READ THE FULL ALVOF RESEARCH REPORT
Operating in Brazil, Alvopetro Energy (OTC:ALVOF) (TSX:ALV) is an upstream producer of natural gas with midstream assets (pipeline and gas treatment facility). The processing facility is on-track to increase its capacity by 25% in July. The company is benefitting from the recent price increase governed by an attractive gas sales agreement. The company's natural gas operations are in Brazil and serve the industrial area of Camaçari.
The company's current organic growth activities include the completion of a 8-km tie-in pipeline, the successful drilling of two exploration gas prospects (182-C1 and 183-B1) and the upcoming drilling of two developmental wells (MUR-1 and MURS-1).
Discovery Wells
In mid-April 2022, Alvopetro's 2,926m 182-C1 exploration well in the Recôncavo Basin was completed with open-hole wireline logs indicating the 25 meters of potential net natural gas pay within the Agua Grande Formation (average porosity of 8.2% and average 34% water saturation).
The 182-C1 well did not encounter pay in the Sergi Formation due to a nearby crossing of a normal fault. Management plans on undertaking a testing program in order to assess the productive capability of the 182-C1 well.
In early July 2022, the company announced a multi-zone discovery by the 2,917m 183-B1 exploration well also located in the Recôncavo Basin. Open-hole wireline logs and fluid samples indicate 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.
Organic Growth Strategy
Increase capacity of gas processing facility
The gas processing plant expansion project is on track to be completed in July. The available processing capacity is expected to increase 25% from 400,000 m3/d (14.13 MMcfpd) to 500,000 m3/d (17.66 MMcfpd).
Increase conventional hydrocarbon pay from Blocks 182 &183
The 182-C1 and 183-B1 exploration wells in the Recôncavo Basin (described above), along with a follow-up well to be drilled in the second half of 2022, are expected to provide feedstock to the gas processing facility via tie-in pipelines.
Add hydrocarbon pay from the Murucututu/Gomo Project
At the Murucututu/Gomo Project, the construction of an 8-km tie-in pipeline (dubbed the Murucututu/Gomo pipeline extension) that connects the 183-1 well to the Caburé pipeline has been completed. The field production facility is expected to be commissioned early in the third quarter. The estimated cost, including field production facilities, is $2.1 million. 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. During the second half of 2022, management plans to drill two fit-for-purpose developmental wells at Murucututu/Gomo, MUR-1 and MURS-1.
Monthly Sales Volume Announcement
On July 7, 2022, Alvopetro Energy announced sales volumes for June. Based on field estimates, total sales volumes averaged 2,480 boepd, a rebound from May's 2,111 boepd when a planned five-day shutdown occurred in order to complete advance work for the gas plant expansion. In June, natural gas sales averaged 14.2 MMcfpd (2,698 boepd) while condensate sales averaged 102 bopd.
For the second quarter of 2022, sales volumes averaged 2,359 boepd, which was down 5.7% sequentially from the first quarter of 2022, again due to the planned five-day shutdown in May.
Further Debt Repayment
On May 16, 2022, Alvopetro repaid an additional $2.5 million of the credit facility bringing the outstanding balance down to $2.5 million.
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.
On June 15, 2022, Alvopetro Energy Ltd announced that the Board of Directors declared a quarterly dividend of US$0.08 per share to shareholders of record on June 30, 2022 and payable in cash on July 15, 2022.
First Quarter Results
On May 12, 2022, Alvopetro Energy reported results for the first quarter ending March 31, 2022. Natural gas and condensate sales were $13.97 million, a record for the company. Sequentially, natural gas and condensate sales increased 41.2% compared to $8.95 million in the fourth quarter of 2021, driven by a sequential 2.8% increase of overall sales volumes to 2,501 boepd, along with the an increase in sales prices through the re-set floor price of the GSA. Natural gas sales averaged 14.3 MMCFPD while condensate sales averaged 99 BOPD. Natural gas price realization was $10.03 per MCF, a 41.9% sequential increase from $7.07 per MCF in the fourth quarter. The realized condensate price was $106.42 per bbl.
Royalties and production taxes were 7.0% 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.
Sequentially, production expenses increased only 5.4%. 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.
G&A expenses decreased 26.5% sequentially, mainly due to short-term incentive bonuses having been issued in the fourth quarter.
Reported quarterly net income was $11.11 million (or $0.3035 per diluted share) versus a loss of $20,000 (or $0.0006 per diluted share) in the comparable quarter last year. The first quarter's earnings were positively impacted by an unrealized foreign exchange gain of $5.009 million. Without the recognition of the unrealized foreign exchange gain, earnings for the first quarter would have been $6.106 million (or $0.1667 per diluted share).
With the realized sales price at $62.08 per BOE, royalties at $4.35 per BOE and production expenses at $3.79 per BOE, the operating netback was $53.94 per BOE.
Working capital improved significantly from $9.10 million at the end of 2021 to $12.3 million as of March 31, 2022. Shares outstanding increased slightly by 0.1% to 33,942,744 shares.
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.
Four years ago, 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.
VALUATION
The current P/S valuation range for this group of comparable companies is between 2.3 and 5.2 times revenues. Utilizing comparable analysis, the target price for Alvopetro Energy is $7.02 per share, which is based on an expected mid-first quartile price-to-sales multiple.
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