PetroTal Corp. ("PetroTal") (PTALF) is pleased to announce a fully funded 2022 capital program of $120 million that is expected to generate material free cash flow, allowing for an expected resumption of a dividend to shareholders by Q4 2022. All amounts are quoted in US dollars.
2022 Key Highlights
- Invest $75 million in drilling and completing four horizontal development wells in 2022. Inclusive of well 10H, which commenced production on January 31, 2022, a total of five new wells will commence production in 2022;
- Target a 2022 average production range between 17,500 bopd and 19,500 barrels of oil per day ("bopd") with an estimated exit December 2022 production rate of approximately 21,500 bopd;
- Generate an adjusted EBITDA1 range of $340 to $365 million, assuming a 2022 average Brent price of $88/bbl and a $37 million net derivative true-up payment from oil arriving and being commercialized at Bayovar through the Northern Peruvian Pipeline ("ONP");
- Execute a facilities and infrastructure expansion program of approximately $43 million which includes a new diluent tank, additional separators, a power plant expansion, additional injection facilities and key process optimization projects;
- Generate free cash flow (before debt service)1 of between $220 and $245 million in 2022;
- Repay $20 million of the 2021 $100 million bond issue in H1 2022;
- Redeem the balance of the bonds in Q3 2022, should cash and working capital levels permit;
- Assuming the entire bond is retired, PetroTal intends to reinstate a stable and rewarding return of capital program as early as Q4 2022; and,
- Allocate approximately $15 million in community social trust payments and direct community investment projects in 2022.
Drilling and Completion Budget
PetroTal will invest approximately $75 million to drill four separate producing development wells in 2022, and complete well 10H which commenced drilling in late 2021 and started production on January 31, 2022. The four new drills in the remainder of 2022 are 11H, 12H, and 13H in the south eastern part of the field and 14H in the north west. These proved undeveloped wells were strategically selected to maximize production
increases, and to continue the extension of the reservoir boundaries. Rig maintenance programs are budgeted to ensure a safe and stable drilling campaign.
Facilities Budget
In 2022, PetroTal will focus on developing necessary infrastructure needed to support continued growth. Approximately $25 million is allocated for a new diluent tank, a three-phase separator unit including engineering and mechanical works, central processing facilities ("CPF-3") planning and construction costs, which will commence in April 2022 and enhance the water injection system with new water injection pumps. This will enable the Company to manage diluent levels to avoid frequent diluent shipments and allow the field to process nearly 200,000 barrels of fluid when completed, which is expected to be by mid 2023.
Over 20 key field infrastructure projects have been identified, totaling $18 million, which will be allocated for optimization, process/production improvement, power expansion, maintenance, and security projects. These projects will be completed in priority of near-term need and are subject to changes given the material and logistical challenges caused by the COVID-19 pandemic.
Block 107 Budget
A total of $2 million is budgeted in 2022 for Block 107 permits. PetroTal expects approval of the Constitucion and Kametza (Osheki) permits in 1H 2022 and 1H 2023, respectively. With these permit approvals, PetroTal will continue to evaluate the Company's deep portfolio of exploration assets for ways to maximize shareholder value.
Community Investment Budget
PetroTal will substantially increase its allocations to community investment in 2022. An estimated $6 million will be dedicated towards the following key project areas:
- Direct social investments in programs, training and education - $0.8 million
- Diesel for electricity generation in Puinahua and other areas - $1.3 million
- Community river erosion control - $1.2 million
- Social space construction projects - $0.3 million
- Environmental innovation - $0.4 million
- Community relations projects - $1.9 million
In addition, the Company expects to generate material net revenue in 2022 and will contribute, on a fortnight basis, an estimated 2022 total of $9 million into community social trust payments assuming no disruptions to PetroTal's ability to produce or sell oil through the ONP, Brazil, Iquitos, or other sales routes planned in the future. PetroTal believes this will create a long-standing alignment between the government, communities, and the Company.
Production Guidance
The Company generates various sensitivities for possible production downtime attributable to social and technical issues. Considering the implementation of the social trust, the Company's current assessment of likely downtime, mostly due to social unrest, and the planned $120 million capital expenditure program, PetroTal's 2022 oil production is expected to range between 17,500 bopd and 19,500 bopd. At the mid point of the range, PetroTal would produce about 6.6 million barrels of oil in 2022, representing a 100% production growth rate over 2021. In addition, the Company expects to exit 2022 with production at approximately 21,500 bopd and with production materially surpassing the 20,000 bopd mark at certain flush production points during the year.
OPEX Guidance
OPEX run rates have increased over 2020 and 2021 levels due to increased activity, inflation pressures, and the Company's continued commitment to manage COVID-19, safety and security. Summarized below are the estimated cost run rates expected in 2022:
Fixed and semi-variable lifting costs that scale with production - estimated at $2.8 million per month including:
- Fuel
- Well and various contract services
Variable transportation costs - $7.2/bbl or ($45 - $50 million for 2022)
- Gross diluent cost and diluent transportation - $4.2/bbl ($1.4/bbl net with diluent sales)
- Barging - $1.7/bbl
- Barging standby, diesel, and supervision - $1.3/bbl
The variable costs outlined above assume that PetroTal is able to sell oil consistently. Interruptions to the ability to sell production may create material volatility to the above per barrel run rates if the Company produces into storage for an extended period of time. Currently, PetroTal uses a 4% diluent blend into the oil mix to facilitate productivity, representing a gross cost of $4.2/bbl. As oilfield dynamics change from increased oil production, the Company expects to reduce its diluent blend. Lastly, tariffs, ONP fees, and differentials that are variable in nature are netted with revenue for financial statement and planning purposes.
Cash Flow Guidance
Assuming an $88/bbl average 2022 Brent price, the current run rate cost structure, and sales agreements for oil exports, PetroTal expects to generate $325 to $350 million of net operating income ("NOI") and between $340 and $365 million of EBITDA1 inclusive of $37 million of derivative true-up settlements. The resulting free cash flow (prior to debt service)1 is expected to be between $220 - $245 million, thereby allowing the Company to facilitate full payout of the bonds in Q3 2022 and implement shareholder returns2 by Q4 2022, along with maintaining a healthy cash balance.
Reimplementation of a Return of Capital policy
PetroTal anticipates material free cash flow generation in 2022. Based on $88/bbl Brent, free cash flow1 is expected to range from $220 to $245 million prior to debt service, taxes, lease payments, hedge costs, factoring, and VAT. In H1 2022, PetroTal intends to repay $20 million of the 2021 $100 million bond issue and $30 million in interest, factoring, lease payments and VAT.
In Q3 2022, the Company expects to be in a position to retire the remaining $80 million in bonds with a 6% call premium of $5 million. Interest saved for the remainder of the year will materially offset this prepayment charge thereby allowing PetroTal to implement a return of capital policy by Q4 2022. When the bonds are fully repaid, the Company intends to reinstate a quarterly dividend (as was done in Q4 2019).
The Company notes that the above intention to reinstate a return of capital policy is dependent on a number of interplaying factors materializing as expected.
Hedging Update
During January and February 2022, the Company hedged approximately 1,100,000 barrels using a combination of puts with an $85/bbl strike and collars with a range of $63/bbl to $70/bbl allowing PetroTal to share in any continued commodity price increases.
In total, PetroTal has approximately 2.2 million barrels hedged, representing approximately 33% of the 2022 mid case production guidance, and in line with the Company's hedging strategy.
2022 EBITDA Sensitivities for Production Ranges ($ millions)
Assuming 2022 average production of 18,250 bopd, PetroTal will be in a position to fully cash fund its 2022 CAPEX program and all debt service, VAT, and lease obligations down to $60/bbl Brent while maintaining a liquidity buffer of approximately $25 million throughout 2022.
Updated Corporate Presentation
Please see PetroTal's website for an updated version of its corporate presentation.
Manuel Pablo Zuniga-Pflucker, President and Chief Executive Officer, commented
"We are excited to communicate our 2022 development plans to the market. 2022 will be a year of achievement and rewarding shareholders who continue to believe in our story and management team. It is vital that we continue drilling wells and executing our 2P development plans by drilling proved-undeveloped locations that should allow future booked location upgrades, prevent base declines, and optimize water handling peaks based on our current infrastructure. We will continue to deliver investment grade well results and manage our balance sheet prudently, as we have over the past four years our team has been together."
