Alvopetro Energy Ltd.

joining our third quarter 2025 earnings call. I'm joined today by Alison Howard, our CFO, and Adrienne Adet, our Vice President, Asset Management.

Hi, everyone. Just a few administrative points before we begin. We will be recording today's call and there will be a replay available on our website later on this afternoon. All attendees have been placed in listening only mode for the duration of the presentation. We will be having a Q&A session at the end of the presentation and you can start logging any questions you have now using the Q&A button you should see on your Zoom screen there, and we'll get to those at the end of the presentation. If you've dialed in by phone, you can send us any questions to socialmedia at alvopetro.com. Lastly, just a reminder, we do go through various non-GAAP measures and we make forward-looking statements throughout the presentation, so we do encourage you to read all of our cautionary statements and other disclosures at the end of the corporate presentation on our website, as well as details on all the non-GAAP calculations in our MD&A that we released yesterday.

All right. Thank you, Alison. So just start things off with production. Just remember, at the end of last year, we upgraded our gas sales agreement with our offtaker, Bahia Gas. In connection with that, we did increase the firm volumes under our contract by a third. And that allowed us to post some pretty strong production increases. As we started this year, Q1, we had a 41% increase quarter over quarter. The production's been relatively steady through the year. We did have a slight decrease in our third quarter production in Brazil, mostly in the month of September, which we'd already announced previously, and that was due to just some demand disruptions. And just keep in mind that occurred right at about the same time as we brought on our new 183 D4 well on our America 22 project. So we had quite a bit of productive capacity at that moment. So what we did is we agreed to a spot sales contract with Bahia Gas for the month of October. And for a good portion of October, we were actually producing At our plant capacity of 18 million cubic feet a day, the net effect was an average on a total company basis of 2,923 barrels of oil equivalent per day. If we include the Canadian production that we've added this year, that's the orange wedge that you see on the chart here. And that was a new record for Alvo Petro. So pretty exciting time to be announcing that.

Okay, so just jumping into some highlights from our Q3 results, starting with our operating net back. A reminder, that's one of those non-GAAP measures. We calculate that starting with our realized price. We express all of our operating net back in per barrel of oil equivalent. So we start at the top of the chart is our realized price per VOE. We deduct off royalties in orange, and then we've combined production and transportation expenses here. That's the gray bar. And then the green bar is our operating net back. So overall, looking at Q3, starting at our realized price, we saw an increase of 256 per BOE from last quarter. That was mainly due to our realized natural gas price, which increased to 11.04, up 4% from last quarter, and also overall higher realized pricing on our condensate sales in Brazil and also oil sales. Subtracting off our royalties, that's the orange bar. Overall, that was slightly higher than last quarter with the higher realized price. Overall, effective royalty rate of just over 5%, just under 5% in Brazil and just about 16% in Canada. On the production and transportation expenses, there was an increase there. Production expenses were up to $6.10 per BOE. We had about an additional $124,000 of expenses in the quarter. A lot of that was with respect to our D4 well, which commenced production at the end of August. And overall, our operating net back this quarter at $55.90, up $1.18 from last quarter, again, mainly due to those higher realized prices we saw this quarter. If you look at that operating net back relative to our realized price, really strong net back margins there. That's at 85% this quarter. So really strong year to date and historically. And that just highlights the strength of the fiscal regime that we're operating in and When you layer in the fact that we have this tax benefit in Brazil that allows for an effective tax rate of just over 15%, it really allows us to generate significant funds flow from operations on these levels of production and makes us really competitive when you're looking at comparing our margins here relative to other companies operating in Canada and in South America. So moving on to funds flow again, that's cash flow from operating activities before changes in working capital. So this chart just compares from, Our Q2 funds flow of $10.4 million to Q3, you can see it's pretty flat there, just up over $100,000 from last quarter, again, mainly due to those higher realized prices. Our other income was also higher this period, and then offsetting that is lower sales volumes and marginally higher royalties, production expenses, G&A, etc., On the net income side, we did see a decrease of about $2.2 million from last quarter. That's mainly related to this impairment that we booked this quarter. We announced last month, we had entered into an agreement to sell some non-core assets in Brazil. It's our Bombalgar and Maia da Lua oil fields. So as part of that, those assets have now been transferred to reclassified as assets held for sale on our balance sheet, pending closing, which is subject to regulatory approvals. And when we reclassify them to held for sale, we do... write them down to our expected proceeds that we'll receive on that disposition. So that was the big driver this quarter in, obviously that's the big driver this quarter in our change in net income overall.

Okay, so just talk about our kind of working cap debt and working capital situation. If you recall, we did take out a project financing loan before we came on production. That is in orange here. Recall, we repaid that on a very accelerated basis. It was completely repaid as of the end of the third quarter 2020. of 2022, and we've been debt-free ever since then. During the same period of time, we did build up a considerable amount of cash and working capital for pretty much two years. After being debt-free, we held up pretty significant cash and working capital balance. We have had a more active capital program here over the last 12 months with concurrent capital programs happening both in Brazil And in Western Canada, we're obviously extremely happy with the results from those capital programs. And I think we're pretty well positioned to ramp up our cash flows as evidenced by the increases in production that you're seeing here as we move into the fourth quarter. And we have had a slowdown in spending levels, particularly in Brazil. So I would expect to see this back to building cash and working capital moving forward. On the dividend history, we introduced the dividend back in the third quarter of 2021. We paid $0.09 US per quarter through all of last year with the bump up in production that we saw. We did increase the dividend this year and we paid three consecutive quarters at $0.10 US per share. That's a yield of yesterday's closing price of just under 9%. And since inception, we've actually paid out over $60 million US to shareholders, or $1.70 US per share. This chart we try to always show and it just highlights the more disciplined capital allocation model that we're following where we're balancing organic growth and returns to stakeholders. We try to take roughly half of our cash flows and reinvest those and take the other half and return them to stakeholders. The chart on the left shows the individual quarters with the black dots and green line being the cash inflows every quarter. As Alison noted, we had funds flow from operations this quarter of $10.4 million, which was pretty consistent with the prior quarter. And then the stacking bars are all the outflows in the various quarters, with the yellow being the organic growth or reinvestment or capital expenditures. You can see those were a bit higher here through the earlier part of this year. And then the green parts are the various forms of stakeholder returns. If you look at the pie on the right-hand chart, it shows this from when we came on production in the third quarter of 2020. In total, we've generated over $193 million of funds flowed from operations. Just over half of that went to reinvestment in yellow, and just under half of that has gone to stakeholders, so pretty close to the model that we had implemented even before we came on production.

We've established a strong platform and now our focus is firmly set on our growth objectives. So we are approaching our near-term goal of 18 million cent a cubic feet a day or 3,000 VOE to fill our current gas plant capacity. And our longer-term vision is to double this. Now this growth is going to come from the combination of our areas. So the first being our cabaret, our core base of operations. Here we've been tying in and operating or optimizing the unit wells from the recent drilling campaign to increase the productive capacity for this asset. The Cabaret unit has been performing well and we can continue to produce our reserves here. But the second and the biggest growth opportunity is from our Mercatutu project. And this 100% working interest project is just north of Cabaret and its pipeline connect to our midstream infrastructure. And we had a very successful completion late last year on our 183 A3 well, and our 183 D4 follow-up well just came on production in August with the IP 30 rate of nearly 1100 VOE a day, which is ahead of our expectations. And last year, GLJ had assigned a combination of 2P reserves, contingent and prospective resource to this opportunity to migrate this production to cashflow in support of our long-term growth. I just want to review our 183D4 well in a little bit more detail. So this well was drilled 106 meters up dip on the structure following the 183A3 success of 2024. And so during drilling, we identified 61 meters of net pay in three Kawarazu sequences, sequence 6.2, 6.3, and 6.4 you see on the logs on the right. This Karawasu sequence is the same formation that produces in Cabaret, our other field just to the south. So we brought this well on production in August from these seven intervals that we completed using North American sliding sleeve technology. As I noted earlier, we had an IP rate of close to 1,100 VOE a day, which is 5.8 million centicubic feet of gas and 97 barrels a day of condensate. And this rate was almost double what we had estimated from our 2024 year-end reserves process. In October, the Mercatucu field rate was 6.1 million centicubic feet a day, which is effectively our limited field capacity. We only had two of the three wells on production. We were very encouraged by the progress of this field, and we continue to plan for increased egress from this field and a more fulsome field development plan, given the success we are seeing from the Kawarasi Reservoir.

Thank you, Adrian. So just moving on to Western Canada here. If you recall, in February of this year, we announced a strategic entry into the Western Canadian sedimentary basin. It was focused on the Manville Stack Heavy Oil Fairway. You can see the red outline was the original area or AMI that we had. Just recently, we announced an expansion to that partnership that we have with our existing partner to cover the whole green area here. So it pretty much It covers the entire western Saskatchewan portion of the Manville-Stack heavy oil play fairway. What we're doing here is, sorry, just touch on this. So once we've earned the additional lands here, we're going to have an interest, a 50% working interest in over 74 sections of land or on a net basis close to $24,000. net acres of land, obviously a proven fairway, a lot of original oil in place per section of land that we have here. We've got stacked multi-zone potential. And what we're doing is we're applying kind of leading edge open hole multilateral drilling technology to unlock this resource that everyone's known has been here for quite some time. So I think over a very short period of time, Not only have we drilled four gross wells, built up a small base of initial production from Canada, but more importantly, we built a multi-year inventory of highly attractive drilling locations in kind of one of the leading plays right now. So I think this is a pretty exciting opportunity for us. This here just shows on the right hand side, the initial economics that we were targeting with the farm ends. We still think $70 WTI is a good long term kind of balancing point, considering a lot of the break even economics for a lot of plays in North America. Obviously, we're below that right now. But at the $70 level, you know, generates extremely robust economics on an IRR basis, close to 100%. Recycle ratio. So the number of times you get your payout on your investment of close to three times and on a per well basis, you know, MPV tens of over $2 million. So even at lower oil prices, or if you use a tight curve, that's say 80% of the the expected type curve, we still can generate some pretty strong returns. So on the left-hand side, it just shows the production forecast for those two type curves in the two lines that you see here, the blue solid one and the dashed one. And then the four different colors that you see with the more jittery data is the actual production data up to the end of September from the four initial wells that we drilled. This Neil Burke well here, obviously performing quite a bit ahead of expectations. Our Lashburn well in green has been pretty, you know, we're still optimizing this, but pretty close to our production result expectation. And then the latest two wells, it's still early days. Those wells are ramping up, cleaning up and being optimized, but it shows you the results from all four of those. And we do expect to be drilling here again in Western Canada starting late this quarter. So in conclusion, I think we still continue to deliver some pretty strong results. Obviously, our funds flow from operations, benefits from our highly attractive gas prices and our industry-leading operating netbacks and operating netback margins that Alison walked you through. We've had a very strong year from a production perspective and with October being a record month for us. Pretty excited about that. And I think we're well positioned to grow that through the end of the year here. Just from an investment proposition perspective, we do try to pitch this on a value yield and growth basis. So for value investors, we continue to trade at below our 1p NPVs. about under half of our 2 PMPVs, and that's before any reserve updates reflecting the success of the 183D4 well that Adrian walked you through earlier, and we do expect that to be positive. For yield investors, our $0.10 U.S. per share dividend quarterly translates into a yield of around 9%. And for growth investors, we've got exciting capital programs. We're a good way through those this year. They are unlocking a lot of potential now, both in Canada and in Brazil. I think we've significantly strengthened our disciplined capital allocation model by combining our growth inventory in Brazil with these new opportunities in Canada and I think we've got an ability to unlock a lot of value for shareholders, especially when you consider it relative to our existing enterprise value. So with that, I think we'll open the floor for question and answer. I'll just stop sharing the screen here.

Okay. So, yeah, we have a few questions in here. Given the significant increase in capital expenditures this quarter, up over 130% year over year, and the sharp reduction in cash and working capital, how is management balancing reinvestment in Brazil and Canada while maintaining financial flexibility and dividend sustainability going forward?

Yeah, no, that's a good question. I tried to touch on that in the slide in the presentation, but yeah, we recognize that we've went through a pretty capital intensive period. To be frank, we did have some challenges with one of the wells that we were drilling. They actually, the 183D4 well that we drilled in Brazil. So the good news is we have that behind us. We've got an extremely exciting result. Like Adrian said, it's roughly, you know, from an IP30 productivity perspective, it's almost double what our GLJ independent reserve evaluation from last year predicted for that well. So I think we're really well positioned for growth. You're already seeing that in the start of the production for Q4. And then from a capital expenditure perspective, you know, right now we're actually not really spending much money at all, particularly in Brazil. We're taking this opportunity where we've got a significant amount of actually excess productive capacity because of the addition of the 183D4 well. We're in a phase here where we're planning for the next phase of drilling. We're planning for the optimization of our facilities to support our next phase of growth. and we're focused on expanding our Bahia gas sales capacity to support a higher, you know, another step up in our levels of production and cash flow. So right now we are building cash and working capital and, you know, we benefit from extremely profitable barrels and that's the plan. So I would, you know, we've been pretty true to, the second part of the question, I think, with respect to our capital allocation model. I think over time, we've been pretty true to the 50-50 mantra, and I would expect that to continue. But yeah, no, we'll have a short period of time where we're building cash and working capital again, and that's already happening.

We did have a couple of specific questions on whether we were providing capital expenditure guidance for Q4 and 2026.

Well, I'll maybe get Allison to help me with the exact numbers. But like I just said, the Q4 capital expenditures will be quite a bit lower. The only things we're really doing right now, we are shooting some seismic in Canada. And the early part of the next phase of drilling in Canada will start in December. So there might be. Certainly one of those earning wells, we would expect it to be drilled in December and maybe part or all of a second well. So those wells are individually from a drilling and completion perspective, about $1.6 million Canadian. And then from a Brazil perspective, there's not much capital happening right now. It's more focused on the next phase of drilling, which we're going to set our 2026 capital expenditure budget probably in the next 30 to 60 days. So we'll come out with some more detail there. But our initial expectations is that we might be back to drilling in Brazil sometime, probably no earlier than the end of the first quarter of next year.

Okay. The 183D4 well at America 2-2 delivered exceptional IP30 rates above expectations. Can you discuss how representative that performance is of the remaining undeveloped wells in the area and what average rates or recovery factors you're now modeling?

Yeah. So as Adrian noted, we drilled this well over 100 meters up dip of the 183A3 well, and we've got probably a better slide in our corporate presentation that you can see a bit better visually the three different sequences that Adrian was talking about. So at the bottom, there's sequence 6.2, in the middle 6.3, and at the top sequence 6.4. So the 183A3 well is only producing from sequence 6.4, and that was kind of the focus of the reserve bookings at the time for that well. In our 183D4 well, we've actually completed all three of those sequences, so a significantly thicker hydrocarbon column, and we've got a whole, let's say, another ring of wells that we can drill, similarly up-dipped from that location even, so... I think it's pretty exciting, but we're still early days on the well. The production results are extremely strong. Just because the IP30s are doubled doesn't necessarily translate into the reserves doubling, but we're pretty optimistic and bear with us. We'll have a new reserve report out in mid-February sometime. Yeah.

A further question on MERC 22, what work is to be included in optimizing the MERC 22 infrastructure?

Yeah, that's something that we're currently working through as a team. Like I mentioned, we're running at the facility capacity at MERC 22, which is the battery at the actual field, which separate our tanks. So that's something that we're looking to upgrade as we work to expand the capacity of that field. Also, the egress from that field to the UPGN is limited by a pipeline, the flow rate of that pipeline. So that's the other aspect that we're looking to improve the production capacity of.

Okay, jumping to Canada, we have a few questions. On realized pricing, what is the expected discount to WTI for the Canadian realized price? So right now in the quarter, I can give you the actuals. So WTI in Q3 was just under $66, and our realized sales price in US dollars for Canadian operations was $49.70. So a discount of around $15, which is, I think, within what we were expecting when we first looked at this. So that's been consistent. The transportation expenses, we did see an increase this quarter. There was a question on the transportation expenses, just under $4 per GOE and our production expenses overall, you know, it's early days. These production expenses, I think, are still very efficient. The operations are still very efficient. And overall, we're monitoring these costs. But yeah, both production and transportation expenses combined under $10 US in Canada. I don't know if you wanted to add anything to that. That's great. And there was a question about the timing on the two pending Canadian wells. But I think, Corey, if you want to reiterate that again.

Yeah, indicatively, we've got four gross wells planned. Two of them would be earning wells. So we're going to pay 100% of working interest on those two to earn 50% in the whole green box, basically, that I showed on that slide. And then we'll have two additional partner wells where we're 50-50 each. So on a total basis, that's three net wells to Alvo Petro. And, you know, the order of the wells still might be in flux. But indicatively, we could get two wells drilled in late November or early December before the Christmas break. And then we would look to come back after the Christmas break and finish the next two wells in the first quarter.

On Canada, do you see yourself finding projects that you would be the operator of?

Yeah, no, we're positioned or positioning ourselves to be able to do that. And we are looking at opportunities all the time. Obviously, we've chosen a strategic partner for the play fairway that we identified. And I think we've got a lot of running room on that. But there are a lot of opportunities out there for sure.

There's a question here. There's a few questions around the share repurchases. So one of the questions is how many shares did we repurchase last quarter? We repurchased just over 10,000, 10,100 shares this quarter and our normal course issuer bid actually expired in mid-August. And then there is some commentary. I don't know, Corey, if you want to talk about, there's some questions around whether the stock buybacks, given they've had little effect on the stock price, is the money better spent on dividends?

Yeah, no, this is a debate that lots of our shareholders have with me and we have at the boardroom table as well. You know, we recognized that we were in a pretty capital expenditure-heavy period, so we actually made the decision to just not necessarily renew that program, but that's something we'll be looking at. I think it's a good thing to have in our toolkit because I think – Having the flexibility to be able to use part of our bucket of cash flow that goes to stakeholders to use that in that form, it's a nice option to have. But obviously, you can see we've prioritized dividends. So is that possible that changes? It's possible. But right now, we're not buying back any shares just because we haven't renewed the issuer bid yet.

Okay, and then there's just a couple questions around, which I'll combine into one around if you can give more details on timing for expansion of processing capacity in Brazil beyond the current capacity of 18 million cubic feet a day.

As we noted before, we're continuing to observe and monitor the D4 results, which Corey said are extremely encouraging, but we need to see more data and to continue to make our field development plans for that asset. And so as we go through that, we'll look to the future and figure out when is the most optimal time to be expanding the plant. So at this point, we're still working through that.

Okay, and I think that is it for questions.

All right, well, thank you, everyone. I think it's a pretty exciting time, again, to be a Novo Petro shareholder. We appreciate your support, and if you've got any further questions, feel free to call any one of us. And another note, we do expect to release a new field tour video. There's been a lot of changes since the last one that we created, so keep your eyes tuned to social media and our YouTube channel. I expect that to be available today for viewing.

Thanks, everyone.