After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. Please note this event is being recorded. I would like now to turn the conference over to Carolina Orozco, Vice President of Investor Relations. Please go ahead.
Good morning, welcome to Canacol's second quarter 2023 financial results conference call. This is Carolina Orozco, Vice President of Investor Relations. I am with Mr. Charles Gamba, President and Chief Executive Officer, and Mr. Jason Bednar, Chief Financial Officer. Before we begin, it is important to mention that the comments on this call by Canacol Senior Management can include projections of the corporation's future performance. These projections neither 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 Mr. Charle Gamba, President and CEO, who will summarize highlights for our Q2 results. Mr.
Jason Bednar, our CFO, will then discuss financial highlights, and Mr. Charle Gamba will close with a discussion of the corporation's outlook for the remainder of 2023. At the end, we will have a Q&A session. I will now turn the call over to Mr. Charle Gamba, President and CEO of Canacol Energy.
Thanks, Carolina, welcome everyone to Canacol's Q2 2023 conference call. In the Q2 of this year, we realized natural gas sales of 185 million standard cubic feet per day, just above the midpoint of our annual guidance of 160 - 206 million standard cubic feet per day. Continue to report strong and stable financials, which allow us to continue to return capital to shareholders via our quarterly dividend program. Our relatively stable production and operating conditions allowed us to report a quarter with high sales prices, net backs and operating margins, EBITDA of $61 million, and a relatively high return on capital employed on an annual basis of 16%.
Last week, we announced our July sales average, 197 million standard cubic feet per day, which is the highest monthly average so far this year. On the drilling front, we announced a successful test of the Chimela oil discovery in the Middle Magdalena, that we had previously announced in January, with an average rate of 353 barrels of oil per day from the base of Lisama. With this test data now in hand, we're progressing development plans for this discovery. This is in addition to the testing of the Saxo and Dividivi gas discoveries, which was also announced in early May, and which was discussed in our last conference call.
With respect to our drilling activity for 2023, we've been primarily focused on exploration of the Ciénaga de Oro prospects, situated close to our Hobo gas processing facility, which can be commercialized very quickly. We announced the discovery of Lula-1, located on our 100% operated VIM-21 E&P contract, which encountered 207 feet of net gas pay within the primary Ciénaga de Oro sandstone reservoir and tested 17 million standard cubic feet per day. We followed this up by drilling the Lula-2 appraisal well, which encountered 230 feet in net pay and tested 24 million standard cubic feet per day. Both Lula wells have been tied into our facilities and are currently on production.
Last week, we announced that we had plugged and abandoned the Pina Norte-1 exploration well, located on our 100% VIM-21 E&P contract, after encountering an overpressure zone in a very shallow reservoir. Fortunately, we were able to move very quickly to drill a twin offset well, which we are now completing and preparing to bring on production next week. With a total of three drilling rigs, we are planning to continue our drilling activity with the Mafaldine and Cereza exploration wells, and the Aguas four development well, all located on the VIM-21 E&P contract. Mafaldine exploration well is situated approximately 1.5 kilometers to the northwest of our whole production facility. The Cereza exploration well, which spud two days ago, is located approximately 500 meters to the north of Hobo.
I anticipate we will be providing results from our drilling activity in our regular monthly updates. Here at Canacol, we understand the crucial role of natural gas in addressing climate change and global challenges, and remain committed to supporting Colombia's objective of achieving a 51% reduction in emissions by 2030. In line with this, we have published our 2022 ESG report and long-term decarbonization goals, whereby we aim to achieve 0 methane emissions by 2026, and reduce Scope 1 and 2 emissions by 50% in 2035, and achieve carbon neutrality by 2050. For 2022, we reported Scope 1 and 2 GHG emission intensities that are on average 80% lower than our oil-producing peers, and 50% lower than our gas-producing peers in North and South America.
Our emissions intensity is lower than the average for many broad equity indices, including some with constituents selected for having low carbon emissions. Our progress has driven us to the top tenth percentile of upstream oil and gas companies in the CSA S&P assessment, and we have received an A rating from MSCI, affirming Canacol's leadership in ESG. I invite all of those interested about our ESG achievements during 2022 to read our report, which is now available on our website. I'll now turn the presentation over to Jason Bednar, our CFO, who will discuss our Q2 financial results in more detail.
Thanks, Charle. The Q2 was another very good quarter with strong netbacks from our producing operations. Our gas operating netback was $3.94 per Mcf in the three months ended June 30, 2023, which is 8% higher than in the same period of 2022, and slightly above our guidance for $3.81-$3.84 on average for 2023. As was the case in the first quarter, these high netbacks can be attributed to strong pricing under our firm contracts at $5 per Mcf on average during Q2 combined with interruptible market pricing that was significantly stronger during the quarter than we had assumed it would be for the whole year of 2023 on average.
Our realized gas price of $5.13 per Mcf net of transportation, was exactly the same as we reported for the Q1 , demonstrating a new, stable, and higher level for our realized prices. We remain encouraged by the persistence of robust pricing for interruptible gas sales. Recall that the majority of our guidance is based on sales under fixed price, take-or-pay contracts with an average price of $5.09 per Mcf for 2023. OpEx was $0.35 per Mcf in Q2, up from $0.25 in the Q1 , as we had previously indicated that we would likely return to doing more maintenance spending in the Q2 . This brought the first half of 2023 OpEx to $0.30, which is slightly less than our internal budgets of $0.32 for 2023 on average.
In percentage terms, our gas royalties were roughly in line with prior quarters at 16.5% of revenue. Return on capital employed was 16% for the Q2 on an annualized basis, and 12% on a trailing 12 month basis. We reported $75 million of revenue net of royalties and transportation, which represents a 6% increase from Q2 of 2022. This increase was driven by an 8% increase in realized prices, slightly offset by a 2% decrease in sales volumes, combined with slightly higher royalties. $34 million in adjusted funds from operations, which represents a 14% decrease from the same period in 2022. This $5.4 million decrease in adjusted funds flow from operations is solely attributable to a 9% increase in current taxes relative to the same quarter in 2022.
We also reported EBITDAX of $61 million, which represents a 10% increase from the same period of 2022. Finally, we reported net income of $40 million, with the change from a net loss in the same quarter of 2022 being due to a deferred tax recovery this year, when we had deferred tax charges in Q2 of last year. As you hopefully recall, in Q4 2022, we initiated a corporate reorganization in order to better optimize our business, alongside of which we also increased our deferred tax asset by $202 million. The most important steps of that reorg, as it relates to our ability to make use of our tax assets, were completed by the end of the Q2 .
As a result, our expectation is that the relatively high current tax expense in the first two quarters of 2023 will not continue going forward, so I expect significantly less current tax expense going forward than we have reported for the first two quarters of 2023. EBITDAX of $61 million in the Q2 was just a few hundred thousand dollars short of a new record we set in the Q1 , so I will again highlight the long-term trend of steadily growing EBITDAX over the last eight years. We do anticipate this trend continuing and are optimistic with regards to the pricing and demand outlook for the second half of 2023. As such, our high case 2023 EBITDAX guidance of $263 million remains unchanged.
Before I hand the call, call back to Charles, I'll make some comments on capital spending to date and the outlook for the remainder of the year, as well as debt levels. Our cash capital expenditures of $99 million for the first six months represents approximately 60% of our unchanged high case capital budget guidance of $163 million for 2023. The $99 million of first half CapEx does include $17.5 million of warehouse inventory at June 30th, as required under IFRS, including a well head and casing materials for Pola and other upcoming wells. If we adjusted for these amounts as traditional inventory items, the CapEx levels for the first half of 2023 would be exactly 50% of the annual $163 million budget.
As such, I do anticipate that we can continue significant drilling activity despite anticipated lower spending in the second half of 2023. During the Q2 , we drew an additional $70 million on our revolving credit facility, such that we've now drawn $145 million in total on this $200 million facility as at June 30th. As a reminder, the main reason for the additional draw during the quarter was to pay a $65 million one-off cash tax bill incurred as part of the corporate restructuring that we had discussed earlier and in detail on prior calls. Our net debt EBITDA leverage ratio was 2.7 times on a trailing 12 month basis at June 30, with the increase from prior quarters caused mainly by the restructuring tax payments.
How this ratio evolves going forward will depend on a host of factors, including gas demand, as a key driver of revenue and hence also EBITDA levels. With our one-off cash tax payment now behind us, my expectation continues to be that our leverage ratio will decrease to approximately 2.4 or 2.5 times at year-end. To refresh everyone's memory, our bond covenant is at 3.25 times, and the revolver is at 3.5 times. As such, we're well inside those covenant restrictions. That concludes my comments. I'll now hand it back to Charles.
Thanks, Jason. Our results for the quarter once again demonstrate the high and stable operating margins, as well as a very respectable return of capital employed. As Jason just outlined, our guidance and plan for 2023 remains unchanged. We're continuing to progress a steady exploration drilling program, targeting exploration prospects located close to Hobo that can be commercialized very quickly. We're doing this in order to build productive capacity to meet the anticipated high demand of natural gas associated with the upcoming El Niño phenomena. Forecast realized contractual gas sales for 2023, which include downtime, are anticipated to range between 160 million standard cubic feet per day-206 million standard cubic feet per day.
Our gas sales averaged 185 million standard cubic feet per day for the first half of this year, and were 197 million standard cubic feet per day during July. The corporation's firm 2023 take-or-pay contracts alone averaged 160 million standard cubic feet per day net for 2023. We are optimistic that we will continue to see strong demand in related sales volumes and pricings, allowing us to report continued growth in sales volumes, revenues, and funds from operations. We therefore expect to remain well-positioned to continue returning capital to shareholders while investing for growth. We're now ready to take questions.
We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Ariana Kovalt of Balance . Please go ahead.
Hi, good morning, thanks for taking my question. This is Ariana Kovalt with Balance. I have three questions. If we may go, one by one, that would be great. First, with regards to drilling for Pola-1, just wanted to confirm on how are, if you could share any insights on how are negotiations going to bring the rig for Pola-1 drilling, and when do you expect activities to begin?
Hi, Mariana. Thanks. With respect to drilling Pola-1, we are planning to target the drilling of the well for the last quarter of this year. Rig availability is very good. Rig availability in Colombia has been increasing as drilling activity has decreased about 33% in terms of drilling activity this year. Rig availability for the 3,000 horsepower we need is very good. We're again targeting to spud that well sometime in Q4 of this year.
Perfect. Just following up with additional traders for the next quarter. Just thinking of the Medellin pipeline, I, I just wanted to confirm on what are the next steps or the steps that are missing to continue on with to start construction works, and what are the strategies that might be in, on the table for Canacol to avoid being exposed to spot markets, if there are any delays with the pipe?
The next step in the process for Medellin would be the receipt of the environmental permit, the EIA, which will allow for construction. We're waiting for the Ministry of the Environment to issue the EIA.
Sorry, just one follow-up there. What is the expected timeline for this?
This year.
Okay, and just one last one. You had mentioned in last earnings call, the UPME bidding process that had started and the potential of having something similar to El Tesorito. Just wanted to confirm on how is this process ongoing, and if there are any updates that you could share in this regard?
Yes. With respect to the, the, the, Subasta, the, the bid round for the Cargo por Confiabilidad, which is the additional standby power generation. The original date proposed by the UPME was, was August 24th, I believe, to submit bids, the UPME delayed that process by three months, to November 24th. We, we remain very actively engaged in, in planning, our proposal, with our consortium members, and we await the November 24th date, to, to make any bids.
Perfect. Thank you. That will be all from my side. Thanks.
Our next question comes from Josef Schachter . Please go ahead.
Good morning, Charles and Jason. Jason, a question for you. I see, you know, the nice bump up 10% on the adjusted EBITDA. Cash flow, though, down, negative 24 versus $35 million comparable quarters. Is that related to that restructuring in tax? Can you kind of walk through the, a little bit more detail of, of, and give us some more color on that?
Yeah, sure, Joseph. You know, the restructuring plan is quite complicated, as things of, you know, this magnitude are. It includes close to 20 steps, and although the, you know, the major steps, such as the transfer of the blocks, et cetera, were done by year-end, some of the trail on steps that have tax impacts, you know, did not get done until the end of Q2. As such, you know, y- we do see that additional $9 million in income tax, and thus, you know, the, the free funds flow is down by $5.4 million. You know, once again, as I said, directly as a result of the additional $9 million in tax.
Now that the bulk of those things are completed, and envision things like, you know, you need to get the company's December 31st audited, and, you know, that typically takes till March, then you do the paperwork, post that, et cetera. Now that those are largely completed, we do anticipate seeing the decrease in our current taxes beginning in Q3 and trailing downwards from there. You know, I'll reiterate, as I think I did in, you know, whether it was the year-end call or the Q1 call, we do anticipate seeing the benefit of the $202 million of the new deferred tax asset to be realized, at approximately $40 million a year for the next five years, and then some additional trailing benefits beyond that.
When we get into, you know, Q3 data, when we, when we have the next conference call, cash flow should be very close to funds flow going forward?
Agreed.
Thank you. Thanks for the clarification.
As a reminder, if you have a question, please press star, then one. I'll now pass it over to Carolina Orozco to read questions from the web.
Thank you. We have one first question from Roberto Paniagua, from Casa de Bolsa: Please give us a deeper explanation of the increases in financial expenses and the deployment of the $105 million in debt.
Okay, the first one, if I understood it correctly, regarding financial expenses, I assume it's the financing costs, i.e., interest, et cetera, which would be largely attributable to the increase in the revolver balance, right? We would have started the year at zero-ish, and of course, now have $145 million drawn, hence the extra interest expense. The second question, the increase in the debt was $70 million. It's drawn the revolver, as I alluded to. It's probably including a change in cash on that to get to $105 million, if I assume you did the math right. The first $65 million of that related to, of course, the $65 million that we paid in May relating to the restructuring. The other components to that would be working capital changes.
Our payables ended in Q2 less than they did in Q1. I think off the top of my head, $8 million less, despite us having increased CapEx of approximately $4 million. Those would be the major components related to the change in net debt.
Thank you, Jason. The second question from Roberto Paniagua is: Has Canacol perceived an increase in gas demand by thermoelectric plant due to the El Niño?
We're seeing overall, overall demand in Colombia for gas has remained relatively stable. El Niño, the full effect of El Niño is anticipated to start in October and November of this year. El Niño is still a little ahead of us here, but so far, you know, overall gas demand in Colombia has been very stable to this point and normal. We expect that to see an uptick in gas demand as El Niño, the effects of El Niño settle in here in October, November later this year, and that will last for between six to nine months, depending on how strong El Niño will be.
Thank you, Charles. We have one last question from Roberto Paniagua, which is: Are you expecting to keep the average gas price over $1.50 per Mcf in the second half of 2023, and the operative net back near the $4 per Mcf?
160 million cubic feet per day of our gas sales are sold under take-or-pay, which those price is fixed. There'll be no change in price related to the majority of our production. The variable in increased price occurs in the interruptible spot sales. We do. We did about 37 million cubic feet per day in July of spot. Above that, we expect to see pricing remain very strong for the rest of the year and building in terms of value through through the last part of the year in the El Niño.
Thank you. We have now a question from Ricardo Sandoval from Bancolombia: Could you please give us the Henry Hub price, $2.48 per MBTU, equivalency in Mcf, please, to compare with this, with the $5.30 you reported?
I don't understand that question. We have nothing to do with respect to Henry Hub pricing.
Yeah. I'll, I'll take a stab at it, 'cause I have it on my screen. It's BTU compared to Mcf. It's right around a one-to-one level. BTU just has the energy content in it. Depending on how rich your gas, it might be 101%. It's essentially one-to-one equivalent. Meaning, of course, that we get more than double the Henry Hub price.
Perfect. Thank you. We also have a question from Diego Espinosa, from BTG Pactual. I believe you already answered, Charle, but just in case you want to add something. Regarding El Niño effect, do you see any increasing demand? How will you face it?
Yeah, as I mentioned, you know, we expect to see gas demand in general increasing, especially through October and the remainder of this year into next year. As I mentioned in our presentation, you know, we're very focused on drilling close to our producing facilities. All the exploration, well, the majority of exploration wells are going to be drilling for the next two months, will be located within several 100 meters of our production facility. The reason for that, of course, is to be able to bring those wells on stream very quickly in order to commercialize into the higher expected demand for gas in the Q4.
Thank you, Charle. A similar question coming from Aman Budhwar, from Pandion Fund Capital Management: Can you please elaborate on the potential for additional sales as a result of El Niño in second half 2023 and the potential higher price impact? If demand for gas is much higher in the back half of the year, what is the cap in terms of access to market, pipeline capacity, and gas production capacity? How will each of these trends into 2023?
Yeah, we expect, as I mentioned a couple of times, we expect to see increased demand for gas, certainly starting in October this year. We expect that to be all thermoelectric power driven. Of course, we have our Tesorito 200 megawatt project situated seven kilometers from our Hobo facility. That 200 megawatt power plant consumes up to 40 million cubic feet per day if it's running flat out, and it's connected to our facility by a private pipeline, so there's plenty of transportation capacity. I expect we could see, you know, up to an additional 40 million cubic feet of sales related to sending gas to that project in order for that project to generate during the El Niño.
Thank you, Charle. This was the last question we received. With this, we finish our call. Thank you all for participating in Canacol's Q2 conference call. Hope you all have a great day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.