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ALVOF: Alvopetro Energy - Monthly Production Continues to Increase from the Caburé Natural Gas Project

04/06/2021

By Steven Ralston, CFA

OTC:ALVOF | TSX:ALV.V

READ THE FULL ALVOF RESEARCH REPORT

Alvopetro Energy (OTC:ALVOF) (TSX:ALV.V) achieved a highly significant, transformational milestone in 2020. After years of developing the Caburé natural gas field and completing the construction of supporting midstream infrastructure (a transfer pipeline and gas treatment facility), along with securing a gas sales agreement with Bahiagás, Alvopetro commenced natural gas deliveries on July 5, 2020. The company transformed into a profitable natural gas and condensate production company.

In 2020, Alvopetro generated $10.6 million in revenues, almost all in the third and fourth quarters, and reported net income of $5.71 million ($0.0543 per diluted share), which included a $1.84 million foreign exchange gain and a deferred tax recovery of $3.75 million. Funds flow from operations was $6.22 million, and the operating netback was $26.85 per BOE.

Both the rate of production/sales and the average realized natural gas sales price are increasing. The average daily sales volumes have increased from 1,856 BOEPD in the first full month of production in August 2020 to 2,222 BOEPD in the last reported month of February 2021. In 2020, the average realized natural gas sales price was $5.36 per MCF, when the gas price floor under the gas sales agreement was $5.28 per MCF. As of February 1, 2021, gas price floor was raised from $5.23 to $5.88 per MCF for the ensuing six months. In the Resource Report completed by GLJ, the pricing assumption for 2021 is $5.70 per MCF.

As of February 2021, the company is producing at a rate of 2,222 BOEPD and generating cash flow well beyond expenses such that the company’s debt (credit facility) is being paid down at a rapid pace. At least 5.7 million has been repaid in the last five months through March 2021. Working capital has increased from a $6.7 deficit in 2019 to a $5.5 million surplus as of December 31, 2020.

In addition to paying down debt, management is focused on advancing the company’s Gomo natural gas project to production, along with pursuing acquisitions and initiating a stockholder dividend.

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 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, 2021 with an effective date of December 31, 2020.

Total net 2P (proved and probable) reserves increased 28.3% YOY (year over year) to 8.94 MMBOE from 6.97 MMBOE in 2019. In the prior year (2019) net P2 reserves increased 29.6%. Accordingly, the net present value before tax (discounted at 10%) is $195.2 million.

Analyzing the increase in reserves on the field level, the company’s net P2 reserves in the unitized Caburé natural gas field increased 2.9% to 4.06 MMBOE, while the net P2 reserves in the Gomo natural gas field increased 151% to 3.01 MMBOE.

The 2020 Reserve Report does not include the risked contingent and prospective resources of the Gomo Project.

The Gomo Project’s potential is highlighted by the recently completed annual reserve and resource evaluation. The Gomo Project’s net 2P reserves increased 150% from 1.202 to 3.014 MMBOE.

The Gomo Project’s reserves are classified as undeveloped since expenditures are required to construct a 9-km pipeline extension and to develop a field facility prior to the commencement of production.

Expectations for 2021

Management expects that the production from the Caburé natural gas field to remain or be above the levels reported during the second half of 2020 so that the average daily natural gas/ condensate sales to be over 1,900 BOEPD for the 2021 year.

In February 2021, management raised its EBITDA forecast from $17 million to US$18 million for 2021.

At the Gomo Natural Gas Project, with the successful completion of the production test of the 183-1 well in March 2021, management is proceeding with plans to commence construction of a 9-km tie-in pipeline that will connect well 183-1 to the 11-km Caburé transfer pipeline. The environmental approval has been already received for this pipeline. The estimated cost is $2.4 million.

Also at the Gomo Project, stimulation of additional net pay in 183-1 well and stimulation of 197-1 well are expected during 2021.

Furthermore, management plans on drilling two natural gas exploration prospects (182-C1 and 183-B1). The civil construction on both these well sites has been completed and the drilling campaign is expected to commence in the second quarter of 2021 at an estimated total cost of $7.7 million. Moreover, in late-2021 or 2022, management plans to drill additional developmental wells at Gomo.

2020 Financial Results

On March 25, 2021, Alvopetro Energy reported results for the year ending December 31, 2020. Natural gas, condensate and oil sales were $11.5 million, a record for the company since deliveries of high pressure natural gas sales volume commenced mid-year on July 5, 2020. Year-over year (YOY) comparisons are meaningless since 2019 sales volumes (from the Mãe-da-lua field) were de minimis averaging only 8 BOPD per quarter. In 2020, the average natural gas price realization was $5.36 per MCF, and the average realized condensate price was $46.57 per bbl.

Sequentially, on a quarter-to-quarter basis, fourth quarter gas, condensate and oil revenues increased 10.7% from $5.32 million to $5.89 million. In the fourth quarter, natural gas sales averaged 11.163 MMCFPD and condensate sales averaged 89 BOPD compared to 10.105 MMCFPD and 79 BOPD, respectively, in the third quarter. Sequentially, operating netback increased from $25.99 to $27.92 per BOE.

Total expenses increased 60.5% year-over year as total revenues increased 2,561% as production came online from the Caburé natural gas field. G&A expenses increased a modest 9.9% YOY and production expenses increased at 384%, a rate much lower than the growth rate of revenues.

Annual earnings were $5.706 million (or $0.0543 per diluted share) versus a loss of $5.011 million (or $0.0518 per diluted share) in 2019. EBITDA also turned positive from -2.723 million in 2019 to +6.221 million in 2020. Working capital improved to $5.5 million as of December 31, 2020 versus a $6.7 deficit at the end of 2019.

Management’s Strategy

Management’s vision is to make Alvopetro Energy a leading independent upstream and midstream gas company in Brazil. Phase 1 consisted of becoming commercial producer of on-shore natural gas producer in the state of Bahia in Brazil, which was achieved in July 2020. The cash flow from the production is expected to help fund additional developmental initiatives and return a healthy dividend to shareholders.

Based on the development of the company’s Caburé’s P2 reserves, management has forecasted an EBITDA profile at the floor price in the sales agreement with Bahiagás (light green bars in the above chart). In 2020, it is estimated that the company has generated EBITDA of US$7.5 million, most of which has been either utilized to reduced debt or added to working capital. For 2021, projected EBITDA is US$18 million, including the impact of forecasted G&A expenses. In 2021, almost all of the projected EBITDA is anticipated to be consumed by capital expenditures (grey bar), debt principal repayment (light blue bar), interest costs on debt (dark blue bar), a UPGN fee to Enerflex for the gas facility (yellow bar) and taxes (red bar). By the end of 2022, it is assumed that the entire amount of debt will have been repaid, and thereafter, between 2023 and 2029, a cumulative amount of CDN$0.74 per share would be available for shareholders.

Valuation

The P/S valuation range for comparable small-cap, producing oil & gas companies is between 12.8 and 2.50. Utilizing comparable analysis, the target price for Alvopetro Energy is $1.25 per share, which is based on an expected mid-second quartile price-to-sales multiple.

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