Alvopetro Announces Gas Sales Agreement Amendment, Operational Update

Source: 5/14/2020, Location: South America

Alvopetro Energy Ltd.announces an amendment to our Gas Sales Agreement with Bahiagás, an operational update and our first quarter 2020 financial and operating results.

Gas Sales Agreement Amendment (100% Alvopetro)
Our natural gas produced from our Caburé natural gas field will be sold under our long-term gas sales agreement ("GSA") with Bahiagás, the local distribution company for the state of Bahia. Bahiagás has agreed to commence the prepayment of natural gas effective May 1, 2020 at a rate of 120,000 m3/d. Alvopetro has agreed to provide a 15% discount off the current contractual price (price determination from February 2020 of BRL$1.02/m3 less 15%) for any prepaid natural gas during May and June 2020, after which normal pricing conditions will apply. Alvopetro will repay the prepayments though a portion of natural gas deliveries during the second half of 2020. Total prepaid revenue for the months of May and June are expected to total BRL$6.4 million ($1.1 million).

As part of our original agreement, Bahiagás agreed to extend their distribution network by 15 kilometres and construct a new gas receiving station (City Gate) at the Facility site. Construction of these projects is continuing, and Bahiagás expects to complete all their projects in June 2020. As part of the amendment, upon the start of supply, Bahiagás has also agreed to double the Firm deliveries under our contract to 300,000 m3/d (10.6 mmcfpd) and reduce any potential supply failure penalties through to the end of 2020. Based on the recent decline in global commodity prices we expect to realize GSA floor pricing from August through December 2020 (US$5.21/mmbtu, subject to exchange rate variations and US CPI). At this floor price and 300,000 m3/d of natural gas sales, we expect gross revenues in 2020 to total BRL$59 million ($11.3 million). Incorporating recent cost savings initiatives, including a 25% reduction in overhead, this is expected to result in EBITDA of approximately $7.5 million during the second half of 2020.

Corey Ruttan, President and CEO, commented, "This is a very positive amendment at an uncertain time globally. It allows us to secure early revenues, double our firm deliveries following full start-up, while having the security of a price floor embedded within our gas sales contract. Considering that most producers are facing sharp declines in commodity price realizations and production shut ins, relative to our peers, we are very well positioned. Our team has worked persistently to deliver this precedent setting development and we are one step closer to realizing the benefits of all this hard work."

Caburé Midstream Project (100% Alvopetro)
Our Caburé Midstream Project includes an 11-kilometre Transfer Pipeline and a Gas Treatment Facility ("Facility"). Construction of the Transfer Pipeline and Facility has been completed and commissioning activities commenced on April 21, 2020, with first natural gas being delivered from the Caburé Unit to the Facility. During the most recent commissioning we have been delivering at rates of up to 280,000 m3/d and will continue to increase rates during the final commissioning steps which are expected to be completed over the next week.

Caburé Unit Development (49.1% Alvopetro)
Natural gas for Alvopetro's midstream project commenced upon commissioning from our Caburé natural gas field (Alvopetro 49.1% working interest). The field has a total of seven wells, with six of these wells tied into recently expanded production facilities, ready to deliver Alvopetro's share of natural gas. The Unit has a planned gross production plateau rate of 450,000 m3/d (15.9 mmcfpd). Depending on our partner's delivery nominations, we have the ability to produce up to 450,000 m3/d against Alvopetro's share of reserves from the Caburé Unit.
Financial and Operating Highlights – First Quarter of 2020
We reported a net loss of $2.4 million in the quarter which included the recognition of an impairment of $1.4 million on our Bom Lugar field due to the market impact from the COVID-19 pandemic which has resulted in declines in future forecasted crude oil prices.

In the first quarter of 2020, we completed all remaining construction for our Caburé midstream development, incurring capital expenditures of $1.0 million including $0.5 million for our 11-kilometre transfer pipeline and $0.4 million in costs at the gas treatment facility. Additional capital expenditures in the quarter included $0.2 million in final costs for the 183(1) stimulation, capitalized G&A of $0.2 million and capitalized finance expenses of $0.2 million.

Our sales volumes averaged 11 bbls/d in the quarter comprised of 5 bbls/d of natural gas liquids (condensate) sales from the Caburé unit and 6 bbls/d of oil from the Măe-da-lua field. Despite a declining Brent price in the quarter, we realized an operating netback of $8.87/bbl as the majority of our sales were made in January when Brent prices were higher.

Our net working capital surplus of $0.3 million as of March 31, 2020, includes cash and cash equivalents of $6.2 million. We drew an additional $8.0 million on our credit facility in the quarter, bringing the total balance outstanding to $13.1 million as at March 31, 2020.

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