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Learn & Earn From One of Brazil’s Leading Independent Gas Companies

Dave Jackson Dave Jackson, Stockhouse
0 Comments| October 26, 2021

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(Click image to watch video)

Alvopetro Energy (TSX-V.ALV, OTCMKTS: ALVOF, Forum) is a Calgary-based, $160 million dollar-plus market cap resource company engaged in the exploration, acquisition, development, and production of hydrocarbons in Brazil. Stockhouse Media’s Dave Jackson met up with company CEO Corey Ruttan to get investors and shareholders up-to-date with all things Alvopetro.


SH: To start off with, Corey, can you tell us a little bit about yourself and the history of the company?

CR: We have had a long history in Latin America that it actually extends back quite a long time. First with Pacalta Resources in Ecuador in the late 1990s. We were then an early entrant in Columbia in 2002 with a company called Petrominerales. We quickly became one of the country's larger exploration companies. We were able to grow both those companies to over 40,000 barrels of oil per day and we managed exits on behalf of stakeholders of about $2.8 billion on a combined basis. Right before Petraminerales was sold, we had actually bought a bunch of assets in Brazil. We hadn't really gotten to work on them yet, so as part of that transaction, we spun out those assets into a new company called Alvopetro, which is us today. I am proud to say that on July 5th, 2020, so just over a year ago, we became the very first independent company in Brazil to deliver sales specified natural gas into the local distribution network. I think that is a pretty significant accomplishment for a company our size.

SH: Can you update our investor audience and your Alvopetro shareholders on any new company developments, especially in the wake of COVID-19?

CR: Obviously it has been a very challenging time for everyone, not only personally but corporately and we at Alvopetro feel very fortunate and proud that we were able to complete our project in the face of all that uncertainty. I think we achieved an awful lot of operational milestones during that time. We have significantly exceeded production expectations over the first 15 months of the project coming on, despite this very difficult backdrop and I do think it's a testament to the strength and resiliency of our team that was laser focused on the task at hand during the pandemic.

SH: Recent big news… last month you announced your first ever dividend payment. How important are shareholder returns as part of your strategy, and does this leave you with enough cash resources to continue investing into growth or should investors start seeing Alvopetro as mainly a value stock now?

CR: We have had a longstanding belief that EMP companies generally have over-invested and under delivered real returns to shareholders. We have had a strategy that I think is much more balanced and disciplined. Our model basically has been, we will take half of our EBITDA and dedicate that to stakeholders and by stakeholders, I mean debt and interest repayments, taxes, things like voluntary social investments and then lastly dividends to our shareholders. Then the second half of that EBITDA is intended to be reinvested in organic growth opportunities. We certainly feel like we can do both. We have lots of exciting near-term catalysts on the horizon and I really do think Alvopetro is a yield plus growth story, specifically with respect to the dividend announcement. Like I said, we have had operational performance well ahead of expectations, combine this with a strong and increasing gas pricing environment. It allowed us to repay over half of our initial project financing in the very first year of production and that has really positioned us well to start the dividend program earlier. We are about six months ahead of our original schedule that we had set. We started our dividend program at 6 cents US per share, which translates into a yield of about 6%.

SH: More recently, along with your September sales volumes you’ve confirmed that you intend to expand your gas plant capacity. Can you expand on that for us?

CR: Stepping back, one thing that is happening in Brazil right now is there is an energy crisis happening. Then there is very strong demand for natural gas as an alternative to more carbon intensive fuels like fuel oil. In connection with our near term growth objectives, we have announced the first, which I hope are one of many expansions to our facility. This expansion allows us to increase our capacity up to a firm level of 18 million cubic feet per day. We expect our production growth over this period of time to come from a combination of our Gomo tight gas plate and from our conventional exploration prospect inventory.

SH: Looking at your quarterly results, I can see that your production has grown every quarter so far. How should the market expect this to translate into financial results through to the end of the year and into 2022?

CR: As you point out and I mentioned, we have had a combination of strong production performance but also a rising commodity price environment. That translates into some very strong, free cashflow generation. If you look at our 2021 EBITDA guidance, we have been able to increase that by over 35% from our original outlook and that is really the backdrop or what is driving this balanced model of stakeholder returns and organic growth. Obviously with another record quarter production in Q3 on the production front, combined with our most recent natural gas price redetermination, which happened or became in effect on August 1st, our pricing increased quite significantly to US $7.70 per MCF on August 1st. I think you can expect our third quarter, when we announce that in mid November, to be our strongest quarter yet. If you look further ahead, we have announced that we expect another natural gas price increase on our next redetermination, which will happen in February, and based on current expectations, we would see that at the ceiling within our contract, which is in excess of US $10 per MCF.

SH: For company shareholders and potential investors, what kind of future development and progress can we expect at your extensive Brazilian operations?

CR: So as I alluded to earlier, we've got some very important near term catalysts in our portfolio. Our near-term growth again is going to come from our Gomo tight gas play. We expect to have our first Gomo well tied in early in the new year and that will really set the stage for a broader development thereafter. In addition, we have got two of our higher impact conventional exploration prospects planned in the near term. They sit immediately north of our gas plant and we expect to start growing the first of those next month. The last important thing to note is because of our strategic infrastructure ownership position right in the heart of the basin, we are uniquely positioned to very quickly convert natural gas successes into production and cashflow.

SH: What separates Alvopetro from the competition and makes your business model unique…especially in this part of the world?

CR: This is an absolutely precedent setting development in Brazil. Like I said, the first ever onshore independent producer to deliver sales specified natural gas into the system. I do think it is a really unique opportunity for investors to get exposure to this, frankly, a very exciting development, especially in a world of increasing natural gas prices. Lastly, I think the business model that I alluded to is a much more balanced model that creates much more capital discipline.

SH: I have to mention your stock has had a very nice bump over the last 12 months…more than doubling in value in less than a year. What can you tell our investor audience regarding the current valuation of your stock and why you think it’s still a good buy right now?

CR: First of all, I think we are pretty happy and proud to say, we are delivering on everything we promised. I think we are delivering well ahead of expectations. When you look at our production, certainly our core project cabaret has now been completely de-risked, certainly relative to where it was a couple of years ago. One thing I didn't mention is in Brazil, we have got an excellent fiscal regime. A royalty rate of about 8.5%, the tax rate on our project is 15%, combine that with the strong and increasing gas price environment and consider that we have got very low natural gas operating costs. The net result is some of the highest margin production available in our industry. If you look at our profit per barrel of oil equivalent produced as a percentage of sales, I think in the second quarter it was about 83% and that would be expected to be increasing as we see increases in commodity prices.

The net effect is these are some of the most valuable barrels in our industry. Lastly our projects are fully developed. A really unique thing is that we have a very flat production profile without all the typical levels of maintenance capital requirements and that is what really helps Alvopetro focus our dollars on growth, as well as returns to stakeholders. Like I said earlier, that has allowed us to aggressively repay debt. I think certainly relative to virtually all of our peers, we have got extremely low leverage and together that has allowed us to accelerate the dividends and create this unique combination of yield and growth.

SH: What’s the long-term strategy for the company moving into 2022 and beyond, and what should retail and institutional investors be looking out for?

CR: I think some of the obvious things is to watch for the results from our near-term catalyst, both on the conventional exploration side, as well as the Gomo tight gas resource development. Frankly, look at our quarterly results, I think the latest price increase. The first time you will see that in our results, will be in our Q3 results and I think the magnitude of these price increases is likely under appreciated by the market. Looking forward to our net asset value or reserve update at year end, that will be the first time we get to see these significant price increases in those reserve NPVs and the last thing I haven't noted is Brazil is going through a transformation right now. The state oil company, Petrobras is in the process of basically selling their entire onshore inventory of oil and gas assets. Keep an eye on our base and keep an eye on the opportunities that will fall out of the advantage we have with our strategic infrastructure position.

SH: Can you tell our audience a little bit about your corporate management and board teams, along with the experience and innovative ideas they bring to the oil and natural gas space?

CR: As I mentioned earlier, I think we have got a pretty strong track record in Latin America. This is a team that has been hand picked based on our successes at Petrominerales and Pacalta. One of our approaches has always been to try to bring new ideas to old areas to add shareholder value. I will just talk about a few examples. Our gas plant, for example, we partnered with Enerflex, which coincidentally is another Canadian based company, on our gas plant. The facility was constructed offsite, it is all skid mounted fabrication. That allowed us to lower costs, increase quality and really shortened the construction timeline for our project. Our approach has always been to try to put North American experience and technology to work and I really think this will bear fruit as you see our tight gas Gomo development unfold over the coming years.

The other thing to note is we have always had a culture of continuous improvement and I think we have got some very tangible experience or examples where we have driven costs down and driven performance up. Our drilling costs are down over 60% from when we first started, our well testing costs are down by over 75%. We have had virtually no downtime at our gas plant. If you look at the Brazilian regulations, we have got a very strict permitting process in place but especially when you consider this was the first project of its kind, we got our pipeline and our gas plan approved within a year of submitting the applications. That is why I would argue much better than most jurisdictions. We have shown that we can get drilling permits in 60 days or less and again, that is a testament to our team. The last point I want to make is we have had a very long standing focused on, on our ESG commitments. Our Brazilian team locally has always been very focused on this as well. So pretty proud of the group we have got working here.

SH: And finally, Corey, if there’s anything I’ve overlooked please feel free to elaborate.

CR: Just in conclusion, I think it is a great time to be operating in Brazil. The market there is very vibrant. I think we built an excellent platform here and now we are uniquely positioned to unlock the remaining kind of natural gas weighted potential in our inventory and lastly, I just want to thank your audience for taking the time to learn a little bit more about Alvopetro.

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FULL DISCLOSURE: This is a paid article produced by Stockhouse Publishing.


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