from Colombia to Venezuela. And there is — there are outstanding agreements for paid evasive to return that gas at some point to Ecopetrol. They have never, however, they’ve never landed on the price of that gas to be returned. But anyways, I think that the importation of gas from Venezuela represents a very interesting opportunity, we’re certainly evaluating that opportunity with respect to Canacol as well. However, they’re significant. There are some impediments to that scheme. The first of course, are the US OFAC sanctions against PdVSA which would be problematic, which would not permit export of that gas by PdVSA to Colombia. So that’s one issue that has to be overcome
And the second is a significant investment in infrastructure in Venezuela to reactivate the oil and gas fields to be in a position to be able to export. So I think in summary, it’s a very interesting possibility for Canacol and there are some significant obstacles to overcome in the near to midterm.
Operator
The next question comes from Chen Lin of Lin Asset Management.
Chen Lin
Hi, thank you for taking my questions. Some of my questions already been answered. I would like to congratulate for this wonderful, very excellent quarter. I noticed you start buying back shares and your company shares trading at very depressed level after the Colombia election. So how much room you have to buy more shares from the open market and then do you plan for any future dividend increase? Thank you.
Jason Bednar
Yes, I can answer that. So first thing I’d like to point out is that we have a very healthy dividends currently, and the share price it’s probably 9 percent-ish. And of course, that’s a return to shareholders approximately US $28 million US annually, right. So it’s certainly not insignificant. As we are have a very aggressive capital program heading into a Medellin pipeline. In terms of exploration, wells, et cetera. I think our normal course issuer bid will be more opportunistic at this stage as opposed to having a set level that we will buy for the remainder of the year.
Chen Lin
Okay, thank you. Can you tell us how much room you have for share buyback? How much —
Jason Bednar
Yes, sure. So it’s a formula based on the free float that the TSX does every year. Our number allotted to the buyback this year was approximately 11 million shares. And we bought back between 5 and 6 million in the first half of this year thus far.
Chen Lin
Okay, great. Thank you. Good to know, you have more room. And can you just expand a little bit, I know you did, it was asked previously the high impact well, a lot of shareholder really waiting for that. What approximate when you get the rig to come in and approximate what time the shareholder will know that it’s a success or not.
Charle Gamba
Yes, thanks, Chen. As I mentioned on the previous question, the rig has been mobilized. 3,000 horsepower, the civil works are being constructed and we hope to spud the well in November. That would put results into January of next year.
Operator
[Operator Instructions]
At this time, I would like to turn to Carolina Orozco to address some questions from the webcast.
Carolina Orozco
Thank you. The first question that we have is from Lucas Roya from Compass Group. Lucas is asking whether is there possibility that there will be no more exploration contract sign, how many years are used to make that you could operate without problems.
Charle Gamba
Thank you, Lucas. We have we hold interest in 11 exploration and production contracts, six in the lower Magdalena Valley, which is our core operating area. Five in the middle Magdalena Valley, which is our new high impact gas exploration area. On those 11 contracts, we have identified about 190 drilling locations, exploration drilling locations, containing on a gross enriched basis 18 TCF of prospective gas resource. So we have sufficient inventory to drill over on those 11 blocks for at least 10 years. So we have a very deep portfolio of opportunities for gas on those 11 contracts, which could see us continuing to drill exploration wells and translate those resources to 17 trillion cubic feet of gross prospective unrealized resources, gas into new reserves for commercial sales.
Carolina Orozco
The next question comes from [Inaudible]. The Minister of Mines and Energy just said that the new government in Colombia would not sign any new exploration contracts for gas and if the gas reserves goes down we will import gas from Venezuela. What do you think? And how can this impact the Canacol business in Colombia?
Charle Gamba
I think I just answered that question, I believe.
Carolina Orozco
Thank you, Charles. Next one is Carlos [Inaudible] SAD. Hello. Have you estimated the impact of a hypothetical approvement of the Colombian tax reform? The government expected to change the royalty compensation and P&L and exports? What do you expect?
Jason Bednar
Yes, we’re still analyzing the impact of the yet approved reform.
Carolina Orozco
Thanks, Jason. The next question is from [Inaudible]. What is the average maturity of the actual take or pay contracts that you currently have?
Charle Gamba
It’s 7.3 years is the answer.
Carolina Orozco
Thank you. The next question is a [Inaudible] Capital. A boom contract that you’re about to sign has taken more time than expected. Can you talk about some of the issues around the delay and how soon do you think you will sign?
Charle Gamba
No issues. We’re currently drafting the final form of the agreement with the party that is been selected. And we anticipate that’s back and forth drafting of the agreements. Of course, we expect that we will be signing those agreements within the next month.
Carolina Orozco
Thank you, Charles. And operator, I think we’d have someone else who to queue to ask a question. Can you please let him in?
Charle Gamba
There is one from [Inaudible] that you should address, Carolina.
Carolina Orozco
Yes, it’s coming through but can we please take and sure others first and then we will address that in [Inaudible]
Operator
The next question comes from [Inaudible] Please go ahead.
Unidentified Analyst
Hello, thanks for taking my question. Congratulations on the results. My question is about Ecopetrol, they over the last weeks made an announcement about deep water finds of gas. And it seems that potentially they could be significant as Ecopetrol even said that they could allow the company to become exporters of gas, which I think indicates a potentially game changing nature of this. So I was wondering, what is your take on these announcements? And how would they impact the domestic market according to your very first initial take? Thank you.
Charle Gamba
They announced, thanks for the question, they’ve announce two announcements. One is a discovery, Uchuva-1 well in the Tayrona contract, which is located off the Coherer coast in North East Colombia, that well was drilled in approximately 840 meters of water to deep water not associated gas discovery. It follows the Orca-1 discovery in the Tayrona contract made by Petrobras in 2014. So it’s the second gas discovery in deepwater in Tayrona. There is — while it is very positive with respect to detecting the presence of gas, the failure to develop Orca, which was discovered in 2014 probably indicates commercial issues associated with developing on a full field basis, non-associated gas discoveries in that water depth. So, while the whichever one discovery is positive with respect to the presence of gas, there are still uncertainties with respect to the commercial viability of developing both Uchuva-1 discovery as well as the Orca-1 discovery which was made in 2014, eight years ago.
The second announcement that Ecopetrol made was with respect to the GORGON-2 sidetrack, which was an appraisal well of the GORGON-1 discovery made in the Gulf of Uraba by Anadarko in 2018. The GORGON-1 well, which is drilled in 2018 encountered gas and the GORGON-2 sidetrack well, which was announced earlier this week, confirm the presence of gas and another part of that discovery, however, the GORGON discovery is located in 4,200 meters of water, which would make it the deepest, the ultra-deep, non-associated gas discovery in the world with considerable issues concerning commercializing discovery in those water depths. So, in conclusion, there has continued to be the successful detection of gas in the Caribbean coast of Colombia, both in moderately deep waters at Uchuva and Orca and ultra-deep waters in GORGON. However, there are significant issues related to the commercial development of those fields, given the water depths for these non-associated gas fields. If they were to be developed, you’d be looking at timelines between eight to 10 years and multibillion dollar development projects.
Unidentified Analyst
That’s very interesting. Very clear. Another question is on the midstream pipeline project. I was just wondering, what is the state of permissions and licensing there? Is there anything that could cross your plans when it comes to environmental regulation, community consultations or so on where the new administration might take a more critical stance on? Thank you.
Charle Gamba
With respect to the environmental licensing. So the project late last year was sanctioned by the Colombian government as a project of strategic national importance to the country. So it has a special designation, which will aid in the environmental permitting process. We are preparing to submit, we have received the DAA from the environmental ministry which essentially is an approval of the pipeline routes. Amongst the options that we presented, they have approved the preferred route that we wish to take. And now we are preparing to submit the environmental permit and the detail environmental permits late September early October this year. So we anticipate that that license should come out in Q2 of next year, which will allow for the commencement of the construction of the pipeline in order to be ready by December 1, 2024.
Operator
The next question is from Oriana Covault of Balanz.
Oriana Covault
Hi, thanks. No, I had just a follow up it was already addressed. Thank you.
Operator
I will pass the conference over to Carolina Orozco for more questions from the webcast.
Carolina Orozco
Thank you. We have another question from [Inaudible] William Blair. What is the average price of your contracted volumes?
Jason Bednar
As we released our guidance in December, the average price for 2022 of our take or pay volumes is $4.74 per MCF net of any related transportation charges, well head price.
Carolina Orozco
We have another question from [Inaudible] from First New York Capitals. The boom contract that you’re about to sign on, I know that one has already been taken. Excuse me. Let’s give it two seconds to see if we get any more questions from the webcast or in the queue.
Charle Gamba
Yes, I see a question here Carolina.
Carolina Orozco
[Inaudible] with Joseph Shafter.
Charle Gamba
I see a question here, Carolina, from [Rodrigo Taurus from Valora Analytica]. Have you seen that question?
Carolina Orozco
Yes, I’m gonna read it, again. I think we read it before, but I’m going to read it again, Charle. So we got a question from Rodrigo Taurus from Valora Analytica. He is asking the Minister of Mines and Energy just said that the new government of Colombia would not sign any new exploration contracts for gas. And if the gas reserves go down, we will import gas from Venezuela. What do you think? And how can this affect Canacol’s business in Colombia?
Charle Gamba
Perfect. Thanks. I think with respect to Venezuela, which I’ve already discussed, it’s certainly an interesting opportunity for Canacol. It’s a very large potential source of gas to commercialize here in Colombia, in addition to the two issues I mentioned previously, which were — with respect to the sanctions against PdVSA and the amount of investment in infrastructure in Venezuela, which would have to be done to achieve this. There’s also some uncertainty with respect to the price that that gas will be sold out within Colombia. So there’s a lot of issues with respect to that pricing of that gas potentially being higher than domestic Colombian gas. And of course, I’d like to reiterate that that Canacol, as I mentioned previously, has an exploration inventory here in Colombia over 17 trillion cubic feet of gross unrisked prospective resource that we can drill through here. So, thank you.
Operator
Next question comes from Josef Schachter of SEI.
Josef Schachter
Good morning, Charle and Jason. The question I had for Jason, on maybe royalty deductibility. Do you mentioned that you’re still looking into it? And congratulations, I’m just starting to have volumes moving to Cretaceous. That was another one. And I’m glad that’s moving forward. The last question I had was related to your production of oil, it’s up 170%. Were these shutting wells that were uneconomic in the past? Are you spending any money there? What’s the outlook for your Colombian oil side and of course the revenues are pretty good. What do you see happening they’re going forward.
Charle Gamba
Hi, Josef. Yes, those — that oil production comes from our Rancho Hermoso oilfield located in the Llanos Basin. We operate that field and our partners that are Ecopetrol. So that fields been producing since 2008 for us, it’s a very, very mature field. And as you stated, the fact of the matter is, you’re quite correct. With the increase in oil price, we’ve been able to reactivate wells that were shut in due to negative economics at lower oil price that simply reflects churning on new wells, we have not spent any capital whatsoever in Rancho Hermoso for the past eight years, and we have no intention of investing any capital in oil related projects in Rancho Hermoso or anywhere else at this moment.
Josef Schachter
So going forward, we should just have depletion, take that number down or is that number able to stay stable for a little while.
Charle Gamba
It’s a very, it’s a mature field. It’s been producing Josef since 2002. So it’s a very old field very mature and declines are very, very low. So very stable production, very low declines, read the sort of tail end of production from that field, which is going to be very long and very flat in general. But very sensitive, extremely sensitive to oil price.
Operator
[Operator Instructions]
The next question comes from [Inaudible]
Unidentified Analyst
Thanks for taking my questions. It’s about take or pay contracts. You earlier mentioned that the average maturity is 7.3 years. And I was just wondering as contract expired, do you plan on renewing them? Or the new scenario where the Minister of Mines is openly positioning again, exploration licenses wouldn’t make sense to increase your spot market exposure as prices could go up in such a scenario. Thank you.
Charle Gamba
Jason, can you take that one?
Jason Bednar
Yes, sure. So historically, our sales profile has been approximately 80% in take or pay contracts. We’ve been in the gas business with the last 20% being interruptible. We have this last quarter was the strongest interruptible prices that we’ve seen in approximately two and a half years. But that’s more internally driven with respect to supply and demand inside Colombia as Colombia produces approximately a BCF a day and uses approximately a BCF a day. Obviously, mature gas fields are in decline and our theoretically, at least our price picks up as demand continues to go up to 3% a year as estimated by UMPE. We’ve been in the gas business for since 2012. So approximately a decade and most of our clients have had renewing contracts during that term. So if you look at any one of the contracts in our portfolio, which are approximately 20 contracts in that portfolio, they routinely roll over at the end of that expiry and we expect that to continue moving forward.
Operator
[Operator Instructions]
Being no more questions in the queue. This concludes the question and answer session as well as the conference. Thank you for your attendance and participation. You may now disconnect.
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