Alvopetro Energy Ltd.

points before we begin. We will be recording today's webcast and we will have a replay available on our website later on this afternoon. All participants are in listening only mode for the duration of the webcast, but we will have a Q&A session at the end of the presentation. If you are watching online through Zoom, you can use the Q&A button on your Zoom screen there and start logging any questions, and we'll get to those at the end of the presentation. If you've dialed in on your phone, you can send any questions by email to socialmedia at alvopetro.com. And then lastly, just a reminder on these calls, we always go through some non-GAAP measures and also make some forward-looking statements. So, you know, please review all of our disclosures on those items, both in our MD&A that was released yesterday and our press release, as well as the presentation that's on our website. There's additional disclosures on those. And with that, I'll turn it to Corey.

All right. Thank you, Alison. So to start with, just talk about our production results in the third quarter. We averaged a little over 2,100 barrels of oil equivalent per day in the third quarter that was previously announced. It was up 29% quarter over quarter and up 24% if you compare it to the third quarter of last year. We also did announce our October production, which was 1,912 barrels of oil equivalent per day. That was impacted for at least portions of the month based on Bahia Gas's demand through October. One of the other nice things to point out is that our new 183A3 well accounted for about 17% of our production in the month of October, and that well continues quite strongly for us. And Adrian will review that later in the presentation. And again, just focusing on our strategy going forward here is what we're looking to do is add more productive capacity from our near-term development drilling program at the unit with Cabaret. and to also add more 100% working interest production from our MRCA 2-2 project through our organically funded capital program so that we can maximize the throughput through our gas plant and ultimately work towards our near-term goal of 3,000 barrels of oil equivalent per day. An expanded productive capacity will also give us flexibility to look at increasing the firm volumes within our Bahia gas contract. which would then lead to increasing kind of the firm or base monthly cash flows that we have on a quarterly basis.

Okay, so just jumping into some highlights from our Q3 results that were released yesterday. Just to start with our operating net back, that is one of those non-GAAP measures I was referring to earlier. This is our operating profitability and we measure and we reflect that in per barrels of oil equivalent. So that's computed based on a realized price. If you start at the top of those stacking bar charts, we deduct off royalties, which is the orange bars and then production expenses, which is the gray bars. And then our operating net back or operating profit per BOE is the green bars. You can see we did see a reduction of just over $5 per BOE from Q2. That was due to a reduction in our realized sales price from $71.97 last quarter to $66.46 this quarter. That was mainly on the US dollar equivalent of our realized gas price. So our realized price in Q2 was $11.83. and we dropped 91 cents to 10.92 per MCF in Q3. That was largely due to foreign currency fluctuations. If you recall, our gas price is set semi-annually based on U.S. dollar benchmark prices, but then it gets set every six months in local currency and local Brazilian reais. And the average reais relative to the U.S. dollar was lower in Q3, was about all close to 7% lower in Q3 than Q2. So that accounted for the majority of that reduction in our overall realized price. The royalties are relatively consistent with last quarter, $1.89 per BOE. That's about 2.8% effective royalty rate, which is quite low. On the production expenses side, we did see a reduction in our per BOE costs by 35 cents per BOE. Actually, our production expenses, if you recall last quarter, we benefited from some historical tax credits. So our production expenses were quite a bit lower last quarter overall in dollar terms. This quarter, they went up about $193,000 just due to the fact that we didn't have that one-time historical tax credit adjustment this quarter. But overall, with higher, the 29% increase in sales volumes, our per BOE costs were down. Overall operating net back of just over $59 this quarter. And when you look at that relative to the $66 sales price, that's a profit margin of 89%. You know, we talk about this every quarter, but that's really best in class when looking at other companies like Albo Petro operating in Brazil, in other countries in South America, and also in North America. And when you layer in the fact that our... our project in Brazil is eligible for a 15% tax rate, we're able to generate significant cash flows from operating activities on this base level of production. So just moving on to funds flow from operations, which is a non-GAAP measure, most closely aligned with cash flow from operating activities, but before working capital, we did see a $2 million increase this quarter from $7.9 million to $9.9 million. Overall, that was mainly due to that 29% increase in sales volumes, partially offset by the reduced realized sales prices, which I talked about earlier, and then also the higher production expenses. Similarly, net income, we saw a $4.8 million increase in net income compared to Q2. Again, that was mainly due to higher overall sales volumes and our overall operating net back in dollar terms went up 1.9 million. The other big driver there was foreign exchange. We had a gain of 0.6 million this quarter compared to a loss last quarter of 3.2 million. So We did see a big adjustment for that and offsetting those increases were additional depletion and depreciation due to increased production levels and then also higher deferred tax. On that foreign exchange component there, just a reminder that's mainly foreign exchange gains and losses recognized by our Brazilian subsidiary on US dollar amounts. It's US dollar intercompany loans between the Canadian parent company and the Brazilian subsidiary, and then also US dollar capital lease in Brazil. So although overall the average rates in Q3, the average HAI had depreciated relative to the US dollar compared to Q2, period end rate, which is used to determine, you know, the foreign exchange that goes through the income statement on those US dollar amounts. There was an improvement as of September 30th compared to June 30th. So we did have a gain this period. And then just quickly on the balance sheet, we continue to have a very strong balance sheet. We ended the period with working capital of $15.8 million, up about $1.2 million from last quarter. And we had cash of $24.5 million on our balance sheet at that time. And a reminder, we are debt-free and have been for over two years now. We repaid our credit facility, fully repaid it in September of 2022.

All right. Thank you, Alison. Just to walk through the dividends, we did introduce this back in the third quarter of twenty twenty one. We paid nine cents U.S. per quarter each of the quarter so far in twenty twenty four. That translates into a current yield of over 10 percent based on our share price. And in total, since inception, this represents over U.S. forty seven million dollars that's been paid out to shareholders or U.S. a dollar thirty one per share. So again, this graph that we show each quarter demonstrates our balanced and disciplined capital allocation and stakeholder return model that we've been following. As a reminder, that model looks to reinvest roughly half of our cash flows in organic growth. and return the other half to stakeholders. So you can see the chart on the left each quarter since we came on production from our cabaret project. The lines with the black dots are the funds from operations each quarter. Alison walked you through that. $9.9 million this quarter, which was up about 25% from the prior quarter. And then each of the stacking bar shows where that cash flow or basically the cash outflows. So the red represents the amounts reinvested in our business, which in the third quarter accounted for 48% of the funds flow. And then the various shades of green are the returns to stakeholders, which in the third quarter amounted to 42%. And then because the height of the stacking bar is below the dot, that contributed to the increase in cash and working capital that Alison reviewed earlier. The other thing that's new this quarter, you can see this little green wedge at the top of the stacking bar, that does represent the share buyback program that we introduced late in August, and most of those purchases happened in September, totaled about a quarter of a million dollars US in the in the third quarter and has been continuing here into the fourth quarter. The pie chart that you see here just represents since coming on production. In total, you can see that we've now had cumulative funds flow from operations totaling $156 million. Of that, 43% has been reinvested. And 48% of it's been returned to stakeholders, with the remaining 9% building that cash and working capital position to really help preserve financial flexibility for us as we move forward. So just talking about our organic growth program moving forward, I think we've established a pretty strong platform to build on. To reiterate, our near-term goal is to get to 18 million cubic feet a day or 3,000 barrels of oil equivalent per day, and that would fill, or depending on the gas specification going through our plant, come close to filling our current capacity within the facility. And most of this growth is planned to come from really our two core assets. Firstly, at the unit, we do have a five-well development program here. Our best guess on that would be that that would start sometime early next year. And then in addition to that, just sitting immediately north of Cabaret, which sits here, as a reminder, is our Murakatutu project. This is a 100% working interest project. We did announce recently a very positive result at our 183A3 well, and Adrian will walk you through our growth plans here, but we're really looking to migrate all of this, the reserves and contingent and prospective resource that we've got booked on this asset into production and cash flow over the coming months and years. And I think we're quite excited about the result that we have at 183A3.

So our Mercatutu gas resource, this is, as Corey pointed out, our 100% working interest asset. And this sits directly north of the Cabaret unit. So this is connected to our midstream infrastructure and connected to our sales point. This represents 4.6 million BOE of 2P reserves. So this has got a lot of opportunity for growth for Alpapetroin. And we made some strong advances in the third quarter at Murukututu. We now have 183 A3 on production. As Corey pointed out, we saw in our sales numbers, we brought this online and we had 1.8 million standard cubic feet average in October for this wellbore. And this completion we did put... five or sorry, six of the zones you see on the log on the right. We brought those online. Those are all cura soup production and we have those online and we're quite excited about the initial results we see in the cura soup portion of this asset. If you look at the plot in the middle, the contour plot, you can see the wellbore that we brought online, which is 183A3. So we're currently planning a wellbore directly to the south of that uptip and structure. And we'll be looking forward to initiating that drilling program at the end of 2024 as a follow up to our current results. The picture on the bottom right shows an aerial photo of this asset. The wellbore that we brought online is where the mouse is there on the bottom right. That's the processing facility, or the, sorry, the field facility. It's pipeline connected to the processing facility. The pad in that same picture in the top left is where we'll be drilling our follow-up well, which will be uptipped in structure. And you can see that there's some other locations and room for growth as follow-ups to our other reserves in that field. So we look forward to the development here.

Right. And just to conclude, you know, I really still feel very strongly that Alvopetra offers a very attractive investment proposition, no matter what your focus is. I hope everyone agrees we've been delivering some pretty strong results off the back of industry leading operating netbacks. very attractive natural gas pricing. We've got a very clean balance sheet and strong free cash flow generation capacity that really helps underpin that balanced and disciplined stakeholder return model that we implemented quite a long time ago. For value investors, we're trading at about a third of our 2P NAV. For yield investors, that US $0.09 per dividend paid quarterly translates into a yield of over 10%. And for growth investors, I think we've got a very exciting organically funded capital program that has the potential to unlock an awful lot of value here over the near term, especially when you compare it to our current enterprise value. And I think we've demonstrated some of that potential with the recent 183.83 success that Adrian talked about. And we certainly look forward to following that up with another well here starting later this year. And with that, I think we'll start the question and answer period. I'll stop sharing the presentation.

Great. So we have a couple of questions to start with on the NCIB. How many shares have you repurchased this year is the first question. I can answer that one. So in Q3, we repurchased 62,800 shares. And then in October, Another 41,700 shares, so that's just over 103,000 to date. And then the next question around this is, do you expect the repurchase plan to eventually reduce the shares outstanding after employee stock plan issuances, et cetera? Oh, Corey, you want to?

Well, yeah, again, we're allocating the portion of our stakeholder return payments, I guess, the 50% of cash flow to the extent that our capital lease and our current dividend or the dividend that we pay in the future is less than that. We're taking that money and allocating it to the issuer. So the answer depends on the results and the pace at which we're repurchasing shares.

Okay, and then in follow-up to that, there's a question. In 2024, it appears you've been distributing less than 50% to shareholders despite the strong balance sheet. Is there a plan to get it back up to 50% and is this through buybacks or higher dividends?

Yeah, I think from inception, we're still pretty close and it's not written in stone to be clear, but we're trying to use the 50% as a pretty close guideline. I think since inception, we've been almost at that. Q3 was a little bit lower than that, partly because the results were so strong and the budget that we allocated to the issuer bid didn't necessarily, we only had one month worth of issuer bid in timing issuer bid, meaning the share repurchase program. So that budget is effectively there for the share repurchases that will happen through the duration of that program, which lasts all the way through till August of next year. And we're hopefully off the back of some continued positive results to be able to add to that bucket.

Perfect. Could you provide some details on the CapEx spend for the quarter along with guidance for Q4 and 2025 if possible? I can maybe comment on that. So in the quarter we had 4.7 million of capital expenditures. The main projects this quarter were the completion of that 183A3 and 183.1 on our MERC 2.2 field. So that was roughly three and a half million of expenditures total overall on the MERC 22 field, or I guess it's 3.8 million with capitalized GNA. And then the other big project we are doing that facilities upgrade for compression at our cabaret field. So there was approximately 0.6 million in spending on that. And then those were the main projects this quarter. Moving on to kind of upcoming projects, we're still working on our, you know, 2025 plan. But the main projects which we've talked about are the unit development wells at the unit. Our cost for that is forecasted to be about $7 million. And then also we will be finishing up this facilities upgrade at Kevere as well. That's another approximately $1 million. And then going forward, the next big plan, what Adrian was talking about is our new well on Meraka Tutu. We are still finalizing the well design on that. So we haven't finalized the capital spending amount for that yet, but it will be similar to what was in our reserve report previously. And those are the main projects that are coming up from a CapEx perspective unless I missed something. Oh, that's great. Any guidance on Bahia gas nominations for Q4?

Uh. Well, so we've got October already already announced. We're currently producing around the firm volumes within our contract. And, you know, it's hard to predict we did they don't indicate far enough out to really comment on it for for for December. And what's been happening is it's been being adjusted kind of on a daily or quarterly or weekly basis. Sorry.

Any update on the arbitration surrounding the redetermination of the cabaret working interest?

No, just that it's in the full kind of arbitration process. So we're still in the finalization of the arbitrators. I think that should be completed here over the next month. But these processes tend to be quite slow in Brazil. Well, not only Brazil, everywhere. So

Just shifting to Brazil overall, given that Brazil's hydro output for power has been affected in the last month, it appears that Brazil is moving to fossil energy as seen in record coal imports. Do you see any increase in gas demand?

Yeah, so this is a seasonal thing in Brazil for sure. I think about 93% of Brazil's energy comes from either hydroelectric or renewable sources, wind and then solar mainly. But even with that, obviously the hydro component is affected a little bit or a lot by how much it's raining. So we went through a drier phase. that did result in more dispatch of the thermal electrical generation capacity within the country. The rains have started, the demand or pressures on that have decreased. There's a system for kind of going red, yellow, green as it pertains to the water levels in the reservoirs and I think we're now back down to a yellow level. The other phenomenon though that's changed because there's so much of the base electrical supply coming from those renewable sources the challenge with these things is You know, it's not always windy and it's not always sunny when you've got the peak energy demand within the country. So the natural gas and the thermal power component is going to be, I think, continue to play a key role to meet that dispatchable energy demand requirements.

What would be the catalyst to ramp up drilling activity in Meraka Tutu? Would you consider debt financing to implement a significant multi-well program?

Yeah, obviously a little bit of this depends on results and also, you know, we have to marry that with permitting and equipment and also with our capacity within our plant. The one thing that we have with Mercatutu is the gas is richer or hotter than our cabaret gas, so right now we've been managing the mix of production between Mercatutu and the unit, such that roughly a quarter of our production is coming from Mercatutu, and the current design of the gas plant seems to be working quite well at that mix. If we add more Mercatutu production, we will be looking at making some minor facility modifications to account for that. So there's some things that have to happen in parallel. I think over the near term, or certainly as you look into next year, with the amount of cash that we have on the balance sheet and the cash flow generation capacity we have, and just the practical realities of executing the capital program, I think we're well positioned to execute that organically without any additional debt capital. But we certainly have a lot of flexibility to do that based on results if we want to ramp that up.

So just following up on a related matter with respect to the mix between Cabaret and Merica Tutu is the Is the plan for 2025 to increase MERC 2-2 production given it's 100% elbow petro at the expense of cabaret?

Well, our plan to be clear is to increase both. So we're adding compression at the unit, we're drilling five wells at the unit, and the plan is to be able to grow the productive capacity and extend the productive capacity of that field. But to complement that, obviously, we want to add more 100% working interest production at Cabaret, and then we'll manage the facilities to accommodate that new gas. But, you know, right now, I wouldn't characterize it necessarily at the expense. The reality is most of our sales has been driven more off the nominations that we're getting from Bahia Gas. And strategically, what we're trying to do is make sure we have sufficient productive capacity available over our whole portfolio of assets so that we can increase the firm volumes that we're committing to with Bahia Gas so that even if there are demand adjustments, we've secured then a higher base level of production and cash flow. And we're just working through that process with Bahia Gas as we speak.

Jumping back into the share repurchases in our normal course issuer bid, what is the limiting factor on the rate of share repurchases? Is it limited by factors in the market, such as a requirement to be less than an average daily price or a certain percentage of total volumes?

Yeah. Right now, it's based on the general budget that we've allocated on a daily basis, but there are also regulations on the percentage limits on how the shares can be bought, limitations on how much can be bought in any individual day. But what we're trying to do is take the budget that we've allocated to it and spread it out over a period of time. For now, that's the pace that we're operating at, and hopefully we can add budget to that as the year progresses.

Just jumping back to America 22 when you announced the 183 A3 well, you notice you noted that production was 2.1 million cubic feet a day, but it seems that October was was below that. Is that due to well declines?

Yeah, the announced production at 2.1 was during our initial production testing, so we're doing that at steady choke settings in the steady period of time. In the October average of 1.8, that was the, like I say, the average over the month. So it includes some facilities downtimes and adjustments to the choke settings during our initial ramp up production from that well. So there can naturally be different. Right now, the well is at or above what we've announced previously. So we're looking forward to what November is going to be for that well.

Can you give us a timeline of when you expect to hit your goal of 3,000 BOE per day?

Yeah, so our objective there is to make sure as we go through our capital program next year is to have that level of productive capacity and then make sure we've got the plant tuned so that it can accommodate a flexible range of gas from America 2 to our cabaret and then marry that with our gas sales. So Honestly, I think our ability to average that through the year is probably going to be driven more from the demand side from Bahia Gas and probably less to do with our productive capacity based on our current plans.

Given the healthy cash position, would it make sense from a cost of financing to buy out the lease on the gas plant?

Yeah, it could. I do think that was a pretty reasonable bit of financial and operational engineering that we did at an important time for the company. I still think it's a good use of capital to have that capital lease there. And at the end of the term, the plant reverts back to us. So it's something we could do. But I think having that cash available for growth opportunities probably makes a bit more sense.

Great, and there are no more questions, so that is it from the Q&A.

All right, well, thank you everyone again for participating. If you've got any questions after the fact, feel free to give us a call, and we look forward to updating you on our progress through Q4 here.