Canacol Energy Ltd.

Hello and welcome to the Canicol Energy 3rd Quarter 2024 Financial Results Conference Call-In Webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. You may submit questions throughout the event by connecting to the webcast. On the webcast, please 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. I would now like to hand the call to Carolina Orozco, Vice President of Investor Relations. Please go ahead.

Good day and welcome to CannaCall's third 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 Bettner, Chief Financial Officer. Before we begin, it's 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, Canacol 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 for our third 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, we will have a Q&A session. I will now turn the call over to Charles Gamba, president and CEO of Canacol Energy.

Thanks, Carolina, and welcome everyone to Canacol's third quarter 2024 conference call. We're pleased to report that this past quarter was another record-breaking one for Canacol, with EBITDAX reaching a new high of $86 million, driven by interruptible pricing, efficient operations, and the ruling in favor of the company in an arbitration process with PromiGas, a gas transportation company here in Colombia, which Jason will discuss in more detail later. Our realized natural gas prices for the quarter were $6.69 per MCF, 24% higher compared to the same period in 2023. Additionally, we generated netbacks of $5.25 per MCF, representing a 27% increase compared to the third quarter of 2023, maintaining strong operational margins of 78%. Our strong performance continues to be supported by robust natural gas prices, which early in the year were driven by the impact of El Niño, weather phenomena in Colombia. While El Nino ended in May, reservoir levels have been recovering slower than anticipated, keeping electricity prices high and driving up interruptible natural gas pricing and demand. Additionally, Colombia's gas supply is tightening. due to the continued production decline of Ecopetrol's large 30-plus-year-old gas fields by Jena on the Caribbean coast and the Cusiana-Cupahagua complex in the interior. This supply challenge has led to increasing reliance on imported LNG to meet national gas demand. This market environment, combined with our focus on cost reduction, production stabilization and increased exposure to the interruptible gas market, have been essential to maximize our response to market dynamics and achieve these results. Our commercial strategy, introduced at the beginning of the year to increase our exposure to the interruptible market, has been effective. During the quarter, we averaged 169 million standard cubic feet equivalent per day of gas and oil sales, which include average realized natural gas sales of 160 million standard cube per day and 9 million standard cube per day equivalent of oil sales. Throughout 2024, our gas production capacity has been gradually recovering thanks to successful exploration drilling activities and our maintenance programs, which include ongoing workovers of existing wells and the installation of additional compression. This last quarter, we drilled the Chantadoura 3 appraisal well on our VIM21 block, continuing with our strategic approach of low-risk near-field drilling, targeting drilling prospects close to existing infrastructure and utilizing legacy 3D seismic data. Chantadoura 3 successfully produced gas into our existing infrastructure. We also drilled the first exploration well in our new Ritolante 3D seismic program located in the northern part of the VIM5 block. The Cardamomo 1 exploration well encountered 203 feet of net porous sandstone within the Cienaga de Oro formation, with non-commercial amounts of natural gas encountered. Despite not resulting in a commercial discovery, it provided valuable data confirming that an active petroleum system exists in a largely undrilled area of the basin on our block. With over 200 feet of reservoir encountered and the presence of gas, Cardamomo results have significantly reduced reservoir and source risk for future prospects we plan to drill in this lightly explored area. I'll now turn over the presentation to Jason Bednar, our CFO, who will discuss our third quarter financial results in more detail.

Thanks, Charles. As you already mentioned, the third quarter of 2024 was another very good quarter with record EBITDAX and strong pricing and netbacks from our producing operations. Also, our financial results continue to be further strengthened by our ongoing commitment to operational efficiency. aimed at reducing costs and capital expenditures while maintaining strong operational and financial performance. Our realized natural gas prices netted transportation of $6.69 per MCF during the three months ended September 30, 2024, represents a 24% increase to the 540 per MCF during the same period in 2023. This increase shows both the 19% increase in the average sales price of our firm long-term fixed price contracts, which reached $6.04 per MCF for the nine months ended September 30, 2024, compared to $5.09 per MCF for the same period in 2023. And secondly, reflects high interruptible prices, which averaged approximately $9 per MCF during this quarter. As Cheryl mentioned, this favorable pricing environment is mainly driven by tight natural gas supply in Columbia, which ratifies our contracting strategy for this year by maintaining a relatively higher exposure to the interruptible market. Driven by the strong pricing and by maintaining cost efficient operations, we achieved a natural gas operating net back of $5.25 per MCF during the third quarter of 2024. which is 27% higher to the same period in 2023, maintaining a strong operational margin of 78%. Despite 10% lower realized natural gas sales volumes during third quarter 2024 compared to the same period in 2023, we generated total revenues, net of royalties and transportation expenses of 87.9 million, which is 15% higher compared to the 76.6 million for the same period in 2023. Adjusted EBITDAX rose significantly by 38%, reaching $85.8 million for three months ended September 30, 2024, compared to $62.1 million for the same period in 2023. This increase was driven primarily by higher operating netbacks for natural gas, alongside a $14.2 million arbitration ruling in favor of Canacol, associated with the natural gas transportation company in Columbia, Promigas. over disputed transportation costs. During the quarter, the Arbitration Tribunal ruled in our favor, ordering PromiGas to reimburse Canicol for overcharged amounts plus interest, totaling the $14.2 million. This settlement was recorded as other income for the period, and on November 6th, we received the funds in full. Adjusted funds from operations also increased by 18% to $57.9 million for the quarter. from $49 million in the same quarter in 2023, mainly attributed to the increase in EBITDAX, though partially offset by higher income taxes. The corporation also reported a net income of $10.3 million for Q3, a substantial improvement from the net loss of $0.5 million in the same period of 2023. This increase was driven by higher EBITDAX and the absence of non-recurring asset impairment recorded in Q3 2023. However, the growth was partially offset by a non-cash deferred income tax expense of $5.3 million in Q3 2024 due to FX changes compared to a deferred income tax recovery of $15.7 million in the prior year. Our capital expenditures for the three months ended September 30, 2024 were $23.9 million, down from $43.8 million in Q3 2023, This reduction reflects lower operating spending on warehouse inventory and facilities and equipment aligning with the corporation's commitment to capital efficiency. Our strategic investments and operational efficiencies have allowed us to achieve a record return on capital employed of 21% for the third quarter, a significant improvement compared to the 3% reported in the same period in 2023. This reflects our disciplined approach to prioritizing high return projects and optimizing capital allocation, ensuring that each investment contributes meaningfully to our financial performance. At September 30, 2024, the corporation had $67.1 million in cash and cash equivalents, marking its strongest cash position since Q1 2023, along with the working capital surplus of $62.1 million, the highest recorded since Q3 2022. This robust liquidity well positions the corporation to meet both ongoing and future operational needs, providing the financial flexibility required to capitalize on strategic opportunities and support sustained growth. On September 3rd, 2024, we announced the successful closure of a 24-month, $75 million senior secure term loan facility with the Macquarie Group. which strengthened the corporation's financial position and offered the flexibility required to sustain growth and accelerate operational investments as needed. To date, we have drawn a total of $50 million. The facility, which carries an interest rate of SOFR plus 8% of drawn amounts, is set to mature in September 2026 and includes a 12-month grace period for principal payments. This new facility aligns well with our existing covenants and supports Canacol's long-term financial strategy. At the end of the third quarter, we were fully compliant with all financial covenants, which include the following. Firstly, a consolidated leverage ratio of 3.25 in current space and 3.5 times maintenance. Our current leverage ratio is at 2.55 times, well inside these covenant restrictions. The second covenant is a minimum consolidated interest coverage ratio of 2.5 times. Our current coverage ratio is 4.85 times, which is well above the minimum required. And finally, a consolidated current ratio minimum requirement of 1 times, and we currently stand at 2.02 times. As such, we're well inside all of our covenant restrictions. Lastly, I'll make a few comments about income taxes. The current tax expense is found on the income statement total 54.6 million for the first nine months of 2024. However, we do still expect the 2024 full year amount to total approximately 30 million post the recording of an anticipated recovery slash reversal in Q4. With respect to cash taxes paid as outlined in the MDNA, We paid the final installments and prepayments of taxes relating to the 2024 year during this quarter. This $36 million of cash taxes paid in Q3 brings the nine-month total cash taxes paid to $66 million and leaves us with minimal monthly tax payments during the fourth quarter. Due to these disproportionately high payments during 2024, we do expect to end 2024 with a sizable tax receivable balance, And as such, we don't expect to have any tax installments due in 2025, but for the nominal amount taken off our monthly revenue checks in favor of our tax accounts. That concludes my comments. I'll now hand it back to Cheryl.

Thanks, Jason. In September, we revised our 2024 capital program to further enhance our drilling activities through the remainder of this year. The updated plan adds four additional wells, for a total of 11 wells, with an estimated capital expenditure of $138 million, which is the original low-end capex estimate for the year. This revised program includes five exploration wells and six development and appraisal wells. We're able to increase our drilling activity and maintain our original capex for 2024, largely due to the cost-effective, cost-efficient initiatives enabling the corporation to maximize operational output while maintaining disciplined capital management. To date, Canacol has drilled seven wells, which includes six successful wells, those being Clarinet Day 10, Pomelo 1, Chantadoura 1, 2, and 3, and recently Nispero 2. For the remainder of 2024, we plan to drill three exploration wells, those being Natia 2, Kite 1, and Peabay 1, along with one appraisal well. The Natia 2 exploration well is a high-impact prospect located on our SSJN7 E&P contract and is targeting sandstones of the Cianaglia Formation with additional potential in the overlying Port Carroll Formation. We spud the well on November 2 with an estimated two-month timeline for drilling and evaluation. Success in the TIA could be particularly exciting, given that it's a sizable prospect with the potential to add substantial reserves, as well as unlock a new gas producing area for the company. Additionally, it will help de-risk nine similar prospects we have identified in the recently acquired Mayupa 3D seismic area. We are also drilling the Kite 1 and PB1 exploration wells, which are near-field prospects positioned on a productive structural trend extending from our Palmer gas field to the south through to our recently discovered Pomelo and Chantadoura gas fields to the north. Both wells are targeting the same Cienaga de Sandstone reservoir targets. We spudded Kite yesterday with results anticipated by late November, and PB1 should spud later in November with results anticipated in mid-December. If successful, both wells will be placed immediately on production and flow into our hobo facility for sales. Finally, throughout the remainder of the year, we will be drilling one additional appraisal well, which if successful, will also be placed on production immediately. Corporation also this quarter secured approval of our fourth E&P contract in Bolivia, TITA, that includes an existing gas field reactivation. The next steps will be to sign all four contracts and begin development operations at TITA with a view to adding reserves and production, commencing gas sales in 2025. As Columbia's largest independent natural gas producer with approximately 16% of market share, we are confident in the strong foundations we built here and the resilience that has carried us through our recent challenges. Our high operational efficiency and profitability with annual operational margins consistently above 75% have kept us agile and well prepared to capture new opportunities. We're also pleased to lead in low emissions with an intensity that is 75% lower than our oil-focused peers and 45% lower than our gas-focused peers, aligning growth with a commitment to environmental responsibility. As we look forward, we see great potential for exploration here in Colombia, with over 20 TCF of unrisked prospective resource on our existing acreage, all located close to existing transportation and production infrastructure. We're confident about the path forward as we continue developing our plans for next year, which we look forward to sharing in January of 2025. Our focus remains on de-risking our exploration portfolio, particularly in the lower and middle Magdalena Bisons of Colombia. This will help strengthen Canacal's position in Colombia's dynamic gas market. Additionally, our recent strategic entry into Bolivia opens up further opportunities to expand our regional presence, creating strong foundations for sustainable growth. Thank you all for your attention and we're now ready to take questions.