Alvopetro Energy Ltd. announces second quarter results and an operational update including our first month of natural gas sales from our Caburé Project under our long-term Gas Sales Agreement ("GSA") with Bahiagás. The Caburé Project is the culmination of a conventional upstream natural gas development coupled with a natural gas commercial solution that includes highly strategic midstream assets.
Commercial deliveries commenced on July 5th and on July 6th we ramped up to our planned daily firm delivery rate of 10.6 mmcfpd (300 103m3/d). In July, we delivered a total of 7.9 million m3 (280 mmcf) of natural gas for a calendar month average of 256 103m3/d (9.0 mmcfpd), with associated condensate sales of 66 barrels per day. The semi-annual price redetermination under our GSA was completed effective August 1, 2020. Sales from August 1, 2020 through January 1, 2021 will be priced at BRL$0.96/m3. As of August 1, 2020, this translates into US$5.58/mcf based on Alvopetro's average heat content to-date at a 7% premium. Future realized US$ denominated sales will be impacted by changes in BRL/USD exchange rates.
Corey Ruttan, President and CEO, commented, "We have now finished our first month of production from our Caburé project. I am extremely proud of our team who are responsible for making this a tremendous success, during a very challenging environment. Leveraging off our new highly strategic infrastructure, we are focused on our next phase of growth and on unlocking the further natural gas potential in our portfolio."
We plan to continue the evaluation of the Gomo tight gas deliverability at our 183-1 wellbore and expect to undertake a longer duration production test in the second half of 2020. Concurrently, we plan to complete the permitting process for an 8-kilometre flowline to connect the 183-1 well to our Caburé Transfer Pipeline.
We expect to commence civil work on our 182-C1 and 183-B1 natural gas exploration prospects located 9-kilometres north of our Gas Treatment Plant. We expect to fund these wells from free cash flow and to commence drilling in the first half of 2021. Our strategy is to balance stakeholder returns with the reinvestment of cash flows in the upstream part of our business and other new business development initiatives to maximize the utilization through our Gas Treatment Plant.
Financial and Operating Highlights – Second Quarter of 2020
- In the second quarter of 2020, commissioning operations at the gas treatment facility and the 11-kilometre Caburé transfer pipeline were completed. A total of 60 mmcf of natural gas was produced from the Caburé unit during commissioning operations. Commercial natural gas sales commenced on July 5, 2020.
- Effective May 1, 2020, Bahiagás began prepayments to Alvopetro for natural gas at a rate of 120 103m3/d for total prepaid volumes of 7.3 million m3 (259 mmcf) in the quarter, recorded as unearned revenue of $1.2 million.
- Capital expenditures of $1.6 million in the quarter were largely attributable to final costs for our Caburé midstream development including $0.5 million in costs at the gas treatment facility (including commissioning costs in the quarter), and $0.1 million for our 11-kilometre transfer pipeline. Additional capital expenditures in the quarter included capitalized G&A of $0.4 million and capitalized finance expenses of $0.6 million.
- Our sales volumes averaged 14 bbls/d in the quarter comprised of 2 bbls/d of natural gas liquids (condensate) sales from the Caburé unit and 12 bbls/d of oil from the Mãe-da-lua field. Despite reduced production expenses, as a result of the declining Brent price in the quarter, we realized an operating loss of $0.78/bbl.
- We reported a net loss of $1.2 million in the quarter, primarily due to negative funds flow of $1.0 million and finance expenses of $0.1 million.
- Our net working capital deficit of $0.3 million as of June 30, 2020, includes cash and cash equivalents of $3.2 million. We drew an additional $2.0 million on our credit facility (the "Credit Facility") in the quarter, bringing the total balance outstanding to $15.2 million as at June 30, 2020.
Senior Leadership Team
Our entire team has done a tremendous job commercializing our Caburé project, accomplishing many firsts in Brazil and marking a major milestone in the development of the onshore natural gas market in Brazil. We are pleased to announce the following appointments within our senior leadership team.
Mr. Adrian Audet has been appointed to the role of Vice President Asset Management. Mr. Audet has held increasingly senior operational roles with Alvopetro since inception. He has spent extensive time in Bahia overseeing our operations, realizing extensive cost savings and improvements in efficiency. Mr. Audet began his career in 2006 and completed his Masters & Undergraduate Degrees in Mechanical Engineering at the University of Alberta. Mr. Audet is a Professional Engineer registered with APEGA and a CFA Charterholder.
Mr. Frederico Oliveira has been appointed Brazil Country Manager. Mr. Oliveira has held increasingly senior roles since 2008, with expertise in regulations, contracts, partnerships, management and cost efficiency. Mr. Oliveira obtained a MBA from the Federal University of Minas Gerais in 2004, and a Bachelor of Science degree in Mechanical Engineering from the Pontificia Universidade Catolica de Minas Gerais.
Messrs. Audet and Oliveira have been instrumental in making our Caburé project a success, and we look forward to their continued contributions.
Incentive Share Grants
The Company has achieved a significant milestone with the commencement of first natural gas production from our Caburé project. In connection with our share-based compensation programs, the Board of Directors has approved a grant of Restricted Share Units ("RSUs") to officers and employees to purchase 900,000 common shares under Alvopetro's Stock Incentive Plan, of which 660,000 are being granted to officers. These RSUs will vest evenly over the next 3 years and expire on the 5th anniversary. The RSUs will be granted on August 17, 2020.