You may submit questions today throughout the event by clicking in the "Submit a Question" box on your screen. Questions will be addressed after the formal presentation has ended. Please note that this event is also being recorded. I would now like to hand the call over to Carolina Orozco, Vice President of Investor Relations. Please go ahead.
Good morning and welcome to Canacol 's Second Quarter Financial Results Conference Call. This is Carolina Orozco, Vice President of Investor Relations. I am with Mr. Charle Gamba, President and Chief Executive Officer, and Mr. Jason Bednar, Chief Financial Officer. Before we begin, it's important to mention that the comments on this call by Canacol 's senior management can include projections of the corporation's future performance. These projections may not constitute any commitment as to future results, nor take into account risks or uncertainties that could materialize. As a result, Canacol assumes no responsibility in the event that future results are different from the projections shared on this conference call. Please note that all finance figures on this call are denominated in U.S. dollars. We will begin the presentation with our President and CEO, Mr.
Charle Gamba, who will summarize highlights from the corporation for the second quarter of 2025. Mr. Jason Bednar, our CFO, will then discuss financial highlights. Mr. Gamba will close with a discussion of the corporation's outlook for the remainder of 2025. At the end, we will have a Q&A session. I will now turn over the call to Mr. Charle Gamba, President and CEO of Canacol Energy.
Thanks, Carolina, and welcome everyone to Canacol 's Second Quarter 2025 Conference Call. We're reporting another profitable quarter with realized natural average gas prices net of transportation of $6.77 per Mcf, given the favorable commodity pricing environment. Field operating costs held at $0.54 per Mcf, generating robust natural gas operating net backs of $5.11 per Mcf, with robust and stable operating margins of roughly 75%. Strong margins translated into adjusted funds from operations of $36.9 million, adjusted EBITDA of $47.4 million, and a net income of $13.9 million. This last figure marks our fourth consecutive profitable quarter and a sharp turnaround from the net loss recorded in Q2 of 2024. Total natural gas and oil sales during the quarter were 127 million cu ft equivalent per day, with 119 million cu ft per day corresponding to realized natural gas sales and 1,382 barrels of oil per day.
With strong pricing and industry leading net backs, Canacol remains well-positioned to continue generating attractive results for the remainder of 2025. Operationally, during the second quarter, we drilled a total of four successful wells, consisting of two appraisal and two exploration wells, extending our track record of operational delivery and disciplined execution across our near-field and rapid commercialization strategy in the Lower Magdalena Valley Basin. We drilled a CQ3 appraisal well, which encountered 200 ft of high-quality CDO pay, and a Fresa-4 appraisal well, which encountered 122 ft of gas-charged CDO sandstones. On the exploration front, Zamia- 1 and Borbón- 1 were also successful, encountering 32 ft and 157 ft of CDO pay, respectively. These wells further add to our inventory of commercial opportunities.
Even though we drilled a total of four successful wells during this period, from a production standpoint, only CQ3, which spudded on April 7th, reached first gas within the quarter and contributed to mitigating the natural decline from base fields. The other wells, Zamia-1 , Borbón- 1, and Fresa-4 , were all spud by quarter end but did not contribute to production volumes during Q2, as completions and tie-ins extended into July. As a result, quarterly average production was lower than in Q1, reflecting the combined effect of natural base field decline and the timing of the new wells coming online post-quarter. I'd like to provide additional context on our drilling activities in the Sucre Norte area. Drilling operations at Zamia- 1, Borbón- 1, and Palomino- 1 experienced temporary delays due to restricted site access caused by local unrest.
Once access was restored, our teams mobilized quickly to continue with the drilling activity in this area without further disruptions. Had these delays not occurred, production from these wells would likely have come online during Q2 as originally planned. That said, I'm pleased to report that Zamia- 1, Borbón-1 , and Fresa-4 are now tied in and flowing, bringing current gas sales to approximately 137 million cu ft equivalent per day. At Natilla-2 , the rig has been released as a forward plan. It is being prepared to drill a new Natilla-3 well, targeting the gas-charged sandstones encountered in the various sidetracks of the Natilla-2 well. The new drilling plan will incorporate drilling techniques to address the difficulty in running production line or across the overpressured gas-charged sands encountered in the Porquero Formation.
I'm also pleased to announce that during the second quarter of 2025, we published our 2024 Integrated ESG and TCFD reports. We believe that strong ESG principles are essential to building a cleaner, more equitable, and accountable energy future. We invite you to read our full reports, which are available on our website. I'll now turn over the presentation to Jason Bednar, our CFO, who will discuss 2025 second quarter results in more detail.
Thanks, Charle. The second quarter of 2025 was highlighted by resilient EBITDA generation, strong net backs, and positive net income. Average realized natural gas prices net of transportation was $6.77 per Mcf, with royalties and field operating costs at $1.12 and $0.54 per Mcf, respectively, resulting in operating net backs of $5.11 per Mcf. These strong unit economics generated revenues net of transportation of $76.2 million, adjusted EBITDA of $47.4 million, adjusted funds from operations of $36.9 million, and operating cash flow of $33.4 million, supported by positive net income of $13.9 million for the quarter. That said, several financial metrics softened compared to the first quarter of 2025 and the second quarter of 2024.
As Charle noted, this variance is particularly partially explained by the timing of our drilling activities, as production from our Sucre Norte wells, Zamia- 1 and Borbón- 1, and potentially Palomino- 1 was delayed following localized short unrest that impacted site access. Had those wells come on stream as scheduled, the year-over-year volume shortfall would have likely been significantly lower. Even so, firm pricing and disciplined cost control protected our margins and overall profitability, and with the Sucre Norte cluster now online, we expect both its volumes and financial contributions to strengthen throughout the remainder of the year. The second quarter was capital intensive, with $57 million in capital expenditures, $11.8 million in cash tax payments, and the scheduled $14 million semiannual bond coupon payments. As a result, cash and cash equivalents stood at $37 million as at June 30th.
Capital expenditures during the quarter were fully funded from operating cash flow and existing cash on hand. I'd like to note the capital expenditures were weighted towards the front half of the year as the bulk of the high-cost Natilla-2 exploration well was absorbed in the first half spending. Looking ahead, while we intend to maintain an active drilling program in the second half, capital intensity is expected to ease. On the tax side, current tax expense was $9.3 million for the first quarter and $23.9 million for the first half of 2025, both lower than prior year periods. On a cash basis, tax payments were significantly lowered at $11.8 million for the quarter, representing an 85% reduction year- over- year. We continue to meet all financial covenants with ample headroom.
As of June 30th, our consolidated leverage ratio was 2.7x , below the 3.25x in-currency and 3.5 x maintenance threshold. Our interest coverage ratio stood at 4.49 x, nearly double the 2.5 x minimum requirement, while the current ratio was 1.14 x, keeping us above the one-time minimum level under the Macquarie loan agreement. I'd like to note that due to average realized contractual natural gas and oil sales volumes falling below 130 million cu ft equivalent per day for two consecutive months, an accelerated amortization clause in our credit agreement with Macquarie was triggered. Consequently, the $50 million term loan is scheduled to amortize in six equal monthly installments beginning September 15th, 2025, unless a waiver is secured. The impact of the accelerated amortization clause is that the loan will be amortized in six months instead of 12 months.
Nonetheless, as part of our continued liability management strategy, we are currently engaged in discussions with two separate banking groups looking to amend our non-bond debt to better match our loan repayments with anticipated future cash flows over the course of 2026 to 2028. While we can't share specifics at this stage, we expect to finalize agreements this September. We will make a public announcement once an amendment has been executed. That concludes my comments. Back to you, Charle.
Thanks, Jason. Looking ahead to the remainder of this year, our priorities remain firstly a commitment to sustaining and growing Canacol 's EBITDA and reserves base through a combination of a commercial strategy maximizing market pricing opportunities and a disciplined capital program that channels investment towards high-return drilling and workovers. Secondly, we will keep advancing with our program of high-impact gas exploration prospects across the Lower and Middle Magdalena Valleys, which have the potential to add significant reserves and production capacity in the long term.
For the remainder of the year, aside from drilling some smaller appraisal and exploitation wells in and around Jobo that can be quickly monetized and contribute to production and cash flow, we will be drilling a high-impact exploration well, Valiente-1 , targeting potentially material gas and condensate reserves. The Valiente prospect is located on the VMM 10-21 contract located in the Middle Magdalena Basin, where Canacol holds a 100% operating working interest. The Valiente prospect is a large shallow structure located approximately five kilometers updip into the south of the Opón gas field, discovered in 1965 by Cities Services and later developed and produced by Amoco in 1997. Valiente- 1 will be targeting the same productive sandstones of the La Paz Formation that were productive at Opón, but at significantly shallower depths of approximately 6,000 ft.
The corporation anticipates spudding the well in October of this year with results before year-end of this year. Thirdly, we are laying the operational and commercial groundwork required to commence activities in Bolivia in 2026, positioning Canacol to replicate its Colombian gas success in a new, prospective, and profitable gas market. In Bolivia, the corporation is awaiting ratification and formalization by Congress of three exploration contracts: Arenales, Ovai and Florida Este, and one field redevelopment contract, Tita, in order to establish the effective date of all four contracts. The corporation is currently preparing to apply for the environmental permit for Tita, along with formulating development plans in order to commence field reactivation activities in 2026. Fourthly, we are focused on maintaining a strong and flexible capital structure to support long-term growth and resilience.
Finally, we continue with our commitment to leading ESG practices aimed at every molecule of natural gas we produce being delivered responsibly and sustainably. Thank you for your attention. We look forward to keeping you updated on our progress in the coming months, and we're now ready to take questions.
We will now begin the question and answer session. You may submit questions by clicking in the "Submit a Question" box on your screen. Questions will be addressed in the order that they are received. At this time, I will now turn the call back over to Carolina Orozco for the question and answer session.
Thank you. The first question comes from Stephane Chelin. Can we expect high-impact drilling to take place this year? If positive, can you provide tentative calendar wells and any correspondent potential?
Yes, I mentioned in the presentation the Valiente- 1 exploration well in the Middle Magdalena Basin of Colombia that has the potential to add material gas and condensate reserves prior to year-end. We're also drilling a fairly extensive program in the Lower Magdalena Valley, consisting of the typical types of wells we've been drilling this year. That would include the Palomino- 1 well, which we're just finishing drilling on the Sucre Norte area. That will be followed by the Fresa-5 appraisal well, which we expect to be on production in mid-September, which would be followed by the [Marinero- 1] exploration well, which we expect to be on production in mid-October. Likewise, we're drilling a development well in Clarinete, Clarinete- 12. Spudding that well early September, we expect that well to be on in early October. Valiente, we will spud sometime in October of this year with results by year-end.
Thank you, Charle. The next question comes from Peter Bowley from Jefferies. Can you confirm CapEx expected for the third Q and fourth Q of 2025?
Sorry, Carolina, can you repeat that question, please?
Yes. This question comes from Peter Bowley from Jefferies. Can you please confirm CapEx expected for third Q and fourth Q of 2025?
Okay, thank you. The guidance, our annual guidance released in February was between $143 million and $160 million of CapEx. I expect to be closer near the upper end of that at $160 million. Q1 was $50 million, Q2 was $57 million. That would mean there's roughly, what, $53 million left to go to hit the $160 million. Once again, my expectation is that'll be the range we're at, with it slightly weighted towards Q3, the remaining $53 million towards Q3 as opposed to Q4.
Thanks, Jason. The next question comes from Fiverr Rodriguez from Fiverr Investments. The question is, what's the roadmap for Natilla-3 ?
Natilla-3 , we're currently just finalizing the drilling program, integrating the results of the Natilla-2 well and their sidetracks thereof to optimize the drilling program to try and better deal with some of the wellbore instability we encountered in the Porquero in Natilla-2 . Once we finalize the drilling program, we'll be looking to approve the AFE internally and looking to drill that well early in 2026.
Thank you. The next question is from Alexander Emery from S&P Global Platts. Can you provide us with more color on the work to be done in Bolivia next year, and when you believe you might obtain the congressional approvals?
Yes, as I mentioned in the introduction, in my words, we're currently waiting for the contracts to be ratified by Congress. That's expected to occur after the elections later this month, sometime in late Q3 or early Q4 of this year. Simultaneously, we're elaborating the environmental permits for the Tita field reactivation, which we expect to be granted early to mid-year in 2026. With those environmental permits in hand, we will commence the reentry and workover of some existing shut-in gas wells in the Tita field to bring those back onto production and production test those. With positive results from those workovers, we will proceed to start to construct some facilities and start to commercialize the field in early 2027.
Thank you, Charle. The next question is from Bill Newman from Research Capital. Can you clarify the 5 million cu ft per day difference between produced gas, which was 124 million cu ft per day, and realized contractual sales, which were 119 million cu ft per day in Q2? Was this due to line pack inventory build or under-deliver taker pay volumes? If so, should we expect some of these volumes to flow through as incremental sales in Q3?
The difference between the gas production and gas sales in all quarters is related to the amount of gas we consume in compression.
Thank you, Charle. Please give us a brief moment while we continue to assemble the roster. Okay, the next question comes from Joshua Nemser from Nine Left Capital. Can you provide some color around what went wrong with Natila-2 , what would be done differently with Natilla-3 , cost and timeline? What gives the team confidence that Natilla-3 will work given challenges and costs with Natilla-2 ?
Natilla-2 encountered some wellbore stability issues in the Porquero. We managed to drill the well without much difficulty, drill new formation, that is. We did encounter five or six gas-charged sands in each of the sidetracks we drilled in Natilla-2. Natilla-2 did prove up the gas potential within the Porquero. However, the problem we ran into was wellbore instability after drilling the well impeded our ability to run production casing. Even though we drilled successfully, we were not able to run production liners successfully across those gas-charged sands in order to production test them. Natilla-3 is being designed primarily to deal with running production casing more easily, and towards that end, we will drill a wider diameter of wellbore through the Porquero and run a narrower casing through the Porquero in order to maximize the success of running casing and production testing those Porquero sandstones.
On the one hand, Natilla-2 confirmed the significant accumulation of gas within the Porquero. On the other hand, we had difficulties casing the Porquero due to instability, resulting in Natilla-3 , which will address those concerns.
Thank you, Charle. The next question is from Alejandra Andrade from JP Morgan. Can you please comment on taxes? You paid a significant amount in the second Q. What is the expectation for the second half of 2025?
Yeah, thank you. We are down to essentially just the monthly withholding taxes off our monthly revenue checks that I've discussed many times in a range of historically $1.2 million or $1.3 million a month. The government just increased that withholding by a couple percent, so it could be, you know, up to approximately $2 million a month. That would be it, and of course, that is to the credit of our prepaid tax account.
Thank you, Jason. We have a question from Benjamin Rojas from BTG Pactual. Do you have any liquidity source in a stressed period?
Thanks. I think the most obvious one that comes to mind is our recent wells that have come on production, which Charle has gone through extensively here, being Zamia, Borbón, and Fresa. Whether it's the press release or the MDNA discusses those wells coming on for an additional 25 million cu ft a day. Palomino, which the press release and MDNA outlook section discusses with an expectation of 10 million-1 2 million cu ft a day, that would total up to $37 million. If I just did simple math on 30 million, adding 30 million cu ft a day, to pick a round number of $12.50 in MTF and sales price because these are sold above our over and above our taker pay volumes, that $12.50 net of royalties and net of operating expenses would approximate $10 in Mcf net back.
30 million cu ft a day at a $10 net back would be about $300,000 a day. 30 days, that'd be about $9 million a month in additional cash flow and adjusted EBITDA. That would be the most obvious source of additional liquidity.
Thank you, Jason. Please give us a brief moment again while we assemble the roster.
Once again, if you would like to submit a question, you may submit questions by clicking in the "Submit a Question" box on your screen. Okay. Carolina, you may continue.
Oh, apologies. With this, we finish our Q&A session. We don't have any more questions for today. Thank you all for participating in Canacol 's second quarter conference call, and we hope you all have a good day today.
The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.