READ THE FULL ALVOF RESEARCH REPORT
Alvopetro Energy Ltd (OTC:ALVOF) (TSX:ALV) is an upstream natural gas producer and midstream operator (pipeline and gas processing facility) with operations that serve the industrial area of Camaçari, which is just north of Salvador, Brazil's fourth largest city. Impressively, the company has developed Caburé natural gas field and has achieved six consecutive quarters of increasing levels of gas and condensate production, bolstered by rising pricing under an attractive long-term gas sales agreement.
Management is now embarked on a plan to open the Gomo Field to the north by drilling two exploration wells, the first of which (182-C1) is slated to be drilled in early 2022. The rig is currently in the commissioning phase. Construction on a 9-kilometer tie-in pipeline commenced in July 2021 and is expected to be completed by around the end of the first quarter. In addition, Enerflex is increasing the gas processing facility's operational production capacity to 500,000 m3/d, which management expects will be available by June 1, 2022.
Management's robust growth plan is being funded organically by the company's improving operational performance, which is being bolstered by a strong pricing outlook.
RECENT DEVELOPMENTS
Monthly Production Announcement
On February 7, 2022, Alvopetro Energy announced sales volumes for January. Based on field estimates, total sales volumes averaged 2,509 boepd, a 2.1% increase over December's average sales volumes of 2,457 boepd. Natural gas sales averaged 14.4 MMcfpd (2,482 boepd) while condensate sales averaged 98 bopd.
Realized Pricing Significantly Increased Effective February 1, 2022
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. Effective February 1, 2022, the price for Alvopetro's natural gas increased from US$7.72/mcf to US$10.50/mcf (BRL1.94/m3 at a BRL/USD foreign exchange rate of 5.58), higher than management's expectation of US$10.15/mcf.
Operational Update
Operationally, management focused on producing natural gas and condensate from the Caburé natural gas field and advancing the company's Gomo natural gas project to production.
During 2022, management plans to drill two natural gas exploration prospects: 182-C1 (Block 182) and 183-B1 (Block 183). Following the completion of a rig maintenance program, most of the contracted rig has been transported to the 182-C1 well site. The rig is in the process of being commissioned. The drilling costs for the each of two wells are estimated to be $3.3 million.
The 9-km tie-in line (dubbed the Gomo/Murucututu pipeline extension) will connect 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 has been completed. Surface reclamation is in process and site construction for the field production facility has commenced. Management anticipates tie-in line will be completed around the end of the first quarter of 2022.The estimated cost, including field production facilities, is $2.1 million.
In the second half of 2022, after the increasing the gas processing facility's operational production capacity, management plans to stimulate and tie-in of the 197-1 well and other follow-up development wells as part of an $8.8 million capex program.
Another Equity Milestone
On February 11, 2022, Alvopetro Energy announced that Independent Trading Group has been engaged to provide market-making services for the company's stock on the TSX Venture Exchange and OTCQX so that reasonable markets can be maintained.
VALUATION
The current P/S valuation range for this group of comparable companies is between 2.47 and 4.25 times revenues. Utilizing comparable analysis, the target price for Alvopetro Energy is $4.50 per share, which is based on an expected second quartile price-to-sales multiple.
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