In the recent Q2 2024 earnings call, PetroTal (ticker: PTAL), Peru's largest crude oil producer, reported significant financial and operational achievements, including a record high net operating income of $80 million and a net income of $35.4 million.
CEO Manolo Zuniga and CFO Camilo McAllister provided insights into the company's performance, including average sales and production volumes of 18,050 and 18,290 barrels of oil per day, respectively.
Despite a decline in global oil prices, PetroTal remains optimistic about its financial outlook, with an expected EBITDA range of $200 million to $240 million for the full year of 2024. The company also highlighted its strong balance sheet, with $95.9 million in total cash, and a commitment to shareholder returns, having distributed $89 million through dividends and share repurchases.
Key Takeaways
- PetroTal announced record net operating income for Q2 2024 and is on track to meet its annual EBITDA guidance.
- The company reported average sales and production volumes of over 18,000 barrels of oil per day.
- PetroTal is expanding its Bretaña oil field and pursuing the acquisition of CEPSA Block 131.
- The company maintains a strong balance sheet with significant cash reserves and no long-term debt.
- Shareholder returns continue with dividends and a share repurchase program, though the buyback program is currently on hold.
- PetroTal is actively exploring M&A opportunities and plans to expand its transportation capacity.
Company Outlook
- PetroTal has visibility towards an active evacuation capacity of 50,000 barrels per day by 2025.
- Unit costs are expected to increase in the second half of 2024 due to the dry season's impact on sales volumes.
Bearish Highlights
- Free funds flow decreased to $36.3 million due to a larger capital program.
- The buyback program has been paused to prioritize capital expenditure and dividend sustainability.
Bullish Highlights
- PetroTal has expanded its Bretaña oil field, with 20 oil wells and four water disposal wells.
- The company plans to grow production and has included three additional production wells in its 2024 budget.
- Discussions with Petroperú on transportation operations and a pilot program with OCP of Ecuador are underway.
Misses
- Seismic work on Block 95 has been delayed until next year due to pending permits.
Q&A Highlights
- The company is exploring the potential for more oil in Block 95 and needs to conduct seismic work to assess it.
- PetroTal is considering expanding its footprint outside Peru by next year.
- The Erosion Control Project costs are significant at $70 million, but no substantial recurring costs are expected post-completion.
- The Block 131 deal is anticipated to blend volumes and reduce diluent costs by $7 million in 2024.
PetroTal's Q2 2024 results demonstrate the company's resilience in the face of fluctuating oil prices and its commitment to growth and shareholder value. With plans for expansion both in production capacity and through mergers and acquisitions, PetroTal is positioning itself for continued success in the oil industry while being mindful of the environmental sensitivity of the areas surrounding its operations.
Full transcript - None (PTALF) Q2 2024:
Jimmy Lea: Hello and welcome to the PetroTal Q2 2024 Results Webcast. Your presenters today will be Manolo Zuniga, CEO and Camilo McAllister, CFO. There will be a question-and-answer session at the end of the presentation. So, if you would like to ask a question, please submit it by the platform and the presenters will do their best to answer it within the time provided. I will now hand over to our presenters. Please take it away, Manolo and Camilo.
Manolo Zuniga: Thank you, Jimmy, and good day, everyone and thank you for joining PetroTal’s second quarter 2024 webcast where we will provide a brief summary of the financial and operational results that we released this morning before market open. If anyone would like further information on the company, please see our website for additional materials. My name is Manolo Zuniga and I am the President and CEO of PetroTal. I am joined today by Camilo McAllister, our Executive VP and Chief Financial Officer. If you have clicked on the link in last evening's press release, you should hopefully see our slide presentation on your screen but you are having issues viewing the presentation please contact petrotal@celicourt.uk and they will be able to assist you. Before I begin, I should mention that there are some disclaimers towards the end of the main presentation on our website, which I would urge you to read at your own leisure. As you can see in slide 2, PetroTal is focused on the exploration and development of onshore oil opportunities in Peru, and we are now Peru’s largest crude oil producer. Our company is listed on London's AIM market, the Toronto Stock Exchange and the USOTC. And this morning our market cap is approximately a US$470 million. PetroTal’s flagship asset is a 100% working interest in the Bretaña oil field, which we have expanded from first production in mid-2018 to a peak of more than 20,000 barrels of oil per day during the past two months. This helped us maintain production near record highs in the second quarter of 2024 when we deliver average sales and production volumes of 18,050 barrels and 18,290 barrels of oil per day respectively. In the first seven months of 2024, we produced 25% more oil than during the first seven months of 2023. Though, I should point out that our year-to-date production would have been slightly higher with more for an 8-day river-locate against our transportation company during the last quarter. As a reminder, we booked 100 million barrels of 2P reserves at the Bretaña field as of year end 2023. We had after-tax NPV10 valuation of $1.80 per share. I would now like to go through our Q2 2024 results by providing some updates on our recent drilling and production results, transportation and marketing initiatives our Block 131 acquisition and guidance adjustments. Please turn to slide 3, where we have summarized recent results from our ongoing development drilling campaign at Bretaña. We successfully completed two new production wells in the recent quarter the 18H and 19H wells with the later ranking among the five best wells we have drilled at the field today. Well 19H averaged 6,860 barrels of oil per day over its first 30 days onstream allowing this well to achieve payout in approximately 40 days. One of the major positive attribute of our drilling program at Bretaña is how quickly our wells pay back our investment. As shown in slide 3, all of our wells had one well 18H, which has only been producing for three months have already paid back our initial investment. Most of our wells have already returned more than 2.5 times our original investment. And in fact, the average payout for our producing portfolio of wells is now 3.4 times. We are pleased to report that with the support of these new wells our production volume averaged more than 20,000 barrels per day in the months of June and July. We recently completed drilling our fourth water disposal well at Bretaña, which should allow us to increase water injection capacity at the field to approximately 170,000 barrels per day by year end. These are necessary investments as we look to maintain our oil production plateau above 20,000 barrels per day over the medium-term. The Bretaña field now has 20 oil wells and four water disposal wells. The number of oil wells online vary depending on formation water, handling capacity and the importance of appropriately sizing plant capacity and oil transportation capacity. Our rig that is now drilling the green [ph] 1H, we hope to complete this well and bring it on production in late September. This well is expected to cause $13.7 million in line with recent wells at the Bretaña field. I’m going to start with the slide 4 at the NOS, the mentioning that is for us the offtake optionality remains a key strategic priority of the company as we continue to pursue reliable cost effective transportation route for our product. As shown in slide 4, PetroTal currently has visibility towards active evacuation capacity of 50,000 barrels per day by 2025 with potential to expand to 70,000 barrels per day being. Now turning to slide 5, where we have provided some additional color around our pending acquisition of CEPSA Block 131 in Peru's onshore Ucayali basin and for Los Angeles 40 API gravity oil field is located. This acquisition continues to proceed in line with our expectations. We have recently received a key interim approval from Perupertro and await final approval into Supreme Decree in the fourth quarter of 2024. PetroTal’s technical team continuous evaluation of the asset with stability to start optimizing production during 2025. The Los Angeles field continue to produce approximately 900 barrels per day of light oil from four wells. We believe the field's existing infrastructure is sufficient to support growth to up to 5500 barrels per day providing PetroTal with a minimum growth opportunity for the near to medium term. As we wrap-up my portion of the conference call, we have summarized the totals updated financial guidance for the slide 6. As I mentioned previously, the results of our recent development drilling program have pushed for production to more than 20,000 barrels per day in June and July. However, dry season has already begun in the month of August and we're expecting production to decline in the coming months as is typical for this time of the year. With that in mind, we are maintaining guidance of Q3 average production of approximately 13,000 barrels per day and for average annual production guidance of 16500 to 17500 per day. Despite the recent correction in global benchmark oil prices Brent crude remains on track to average $22 per barrel in 2024 which is higher than our original budget assumption of $77 per barrel. As a result, PetroTal now expect full year 2024 EBITDA to fall within a range of $200 million to $140 million exceeding our original guidance of just $200 million. I would also like to address the changes to our capital program, specifically, the inclusion of three additional production wells in the 2024 budget. As we disclosed in our press release this morning we have elected to accelerate the drilling of these three horizontal development wells at Bretaña from H1 2025 -- first half of 2025 into Q4 2024. We estimate this change will save us more than $8 million in standby fees that we would have incurred to hold the rate at Bretaña until the previously scheduled 2025 drilling program we assume in Q1 2025. The early completion of the development wells should also allow us to capitalize on our recent investments in water-handling capacity which by year end will be a 670,000 barrels of water per day and also allow us to maximize production through the next wet season which usually begins in December. We now plan to release our drilling rig once the 2023 H well is completed in early Q1 2025 and do not plan to resume drilling at Bretaña again until Q4 2025. Even with increase to our budget we continue to forecast adjusted after-tax free funds flow of up to $55 million in 2024. Pre return of capital initiatives as shown on slide 6 in front of you. I would like to point out that increased our capital budget from originally enrolled 135 million have essentially been offset by a corresponding increase to our EBITDA guidance. As usual we are prepared to revisit our free cash flow guidance as the year goes on. And with that I will now turn the call over to our CFO, Camilo McAllister who will provide a brief update on our Q2 2024.
Camilo McAllister: Thank you, Manuel and thank you to everyone who has turned into our webcast today. I would like to start-off by highlighting some of the key items from the press release and financial statements that were issued earlier this morning with the visual support from slides 7. So from an operational perspective, our production averaged 18,290 barrels of oil per day in the second quarter with corresponding oil sales of 18,050 barrels per day and we are pleased to report that the quarterly average production levels have remained within 4% of record highs supported by the contribution from our two recent and horizontal production wells and partially offset by an eight day river blockade as Manuel discussed earlier PetroTal once again delivered a strong financial metrics in the quarter. I would like to highlight the following notable profit and loss items. First the net revenue of $103.1 million or $62.76 per barrel compares to $100.6 million last quarter as we benefited from an increase of $2.78 per barrel against last quarter. , PetroTal has paid royalties of $10 million in the second quarter, this is up from 9.5 in the first quarter. This amounts to about $6.08 per barrel and includes provisions for our social trust initiatives. Royalty expense is calculated, as you know, as a percentage of net revenue and our unit royalty expenses have remained relatively stable for the past several quarters. Our total operating and transportation expenses were $13.1 million in the second quarter and this compares to approximately $11.5 million in the first quarter. Our lifting costs on a per barrel basis were $6.10 in the second quarter, and this compares to $5.56 on a per barrel basis on day last quarter. Our unit operating costs were slightly higher this quarter due to expense facility maintenance charges. Direct transportation costs have also increased slightly to an average of $1.86 per barrel and this is mainly due to a combination of higher diluent costs and a reversal of a non-recurring storage credit that we had received in the first quarter. Now consistent with prior years, we expect our unit costs to increase in the second half of the year, due to the impact of the dry season on our sales volumes. Our sales allocation were broadly consistent with prior quarters with 89% of our sales volumes directed through the Brazilian export route and 11% directed through the Iquitos refinery. Now our net operating income has reached a record high of $80 million in the second quarter of 2024. This equates to $48.72 per barrel. And PetroTal continues to benefit from a combination of strong production volumes and favorable Brent oil pricing. Second quarter EBITDA came in at $69.5 million. Essentially this is flat to the prior quarter. I would like to point out that PetroTal has already generated over $140 million in EBITDA in the first six months of 2024 putting the company well in its way to achieve our annual restated guidance of $200 million to $240 million. Our net income has amounted to $35.4 million in the second quarter, which is a decrease of just over -- sorry $11 million compared to the prior quarter. However, year-to-date net income of $83 million is consistent with the same period last year, and Q2 2024 marks the 18th consecutive quarter of positive net income for the company. We invested $38.9 million of CapEx in the second quarter. This is nearly $29 million of which was dedicated to our ongoing drilling campaign. We also invested $9 million in field infrastructure and fluid handling capacity at that refinery field during the quarter and through the first six months of 2024 our capital spending it's striking approximately $10 million ahead of last year's level, mainly due to the impact of a more active drilling campaign. Our free funds simply increased from $36.3 million -- sorry, our free funds flow have increased to $36.3 million. This is down from $41.7 million last quarter, and this is mainly due to the impact of a larger capital program this quarter. PetroTal generated $78 million in free funds flow over the first six months of 2024, compared to $74.3 million over the same period last year. We are pleased to report that PetroTal maintains a strong balance sheet having exited the quarter with $95.9 million of total cash, an increase of $10.7 million compared to the prior quarter. Importantly, our cash balance now includes $85.1 [ph] million in unrestricted cash, which increased substantially from $62.5 million at the end of last quarter. This change was partially driven by the release of $13.4 million to the social trust fund of which $12.6 million came from restricted cash, but also from our strong free cash flow generation. Accounting for various working capital various balances, we are in a $50 million net surplus position compared to just over $55 million at the end of last quarter. We have no long-term debt and zero amounts drawn on our short-term credit facilities as of the end of the second quarter. Turning now to Slide 8 that summarizes our return of capital policy and amounts paid since inception. PetroTal continues to pay a base dividend of $0.015 per quarter since the dividend was initiated in the first quarter of 2023, we have already returned a total of $89 million to shareholders which amounts to basically $0.10 per share. We maintain optionality to issue top-up dividends in the quarters for which our 12 month liquidity forecast exceeds our internal targets. PetroTal also maintains the option to repurchase shares under our ongoing normal course issuer bid. Although, the pace of our share repurchases has moderated somewhat in the second quarter of '24, we have still repurchased and canceled nearly 18 million shares since the end of 2022 from our total investment of just over seven million. Our return of capital program currently prioritizes dividend sustainability, while balancing development capital requirements of our existing asset base. With that in mind, we will continue to monitor buyback levels. I thank you for your continuing investor support and I'll now turn back to Celicourt for the Q&A session.
A - Jimmy Lea: Thank you, Manolo and Camillo. First question do you have any updates regarding DOMP? Is there any developments with Petroperú? And is there a possibility to use DOMP within 2024?
Manolo Zuniga: Yes, if I can give you an update where we are with the DOMP, we continue our conversations with Petroperú and how to optimize the transportation operations with the pipeline. We have indicated to them that if somehow they need to optimize the operation. So they may lower the tariffs in the Badlands working, there recently in a cut in pump oil compensation five to the portal by here that will allow us to do another shipment of the oil that is being stored in that pipeline for a long time, actually is Petroperú. But keep in mind that the body that you expect that we are not yet ready to put oil in the pipe given how long it takes to come out the portal by your works and that will impact our cash flows. So we continue talking to them. We're expecting other operators to put oil in the pipe that will also help. But for now in 2024 and not even 2025, we're assuming the use of the pipeline that we're still expecting to be able to eventually reach 70,000 barrels of transportation capacity we will need to use.
Jimmy Lea: In five year including potential M&A, where do you hope PetroTal's production flow rates will be?
Manolo Zuniga: Well your goal is to continue growing the company in the market versus initially mentioned that you need to have 50,000 barrels of oil plus to have a significant presence in the market. The investors really like what we have been able to accomplish in the last six years and our intent is to continue doing that. They had a small acquisition that we did of say the sale of the Los Angeles feel we mention how we could increase production. We're looking at that and we continue as we develop our routes in our markets for routing Britannia to continue growing production into the future. The fact that we are looking at establishing 50,000 barrels of transportation capacity can eventually 70,000 gives you a hint of where we're heading.
Jimmy Lea: When will CapEx spend reduce.
Camilo McAllister: So this is Camilo and as we shared today the drilling program has been accelerated. We are also ongoing facility investments to upgrade water handling capacity. We are working on the air ocean project. So there's multiple fronts that we're currently attending. And therefore the CapEx increased guidance. And as you also heard from Manolo, we expect to finish this drilling campaign in the first quarter of next year. And then we should be focusing on what sort of investments we can do in low say 131 and how to best distribute our funds for next year. So once the budget is prepared and we have a guidance for next year, we could be sharing these details.
Jimmy Lea: Thank you. Will Peru consider the additional erosion and community protection investments in future royalty rate discussions?
Manolo Zuniga: No not in the royalty rate per se, but in Peru they have a program called workforce taxes. You can commit your future income taxes paid to do these type of projects. And we are discussing with the regional government of [indiscernible]. We're well located to be able to submit in some of these initiatives and to be paid for it with our future taxes. And that would be a win-win for everybody and ion Peru they've been doing this now for a number of years. The large mining companies for example have taken advantage of that to provide a support to the communities based on their own taxes. The concept of course is that the private companies can deliver projects better than the economy it entities.
Jimmy Lea: What near term potential in terms of improved production rates do you see a Block 131?
Manolo Zuniga: The Los Angeles field in Block 131 in central year are quite interesting case, It’s light oil, supported by an aquifer. So we're very familiar with that concept. It's almost like a college book patrolling gearing your case. Our idea is we’re looking at the possibility of doing horizontal wells that they could quickly increase production, but we also see potential in the deeper horizons that were penetrated by a couple of the wells drilled by CEPSA’s were never tested and we see a lot of potential there. So it's quite exciting what we're looking at in that a relatively small field that I'm hoping to grow as we have done Bretana.
Jimmy Lea: Could you give us a rough time line about how PetroTal plans to pursue longer-term transportation goals, once the 100,000 barrel pilot program with OCP of Ecuador is completed?
Manolo Zuniga: Well we have now the Manaus, Brazil route as a good example, where we've plan to do. Just to remind our investors, our first shipment via Brazil was done in December of 2020. I still believe that that was the reason we were able to raise $100 million bonds in early 2021, the ones that we paid in two years window that had a three year term. And then by the initially 140,000 pilot, we went up to 200, then 250 then 400 and lately we've been doing 600,000 barrels per month to Brazil. That gives you an idea what we could accomplish. Now just keep in mind that the Napo River that comes from Ecuador is much smaller river than the Amazon (NASDAQ:AMZN) River. But interestingly, it was when it is dry in Peru, in Ecuador, it's in the other side of the Ecuador and therefore, is wet. So there are rains in Ecuador right now, probably its dry in Peru, even though we are neighboring countries. And we could maybe benefit from that and take advantages of the Napo River. I'm very excited and we indicated in our presentations, maybe we can go to 150,000 per month, maybe more. And that's not only the only route that we're looking at. We plan to, as we show in our presentation, having other possible routes. Again, the idea is to be at 50,000 by next year and continue growing once it's owning peak back, and we can use it.
Jimmy Lea: Are you looking at possibly building more storage capacity on Bretana for produced oil to accommodate low water – sorry, in order to accommodate low water levels to barges in the dry season, so that the produced oil can be transported to announce at a later date. And if so how much do you expect to build and for which price?
Manolo Zuniga: The idea of building a storage capacity in Bretana is not really impactful, when we are producing 20,000, 25,000 as we intend to do in the future or even more than you would have to have a major times to do that. Keep in mind that we are adjacent to the Pacaya Samiria National Reserve. So, and that's why our footprint is a small. We're going to eventually need to grow that footprint some, but not to add a tank farm. We are in a very sensitive area, and it will not have much of an impact because you may be able to store 100,000 or so, and that's in a matter of a few days, it will be fully used. What we need to continue doing is expanding the barge fleet, which we have done. And eventually, the ultimate goal, especially we find more oil in the leads that we have in Block 95 is to connect directly to the O&P, there is solution, and that's what we're looking at. And for that, of course, we want to do the seismic in Block 95. And then you see the potential that we believe we may have two, three other Bretana’s in Block 95. And that's why we are looking ahead to expand the capacity to 50,000, 70,000, so everything is connected and where we very steadfast on our approach.
Jimmy Lea: Do you have the option of using the O&P only in the dry season or do you have to use it all year round?
Manolo Zuniga: Maybe this question is more related to the OCP. The one in Ecuador because in the past when we were using the O&P, we were using it in mostly dry and wet season. We have not used the O&P again, the fact that it takes so long for the oil to arrive in the Pacific coast. We cannot afford that from a cash flow point of view. While the OCP, we can quickly market the oil, and that's why we are doing this pilot on the OCP.
Jimmy Lea: Can the company provide more details on the buyback program and why the buybacks have been put on hold, the current suppressed share price would this not be a good return for shareholders?
Camilo McAllister: Sure, it’s Camilo. So yes indeed in the second quarter we have inserted some additional constraints on the buyback program to ensure we were prioritizing on the upcoming growing capital spend and dividend sustainability. But going forward as always, we will continue to monitor the plan and make sure we know if there's any adjustments to be made that they are done. So to take advantage of the prices, our environment, and the investments in the future.
Jimmy Lea: Given the strong financial position of PetroTal, why isn't the board aggressively conducting M&A?
Manolo Zuniga: Well, we have already done the small Los Angeles field acquisition. We continue to pursue opportunities and are looking -- but again, we are very technical-oriented. We need to make sure that whatever we do will enhance the value of the company. It's always difficult when you have Bretaña as a reference. We actually imagine that Barry, the small Los Angeles field, where we see the opportunity of doing something similar to Bretaña, not probably of the same size. So those are the opportunities we're looking at. And we're hopeful that we may be able to do some more, later -- probably by next year -- and maybe also expanding outside Peru.
Jimmy Lea: You will pay about $7 million in diluent costs for 2024. How will this change once you close the Block 131 deal?
Manolo Zuniga: Well, that was one of the reasons that we actually -- I think the announcement we mentioned, we have in our presentations -- there are some synergies, and that is one of them, that we could actually blend volumes. And, of course, by increasing the production in the Los Angeles field, it means more blending. And that's something we looked at very carefully because we don't have to use the other way to go to -- for example -- the Iquitos Refinery. The Iquitos Refinery could become again our best market, which is very close by. So, as always, as you know, we have always optimized operations from day one. Everything we do is to optimize as much as possible.
Jimmy Lea: A question on the cost of the Erosion Control Project; we know that the project will cost around $70 million in total, and 60% of this amount will be recognized under OpEx. I would like to understand if there will be any recurring impact from that spending into next year under OpEx, or will you be done completely once you spend the $70 million?
Camilo McAllister: Thank you for that question and for conveying the message back to us in the way we have distributed. So, great to hear you're listening. The Erosion Project was funded mainly through 2025. So, in the future years -- and that would be post-completion of the project -- there will be no significant recurring costs.
Manolo Zuniga: In the nearby communities, for example, looking at what we are doing in Bretaña, we are asking the Regional Government to help. And that's where the idea of local taxes may come in; we can help some of the other communities. But for us, we don't plan to spend money on the future as such.
Jimmy Lea: Seismic work on Block 95 expansion should start this Q3. What is the status at the moment?
Manolo Zuniga: Well, unfortunately, the project is not going to start in Q3. We are still waiting for the EIA permit to do it. So, we're going to have to defer the acquisition for next year. But now we are getting good sight on when the permit will be awarded. We're getting ready to execute the contract with the Seismic Survey company, which will start buying all of the materials needed for the acquisition campaign and will then need to do all of this next year. For this delay, it's our possibility to see how much we may have in Block 95, but as I always say, time flies. And we'll be ready to execute that next year.
Jimmy Lea: Thank you, Manuel and Camilo. There are no further questions at this time. I will now hand back to both of you for closing remarks.
Manolo Zuniga: Well, as always, we would like to thank our investors. We're very excited about what we're doing. And, of course, I really enjoy having Camilo as our CFO. He is doing an outstanding job. Camilo, would you like to say some final words?
Camilo McAllister: No, thank you, Manuel. Just to reiterate the strong production and cash flow generation -- it’s a good track record of the company, and we will continue to perform.
Manolo Zuniga: Well, thank you so much.
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