Canacol Energy Ltd.

You may submit questions today throughout the event by clicking in the submit a question box on your screen. Questions will be addressed after the formal presentation has ended. Please note that this event is also being recorded. I would now like to hand the call over to Carolina Orozco, Vice President of Investor Relations. Please go ahead.

Good morning and welcome to Canacle's second quarter 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 Bednar, Chief Financial Officer. Before we begin, it's important to mention that the comments on this call by Canacle's 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, Canacle assumes no responsibility in the events 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 the corporation for the second quarter of 2025. 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 2025. At the end, we will have a Q&A session. I will now turn over the call to Mr. Charles Gamba, President and CEO of Canacle Energy.

Thanks, Carolina, and welcome everyone to Canacle's second quarter of 2025 conference call. We're reporting another profitable quarter with realized natural average gas prices in the net of transportation of $6.77 per MCF, given the favorable commodity pricing environment. Field operating costs held at $0.54 per MCF, generating robust natural gas operating net of $5.11 per MCF, with robust and stable operating margins of roughly 75%. Strong margins translated into adjusted funds from operations of $36.9 million, adjusted EBITDAX of $47.4 million, and a net income of $13.9 million. This last figure marks our fourth consecutive profitable quarter and a sharp turnaround from the net loss recorded in Q2 of 2024. Total natural gas and oil sales during the quarter were $127 million standard cubic feet per day, with $119 million standard cubic feet per day corresponding to realized natural gas sales and 1,382 barrels of oil per day. With strong pricing and industry netbacks, Canacle remains well positioned to continue generating attractive results through the remainder of 2025. Operationally during the second quarter, we drilled a total of four successful wells, consisting of two appraisal and two expiration wells, extending our track record of operational delivery and disciplined execution across our near field and rapid commercialization strategy in the lower Magdalena Valley Basin. We drilled the Sikhu III appraisal well, which encountered 200 feet of high quality CDO pay, and the Fresa IV appraisal well, which encountered 122 feet of gas-charged CDO sandstones. On the exploration front, Zamiya 1 and Bourbon 1 were also successful, encountering 32 and 157 feet of CDO pay respectively. These wells further add to our inventory of commercial opportunities. Even though we drilled a total of four successful wells during this period, from a production standpoint, only Sikhu III, which sputtered on April 7th, reached first gas within the quarter and contributed to mitigating the natural decline from base fields. The other wells, Zamiya 1, Bourbon 1 and Fresa IV, were all spud by quarter end, but did not contribute to production volumes during Q2, as completions and tie-ins extended into July. As a result, quarterly average production was lower than in Q1, reflecting the combined effect of natural base field decline and the timing of the new wells coming online post-quarter. I'd like to provide additional context on our drilling activities in the Sukri North Day area. Drilling operations at Zamiya 1, Bourbon 1 and Palomino 1 experienced temporary delays due to restricted site access caused by local unrest. Once access was restored, our teams mobilized quickly to continue with the drilling activity in this area without further disruptions. Had these delays not occurred, production from these wells would likely have come online during Q2, as originally planned. That said, I'm pleased to report that Zamiya 1, Bourbon 1 and Fresa IV are now tied in and flowing, bringing current gas sales to approximately 137 million standard cubic feet per day. At Natia II, the rig has been released as a forward plan. It's being prepared to drill a new Natia III well, targeting the gas-charged sandstones encountered in the various side tracks of the Natia II well. The new drilling plan will incorporate drilling techniques to address the difficulty in running production line or across the over-pressure gas-charged sands encountered in the Port Guerreau Formation. I'm also pleased to announce that during the second quarter of 2025, we published our 2024 integrated ESG and TCFD reports. We believe that strong ESG principles are essential to building a cleaner, more equitable and accountable energy future. We invite you to read our full reports, which are available on our website. I'll now turn over the presentation to Jason Bednar, our CFO, who will discuss 2025's second quarter results in more detail.

Thanks, Charles. The second quarter of 2025 was highlighted by resilient EBITDAX generation, strong netbacks and positive net income. Average realized natural gas prices net of transportation was $6.77 per MCF, with royalties and field operating costs at $1.12 and $0.54 per MCF respectively, resulting in operating netbacks of $5.11 per MCF. These strong unit economics generated revenues net of transportation of $76.2 million, adjusted EBITDAX of $47.4 million, adjusted funds from operations of $36.9 million, and operating cash flow of $33.4 million, supported by positive net income of $13.9 million for the quarter. That said, several financial metrics softened compared to the first quarter of 2025 and the second quarter of 2024. As Charles noted, this variance is particularly, partially explained by the timing of our drilling activities as production from our Super Norte wells, Zamiya 1 and Bourbon, and potentially Palamina 1, was delayed following localized short unrest that impacted site access. Had those wells come on stream as scheduled, the -over-year volume shortfall would have likely been significantly lower. Even so, firm pricing and disciplined cost control protected our margins and overall profitability. And with the Super Norte cluster now online, we expect both its volumes and financial contributions to strengthen throughout the remainder of the year. The second quarter was capital intensive with $57 million in capital expenditures, $11.8 million in cash tax payments, and the scheduled $14 million semi-annual bond coupon payments.

As a result,

cash and cash equivalents stood at $37 million as at June 30th. Capital expenditures during the quarter were fully funded from operating cash flow and existing cash on hand. I'd like to note that capital expenditures were weighted towards the front half of the year as the bulk of the high cost Natia II exploration well was absorbed in the first half spending. Looking ahead, while we intend to maintain an active journaling program in the second half, capital intensity is expected to ease. On the tax side, current tax expense was $9.3 million for the first quarter and $23.9 million for the first half of 2025, both lower than prior year periods. On a cash basis, tax payments were significantly lowered $11.8 million for the quarter, representing an 85% reduction year over year. We continue to meet all financial covenants with ample headroom. As of June 30th, our consolidated leverage ratio was 2.7 times below the 3.25 occurrence and 3.5 times maintenance threshold. Our interest coverage ratio stood at 4.49 times, nearly double the 2.5 times minimum requirement. While the current ratio was 1.14 times, keeping us above the one-time minimum level under the McCorry loan agreement. I'd like to note that due to average realized contractual natural gas and oil sales volumes falling below 130 million cubic feet equivalent per day for two consecutive months, an accelerated amortization clause in our credit agreement with McCorry was triggered. Consequently, the 50 million term loan is scheduled to amortize in six equal monthly installments beginning September 15th, 2025 unless the waiver is secured. The impact of the accelerated amortization clause is that the loan will be amortized in six months instead of 12 months. Nonetheless, as part of our continued liability management strategy, we are currently engaged in discussions with two separate banking groups looking to amend our non-bond debt to better match our loan repayments with anticipated future cash flows over the course of 2026 to 2028. While we can't share specifics at this stage, we expect to finalize agreements this September. We will make a public announcement once an amendment has been executed. That concludes my comments. Back to you, Charles.

Thanks, Jason. Looking ahead to the remainder of this year, our priorities remain firstly, a commitment to sustaining and growing CannaCol's EB DAX and reserves base through a combination of a commercial strategy, maximizing market pricing opportunities, and a disciplined capital program that challenges investment towards high return drilling and workovers. Secondly, we will keep advancing with our program of high impact gas exploration prospects across the lower and middle Magdalena valleys, which have the potential to add significant reserves and production capacity in the long term. For the remainder of the year, aside from drilling some smaller appraisal and exploitation wells in and around Hobo that can be quickly monetized and contribute to production and cash flow, we will be drilling a high impact exploration well, Valiante 1, targeting potentially material gas and condensate reserves. The Valiante prospect is located on the VMM 10-21 contract, located in the middle Magdalena basin, where CannaCol holds a 100% operating working interest. The Valiante prospect is a large shallow structure located approximately five kilometers up-dip and to the south of the Opan gas field, discovered in 1965 by City Service and later developed and produced by Amaco in 1997. Valiante 1 will be targeting the same productive sandstones of the La Paz formation that were productive at Opan, but at significantly shallower depths of approximately 6,000 feet. The corporation anticipates spouting the well in October of this year, with results before year-end of this year. Thirdly, we are laying the operational and commercial groundwork required to commence activities in Bolivia in 2026, positioning CannaCol to replicate its Colombian gas success in a new, prospective and profitable gas market. In Bolivia, the corporation is awaiting ratification and formalization by Congress of three exploration contracts, Arenales, OPAI, and Florida Estates, and one field redevelopment contract, TITA, in order to establish the effective date of all four contracts. The corporation is currently preparing to apply for the environmental permit for TITA, along with formulating development plans in order to commence field reactivation activities in 2026. Fourthly, we are focused on maintaining a strong and flexible capital structure to support long-term growth and resilience. And finally, we continue with our commitment to leading ESG practices aimed at every molecule of natural gas we produce being delivered responsibly and sustainably. Thank you for your attention. We look forward to keeping you updated on our progress in the coming months, and we're now ready to take questions.

We will now begin the question and answer session. You may submit questions by clicking in the submit a question box on your screen. Questions will be addressed. In the order that they are received. At this time, I will now turn the call back over to Carolina Orozco for the question and answer session.

Thank you. The first question comes from Stefan Schelling. Can we expect high impact drilling to take place this year? If positive, can you provide tentative calendar wells or any corresponding potential?

Yes, I mentioned in the presentation the Valiente 1 exploration well in the middle Magdalena Valley of Columbia that has the potential to add material, gas, and condensate reserves prior to year end. We're also drilling a fairly extensive program in the lower Magdalena Valley consisting of the typical types of wells we've been drilling this year. That would include the Palomino 1 well, which we're just finishing drilling on the Cronorte area. That will be followed by the Fresa 5 appraisal well, which we expect to be on production mid-September, which will be followed by the Mariner 1 exploration well, which we expect to be on production in mid-October. Likewise, we're drilling a development well in Clarinete, Clarinete 12. Spudding that well early September, we expect that well to be on in early October. Valiente, we will spud sometime in October of this year with results by year end.

Thank you, Charles. The next question comes from Peter Bowley from Jeffries. Can you confirm CAPEX expected for the third queue and fourth queue of 2025?

Sorry, Carolina, can you repeat that question, please?

Yes. This question comes from Peter Bowley from Jeffries. Can you please confirm CAPEX expected for third queue and fourth queue of 2025?

Okay, thank you. The guidance, our annual guidance released in February was between 143 million and 160 million of CAPEX. I expect to be closer near the upper end of that at 160. Q1 was 50, Q2 was 57. That would mean there's roughly what, 53 million left to go to hit the 160. You know, once again, my expectation is that will be the range we're at with it slightly weighted towards Q3, the remaining 53 towards Q3 as opposed to Q4.

Thanks, Jason. The next question comes from Fiber Rodriguez from Fiber Investments. The question is what's the roadmap for Natia 3?

Natia 3, we're currently just finalizing the drilling program, integrating the results of the Natia 2 well and their sidetracks thereof to optimize the drilling program to try and better deal with some of the well-born instability we encountered in the poor caro in Natia 2. So once we finalize the drilling program, we'll be looking to approve the AFE internally and looking to drill that well early in 2026.

Thank you. The next question is from Alexander Emery from S&P Global Platt. Can you provide us with more color on the work to be done in Bolivia next year and when you believe you might obtain the congressional approvals?

Yes, as I mentioned in the introduction, in my words, we're currently waiting for the contracts to be ratified by Congress. That's expected to occur after the elections later this month, so sometime in late Q3 or early Q4 of this year. Simultaneously, we're elaborating the environmental permits for the TITA field reactivation, which we expect to be granted early to mid-year in 2026. And with those environmental permits in hand, we will commence the reentry and work over of some existing shut-in gas wells in the TITA field to bring those back on to production and production test those. And with positive results from those workovers, we will proceed to start to construct some facilities and start to commercialize the field in early 2027.

Thank you, Charles. The next question is from Bill Newman from Research Capital. Can you clarify the 5 million feet per day difference between produced gas, which was 124 million feet per day, and realized contractual sales, which were 119 million feet per day in Q2? Was this due to line pack, inventory build, or under-delivered take or pay volumes? And if so, should we expect some of these volumes to flow through as incremental sales in Q3?

The difference between the gas production and gas sales in all quarters is related to the amount of gas we consume in compression.

Thank you, Charles. Please give us a brief moment while we continue to assemble the roster. Thank you. Okay, the next question comes from Joshua Nemzer from 9Less Capital. Can you provide some color around what went wrong with Natiia 2? What would be done differently with Natiia 3 cost and timeline? What gives the team confidence that Natiia 3 will work given challenges and costs with Natiia 2?

Natiia 2 encountered some well-bore stability issues in the Porquero, so we managed to drill the well without much difficulty. You drill a new formation, that is. And we did encounter five or six gas-charged sands in each of the side tracks we drilled in Natiia 2. So Natiia 2 did prove up the gas potential within the Porquero. However, the problem we ran into was well-bore instability after drilling the well, impeding our ability to run production casing. So even though we drilled successfully, we were not able to run production liners successfully across those gas-charged sands in order to production test them. Natiia 3 is being designed primarily to deal with running production casing more easily. And towards that end, we will drill a wider diameter well-bore through the Porquero and run a narrower casing through the Porquero in order to maximize the success of running casing and production testing those Porquero sands. So on the one hand, Natiia 2 confirmed a significant accumulation of gas within the Porquero. On the other hand, we had difficulties casing the Porquero due to instability resulting in Natiia 3, which will address those concerns.

Thank you, Charles. The next question is from Alejandro Andrade from JPMorgan. Can you please comment on taxes? You paid a significant amount in the second queue. What is the expectation for the second half of 2025?

Yeah, thank you. We are down to essentially just the monthly withholding taxes off our monthly revenue checks that I've discussed many times in the range of historically 1.2 or 1.3 million a month. The government just increased that withholding by a couple percent, so it could be up to approximately 2 million a month. But that would be it. And of course, that is to the credit of our prepaid tax accounts.

Thank you, Jason. We have a question from Benjamin Rojas from Veteje Pactual. Do you have any liquidity source in a stress period?

Thanks. I think the most obvious one that comes to mind is our recent wells that have come on We have the best wells in the world, which is the one that has been under production, which Cheryl has gone through extensively here being Zamiya, Borbon and Fresa. Whether it is the press release or the MDNA, it discusses those wells coming on for an additional 25 million cubic feet a day. Palomino, which is the press release and MDNA outlook section, discusses with an expectation of 10 to 12 million cubic feet a day, so that would total up to 37 million. But if I just did simple math on adding 30 million cubic feet a day to pick a round number of $12.50 in MCF and sales price, because these are sold over and above our take or pay volumes, that $12.50 net of royalties and net of operating expenses would approximate $10 in MCF net back. So 30 million cubic feet a day at a $10 net back would be about $300,000 a day. 30 days, that would be about $9 million a month in additional cash flow and EBITDA. So that would be the most obvious source of additional liquidity.

Thank you, Jason. Please give us a brief moment again while we assemble the roster.

Once again, if you would like to submit a question, you may submit questions by clicking in the Submit a Question box on your screen. Okay. Carolina, you may continue.

Oh, apologies. With this, we finish our Q&A session. We don't have any more questions for today. Thank you all for participating in Kinnacle's second quarter conference call, and we hope you'll have a good day today.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.