KGEI - NASDAQ

Good day, and welcome to the Kolibri Global Energy Second Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. Also, this call may contain forward-looking statements regarding Kolibri’s strategic plans, anticipated production, capital expenditures, exit rates and cash flows, reserves and other estimates and forecasts. Forward-looking information is subject to risks and uncertainties, and actual results will vary from the forward-looking statements. This call may include future-oriented financial information and financial outlook information, which Kolibri discloses in order to provide readers with a more complete perspective on Kolibri’s potential future operations, and such information may not be appropriate for other purposes. For a description of the assumptions on which such forward-looking information is based on and the applicable risk of uncertainties in Kolibri’s policy for updating such statements. We direct you to Kolibri’s most recent annual information form and management discussion and analysis from the period under discussion, as well as Kolibri’s most recent corporate presentation, all of which are available under Kolibri’s website. I would now like to turn the conference over to Mr. Wolf Regener. Please go ahead, sir.

Thank you, and thank you everyone for joining us today. With me on today's call is Gary Johnson, our Chief Financial Officer. We released our 2024 second quarter report yesterday and we'll assume you've had a chance to look over the report. We're very pleased with the accomplishments we have achieved this quarter, strong financial results, continued progress on development program, solid production from the field. Our line of credit was increased to $50 million with Bank of Oklahoma. Earlier this month, we also announced that drilling began on the first of our three longer lateral wells, the Alicia Renee 2-11-3H will be followed by the 2-11-4H and the 2-11-5H. I want to take this opportunity to thank everyone in the company who has worked so hard to grow the company. And with that, I'd like to turn the call over to Gary to discuss our financial results.

Thanks, Wolf, and thanks, everyone, for turning the call. I'm just going to go over a few highlights of the second quarter and year-to-date results, and then we can take questions at the end of the call. All amounts are in U.S. dollars unless otherwise stated. As a walk back to the earnings release went out yesterday and we are very pleased with the results. We had significant increases in production, revenue and adjusted EBITDA compared to the prior year. So, I'll start by going over the second quarter. Average production was up 30% to 3,128 BOE per day compared to 2,415 in the prior year quarter. The increase is due to production from the wells that were drilled and completed over the past 12 months. The production mix for the second quarter was 74% oil, which was slightly below the 75% oil mix from the prior quarter, which shows that, our field isn't getting significantly more gassy over time. Adjusted EBITDA was $10 million, compared to $7.6 million in the prior year quarter, which was an increase of 31%, due to the higher production and higher prices, which were up about 7%. Net revenue increased 38% to $13.9 million compared to $10.1 million in the prior quarter due to higher production and prices. Our net back from operations increased slightly to $40.40 per BOE compared to $39.56 per BOE in the prior year quarter. And this was due to higher average prices for the quarter, which were mostly offset by higher operating expenses per BOE due to adjusted true-ups, reworks and higher water hauling costs. Net income was $4.1 million and basic EPS was $0.11 per share in the second quarter compared to $4.3 million and $0.12 per share in the prior year second quarter. The slight decrease was due to $1.5 million of deferred income tax expense in the second quarter of 2024, as well as higher operating and G&A costs, which offset the higher production and prices for the quarter. I'll now move on to the year-to-date June results. Average production for year-to-date June was up 15% to 3,216 BOE per day compared to 2,803 in the prior year period. And again, the increase was due to production from the wells that were drilled over the last 12 months. The production mix for the first six months of '24 was 74% oil compared to 76% in the prior year period. Adjusted EBITDA was $20.4 million compared to $19 million in the prior year period, which was an increase of 7% due to the higher production and higher prices, which were up slightly up 1%. Net revenue increased 15% to $28.1 million, compared to $24.4 million in the prior year period, due to higher production and prices. Net back from operations decreased to $39.66 per BOE compared to $42.07 per BOE in the prior year period. This was due to higher operating expenses per BOE due to adjusted true-ups as well as reworks and water hauling costs. Net income was $7.4 million and basic EPS was $0.21 per share in year-to-date June '24 period compared to $12.2 million or $0.34 per basic share in the prior year period. The decrease was due to $2.5 million of deferred income tax expense that was recorded in '24 and an unrealized gain of $2.1 million from -- unrealized gain of $2.1 million from commodity contracts that was recognized in the prior year period. And I also just want to point out, like we mentioned, our credit facility was redetermined in the second quarter and our borrowing base was increased from $40 million to $50 million which was a 25% increase. This gives us more flexibility in managing our working capital going forward and it also demonstrates the value of the field. And with that, I'll hand it back to Wolf.

Thanks, Gary. As you can tell from our results over the last few years, we've had some excellent growth. Revenue and cash flow growing, keeping our leverage low and executing well in the field. We always strive for comp improvement and the drilling cost improvement, completion improvements we've had, and the fact we're now drilling the longer laterals are great examples of that. We also made efforts to increase reserves further. We stepped out where we felt we could add proved reserves and locations that were listed as possible on our last reserve report. Our analysis proved to be correct, as the nickel well came in performing well. As for the stock price, we're taking steps to try and reduce what we believe is the valuation gap. Last year, we uplift into NASDAQ to give U.S. investors an easy access which also allows U.S. brokers to recommend our shares. We are increasing our marketing plans to make more of our story, so the market will hopefully recognize the company's value that we believe. Summer is over soon, and we have a nice catalyst coming up for these new longer laterals coming along. So, we'll increase our marketing focusing mainly on the U.S. Also, while the Board has not approved a share buyback program yet -- share buyback program yet, excuse me, we are working on putting everything in place so that a buyback could be approved by the board. Our plan is to continue to build and grow company value and we appreciate everyone being on the call today. This concludes the formal part of our presentation. We would be pleased to answer any questions you may now have.

[Operator Instructions]. And the first question will come from John White with ROTH Capital. Please go ahead.

Good morning and congratulations on a nice quarter.

Thank you, John.

Remind me again, how many 1.5-mile laterals have you drilled?

We have not drilled any so far. So, these will be the first three that we are doing here.

Okay. Did you have to get a bigger drilling rig than you had been using?

We did get a slightly different rig than we had before, not substantially different, but a little bit better quality, I'll say, in order to handle this. And we've made enough improvements over the years, where we've been drilling well, better, having more control, changing some things around. And that's really the reason that we feel very comfortable with going to the longer laterals now in the field versus just drilling the mile-long laterals.

Okay, thanks for that. And which of the Renee wells will be fracked first?

We'll do all three of them actually at the same time. So, it'll be a continuous process, literally drilling, doing one on the first one, one on the second one, one on the third one. So, a three-well zipper frac if you may.

Okay. And you want to give a preliminary date for when the fracs will occur?

I'm hoping early in fourth quarter. That will be obviously, hopefully drilling continues going well so far. So hopefully that continues to go so well. And then on the completion side of things it will be a little subject to frac crew availability, but it looks like it's pretty good availability for early in the fourth quarter. So, we're pushing for as early as we can.

And no difficulties finding services?

No, we've had some good bids coming in and we will be selecting those services here in the next day or so actually.

Okay. And you said the fracs will be end of fourth quarter?

In the beginning of fourth quarter, yes, early.

Beginning?

Yes.

Okay. Thanks for that detail. I appreciate it. And I'll pass it back to the operator.

Sounds good. Thank you, John. Appreciate it.

The next question will come from Andrey Litvin with Edison Investment Research. Please go ahead.

Good morning or good afternoon. Thank you for the opportunity to ask questions. So, the first question on the gas and NGL pricing in the second quarter. So, the prices were actually quite lower than or visibly lower than benchmarks. And I think kind of similar situation happened in last year as well in the second quarter. So, is it like a recurring pattern that the pricing are weaker in the second quarter and then we see some recovery? So, what's your kind of your expectations roughly?

A little billion of that is some of the adjustments that we have that than in the fourth quarter and the first quarter, excuse me, versus the second quarter. The way our gas sales work is all of our gas when we produce it is what I'll refer to as wet gas. And so that's sold into the gathering system that XTO runs and they sell and market our natural gas and the NGL for us. We get the same pricing that they get. When they go to multiple different outlets, so it does vary a bit. Sometimes it's a little lower, and other times we've had gas prices that were higher than that. So, in the end, it kind of works out, that it averages out. But, I haven't looked at what the actual reason is nor given Exxon's size. I don't think we could really figure out, what they're doing in certain quarters. So, it's a little bit of a black box for us unfortunately.

Okay, I understand. All right, thank you. And the second question on just a follow-up on the new wells with longer laterals. Is it possible to give some color and like quantify at least roughly what the improvements in economics might be from these wells?

We'll see what the economic improvements are. What we're hoping for is that, generally on the mile and a half laterals, you'd like a foot-by-foot productivity increase. We would hope that, we can get a full 1.5 times increase over what we were hoping for on a single mile lateral, but we're actually budgeting like 1.35 times increase just to be conservative and hoping for the best that it's actually a little higher than that.

We're talking about production at the moment, right? So, 1.3 times increase?

Yes, over the first part.

Okay, cool. Thank you. And just one more question, quick one. So, you drilled one well at the end of last year in the welling well, but you haven't completed it yet. Are you planning to complete it later this year or what's the end --?

We actually have two DUCs, both the well. But no, those will probably be pushed off till next year. We'd like to drill some other wells right around there. With the good results we had with the Nickel hill, we decided that to stay over in that area and drill these next three wells. And then, when we come back over to the BLM region, we'll drill a few more wells around that, that will also hopefully be longer laterals and then complete all those at the same time.

Okay. I understand. Sorry, just one more follow-up, very quick one. In terms of the natural gas and NGL processing costs related to prior year, so you're still incurring some costs in the second quarter. To what extent these costs are going to occur like in the subsequent quarters as well? So, is there any visibility?

As far as -- are you mean the adjustments?

Yes, the adjustments.

Yes. We don't expect any more. I mean, we don't know of any more. Those are adjustments that come, but we're not aware of any more that are coming, to answer your question.

I understand. Okay. Thank you very much. Thank you.

The next question will come from Kiernan Lindt [ph] Investor. Please go ahead.

Hi, guys. Great quarter. Just wanted to touch base on two things. You touched on the first one a bit already. The two DUCs that you're sitting on, I think they're mile-long wells. You mentioned that, you might go back to that location and drill longer wells. Can you extend the DUCs length or are you kind of locked in at a mile?

I think we get too skinny, if we try to go out of that. So, our current plan is to leave them as one mile and then have the offsetting wells that are drilling here in the area be a mile-and-a-half.

Okay. I'm just thinking, for timing on those wells is sometime in '25 Q1 or Q2 or something like that or...

Yes, we haven't put together our budget or forecast for the Board to approve yet for next year. Again, we'll balance out where we are cash flow wise, what we're doing with other things like share buybacks and things like that. And then what the timing is of drilling those wells, drilling the next several wells.

I guess my second question is, did you bring on a new Director of Engineering recently? Is that right?

We did. We did. Dan Simpson came on here a while ago. He has been helping us on in the background for a while, helping us with some reservoir engineering and things like that already. He has been part of the company now officially for five months, but he's been doing some consulting for us for a number of years.

Understood. And I take it that it's Dan Simpson's view that the 1.5 mile is appropriate and that's kind of where these extended lateral lengths decisions came from or is that...

Yes. I mean, he's definitely a believer in the longer laterals as well. I think in the past, we've looked at it before as well. And really what it came down to is the way we were drilling wells in the past and we didn't have the learning yet that we did, that we didn't quite have the ability to smoothly feel very comfortable drilling longer laterals in the mile, because we do have some structure here in this field. So, it's not quite as straightforward as some other areas, but we do feel comfortable with how things are going and you can see from some of my presentations earlier, how much faster we're drilling wells and along with that also was a lot more precision as well. And so, with those combination of things, we felt very comfortable we can go to mile and a half laterals or even 2-mile laterals. And when we pick either mile and a half or two-mile lateral, that's really based on the geology out here. So, any kind of restrictions we have with potential faults or where we have acreage, where we say, look, we can put, if we have 3 miles from north to south, we're going to say, look, we'll drill 2 mile and a half laterals versus drilling a 2 mile and a 1 mile lateral, Right? So those are the kind of decisions that we have. So yeah. Now, he's all in favor of it. The economics look really good. So hopefully, we're getting a big bump to our economics, when we drill these longer laterals. And yes, these have been a great addition to the team, so we're happy to have them.

And I guess just for the issue comment about deciding if you have 3 miles going between 2 and 1.5 miles, have you reconsidered the field development approach given that you're moving to 1.5 miles? And I mean, you'll need to drill them, see some results, but, how does the field development plan evolve given where you're going with the lateral length, whether it's 1.5, maybe even 2 in the future? Have you thought that through a bit or?

Yeah, we have. I mean, an our reserve report this next year should be a whole lot different just because we're going to meddle and so convert them to doing a mile and 1.5 to 2 mile lateral, in the field in general. And so, we are still working through exactly which ones we do first, where we go in the field and laying out the complete field development program. That's the next step here over the next, couple months. But, we've kind of sketched out where we believe a mile and a half lateral were 2-mile laterals in a couple of places that we still need 1-mile laterals just to fill in some gaps.

And when do you think, it would be appropriate to share that field development plan with the broader investment community? Is that like a 6 month or 12 month down the road or is that sooner?

I think it's most appropriate to do that once the other one soon signs up on everything as well just because it is they are the third party that everyone would be looking to anyway. So, we can have our thoughts but our reserve report will be what influences that as well.

Okay. And I guess final question here, if these longer laterals are successful, is there a broader acreage subset that is applicable because of the improved economics of the longer laterals or?

The potential for sure. We do have some longer laterals that we're pushing into, like, probable and possible areas, in our internal look at it. And so, we'll just have to see how that all works out. Right? So first up here, we see what kind of numbers we get out of this. I'm hoping, like I said, we get 1.5 times increase, when we drill these. That would be fantastic even though we're budgeting for a little less. And, then we'll just run economics and that will depend on, where prices are as well. Right? Assuming prices kind of hang on this range, which is works for us. But the higher they go, the more we can step out to areas that, have a little higher risk and maybe we're concerned about a little lower productivity that's on the possible side of some of those reserves.

Well, perfect. Well, thank you so much for answering my questions. Great job, guys.

Thank you very much. Appreciate you listening on your questions.

The next question will come from Garrett King with [Indiscernible]. Please go ahead.

Hi. Could you talk about the thought process that you go through when deciding whether to allocate capital towards growing production versus share repurchases?

Sure. I mean, let me qualify this by this will be my opinion, not necessarily the entire board, but I'll seek for myself and then because the board hasn't made a decision on anything yet officially. But, we do believe that our shares are undervalued. And, so we do want to allocate some amount of funds toward, share buybacks. We will have some limitations on that because it's based on volume as well and what the exchange approves us for. So, we'll when you see a press release from us eventually after the board hopefully approves everything, you'll see what those numbers are that will be maxed out at. And then after that, the decision will be, okay, so we can allocate this much money towards share buybacks. We can allocate this much money to the type paying down debt and this much money to drilling more wells. And that's a bit of a fluid situation. Oil prices stay at this range, then it probably makes sense to drill wells, just keeping debt in a reasonable level where we just use it to manage our working capital.

Got it. And is it something as simple as just having an NPV on the wells that you're drilling an NPV on what you think the stock earnings will be and you just run it at the strip or pick an oil price and then just kind of choose whatever the highest return is?

Then likewise, I mean, if you look at us compared to a number of other publicly-traded companies that are in our size, I think we're trading at a pretty large discount on our versus our proved reserves, right? So, we feel like, as we develop more reserves then that valuation gap will shrink, but if we're so far off on that valuation gap and that leans more toward buying back some more shares as well, in addition to exactly what you described.

Got it. Okay. And could you just describe your hedging strategy, just in general?

Sure. Hedging strategy what we've been trying to do, so the bank has us do a certain number of hedges that go out about a year-and-a-half. And so, every quarter we have to add another quarter's worth of reserves. With the forward strip being down, what we've been trying to do is put in place some cost with collars to have the lower end in the $60, $65 range to protect us from a sudden downside that's unexpected, but yet keeping the upper end of the collar open as far as possible so we can float with the oil price.

Approximately what percentage of your production the bank require for the next year and a half?

Gary, do you have that handy?

It depends on our utilization of the debt compared to, but I think it's currently it's 50%.

Yes, 50% of where we are currently on a debt basis, before the first year, and then that might be let me pull that up. I was going to say, it floats between 50% and 75% depending on our debt utilization and then the next year out is lower for the next half year, I should say. We moved that down from having to hedge two years down to a year-and-a-half.

Got it. Okay. And in terms of M&A, I mean, it sounds like you guys haven't really been talking about anything and obviously doing something with equity, doesn't seem like a great idea given the valuation. But I mean, is that something you guys are focused on or more currently just focused on growing organically?

We're growing organically, but we're definitely looking for other projects as well, right? So, in this business, you have to be open to all aspects, whether that's -- if we can find something that fits into our valuation and let's say a private guy that wants to fit into our valuation no matter where the stock price is trading, then you can do a deal. And if it's not in that realm and they're looking at our stock price only versus our valuation of our property, then that's hard to make it accretive, and so you're not going to be doing the same breath, anything somebody comes along and wants to pick it up give us the right price that our shareholders will go for, we're open to that as well.

[Operator Instructions]. And this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Wolf Regener for any closing remarks. Please go ahead, sir.

Just thank you very much for everyone being on here and participating. Great questions and everyone else for listening. And we're going to strive to keep reducing that valuation gap and keep doing a good job in the field and growing the company. So, thank you everyone for your support