READ THE FULL ALVOF RESEARCH REPORT
Alvopetro Energy Ltd (OTC:ALVOF) (TSX:ALV) is an upstream natural gas producer, midstream operator (pipeline and gas processing facility) and exploration company (prospects). The company's natural gas operations are in Brazil and serve the industrial area of Camaçari.
The company's natural gas production from the Caburé field will benefit from two catalysts. First, under an attractive long-term gas sales agreement with Bahiagás, the contract price has significantly increased from US$7.72/mcf to US$11.28/mcf effective February 1st. With natural gas and condensate sales averaging above 2,400 boepd the last two quarters, the financial effect could be surprising when the company reports first quarter results in mid-May. Second, the operational production capacity of the company's gas processing facility is slated to increase 33% to 500,000 m3/d in June. This increase in sales volume should spur an additional boost in financial results.
Further sources of production are being developed through management's focus on opening the Murucututu/Gomo Gas Field. In mid-2022, two wells (183-1 and 197-1) are expected to enter production Natural gas resources are confirmed in 183-1 and 197-1. Well 183-1 was stimulated and later production tested in March 2021 and is expected to be tied-in during the second quarter of 2022. Well 197-1 is slated to be stimulated and tied-in thereafter. An 8-km tie-in line, which connects the 183-1 well to the 11-km Caburé gas field transfer pipeline, has been completed.
In addition, the drilling of two natural gas exploration prospects (182-C1 and 183-B1) is expected to be completed in the first half of 2022. Exploratory well 182-C1 was spudded on March 2nd. When the hole is completed, the rig will move to183-B1 well site. Moreover, in the second half of 2022, management plans to drill two fit-for-purpose developmental wells at Murucututu/Gomo, MUR-1 and MURS-1.
In March, the Board of Directors increased the quarterly dividend by 33% to $0.08 per share due to the company's increased production level and the strong pricing outlook.
Lastly, Alvopetro's annual independent reserves assessment was announced in March. Though total net 2P (proved plus probable) reserves decreased 8.12% YOY as would be expected given the production volumes extracted from the Caburé natural gas field during 2021, Alvopetro's net asset value of 2P reserves increased 52.3%, primarily due to higher forecasted prices.
RECENT DEVELOPMENTS
2021 In Review
During 2021, Alvopetro ramped up production from the Caburé natural gas field to above the 2,400 boepd level, the result of developing the field and completing the construction of the supporting midstream infrastructure, along with securing a gas sales agreement with Bahiagás. The company is now a profitable natural gas and condensate production company with further production potential from nearby gas fields and the current work program to increase the capacity of the gas processing facility by 25% [from 400,000 m3/d (14.13 MMcfpd) to 500,000 m3/d (17.66 MMcfpd)].
In 2021, Alvopetro generated $32.95 million in revenues. The company reported net income of $6.614 million ($0.1894 per diluted share) versus $5.706 million ($0.1628 per diluted share) in 2020. The improvement in operations was not accurately reflected by the earnings increase as 2020 earnings were bolstered by non-operational accounting items, namely significant gains through a deferred tax recovery and foreign exchange.
Funds flow from operations was $24.29 million ($0.71 per diluted share), a 694% increase from $6.216 million ($0.18 per diluted share) in 2020. Operating netback was $33.39 per BOE versus $26.85 per BOE in 2020.
On March 18, 2022, Alvopetro Energy reported results for the year ending December 31, 2021. Natural gas and condensate sales were $34.98 million, a record for the company. Year-over year (YOY) comparisons are meaningless since sales volumes from the Caburé natural gas field commenced in mid-2020.
During 2021, natural gas and condensate sales averaged 2,358 boepd, ramping up from 1,950 boepd in the fourth quarter of 2020 to the slightly above 2,400 boepd in the second half of 2021. Sales are predominately from natural gas (95.5%) with 4.4% generated by NGLs from condensate.
For the year, royalties and production taxes were 8.9% of natural gas and condensate sales. The Caburé natural gas field is subject to a 10% government royalty and a 1% landowner royalty. The Mãe-da-lua field and Block 182 have an additional 2.5% gross-overriding royalty. However, royalties are determined at an inherent reference price attributable to production of raw natural gas produced, which is lower than the GSA contracted sales price, which results in a lower effective royalty rate. The reference price is also tied to current Henry Hub prices.
Production expenses increased slightly more than sales (276% versus 240%), primarily due to higher fees associated with increased sales volumes. Most of Alvopetro's production expenses are related to fees paid to Enerflex for the operation of the transfer pipeline and gas processing facility, along with unit operating costs on the Caburé upstream assets.
Net income increased 15.9% to $6.614 million ($0.1894 per diluted share) from $5.706 million ($0.1628 per diluted share) reported in 2020.
Consolidated EBITDA for 2021 was $25.148 million, significantly higher than management's initial forecast of $17 million made in February 2021.
Year-end working capital improved significantly from $5.5 million in 2020 to $9.1 million at the end of 2021. Shares outstanding declined slightly by 0.3% to 34.9 million shares due to a share restructuring conducted in September 2021 prior to the initiation of a dividend.
In September 2022, the Board of Directors declared the company's initial quarterly dividend of $0.06 per share. After only paying two quarterly dividends, the Board increased the dividend by 33% in March 2022 to $0.08 per share due to increased production and strong pricing.
Dividend Increase
On March 17, 2022, the Board of Directors declared a quarterly dividend of $0.08 per share, a 33% increase over the prior dividend reflecting increased production from the Caburé project and the increase in the realized natural gas price. Shareholders of record on March 31, 2022 received the declared dividend on April 14, 2022.
EXPECTATIONS FOR 2022
Having paid down debt to the $6.5 million level and established a production base from the Caburé natural gas field, management is now focused on growing reserves (and production) by advancing the company's Murucututu/Gomo natural gas project to production. In addition, the construction of an 8-km tie-in pipeline that connects well 183-1 to the 11-km Caburé transfer pipeline has been completed.
The drilling of two natural gas exploration prospects (182-C1 and 183-B1) is expected to be completed in the first half of 2022. Exploratory well 182-C1 was spudded on March 2nd. When completed, the rig will be moved to183-B1.
At the Murucututu/Gomo Project, the stimulation of well 197-1 is expected during the second quarter of 2022. Moreover, in the second half of 2022, management plans to drill two fit-for-purpose developmental wells at Murucututu/Gomo, MUR-1 and MURS-1.
Monthly Production Announcement
On March 7, 2022, Alvopetro Energy announced sales volumes for March. Based on field estimates, total sales volumes averaged 2,512 boepd, a 1.3% increase over February's average sales volumes of 2,459 boepd. Sequentially, average daily sales for 1Q 2022 increased 2.8% to 2,500 boepd versus 2,433 boepd in 4Q 2021. In March, natural gas sales averaged 14.4 MMcfpd (2,482 boepd) while condensate sales averaged 101 boepd.
Realized Pricing Significantly Increased Effective February 1, 2022
Effective February 1, 2022, the price for Alvopetro's natural gas increased from US$7.72/mcf to US$11.28/mcf (BRL1.94/m3 at a BRL/USD foreign exchange rate of 5.1966), higher than management's original expectation of US$10.15/mcf.
On May 7, 2018, Alvopetro Energy entered into an attractive long-term gas sales agreement with Bahiagás (Companhia de Gás da Bahia). The floor and ceiling prices for natural gas are re-set semi-annually on a local currency basis.
Operational Update
Natural gas resources are confirmed in 183-1 and 197-1. Well 183-1 was stimulated and later production tested in March 2021 and is expected to be tied-in and in production starting in the second quarter of 2022. Well 197-1 is slated to be stimulated and tied-in around mid-year, probably after the gas processing facility's operational production capacity has been expanded.
The 8-km tie-in line (dubbed the Murucututu/Gomo pipeline extension) now connects the 183-1 well to Alvopetro's existing 11-km Caburé gas field transfer pipeline. In July 2021, field construction commenced, including the welding of pipe and the opening of ditches in preparation of installation.
The final pressure testing of the pipeline was followed by surface reclamation. The construction of a field production facility is currently underway. The Murucututu/Gomo tie-in pipe line was completed in early 2022. The estimated cost, including field production facilities, is $2.1 million.
Exploration well 182-C1 (aka Agua Grande/Sergi gas prospect) on Block 182 was spudded on March 2, 2022 with the intent to drill to a measured depth of 2,920 meters. A second conventional natural gas exploration well (183-B1) is planned immediately thereafter on the adjacent Block 183.
ANNUAL EVALUATION OF RESERVES
Annually, generally in early March, Alvopetro provides an independent Reserve Report (prepared in accordance with NI 51-101). The report assesses and evaluates the reserves of Alvopetro's Caburé conventional natural gas pool (located on Blocks 197 and 198), the Murucututu/Gomo Natural Gas Project (area around the 183-1 and 197-1 wells in Blocks 183 and 197, respectively) and two mature oil fields: the 2,238-acre Bom Lugar and 432-acre Mae-da-lua. The latest report, which was last prepared by GLJ Petroleum Consultants, is dated March 8, 2022 with an effective date of December 31, 2021.
On March 8, 2022, Alvopetro's annual independent reserves assessment was announced. Total net 2P (proved plus probable) reserves decreased 8.12% YOY (year over year) to 8.212 MMBOE from 8.938 MMBOE in 2020 due to 2021 production volumes at the Caburé natural gas field.
Analyzing the increase in reserves on the field level, the company's net P2 reserves in the unitized Caburé natural gas field decreased 13.8% to 4.867 MMBOE, while the net P2 reserves in the Murucututu natural gas field increased 1.39% to 3.056 MMBOE.
Alvopetro's net asset value based on 2P reserves (before tax and discounted at 10%) increased 52.3% from $195.2 million at year-end 2020 to $297.3 million at year-end 202, primarily due to higher forecasted commodity prices.
VALUATION
The current P/S valuation range for this group of comparable companies is between 2.6 and 7.5 times revenues. Utilizing comparable analysis, the target price for Alvopetro Energy is $5.60 per share, which is based on an expected mid-second quartile price-to-sales multiple.
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