ALVOF: Alvopetro Energy – Updates on Exploration Wells; Drilling & Production Testing Continues. Operational Capacity of Gas Processing Facility has been Increased by 25%.
Operating in Brazil, Alvopetro Energy (OTC:ALVOF) (TSX:ALV.V) is an upstream producer of natural gas with midstream assets (pipeline and gas treatment facility). The operational capacity of the processing facility was increased by 25% during the third quarter. The company’s natural gas operations are in Brazil and serve the industrial area of Camaçari.
The company’s recent organic growth activities include the completion of an 8-km tie-in pipeline, the drilling of three exploration gas prospects (182-C1, 182-C2 and 183-B1) and the commissioning of the field production facility at the Murucututu Project, along with its subsequent initiation of production from the 183(1) well.
Updates on Exploration Wells 182-C2 & 183-B1 (both in the Recôncavo Basin)
182-C2: In October 2022, Alvopetro completed its 3,185m 182-C2 exploration well situated on the company’s Block 182 in the Recôncavo Basin. Open-hole wireline logs indicated 10.9 meters of potential net hydrocarbon pay within the Agua Grande Formation (average porosity of 8.9% and average 25.1% water saturation). The 182-C2 well also encountered 121.3m of sand with an estimated porosity over 6% in the Sergi Formation. Management plans on undertaking a multi-zone testing program in order to assess the productive capability of the 182-C2 well.
183-B1: In early July 2022, the company announced a multi-zone discovery by the 2,917m 183-B1 exploration well. Open-hole wireline logs and fluid samples indicated potential net hydrocarbon pay over a total of 34.3 meters within multiple formations (average porosity of 10.6% and average water saturation of 29.0%). Potential light oil pay was encountered over 5.3m in the Candeias Formation, 11.4m of potential natural gas pay in the Agua Grande Formation and 17.5m of potential light oil pay in the Sergi Formation. Management plans on undertaking a multi-zone testing program to validate the pay intervals and to test intervals not thoroughly assessed due to wellbore washouts.
183-B1 (continued): On November 07, 2022, Alvopetro Energy announced test results from initial production test of the deepest of three formations (Sergi Formation) that exhibited hydrocarbon shows. A 72-hour production test of 26.5m of perforated intervals recovered 59 barrels of 43°API oil and 0.28 MMcf of associated gas. Alvopetro is engineering a stimulation plan for the upper Sergi interval section. Also, applications have been submitted for the drilling of two follow-up wells that will target the Sergi Formation and the deeper Boipeba Formation from this same 183-B1 surface location.
183-B1 (continued): Then, on November 22nd, initial results from the second deepest formation (Agua Grande Formation) at 183-B1 was released. A 72-hour production test of 8.5m of perforated intervals recovered 2.4 barrels of 43°API natural gas liquids (condensate) and 2.4 MMcf of associated gas; however, the flow rate decreased significantly during the test and pressure build-up following the test was slow. The company is now proceeding up-hole to test the Gomo member of the Candeias Formation where open-hole logs 5.3m of potential net light oil pay was encountered (average porosity of 15.7% and average 35.0% water saturation).
Realized Natural Gas Pricing Effective August 1, 2022
Effective August 1, 2022, the ceiling price for Alvopetro Energy’s natural gas was reset to US$10.22/MMBtu (BRL1.94/m3 at a BRL/USD foreign exchange rate of 5.08).
Over four years ago, on May 7, 2018, Alvopetro Energy entered into an attractive long-term gas salesagreement 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.
Increased Capacity of Gas Processing Facility
During the third quarter of 2022, capacity of the gas processing plant was expanded to 500,000 m3/d (17.66 MMcfpd) from 400,000 m3/d (14.13 MMcfpd). Production rates have recently varied from 440,000 m3/d to slightly over 500,000 m3/d. Going forward, the daily production is anticipated to be dependent on the demand of Imetame Energia’s thermal power project (which is entitled to a natural gas supply under the unitization agreement of Blocks 197, 198, 211 and 212) until Alvopetro Energy’s production from new projects come online. Management has indicated that Bahiagás (Companhia de Gás da Bahia) continues to request as much gas as Alvopetro can deliver.
Debt (Credit Facility) Fully Repaid
During the third quarter of 2022, Alvopetro Energy paid off the remaining $2.5 million on the credit facility and canceled the facility. As of September 30, 2022, working capital was $12.2 million, which includes $17.38 million in cash and cash equivalents.
Dividends
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 from the Caburé project and the strong increase in the realized natural gas price.
After another three quarters, on November 15, 2022, the Board approved a 50% increase in the quarterly dividend to $0.12 per share, which is payable on January 13, 2023 to shareholders of record at the market close on December 30, 2022.
Share Repurchase
On November 15, 2022, Alvopetro Energy’s Board approved to submit an application to launch a share buyback program under a Normal Course Issuer Bid (NCIB). After the customary approvals, we expect a share buyback program to be announced.
Third Quarter Results
On November 15, 2022, Alvopetro Energy reported results for the third quarter ending September 30, 2022. Natural gas and condensate sales were $16.67 million, another record for the company. Sequentially, natural gas and condensate sales increased 5.6% compared to $15.79 million in the second quarter, driven by a sequential 12.0% increase of overall sales volumes to 2,642 boepd, along with an increase in sales prices through the re-set floor price of the GSA. Natural gas sales averaged 15.139 MMCFPD while condensate sales averaged 117 BOPD. Natural gas price realization was $11.18 per MCF, a 6% sequential decrease from $11.90 per MCF in the second quarter. The realized condensate price was $101.57 per bbl.
Royalties and production taxes were 7.9% of natural gas and condensate sales. The Caburé natural gas field is subject to a 10% government royalty and a 1% landowner royalty while the Bom Lugar field is subject to a 5% government royalty and a 0.5% 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.
Reported quarterly net income was $8.79 million (or $0.2381 per diluted share). This year, shares outstanding have increased by 6.8% to 36,201,388 shares, primarily due to all outstanding warrants being exercised during the third quarter (1,342,978 warrants exercised by cashless exercise and 1,342,978 warrants exercised at $1.80 per share), for which Alvopetro received cash proceeds of $2.4 million and issued 2,081,616 shares. With the realized sales price at $68.59 per BOE, royalties at $5.42 per BOE and production expenses at $3.34 per BOE, the operating netback was $59.83 per BOE.
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