Canacol Energy Ltd.

Good day and welcome to the CannaCall Energy first quarter 2024 financial results. All participants will be in listen-only mode. To receive assistance, all participants may signal a conference specialist by pressing the start key followed by zero. You may submit questions throughout the event by connecting to the webcast. When in the webcast, place your question in the Ask a Question field. Questions will be addressed after the formal presentation has ended. Please note this event is being recorded. And now, I would like to turn the program over to Carolina Orozco, the Vice President of Investor Relations. Please, go ahead, Carolina.

Good morning and welcome to Canacol's first quarter 2024 financial results conference call. This is Carolina Orozco, Vice President of Investor Relations. I am with Mr. Charles Gamba, President and Chief Executive Officer, and Mr. Jason Bednard, Chief Financial Officer. Before we begin, it is important to mention that the comments on this call by Canacol Senior Management can include projections of the corporation's future performance. These projections neither constitute any commitment as to future results nor take into account risks or uncertainties that could materialize. As a result, CanaCall assumes no responsibility in the event that future results are different from the projections shared on this conference call. Please note that all finance figures on this call are denominated in U.S. dollars. We will begin the presentation with our President and CEO, Mr. Charles Gamba, who will summarize highlights from our first quarter 2024 results. Mr. Jason Bednar, our CFO, will then discuss financial highlights. Mr. Gamba will close with a discussion of the corporation's outlook for the remainder of 2024. At the end, management will be responding to written questions received through the webcast. I will now turn the call over to Mr. Chal Gamba, President and CEO of Canacol Inc.

Thanks, Carolina, and welcome everyone to Canacol's first quarter 2024 conference call. During the first quarter of 2024, we achieved historic record natural gas sales prices and netbacks. Caneco's gas sales prices have consistently increased quarter over quarter since mid-2021. In the first quarter of 2024, we realized prices 29% higher than the same period in 2023 and 9% higher than the previous quarter. This is due mainly to tighter supply and demand conditions in Columbia, coming from declining rates in the country's main producing fields, exacerbated by the recent El Nino phenomenon, which has led to increased demand from thermal generators, influencing prices in the interruptible market. Additionally, we reported a record quarterly netback of $4.90 per MCF, with an EBITDA of $61 million. Realized natural gas sales averaged 150 million standard cubic feet per day, marking an 11% decrease from the previous quarter. Our production capacity has, however, been recovering thanks to successful drilling and work over activities during this year. As a result, our sales gas at the end of April were approximately 169 million standard cubic feet per day, and our current productive capacity stands at 177 million standard cubic feet per day. Regarding drilling activity, we have drilled two successful Siena de Oro exploration wells, Pamello 1 and Champadoura 1, which are located close to our hobo gas processing facilities and have been rapidly placed into permanent production. We also had success in infill drilling with the Clarinete 10 development well and the Chantaduro 2 appraisal well, the latter of which tested at a rate of 12 million standard cubic feet per day and is also being tied into permanent production. With respect to capital expenditures, our accrued capex during the first quarter of 2024 was $36 million, 50% lower than the previous quarter and almost 25% lower than the same period in 2023. as we focus on enhancing efficiencies to reduce operational costs and capital expenditures. With these improved efficiencies, we're anticipating finishing the year with capital expenditure within the lower range of our initial guidance and even below it. This underscores our commitment to maintaining financial discipline while ensuring operational performance. I'll now turn the presentation over to Jason Bednar, our CFO, who will discuss our first quarter financials in more detail.

Thanks, Charles. The first quarter of 2024 was another very good quarter with strong record pricing and netbacks from our producing operations. A realized gas price of $6.60 per MCF in the three months ended March 31st, 2024 was the highest we've ever achieved in a quarter and represents a 29% increase from the same period in 2023 and a 9% increase from the three months ended December 31st, 2023. The increase in our realized gas price is due to a 19% increase in the average sales price of our firm, fixed price take-or-pay contracts, and higher interruptible prices. To refresh everyone's memory, most of our sales consist of 124 million standard cubic feet per day under fixed price take-or-pay contracts with an average price of $6.04 per MCF as compared to the 2023 basket of $5.09 per MCF. Driven by the strong pricing, we achieved record operating net back of $4.90 per MCF in the first three months ended March 31st, 2024, representing a 22% increase from the same period in 2023 and a 12% increase from Q4, 2023. Our operating expenses for the three months ended March 31st, 2024 were 45 cents per MCF being six cents higher than the 2023 average operating costs. However, operating expenses for the first quarter of 2024 was $0.16 lower compared to the last quarter in 2023, given reduced maintenance and water treatment costs, as well as the absence of a one-time service cost associated with the compressor unit at the Hobo gas processing facility. Gas royalties slightly increased to 18.9% of revenue, driven by higher production on the VIM-5 block, which is subject to higher royalties. Despite 19% lower realized natural gas sales volumes during the first quarter of 2024 compared to the Q1 of 2023, total revenues, net of royalties, and transportation expenses increased 5% to $77.7 million, and adjusted EBITDAX increased slightly to $61 million, which was mainly attributed to higher average natural gas sales prices. With similar adjusted EBITDAX of $61 million for the Q1 compared to the same Q1 in 2023, adjusted funds from operations increased 29% to $42.2 million for the first three months compared to $32.7 million for the same period in 2023. This increase is mainly attributed to a reduction in current tax expense of approximately $9 million, resulting from the corporate restructuring previously disclosed. I'd also like to reiterate, despite recording $17.2 million of current income tax expense for Q1, the corporation still expects 2024 annual current tax expense to total approximately $35 million. The corporation realized a net income of $3.7 million for the three months ended March 31st, 2024, compared to a net income of $16.9 million for the same period in 2023. The decrease in net income for Q1 is driven by a non-cash deferred income tax expense of half a million dollars as compared to a deferred income tax recovery of $17.4 million in 2023. The 2023 recovery was FX related, whereas the Q1 2024 FX was essentially flat throughout the quarter. Net capital expenditures for the three months ended March 31, 2024 was $35.9 million compared to $47.1 million in Q1 of 2023 and compared to $72.2 million for Q4 of 2023. As Cheryl previously mentioned, the corporation has been focused on operational efficiencies with the objective of reducing costs and maintaining strong financial results. With respect to our low-case guidance CapEx budget of $138 million, I'd like to state that our current working model anticipates total CapEx of approximately $120 million for that same capital program, reflecting a reduction of $18 million. During this call, I'd like to address the short-term liquidity concerns that have surfaced in the markets. First of all, we want to emphasize that we are actively managing our liquidity position with prudence and foresight. Any speculation suggesting that we may not meet our next bond coupon payment is completely false, and we reaffirm that we are well-positioned to meet all of our future financial obligations. As at March 31st, 2024, our cash position was $25 million. Subsequently, on April 26th, 2024, we announced the sale of over 60 million common shares of Arrow Exploration at a price of 18.5 pence per share for a total of $13.3 million net of fees. As at April 30th, 2024, the corporation had a cash balance of approximately 30 million, not including these arrow share sale proceeds as the trade settled on May 3rd. So effectively an April 30 cash balance of $43 million. While speaking about April, I'm also pleased to state that April's EBITDA, buoyed by high interruptible prices, was approximately $26 million. which of course is $6 million higher than the average of January to March of roughly $20 million EBITDA each month. Of course, April revenues aren't received on April 30th, thus these additional amounts are not included in the $43 million cash balance I just discussed, once again affirming ample liquidity for bond coupon payments and future obligations. To comment solely on the Arrow share sale, the holding of shares in a publicly traded oil company was obviously a non-core asset for us. $55 million of the $60 million share position we held was acquired in October 2021 upon their secondary AIM listing at a cost basis of approximately $4.8 million U.S., including associated warrants we later exercised. That position netted a fully tax sheltered gain of approximately $7.5 million, once again in U.S. dollars. With respect to Canon Call of November 2028 notes in February 2027 revolving credit facility, we are in compliance with all of our debt covenants. Our net debt to EBITDA leverage ratio was 2.9 times and interest coverage ratio was 4.65 times at March 31st, 2024. To refresh everyone's memory, our bond leverage covenant is at 3.25 in current space, and the revolver is at 3.5 times maintenance covenant. Our interest coverage covenant is a minimum of 2.5 times. As such, we're well inside those covenant restrictions. Further, and a point I have not previously discussed, the bond indenture allows for certain additional credit facility baskets, which effectively raises the leverage ratio allowed under that covenant. Given the cash balances and leverage ratios I just went through, I'd like to respond to rumors in the markets. I can unequivocally state Canicol has not hired a financial advisor, nor have we ever spoken to one at any time during 2024, and we have not ever contemplated a restructuring. I will now turn the presentation back to Charles.

Thanks, Jason. In our 2023, our exploration drilling activities met with limited success due to several factors. Primarily, our entire exploration portfolio was built upon opportunities identified from legacy 3D seismic data acquired approximately a decade ago, with the most promising prospects having already been drilled years prior and yielding discoveries such as Nelson, Clarinete, Aguas Divas and Pandorete. This led to a diminished pool of large and or low risk drilling targets in the recent years, with the latest last substantial discovery, Aguas Divas, made in 2021. Additionally, the failure to reach the target of the high-impact Matia I exploration well on our SSJN 7 contract due to mechanical issues contributed to setbacks experienced in 2023. Since 2022, we have invested approximately $70 million in the acquisition of three new large seismic programs, one located in our SSJN 7 block, another in the northern part of the VIM 5 block, and the last one at the west side of our BIM fly block, which opens a whole new portfolio of exploration prospects. During the first half of 2024, we've been prioritizing smaller, low-risk exploration opportunities in the vicinity of our hobo facilities, identified from the legacy 3D sizing data, with a 100% exploration success rate with the discoveries of Pomelo and Chantadoura. Furthermore, in mid-summer, we are planning to drill the high-impact Cardamomo I exploration wells. first exploration well to be drilled off the new 3D seismic acquired in the northern part of our VIM-5 exploration contract in 2023. Success in this prospect could have substantial impact in reserves additions and potentially unlock a new producing area for Canacol. In summary, for the remainder of 2024, the corporation is focused on the following objectives. In line with maintaining and growing Canacol's reserves and production in its core gas assets in the lower Magdalena Valley, The corporation is executing comprehensive development exploration programs. The corporation's aim is to optimize its production and increase reserves by drilling up to five development wells and four exploration wells, install new compression and processing facilities, and work over operations on producing wells in the corporation's key gas fields. The corporation to date has completed the drilling of two successful exploration wells, Melo 1 and Transduro 1, and two successful development wells, Clarinet A10 and Chantaduro II. The Chantaduro II well was recently completed and tested at a rate of 12 million standard cubic feet per day and is currently producing into the Hobo gas treatment facility. Through these above-mentioned activities, the corporation managed to stabilize its gas sales at an average rate of 150 million standard cubic feet during Q1 of 2024 and lifted gas sales to approximately 169 million standard cubic feet by the end of April 2024. As I mentioned earlier, our current gas production potential stands at approximately 177 million standard cubic feet per day. On the exploration front, the corporation expects to drill the high-impact and potential material Cardamoma I exploration well in mid-summer of 2024. Cardamoma I will be the first exploration well drilled off its newly acquired Ritoblante 3D seismic survey acquired on the northern part of the VIM-5 EMP contract in 2023. where the corporation has identified 15 new gas prospects in the Cienaga de Oro Sandstone Reservoir, the same reservoir that produces 15 kilometers to the south in the majority of the corporation's gas fields. The Cardamomo prospect exhibits well-defined ABO, which is a direct indicator of gas within the prospect, identical to that exhibited by all of the corporation's major gas discoveries, such as Nelson, Clarinete, Pandureta, and Aguas Vivas fields. Secondly, maintaining a low cost of capital, cash, liquidity, and balance sheet flexibility to invest for the long term. In a year of expected highly supportive gas market dynamics, the corporation is tactically prioritizing investments in the lower Magdalena Valley and has therefore decided to postpone the drilling of the Polo I exploration while locating the middle Magdalena Valley to 2025. On April 26, 2024, the corporation sold its non-core investment in Arrow for gross proceeds of $13.8 million. to add additional liquidity. Thirdly, Bolivia. Achieve the government's approval of a fourth E&P contract that covers an existing gas field reactivation to begin development operations with a view to adding reserves in production and commencing gas sales in 2025. And lastly, continue with the corporation's commitment to its environmental, social, and governance strategy. I'm pleased to announce the release of our 2023 ESG Integrated Report in the coming weeks. highlighting our dedication to corporate responsibility and sustainable operations. Caneco's inclusion in the S&P Global Sustainability Yearbook 2024 reflects our excellence in sustainable practices, particularly in corporate governments within the oil and gas upstream and integrated segment. The report will comply with the United Nations Global Compact Communication on Progress requirement, utilizing GRI standards and SASD indicators for the oil and gas sector. We'll also integrate metrics from the IPIECA and will align with TCFD recommendations, the UN Agenda 2030, and the S&P's Global CSA. CannaCall emphasizes the importance of integrating ESG strategies into our business model to meet shareholder and stakeholder expectations, striving for continuous improvement in ESG performance. And finally, with respect to EcoPatrol's unfortunate statements concerning CannaCall in their first quarter conference call held on May 8th, I would like to formally state that we have had no discussions whatsoever with EcoPatrol concerning a corporate transaction or any other transaction. Furthermore, we have had no discussions with any other company or any other banks regarding any corporate transaction or any other transaction whatsoever. EcoPatrol's public statements do, however, reflect the strategic importance and value of Canacal's role as the largest independent gas producer in Colombia, as well as the critical shortage of gas reserves in this country. It's not unexpected that there is a great deal of interest in our gas reserves in Colombia, which are second only to those of Ecotrol, and were recently evaluated by our third-party auditors as having a 2 p.m. to be 10 after-tax value of 1.8 billion U.S. dollars. We'll now respond to some questions sent via the platform.

Operator, can you please give instructions to receive questions while we process any questions that we are receiving?

Absolutely. Thank you. We will begin the question and answer session. You may submit questions by connecting to the webcast and then placing your question in the Ask a Question field. The questions will be read and management will answer. Carolina, please go ahead.

Thank you. We have one question from David Lee from Alliance Global Investors. Could you please speak to current trends in gas price realizations in April?

Yes. With respect to April, we saw very high interruptible gas pricing due to very severe El Nino effect, which is a very dry weather phenomenon. We were selling gas into the interruptible market at $17 in MCF. up to 40 million cubic feet per day, all through thermal generators who were covering the shortfalls of electricity in the market. So April was a very strong month, very dry month, very low levels of hydroelectric electrical generation and very high thermal generation.

Thank you, Charles. We have another question from Julio Delgado. What is the current participation of contracted gas sales and what is the projection towards year end?

I can answer that, I guess. If I understand the question properly, and I did touch on the script, so we have our current take or pay baskets that runs until December 1st, 2024, which is the start of a new contracting year annually in Columbia. The current basket is 124 million cubic feet a day at an average price of $6.04. I did also mention that compares, you know, it's up 19% compared to the prices compared to 2023. And looking forward of that 124 million cubic feet a day, Only 12 million cubic feet a day drops off for next year, thus leaving the price relatively unchanged.

Thanks, Jason. Please give us a couple of minutes, and we are processing questions with you. We have a question from Alejandra Andrade from JP Morgan. With El Nino easing, are you seeing gas prices easing as well?

Yes, with El Nino starting to ease, there have been higher levels of rainfall and the reservoirs, the hydroelectric reservoirs are starting to fill. So we've seen a decrease in gas demand, particularly in the coast, as well as pricing. So it seems that we are coming out of the El Nino period now for the next two months and we'll regress to sort of normal type conditions here in Colombia.

Thank you, Charles. Please give us a couple of minutes again.

We have a question from Albert Chang from Santander. What is modeled for Cardamomo 1 contribution to output?

Cardamomo is a typical Cienaga de Oro target. It's a little deeper than our producing fields, about a thousand feet deeper. So we expect that the well, if successful, will IP at a rate between 12 and 15 million cubic feet per day. Given success at CARTOMOMA 1, there are three or four follow-up locations to drill in that field to develop it as well.

Thank you, Charles. Next question is from Diego Espimosa from Beta HEP Actual.

What is the current average duration of your take or pay contract? Just to understand how contracted prices could be in the second half of 2024 when El Nino fade away.

Yeah, the weighted average life of our take or pay contracts is 4.5 years. And, you know, once again, that's 124 million cubic feet a day. So it's, you know, roughly 75%.

of our total sales.

Thanks, Jason. We are processing more questions. Please hold with us. We have one question from

David from SP Angel. How do you think about your capital structure and capital allocations policy ahead of taking on a higher risk exploration led strategy versus last year's infrastructure led strategy?

I don't view the strategy as higher risk. Our exploration activities over the past 10 years have always been very consistent. As you know, we've enjoyed a very high rate of success, 82%. chance of success, and this year's program is no different. We've already scored two for two on our first two exploration loss, and the remaining exploration wells we drilled this year will have a fairly high chance of success as well. We've not shifted to anything higher risk. Last year, we spent quite a bit of money in infill drilling into the existing fields. So, I think the strategy remains the same, particularly with respect to exploration. Fairly conventional exploration risk that has historically generated very high chances of success.

Thanks, Charles. The next question comes from Daniel Guardiola from BTG Pactual. What is the expected capex associated with drilling the high-impact whale Cardamomo I exploration?

I'm sorry, could you repeat that question? Yes, of course.

What is the expected capex associated with the drilling of the high-impact well, Cardemona 1 exploration well?

It's a typical vertical exploration well. It's about 1,000 feet deeper than our typical wells. So with respect to the civil works, we have to build a road into the location and a platform, and the drilling of the well, we're outlooking around $6 million, as opposed to $4.5 to $5 million for a typical exploration well.

Thank you. Give us a couple of minutes we're processing any further questions received.

We have one question from Diego Espinoza from BTH Pactual. At what price have you been renewing your contracts during this year?

As I mentioned, the contract year for long-term contracts is December 1st. Typically, the contract renewals are in the fall and not during this time. So I'm unaware of any contracts that have been renegotiated or extended heading into next year as it's a little bit early.

Thanks, Jason. We have one question from Daria Lema from Bloomberg Intelligence.

Your funding position appears to be solid in second Q. Will you be looking at postponing some of the exploration program in the next year to improve your cash position in 3Q?

Our funding position is solid for the rest of the year, basically, and we're going to continue with our exploration programs in the lower Mag Valley, so we're going to go ahead and drill We're currently preparing the rig to mobilize to the Cardamomo 1 location, which we anticipate flooding in July, followed by another high-impact well in the fourth quarter. We did, as I announced, as I mentioned a little earlier, we did defer the drilling of the Polo 1 exploration well, which we're planning to drill sooner rather than later, in the middle Magdalena Valley. We're deferring that until next year. so that we deploy our capital this year into the lower Mag Valley, where we can commercialize our reserves very quickly into the existing market. So, we're continuing with our exploration programs against a very solid financial background.

Thanks, Charles. We have a question from Diego Espinoza from Beteje Pactual. From where you expect the growth in research will come during 2024, considering the important decrease in capex for 2024?

We expect the four exploration wells we're drilling this year. The smaller ones we drilled, Carmelo and Chantadura, are decent reserve ads. We're looking at 5 to 10 BCF each on those. And the two large ones, Cardamomo, and the second one we're going to be drilling in the latter half of the year, are 60 BCF targets. So we expect a return off the new seismic. Those two big exploration wells are going to be drilled off the new 3D seismic required. We expect the return to fairly robust reserve replacement ratios well above 100%.

Thank you, Charles.

Please give us a couple of minutes. We have a question from from Maine first.

Would import of gas from Venezuela put downward pressure on prices in Colombia? Any idea on potential impact?

The concept of importing gas from Venezuela is a fairly complicated one, but I suppose, you know, aside from the issues of timing in that, you know, it will certainly not be happening anytime soon. Certainly a five-year plus type of outlook in terms of timing. It all depends what the price of the gas is, I suppose. I don't know that there have been any formal discussions with anyone concerning the price of that exported Venezuelan gas. I don't imagine pay the VESA, we'll be giving the gas away into the Colombian market, I would think. But it's a very difficult question to answer. However, you're looking at the outlook for any potential Venezuelan gas to enter the Colombian market is in the five-year plus timeframe.

Next question is from Alex Marrucho from Lord Abbott. Regarding new take-or-pay contracts, what is your expectation of prices for such?

Yeah, this year, well, going from 2023 to 2024, the average increase in our take or pay contracts was approximately 20%. We're now moving out of El Nino, but we are, however, moving forward into a very tight supply scenario. Equipatrol's fields continue to decline in terms of production. There are very few other operators adding significant reserves of any sort. So we expect supply to be increasingly tight going into 2025, which should drive pricing in a very positive way for us. The only other potential source of gas entering Colombia would be LNG through SPEC. So I expect that the ceiling for gas prices next year would be parity with SPEC. landed gas in the $10 to $12 range would be sort of the absolute ceiling. But we do expect the tightness to increase in terms of supply, and that to have a positive effect on our negotiating with new contracts going into next year. So I would expect a 10 to 15 percent increase in terms of outlook.

Thank you, Charles. Next question is from Juan Cruz from Morgan Stanley. Given the reduction in CAPEX and the average production of 150 milliliters per day in first quarter 2024, how confident are you that you will reach production guidance for the year?

Okay, so a couple of things in that. As I mentioned, the reduction in CAPEX is for the exact same drilling program that was originally envisioned. So there's no change aside from efficiencies. Q1 was indeed 150 million cubic feet a day, but as Cheryl stated, our current productive capacity is 177 million cubic feet a day.

As such, our guidance remains unchanged.

Thanks, Jason. Give us a couple of minutes as we process any further questions.

With this last question, we now conclude the first quarter 2024 conference call. Thanks, everyone, for joining us in this quarter, and we hope you join us again in the second quarter conference call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Have a good day.