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Introduction

When I last talked about Alvopetro (OTCQX:ALVOF) about six months ago, the company was about to be able to raise its natural gas prices, which are set on a semi-annual basis. This means that the first quarter of 2022 was In the first quarter, the increase in the price of natural gas helped the company, which was immediately reflected in the financial results.

Alvopetro energy table
Data by YCharts

Alvopetro’s primary listing is on the TSX Venture Exchange where it trades with ALV as stock symbol, and I would strongly recommend using the Toronto listing to trade the company’s stock. The average daily volume in Canada exceeds 16,000 shares per day, and the current market capitalization is just over C$200 million. By using the current exchange ratethis translates to US$161 million (or US$4.73/share) and since the company reports its financial results in US dollars, I will be using USD as my base currency throughout this article.

The first quarter shows the impact of higher natural gas prices

As you can see from the image below, Alvopetro has been a relatively consistent producer, with the company focusing on keeping its natural gas production stable and paying down debt rather than blindly pursuing the growth at all costs.

Alvopetro Power Generation

Alvopetro Investor Relations

In the first quarter of this year, the average production rate expressed in barrels of oil equivalent was 2,501, but as you can see, about 96% of oil equivalent production is actually natural gas. Oil production was only 12 barrels per day, with condensate accounting for about 99 barrels per day.

This means that Alvopetro must obviously be viewed from a natural gas perspective (despite publishing its results in an oil equivalent format). The average natural gas price received in the first quarter was US$10.03 per Mcf, an increase from the $5.68/Mcf received in the first quarter of last year.

Alvopetro Energy Realized sales prices

Alvopetro Investor Relations

Maybe I should first explain how natural gas pricing works for Alvopetro. The company entered into a agreement with Bahiagas to sell its natural gas using a floor price and a cap, the cap of US$9.61/MMbtu being indexed to the US CPI. The price of natural gas is fixed for six-month periods, providing excellent visibility for Alvopetro, but the downside is obviously that it cannot take advantage of fluctuations during said six-month period. The most recent reset was on Feb 1 and is now at US$11.28/Mcf, but as the contract is priced in BRL there will be fluctuations in the USD equivalent and a stronger BRL helps states company financial statements in USD.

Keep in mind that the new contract price did not take effect until February 1, which means that the first quarter results contain 2 months of the new gas price and one month of the old natural gas price. . The second quarter will contain three months with the rise in the price of natural gas, while in the third quarter we will see another reset on August 1st. This reset will again be based not only on the price of natural gas in Brazil, but on a combination of the price of Brent oil, the price of natural gas Henry Hub and the national balancing point. As Brent and Henry Hub have been everywhere for the past few weeks, it remains to be seen what the next contract price will be.

In any case, Alvopetro is currently prints money. The company reported revenue of US$14 million and net revenue of $13.1 million after factoring in royalty payments.

Operating costs are exceptionally low. As you can see from the image below, the “pure” production expenses were only $853,000. That’s just under $0.75/Mcf. The majority of expenses are actually depreciation and depletion expenses and business overhead.

Alvopetro Energy income statement

Alvopetro Investor Relations

The company reported net income of $11.1 million, but keep in mind that pre-tax profit was driven by a foreign exchange gain, so perhaps we should focus on the cash result of Alvopetro to better understand the performance of the company.

Cash flow from operations was US$10.9 million, but this included a deferred tax charge of $2 million and excluded $0.6 million of interest and lease payments. Thus, on an adjusted basis, operating cash flow was approximately $8.3 million.

Alvopetro Energy cash flow statement

Alvopetro Investor Relations

Total capex was $3.8 million, which was approximately four times higher than the same period last year and more than twice higher than depletion and depreciation expense. Capital expenditures were primarily related to the completion of the 182-C1 well at a total cost of $1.9 million, while the company also spent $1.2 million on pipeline and production facility costs of the Murucututu gas field. The latter could be an interesting source of additional growth for Alvopetro, as 2P reserves were worth an estimated $72 million at the end of 2021.

Alvopetro Energy 2P balance sheet

Alvopetro Investor Relations

As you can see below, Alvopetro plans to stay busy this year. A good decision not only because exploration and development investments are easily covered by incoming cash flow, especially since the new 183-1 well will soon be connected to the pipeline. Well 197-1 will also soon be connected to the gas pipeline, so we should see a nice upturn in gas production results this summer and Alvopetro should be able to increase its daily production rate in the fourth quarter.

Alvopetro Energy Development Pipeline

Alvopetro Investor Relations

And even despite these relatively aggressive investments in growth, free cash flow was still around US$4.5 million or around C$5.9 million in the first quarter. Spread across 34 million shares, that’s $0.13 per share, meaning the company is trading at just 9 times free cash flow and that includes investments in new gas wells that are expected to start soon. contribute to turnover.

Investment thesis

Meanwhile, Alvopetro continues to pay a quarterly dividend of $0.08 per share for a dividend yield of 6.75%. The payout ratio is around 60% (and again, this includes growth investments) while Alvopetro continues to reduce its gross debt and net debt. In the first quarter of the year, Alvopetro reduced the amount of cash drawn on its credit facility to $5 million and the existing cash position of $12.7 million effectively means the company ended the quarter with a positive net cash position of over $7 million. After the quarter ended, the company repaid an additional $2.5 million, and I expect the final $2.5 million to be repaid soon. As this credit facility had a cost of debt of approximately 9.5%, Alvopetro will save over $0.5 million per year in interest charges, which will further increase free cash flow.

I don’t have a position in Alvopetro, but the strong financial performance and exploration success probably means I should be long in the near future. I expect the realized price of natural gas to decline from August 1 when the price will reset, but cash flow should remain relatively stable thanks to the higher production rate when the new wells come on. in service. As the most recent reserve calculation shows a PV10 value of US$255 million (US$7.5) on an after-tax basis using around $9 as a benchmark gas price, I believe Alvopetro has more flexibility.

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