Canacol Energy Ltd (OTCQX:CNNEF) Third Quarter 2022 Results Conference Call November 11, 2022 10:00 AMm. ET
Participating companies
Carolina Orozco – Vice President – Investor Relations and Communications
Charle Gamba – President and CEO
Jason Bednar – Chief Financial Officer
Conference Call Participants
Oriana Covault – Balanz
Josef Schachter – SER
Chen Lin – Lin Asset Management
Steven Bodzin – REDD Intelligence
Operator
Good morning and welcome to Canacol Energy’s third quarter 2022 monetary effects convention call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, you will have the opportunity to ask questions. [Operator Instructions] Please note that this occasion is being recorded lately.
Now I would like to speak with Carolina Orozco, Vice President of Investor Relations. Continue.
Carolina Orozco
Good morning and welcome to Canacol’s third quarter 2022 monetary effects telephone convention. I stand with Mr. Charle Gamba, President and CEO; and Mr. Jason Bednar, Chief Financial Officer.
Before we begin, it’s vital to mention that feedback on this call through Canacol’s senior control is likely to come with projections of the company’s long-term performance. These projections are not binding as to long-term effects and do not take into account any hazards or uncertainties that might materialize. Accordingly, Canacol assumes no duty in the event that the long-term effects differ from the projections shared in this convention call.
Please note that all monetary figures for this call are expressed in U. S. dollars. We will begin the presentation with our President and Chief Executive Officer, Mr. Charle Gamba, who will summarize the highlights of the third quarter results. Jason Bednar, our CFO, will then talk about monetary highlights. Gamba will conclude with a talk on the company’s prospects for the remainder of 2022 and 2023. At the end we will have a question and answer session.
I now give the floor to Mr. Charle Gamba, President and Chief Executive Officer of Canacol Energy. Charles, we can’t hear you.
Carlos Gamba
hello?
Carolina Orozco
Yes. Yes. We can hear from you now.
Carlos Gamba
Can you hear me now, Caroline?
Carolina Orozco
Yes, I did.
Carlos Gamba
Good Morning.
Carolina Orozco
Yes, Charles. We can hear you now. It turns out that we have lost the connection with our Charles speaker. Please wait while we reconnect. [Technical difficulty]
Operator
Ladies and gentlemen, we have reconnected with our stakeholders. Charles, please move on.
Carlos Gamba
Good morning, everyone. I for the delay in login. Anyway, smart morning and smart afternoon, and welcome to Canacol’s Q2 2022 conference call. In the third quarter of 2022, we achieved herbal fuel sales of 184 million popular cubic feet consistent with the day, which is above the midpoint of our annual guidance of 160 to 200 million popular cubic feet per day.
Tesorito, the 200-megawatt thermal power plant, in which we have a 10% stake and is the sole fuel supplier, began generating electric power in mid-September. Once again I want to congratulate Celsia, our operating partner, on the successful completion of the structure procedure and I hope that this investment will contribute to the continued expansion of our business, either through our capital investment and, of course, through increased demand for our fuel.
Our strong production and operating situations allowed us to report another quarter with superior net income and an operating margin of 78% and a superior return on contracted capital of 17% annualized for the quarter. We continue to execute our planned drilling program this year with a total of nine progression and exploration wells drilled to date, adding 4 successful exploration tests.
Finally, after the end of the quarter, we signed a strategic renewal SETCO to build on the operation and maintenance of the allocation of the Jobo pipeline in Medellín, which I will talk about in more detail when I talk about the prospects for the remainder of this year. and beyond.
I now give the floor to Jason Bednar, our Chief Financial Officer, who will speak in more detail about our third-quarter financial statements.
Jason Bednar
We continue to execute our plan and grow our herbal fuel business in the third quarter. We report the following for the third quarter of 2022. $70 million in net royalty and transportation production revenue, a 6% accrual compared to the third quarter of 2021. This accumulation is due to higher learned costs that more than offset the decline in sales volumes.
We reported an adjusted operating budget of $39 million, representing a 1% increase over the same era in 2021, and also reported EBITDAX of $56 million, representing a 4% increase over the same era in 2021. Finally, we reported a net loss of $5 million compared to the net revenue source of $9 million in the same era in 2021.
As I have explained in many previous convention calls, a vital thing in our net source of income each quarter is unrealized foreign exchange gains and losses that would possibly have an effect on the valuation of our tax funds, which are in Colombian pesos.
In the third quarter, we recorded a deferred tax expense of $11 million, mostly due to a deterioration in the price of the Colombian peso against the U. S. dollar, without which we would have posted a truly large positive net income. In case the peso appreciates against the US dollar in the future, the company will perform a deferred tax recovery.
Our net fuel consistent with revenue source $3. 73 consistent with MMcf for the 3 months ended September 30, 2022, up 7% from the same consistent period in 2021, up 2% from the prior quarter and 4% more than our address of $3. 60 on average for 2022.
Our learned fuel value of $4. 76 is the highest we have reached since before COVID and matches our forecast for the year of $4. 61 to $4. 74 according to MMcf, thank you for matching the interruptible values. We are encouraged by the patience of physically powerful stocks for interruptible fuel sales, despite weaker absolute demand. Most of our forecasts are based on sales of the company’s acquisition agreements at a constant value with an average constant value of $4. 74 consistent with MMF3.
OpEx $0. 28 consistent with MMcf in the third quarter, compared to $0. 36 in the first quarter and $0. 31 in the second quarter, as we performed less maintenance and benefited from a decline in the Colombian peso when measuring our local prices in U. S. dollars. We continue to expect very little maintenance in the current part of the year and expect the average OpEx in 2022 to be around $0. 30 consistent with MCF.
In percentage terms, our fuel royalties accounted for 16% of gross revenue, which is in line with the average of the last two years. I will again highlight the return on contracted capital in our financial statements over the past 15 quarters, averaging 16% over the past 12 months.
This concludes my comments on the third quarter monetary results. Now I will return it to Charles.
Carlos Gamba
Thank you, Jason. Once again, our third-quarter effects demonstrated superior and solid or consistent margins, as well as a very respectable pullback in capital employed. Our forecast for 2022 remains unchanged. We expect production and money to achieve our cabin’s top finish, which was based on 200 million standard cubic feet based on average fuel sales day, with CapEx targeting our cabin bottom cap at $170 million.
Our exploration program will continue at an accelerated rate until the end of the year and early 2023, with 4 high impact exploration wells, either excavating or to be excavated in a matter of weeks in Saxafon, Chimela, Dividivi and Natilla. will enable us to meet our 12-well drilling guidance by 2022 with a 13th Natilla well to be achieved by TD in early 2023.
In May-October, we published an update on our Jobo-Medellín gas pipeline project. Specifically, we announced the successful execution of an agreement with Shanghai Engineering and Technology Corp. , or SETCO, to build and commission the pipeline project. SETCO is a pipeline structure and production consortium founded in China, which is dedicated to structuring giant fuel pipelines in Asia and the Middle East.
This is the third time in Canacol’s history that we first defended and funded a pipeline assignment with some other corporate entity that subsequently took the fee and it was built, owned, modernized and maintained.
The past two assignments with Promigas have allowed us to increase the transportation capacity of our Jobo plant from less than 50 million popular cubic feet consistent with the day of 2016 to two hundred million popular cubic feet consistent with today. And this pipeline from Jobo to Medellin allocation will increase the overall transportation capacity of the pipeline to more than three hundred million popular cubic feet consistent with the day it is completed at the expired expiration of 2024.
Based on what we have done for those past appropriations, we will dedicate or comment on the charge of this assignment beyond the fact that Canacol has agreed to pay a steady payment for a certain volume of fuel to be transported by pipeline to Medellín during an era of time.
Combined with the long-term sales contracts we have signed, we expect lustful effects at a price slightly higher than what we have lately marketed exclusively to consumers on the Caribbean coast.
Our recent update on the Medellín allocation highlighted that we now have two 12-year fuel sales contracts for a total volume of 75 million cubic feet consistent with the day the Medellín pipeline becomes operational in 2024, expiring in 2024. This allocation has a significant strategic price for Canacol and Columbia.
As Canacol pursues its allocation to the lives of millions of Colombians by supporting the Colombian government’s vision of transitioning to cleaner but no less abundant energy in the long term by using herbal fuel as a key transition fuel. Specifically, this allocation will allow consumers in Colombia’s interior to maintain or increase their fuel consumption through the middle of this decade, despite allocated declines in production from Ecopetrol’s largest fuel fields in Colombia’s interior. The allocation will also allow Canacol to increase our fuel sales and net revenue by accessing what is a new market for us and doing so profitably.
I would like to thank everyone at Canacol and SETCO who have worked hard to get us to this point, and I look to the future to keep you updated over the coming quarters and years as SETCO works to complete the project. As in the past year, we will announce our forecast for 2023 in the first part of December. In short, we continue to produce monetary effects within our previously established guidance, and we continue to return capital to shareholders while making an investment in growth.
We are now in a position to answer your questions.
Q&A session
Operator
Now we will begin the response session. [Operator Instructions] Today’s first is by Oriana Covault with Balanz. Continue.
Oriana Covault
Good morning, good afternoon. Thank you for answering my questions. Here is Oriana Covault with Balanz. I have two questions, if I can answer one by one, that would be great. First, in relation to the Jobo control pipeline. Do EPM contracts come with fines and/or consequences related to delays in the commissioning of the contract?And if so, if those occasions are paid for structure delays on the EPC side, they are covered through Canacol or passed through the contractor. That’s my first question.
A-Charle Gamba
Thank you for the question. As in all our fuel sales contracts, we highlight any of the main express points related to the contract, adding those. . .
Oriana Covault
It is ok. Maybe just stick to exploration plans. Could you share updates related to deep fuel wells, in Pola component, one I understood as part of last quarter’s program?And how does it happen?
A-Charle Gamba
Merci. Pola-1 is the first La Luna deep target well we are drilling at our new surface position in Colombia’s Central Magdalena Valley. We used a fairly deep well of 3000 horsepower, up to 19,000 feet in terms of total vertical depth. We have had some delays in terms of hiring this platform. We originally intended to drill this well in the last quarter of 2022, however, we plan to split this well now in the first quarter of 2023. Therefore, the civil works for this has already been built and the site is prepared and able to settle for the 3000 horsepower platform. Who will arrive here in the first quarter to drill that well. This well will take about five months to drill and complete the test. Wait for the timing of this well in the first quarter of 2023.
Oriana Covault
It is ok. Perfect. it is very clear Thank you.
Operator
The next one comes from Josef Schachter with SER. Please continue.
Josef Schachter
Hi Charle and Jason, great to communicate with you. First question, in your score 18 of the results, it seems that when you communicate about the agreement with SETCO, you refer to the reimbursement of the cost of $12 million. Is this something Canacol will be paid before the end of the year or is it something that will happen in 2023?
Carlos Gamba
Yes, this payment will be made upon receipt of the project’s environmental permit, in which case SETCO will refund all prices up to that date in Canacol as scheduled in August 2023.
Josef Schachter
It is ok. So August 2023. Good, good. Next for me. The 4 wells you drill; Saxafon, Chimela, Natilla and Dividivi; Two of them are expected to be completed before the end of the year. Are we aiming for goals of 10 to 20 billion cubic feet?And do you expect them to be included in your reserve report at the end of the year if they are finished and you can verify them before the end of the year?
Carlos Gamba
Yes, 3 of them; Chimela, Saxafon and Dividivi will be finished and tested before the end of the year; only Natilla, which is much deeper above 15,000 to 16,000 feet on SSJN-7. It will finish drilling at the end of January, in early February. We anticipate that if any of those 3 wells, which would be Saxafon, Chimela and Dividivi evidence of gas, we will reserve them as reserves in our 2022 reserve balance, correct.
Josef Schachter
It is ok. And Chimela, when I look at the map, it’s VMM 45, right in Pola-1’s domain, will they drill this one to eliminate the risk of Pola-1, or is it a completely different structure?
Carlos Gamba
Yes. It is – Chimela sandstone goals, the traditional sandstones of the Lisama tertiary formation. This education is very productive in the region. Deep, however, deeper than there, however, 2,000 to 3,000 feet deeper than your targets there. And we hope that the Lisama base here involves more herbal fuel than oil.
So it’s a separate goal. It is a tertiary sandstone target. We expect it to be fueled along the same fake systems connected to the deepest target of La Luna Pola. That’s where all the fuel comes from. But this is a sun test.
Josef Schachter
It is ok. And as you descend into those spaces, those are also the spaces you hope to locate in Pola, so if Pola doesn’t have the good fortune of the relegation zone, the upper spaces could succeed. Is that what you’re here in, or is it completely different structurally?
Jason Bednar
Yes, we are effectively eliminating the risk of the tertiary segment related to Pola, which also has tertiary objectives and the presence of fuel will also be very important. So, it’s kind of risky from Pola’s deepest location, even though Pola is a target of the Moon.
Josef Schachter
It is ok. And the last one for me. Your CapEx budget is very important. And, of course, it also has the capital needs in the dividend. Do you have any idea of having a DRIP so that others who see that the inventory is reasonable enough can use the DRIP format to keep it up to date?Is this something you see as a way to praise shareholders without making money and then have more money for other companies?
Carlos Gamba
I can answer that. In fact, this is all that the Council has and is considering. So thank you for raising it and showing your interest in it.
Josef Schachter
It is ok. I think I’ll leave it there. Thank you, and I hope it moves. Consider the DRIP I think for retail shareholders, this may be something that would be wonderful to consider. With that, thank you very much for answering my questions.
Carlos Gamba
thanks joseph
Operator
Next one comes from Chen Lin of Lin Asset Management. Continue.
Chenlin
Hi, thank you for answering my question. In fact, I’m just proceeding by DRIP. For the U. S. U. S. -based U. S. Do you intend to offer this DRIP only through Canada or are you open to making a potential investment like me in the United States?
Carlos Gamba
One of the reasons why we began to look at this precisely the reason why it raises. And my expectation, if offered, is that we offer it to all shareholders.
Chenlin
So, for us, we will first have to have a withholding tax, or is it not a tax?I don’t know. I mean, I’m not an expert on this. . . Tax legislation. . . foreign tax legislation?
Carlos Gamba
Oui. Si need to call me after this convention call or any time next week. I’m also not an expert on resident taxes, but I know we have victory over that.
Chenlin
It is ok. Great. Thank you. The other consultation I have is with this new government, they are not open to additional concessions, as far as I know. Do I just need to check with you?
Jason Bednar
Therefore, for existing exploration and production blocks owned by operators in Colombia, activity will continue under those contracts. There will be the option to drill exploration evaluation and progression wells in all existing contracts.
As for new exploration tenders and the availability of new exploration spaces, first of all the position of the government and the Ministry of Mines and Energy, the Ministry of Mines and Energy deserves not to award new contracts because it thought there were enough contracts. already to be explored in the next 4 years. However, in recent weeks, the President of the Republic has indicated that lately he is comparing the option of providing new exploration and production spaces in the next 4 years. So it turns out that they are going back a little in this position, but nothing definitive in any direction to reach it.
Chenlin
Hopefully, the EU’s energy crisis is a wake-up call for the government. And also, do you foresee any adjustment in royalties or long-term in the country?
Carlos Gamba
Again, there will be no adjustments to electronic contracts.
Chenlin
It is ok. Great. Thank you. Hopefully, this will deter your competitor from exploring where you are increasing your production. Just to confirm, your Pola 1 is in line to drill next year, is it rarely like that?And we listen to the shareholder, we hear anything until the middle of the year. That’s right?
Carlos Gamba
We will release our guidance for 2023, adding our drilling program through mid-December and the pace now expected, Chen, is to start drilling Pola 1 in the first quarter of 2023, and this well will take approximately five months to drill, complete. and test
Chenlin
Can you remind us what the objective and objective of this Pola 1 is?
Carlos Gamba
The goal is The Moon for the Cretaceous The Moon is gas. We have non-threat recoverable gross resources, average resources of around 500 Bcf with threatened prospective resources of around two hundred Bcf. So it’s a very big goal for us, a very vital well. And, of course, this is the first deep well we will drill at our Moon position in mid-May. We have just under one million net hectares authorized for the Moon with approximately 15 Tcf of average gross prospective resources free of threats. known on the Moon through third-party auditors.
Chenlin
Super. Thank you. Good luck.
Carlos Gamba
Thank you. Thank you Chen.
Operator
Next up is from Christine Ronac [ph] of HSBC. Continue.
unidentified analyst
Hello. Thank you. Question, about the new tax rate, I know it is not finalized. Completion will take place next week. Remind me, I think your 35% corporate tax rate isn’t going to go up, as it is for oil companies. He wasn’t sure if they didn’t have relays like the oil producers. , tax deduction, I take everything you have deducted from your royalty time 35%. So I get about $20 million that would be paid out until 2024, if I’m close, that would be great. Thank you.
Jason Bednar
It is ok. Thank you, Christine. Je can take care of this. And I see in our email questions that we have several on exactly the same topics. So I’ll review to complete this. So, first of all, as far as I know, the reform has not yet been voted on. As it has been before Congress lately, fuel. . . Herbal fuel is not subject to the source of income tax. So he’s right. And royalties, however, may not be deductible. So when we go through the last route, again, our 35% income tax rate source, we don’t expect it to replace as it is now, we still possibly wouldn’t be able to deduct royalties, which is the same as oil, which will be the same effect that all businesses will have equally, right?
Therefore, this effect would be our 35% tax rate on the base payment of 6. 4%. So, in order not to complicate it too much, some of our blocks have royalties of 20%, some have 6. 4%. What is the delta that is the delta?a factor x that other people bid for when they first bid on the ANH block. The non-deductibility, as we recently perceived, is based on the foundation payment of 6. 4%. .
Operator
Now I turn the lecture to Carolina Orozco, for any other questions about the webcast.
Carolina Orozco
Merci. La first one we have is from Andres Duarte from Corficolombiana. Andreas asks, can you tell us the difference between fuel access costs and local contract costs lately and in the near future?
Carlos Gamba
Import value to domestic value, right?
Carolina Orozco
Correct.
Carlos Gamba
Yes, the value of domestic wells this year in 2022 averaged between 450 and 550 fuel producers. Shipments of imported LNG delivered to Cartagena have been very low this year. There were previously imported shipments in 2022, with landed values of $14 to $16 not resupplied. Therefore, the LNG values of the LNG batch that landed here in Cartagena this year were about 3 times the value before being advertised as fuel as national wellhead values.
Carolina Orozco
Thanks Charle. La next query is from Roberto Paniagua of Casa Voca. Roberto asked what effect the Canadian proposal to impose a 2% tax on a buyback percentage has on shareholder pricing starting in January 2024.
Jason Bednar
Yes, I can answer that. So, I mean, our percentage of buybacks this year totaled $13, about $13 million from the US. U. S. So 2%, of course, would be, I think it’s $260,000. I mean it is, I don’t think any company is in favor of that. Having said that, it’s $260,000 for us. I don’t think it hurts price creation.
Carolina Orozco
Thank you, Jason. We have a query from Pierre Groner. Ask Pierre. Heh, would you like to know more about the company’s logic regarding the consolidation allocation discussed in the October 24 press release?
Carlos Gamba
Yes well. Therefore, the value of our consistent percentages has decreased slightly, some of our peers have increased the consistent values. That’s not the motivation. The procedure of the idea here, many trading accounts have discussed trading fees with us. We believe that a long business fee, sorry, i. e. the value they pay according to the constant percentage and can reduce your trading costs, would possibly generate more interest.
I think it’s vital to note that we made the decision to continue this consolidation alongside the SETCO pipeline announcement that we will reshape the business in a year or two and take the opportunity to address some of the considerations raised through some of our shareholders throughout this monumental announcement for us.
Operator
We have consultation of. . .
Carolina Orozco
Yes, go ahead, operator.
Operator
Next up in the audience is Steven Bodzin of REDD Intelligence. Continue.
Steven Bodzin
Hello thank you very much. There have been reports about the option of reopening this Venezuelan pipeline and reversing the contribution of some fuel imports, not many main points so far. I don’t even know if that’s realistic. I guess if you have any concept about that or if it can just be a challenge in the next five to 10 years?
Carlos Gamba
Yes. Thank you for this question. There are hypotheses earlier this summer about Venezuela’s fuel option. Of course, Venezuela comprises giant fuel reserves. And there is a lot of fuel in Venezuela, most of the existing fuel production is used there for domestic consumption, of course.
So there is a kind of 3 disorders related to the option of loading fuel from Venezuela. It’s infrastructure. There is an oil pipeline between Venezuela and Colombia that was built in 2008. This pipeline was used to ship fuel from Colombia to Venezuela and also uses a smart amount of fuel in the Maracaibo region to reinject oil production tanks at reservoir pressure.
This pipeline fell out of use in 2014. The pipeline has a capacity of around three hundred million cubic feet consistent with the day. As a result, the pipeline has necessarily been closed for almost 8 years. Therefore, there is a bit of uncertainty about investments. necessary for this pipeline, which is about 350 kilometers long, to fix it and install the correct new anti-flow compression apparatus.
Therefore, an investment of doubtful magnitude to date is required for this pipeline. And the pipeline, I add, is owned and operated through PDVSA, Venezuela’s National Company.
The moment factor is the availability of fuel, as I mentioned, most of the fuel that is produced in Venezuela, specifically in western Venezuela, which has to reach this pipeline is used lately in the domestic market. There isn’t much fuel surplus in the Venezuelan market lately. for export to Colombia.
And the third question, of course, applies. The value of this fuel shipped from Venezuela to Colombia. Naturally, PDVSA and the Venezuelan government are exporting fuel, especially to the European market in liquefied form where values, of course, are much better. .
As I mentioned in the consultation request above, wellhead costs in Colombia are $4. 50 to $5. 50 consistent with MMBtu. And, of course, fuel costs in Europe can exceed $40. So when it comes to fuel exports, it is very likely the government of Venezuela and PDVSA will concentrate on liquefaction and export of fuel to Europe of much more consistent costs compared to Colombia.
That said, those are the 3 main elements related to this option of uploading fuel from Venezuela to Colombia.
Steven Bodzin
It seems that he is not involved in the competitive threat.
Jason Bednar
Not in the short term, no, not in fact in the next two to five years. And again, I think realistically and very reasonably, I think the Venezuelan government will focus more on exporting this fuel to markets with much higher prices.
Steven Bodzin
I guess the explanation for why I asked about the timeline of five years or more is just to look at the adult schedule of bonds and think long-term. A one-off problem.
Jason Bednar
No, that’s not a problem. And again, the value is — I don’t think, I don’t think anybody expects Venezuela to give away its gas. I think there will be a value related to that, and it will be closer to foreign values than to Colombian national values. .
Steven Bodzin
It is ok. Thank you.
Operator
This concludes our Q&A consultation and concludes the convention call. Thank you for attending today’s presentation. You can now log out.