Petrotal Corp

XTSX:TAL

Earnings Call Transcript

[Unknown]

Hello, and thank you for joining the PetroTal webcast. I'll hand straight over to Manuel and Doug, who will walk us through the presentation, after which we've got time for Q&A. So without any further ado, Manuel and Doug, many thanks, over to you.

[Manuel Zuniga Pflucker, executive]

Thank you, Mark, and good day everyone, and thank you for joining the PetroTal second quarter webcast, where we will provide a brief summary of our Q2 2022 operational and financial results. If anyone wants further information on the company, please see our website for additional materials. My name is Manuel Zuniga, and I'm the President and CEO of PetroTal; and I'm joined by my colleague, Doug Urch, Executive VP and CFO. You have clicked on the link in last evening's press release, you should hopefully have sign up to the webcast. So you may see the slides on your screen. But you are having issues in seeing them, please contact [email protected], 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. For those that are new to the story, PetroTal is an onshore Peru-focused oil company and Peru's largest crude oil producer.

As shown in Slide 2, the company is listed on London's AIM market, the OTC and the Toronto Stock Exchange and has a market cap of approximately USD 470 million and a net surplus of around $80 million. We have a 100% working interest in the Bretaña oil field, which we have expanded from minimal production to over 25,000 barrels of oil per day in late June of 2022 with current production averaging over 19,000 barrels of oil per day over the last 3 days.

The Bretaña field has 2021 year-end 2P reserves of 79 million barrels and now has 12 producing wells. Those 3 of them remain [ sharing ] as we continue to constrain production. All of our producing wells have paid out their initial investment with our most recent well paying out in less than a month, and we have just reached a milestone of having produced 10 million barrels early this week after just 4.5 years since first oil.

Over the past year, we have demonstrated continued operational excellence with attractive well performance and operating results. This is evident by our seventh straight quarter of production growth while demonstrating strong capital efficiency and an absolute commitment to safety and employee wellbeing. We're excited to communicate details on our record second quarter and walk through the adjustment of our second half 2022 development plan on this call.

Slide 3 summarizes some key Q2 2022 highlights. From an operational perspective, we delivered another record quarter producing just under 14,450 barrels of oil per day, our seventh straight quarter of growth and selling 14,600 barrels of oil per day, which was flat from Q1 2022. During the quarter, we spent approximately $24 million focused on drilling and completing well 11H along with other small infrastructure projects.

While 11H came on production right at the end of the quarter at over 9,000 barrels of oil per day paid out in just 30 days and has averaged almost 9,000 barrels of oil per day during August, allowing it to reach 360,000 barrels of production in just 40 days online.

Operating guidance as shown in Slide 4 remains at around 15,000 barrels of oil per day for the 2022 year, with Q3 2022 production estimated at approximately 14,250 barrels per day and Q4 2022 increasing to approximately 19,500 barrels of oil per day, which includes the scheduling adjustments to our drilling plan.

FX is on target at approximately $110 million for the year and now includes some additional capital to start a critical 36-month erosion control project. This project is projected to be [indiscernible] material from a total F&D perspective. However, does require detailed technical attention over the next few years.

Slide 5 summarizes the remaining Q3 and Q4 drilling plan, which has slightly been adjusted. Due to well servicing and a conductor pipe placement well 13H that was spud yesterday will be drilled before 12H. As shown in this slide, we still anticipate getting both 12H and 13H wells on production by year-end while continuing to forecast quarter-over-quarter production growth.

On Slide 6, we show as a surface map of the field, which nicely summarizes our Bretaña development strategy. As you can see, we will nearly complete the 1P Southeastern drilling campaign stepping out from 11H and 8H wells with further development to the south anticipated as we expect to continue upgrading the P2 and P3 locations into the Peru or Calgary. Similarly, early next year, we plan to drill the 14H to the north well -- to potentially further upgrade in northwestern locations.

Slide 7 shows the 3 oil sales routes via barges. Our priority sales route is via the Amazon River to a major terminal at Manaus, Brazil, which currently has a capacity of up to 16,000 barrels of oil per day with a full barge fleet. This route currently delivers the strongest economics, even though Manaus is 2,100 kilometers away. The second route is to the nearby Iquitos refinery, where we can just sell up to 2,000 barrels of oil per day. Lastly, we have the barge to pipeline to the port of Bayovar route, which uses the Petroperu-operated ONP pipeline that is currently down for maintenance and can handle up to 20,000 barrels of oil per day from our field.

This forced us to depend on the first 2 routes for the last few months. As [ Petroperu's ] fiscalized production scheduled for July and August has shown, we have been navigating some commercial and logistical bottlenecks on our Brazil route. As you can see on this slide, the route to Brazil is not only long, but it's also logistically complex. For example, in July, the company was able to redirect over 456,000 barrels to Brazil with very little lead time and with headwinds from barging [ shortages ] stemming from low river levels as we're now in the dry season.

The company is working hard from a commercial perspective to examine all opportunities to maximize and stabilize sales volumes via the Brazil route, including optimizing offloading infrastructure compatibility in Manaus and has now secured enough barging capacity for late August and September to increase production as I mentioned earlier.

From a Petroperu perspective, although no formal maintenance schedule or the communication has been received, we have had many discussions with the internal operation staff that estimate the ONP being back online by late September or early October, further strengthening our ability to sell our oil. When the ONP maintenance is complete, we will evaluate Petroperu's commercial and credit liability in deciding how much oil to potentially ship through the ONP.

Slide 8 describes the model we're using to implement the 2.5% social trust, which is allowing us to achieve immediate peace in our district. The ongoing work in cable discussion with the different stakeholders have been very productive over the last quarter. We are, therefore, recommending other oil companies and Petroperu to implement similar 2.5% social trust.

I will now turn over the meeting to my counterpart, Doug Urch, who will provide a brief financial update.

[Douglas Urch, executive]

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 9. From a balance sheet standpoint, PetroTal exited the quarter with over $77 million of total cash and is in an $80 million net surplus position considering other working capital amounts, including short- and long-term debt. The company repaid $20 million of the bonds reserved for M&A activities on April 1, 2022, allowing for bond interest savings in Q2 2022 and beyond. The company now has $80 million of bonds remaining, of which $51.3 million are long term and the remaining due for repayment within the next 12 months. The company exceeds all financial covenants as at June 30, 2022.

The company delivered solid financial performance in the quarter, generating records on the following earnings statement line items. Net revenue of $118 million; net operating income of $99 million, representing $74.13 per barrel; earnings before income tax, depreciation and amortization, EBITDA of $93 million; free cash flow before all debt service and changes in noncash working capital of $69 million; and lastly, net income of $84 million. PetroTal generated a netback of over $74 a barrel on a contracted Brent price of $111 per barrel during the quarter, generating a 67% operating margin on a 19-degree API heavy oil quality.

Of note, this quarter was all in -- was -- our all-in operating and transportation costs were under $10 per barrel. Contributing to this metric was the elimination of all diluent blending for the Brazilian oil export route, in addition to optimize and streamline fixed lifting costs in Q2 2022.

Royalties for the quarter were $8.1 million, versus $6.4 million due to the higher Brent oil prices and represent approximately 6% of contracted revenue on a gross and per barrel metric. PetroTal booked a record $84.2 million in net income for the quarter versus $64.5 million in Q1 2022.

The Q2 2022 net income included a derivative gain of $6.5 million compared to the prior quarter of -- a gain of $21 million, further substantiating the financial performance of this quarter on a normalized basis.

In summary, we reiterate our strengthening cash and net surplus position as we move through 2022. Finally, as at Q2 quarter end, the company had $89.4 million in receivables, $35 million higher than the prior quarter. The majority of these amounts have been subsequently satisfied. PetroTal will continue to work with Petroperu while they reactivate their credit capacity upon completion of their audit.

On Slide 10, we show that in conjunction with reiterated production guidance for the year, we are holding our EBITDA and free cash flow guidance at the May 2022 forecast levels.

Slide 11 summarizes our robust anticipated cash flow and potential for material return of capital scenario, demonstrating a significant ending cash position of $138 million at year-end pro forma. The potential bond repayment will be tied to receivable reductions. Just a reminder to our investors that we will hold -- we need to hold a minimum cash balance for working capital and risk management purposes as the company does not have a reserve-based lending facility in place and feels about $75 million is appropriate to handle a 6-month capital program, G&A expenses and other ongoing obligations, should a downturn in Brent occur.

Slide 12 reinforces our commitment to eventually reinstating a return of capital program in the near future with the company evaluating buybacks and/or a robust dividend policy if economically viable and cash levels permit. As we prepare our 2023 budget, we will examine various return of capital models for the best and most optimal way to allocate free cash flow back to our investors. The company is currently trading at only 1x EV to 2022 EBITDA and under 1x 2023 EV-to-EBITDA, which will factor into management's decision on how to allocate future capital returns for the most accretive and tax-efficient options to investors. I thank you for the continuing investor support and celebration of positive milestones for the company.

I will now turn it back to Celicourt for the Q&A session.

[Unknown]

First question in from Martin Harris. Please can you update us on the credit position of Petroperu? And tell us when the $53.9 million derivative settlement is likely to be received.

[Douglas Urch, executive]

While we continue to monitor Petroperu's credit restoration progress, we've been told that they will be finishing their audit soon, and we'll have the financial capacity soon. We await their progress.

[Unknown]

A question from John Ashcroft. What is the risk of a windfall tax, how may that affect future developments?

[Manuel Zuniga Pflucker, executive]

In Peru, fortunately, the licensed contracts, which are known as contracts law are protected from increase in taxes. The license contracts have the taxes stability clause. So unless they change the constitution in Peru, which -- that will happen if there's no risk for that.

[Unknown]

Right. From [indiscernible], have you considered a solar-powered barge, good for ESG and reducing diesel costs to barge to Brazil?

[Manuel Zuniga Pflucker, executive]

Actually, that is a good idea. We don't own the barges. The trading company actually contracts the barges. So we're not at that level, but that's an idea that -- it will need to be investigated carefully.

[Unknown]

Okay, from Heinz Schmidt. You have provided your cash balance as of August 15. Does the cash generated since June 30 include any settlement of ordinary receivables or derivative assets? Or is this purely ongoing free cash flow generation?

[Douglas Urch, executive]

The August 13, cash balance includes receipt of our Brazilian counterparty amounts, but not Petroperu.

[Unknown]

Okay. A question from Lucas. Has Petroperu said anything further about the pipeline?

[Manuel Zuniga Pflucker, executive]

As I mentioned, we are in contact with the operations people of the ONP. And they have -- continue to indicate that they expect to have a pipeline running by the end of September, maybe early October.

[Unknown]

Okay. And from Stephane Foucaud, how are you looking to manage the barging shortage issue in the future of the long-term solutions that would prevent this situation from happening again?

[Manuel Zuniga Pflucker, executive]

Well, we need to keep in mind that we start barging oil to Brazil at the end of 2020. So it's been about a little bit more than 1.5 years. And from small volumes, we're now sending more than 450,000 barrels via Brazil. We see that the shipments via Brazil, it could be optimized. We are telling our trading partner is -- that buys our oil -- they buy the oil FOB Bretaña, by the way, in a ways of optimizing that. We see that actually with the same number of barges, we could optimize deliveries by up to 1/3. So from 450,000, basically, we could go to 600,000 barrels. And that's the ideal case without needing to engage more barges.

On the side of Manaus, as I mentioned in my presentation, it's key for us to have access to tanks at Manaus, whereby the barges will deliver into the tanks and then from the tanks into the mother tanker because right now, they continue each barge to continue to unload into the mother tanker, and that is delaying sales quite a bit. So that's why we are optimizing. And we are going to work hard to continue optimizing so we can eventually hopefully go to the 20,000 barrels per day mark, which was always our goal when we started selling to Brazil.

[Unknown]

Okay. Next question from Daniel Boss. An excellent quarter, well done. What is the progress on moving from TSXV to TSX? I think this will be important to attract more institutional investors and will increase traded volume.

[Douglas Urch, executive]

Yes. We certainly agree with you, Daniel, and we have submitted all of the required documentation at this stage to the TSX for our consideration for our upgrade. Discussions are ongoing, and I expect that by year-end, we should have that graduation complete. We'll keep you posted.

[Unknown]

Next question from Marco [indiscernible]. Is there an exact date for the bond repayment?

[Douglas Urch, executive]

There isn't yet. As we mentioned in the webcast, we feel that the need is -- we need to see how the receivable reductions come through, ensure that we have liquidity so that we have the required cash available for our internal needs plus also to ensure that not only would we pay out the bonds, but there's enough cash building for -- to determine a regular return. So that's something we're monitoring closely, and we certainly expect to get there sometime likely late Q4 or sometime in Q1. That's still our timing that we're taking on.

[Unknown]

Okay. Again, from Stephane. What are the risks of the ONP restarting later than end of September, October?

[Manuel Zuniga Pflucker, executive]

From a technical point of view, I don't see such a risk. The issue is going to be more on the social side. If Petroperu encounters additional problems with the local communities that are around the pipeline or -- so that will be the only risk. I've been communicating with Petroperu's top management on how we could help them avoid that. And I have actually sent a long letter with the idea of they should implement the same 2.5% social fund for the pipeline tariffs. And -- but we will -- we are paying attention to [ roll it ].

[Unknown]

And again, from Stephane, asking for a comment on the communities and whether they are now firmly behind the company.

[Manuel Zuniga Pflucker, executive]

Well, again, I mentioned the communities around the pipeline -- in Bretaña, I believe that the progress that we have made on the social fund and the working [ tabletization ] that we've been having, and we can see the engagement of the so-called indigenous leaders with the so-called mix raced people and how the communication has improved tremendously in full support of the company even putting communications out saying we support PetroTal. We want PetroTal to grow.

So as I mentioned in my comments, that is giving me a lot of confidence that -- I would not like to say they are fully behind that because anything can happen. We are very confident that we are at the right path to achieve that long-term peace. And that's why I have now started to promote the same idea with the other oil companies, particularly Petroperu and the pipeline. And I think we can achieve that and allow the pipeline to work on a consistent basis like it should be, especially now that the Talara Refinery will be ready by the end of the year if they want to meet that [indiscernible]. So Petroperu is aligned with us, and we're working to get things and resolve that not only around the Bretaña field but around the entire channel.

[Unknown]

Okay. And the next question from Mantas, also referencing Petroperu. Broker notes state the payment from Petroperu will be in 2023. However, in one of the company's RNSs, you say payments should be received in August. Can you clarify which of the dates is more accurate?

[Douglas Urch, executive]

Well, as Petroperu continues to restore access to credit through completion of their audit, we'll have a better idea of the payment schedule. The expectations are that it's likely going to take a little bit longer, and we're working on terms with them at this point in time.

[Unknown]

And Justin from John Stanford had a related point, would you start using the pipeline, again, if Petroperu has paid you the outstanding trade receivables?

[Douglas Urch, executive]

Well, we would certainly look to do so if their credit was restored and their -- the flexibility on the commercial terms are shown.

[Unknown]

That at the moment covers all the questions received. So perhaps going to hand back over to Manolo and Doug for any closing remarks.

[Manuel Zuniga Pflucker, executive]

Well, we're very excited with the results that we have achieved in the second quarter. As we mentioned, we intend to continue growing the company. We're very focused on setting up, paying the bonds and taking up even in plan for the benefit of all of the stakeholders of the company. So this remaining on the third quarter, fourth quarter, it's quite exciting for us, as you can imagine. Having the pipeline [indiscernible] is a challenge. And as you have seen during the last couple of months, we've been navigating through that very well. And we will continue paying attention to be fully optimum via Brazil and ideally having all 3 wells working that if one is down, we can use the other one.

So thank you so much for the patience and all your support. We're very happy with the results, and we're extremely excited.