Joining our third quarter 2025 earnings call. I'm joined today by Alison Howard, our CFO, and Adrian Audet, our Vice President, Asset Management.
Hi everyone. Just a few administrative points before we begin. We will be recording today's call, and there will be a replay available on our website later on this afternoon. All attendees have been placed in listen-in-only mode for the duration of the presentation. We will be having a Q&A session at the end of the presentation, and you can start logging any questions you have now using the Q&A button you should see on your Zoom screen there, and we'll get to those at the end of the presentation. If you've dialed in by phone, you can send us any questions to Social Media at alvopetro.com. Lastly, just a reminder, we do go through various Non-GAAP Measures, and we make forward-looking statements throughout the presentation. We do encourage you to read all of our Cautionary Statements.
Other disclosures at the end of the corporate presentation on our website, as well as details on all the Non-GAAP calculations in our MD&A that we released yesterday.
All right. Thank you, Alison. Just to start things off with production. Just remember, at the end of last year, we upgraded our gas sales agreement with our off-taker, Bahiagás . In connection with that, we did increase the firm volumes under our contract by a third. That allowed us to post some pretty strong production increases. As we started this year, Q1, we had a 41% increase quarter-over-quarter. The production's been relatively steady through the year. We did have a slight decrease in our third quarter production in Brazil, mostly in the month of September, which we'd already announced previously, and that was due to just some demand disruptions. Just keep in mind that occurred right at about the same time as we brought on our new 183-D4well on our Murucututu project.
We had quite a bit of productive capacity at that moment. What we did is we agreed to a spot sales contract with Bahiagás for the month of October. For a good portion of October, we were actually producing at our capacity of 18 million cu a day. The net effect was an average on a total company basis of 2,923 barrels of oil equivalent per day. If we include the Canadian production that we have added this year, that is the orange wedge that you see on the chart here. That was a new record for Alvopetro. A pretty exciting time to be announcing that.
Okay. Just jumping into some highlights from our Q3 results, starting with our operating netback. A reminder, that's one of those Non-GAAP Measures. We calculate that starting with our realized price. We express all of our operating netback in per barrel of oil equivalent. We start at the top of the chart, which is our realized price per BOE. We deduct off royalties in orange, and then we've combined production and transportation expenses here. That's the gray bar. The green bar is our operating netback. Overall, looking at Q3, starting at our realized price, we saw an increase of CAD 2.56 per BOE from last quarter. That was mainly due to our realized natural gas price, which increased to CAD 11.04, up 4% from last quarter, and also overall higher realized pricing on our condensate sales in Brazil and also oil sales.
Subtracting off our royalties, that's the orange bar. Overall, that was slightly higher than last quarter with the higher realized price. Overall effective royalty rate of just over 5%, just under 5% in Brazil, and just about 16% in Canada. On the production and transportation expenses, there was an increase there. Production expenses were up to CAD 6.10 per BOE. We had about an additional CAD 124,000 of expenses in the quarter. A lot of that was with respect to our D4 well, which commenced production at the end of August. Overall, our operating netback this quarter at CAD 55.90, up CAD 1.18 from last quarter, again, mainly due to those higher realized prices we saw this quarter. If you look at that operating netback relative to our realized price, really strong netback margins there. That's that 85% this quarter. Really strong year to date and historically.
That just highlights the strength of the fiscal regime that we're operating in. When you layer in the fact that we have this tax benefit in Brazil that allows for an effective tax rate of just over 15%, it really allows us to generate significant funds flow from operations on these levels of production. It makes us really competitive when you're looking at comparing our margins here relative to other companies operating in Canada and in South America. Moving on to funds flow, again, that's cash flow from operating activities before changes in working capital. This chart just compares from our Q2 funds flow of CAD 10.4 million to Q3. You can see it's pretty flat there, just up over CAD 100,000 from last quarter, again, mainly due to those higher realized prices. Our other income was also higher this period.
Offsetting that is lower sales volumes and marginally higher royalties, production expenses, G&A, etc. On the net income side, we did see a decrease of about CAD 2.2 million from last quarter. That's mainly related to this impairment that we booked this quarter. We announced last month we had entered into an agreement to sell some non-core assets in Brazil. It's our Bom Lugar and Mae-da-lua oil fields. As part of that, those assets have now been transferred to reclassified as assets held for sale on our balance sheet pending closing, which is subject to regulatory approvals. When we reclassify them to held for sale, we do write them down to our expected proceeds that we'll receive on that disposition. That was the big driver this quarter in, obviously, that's the big driver this quarter in change in net income. Overall.
Okay. So just talk about our kind of working debt and working capital situation. If you recall, we did take out a project financing loan before we came on production. That is in orange here. Recall, we repaid that on a very accelerated basis. It was completely repaid as of the end of the third quarter of 2022. And we've been debt-free ever since then. During the same period of time, we did build up a considerable amount of cash and working capital for pretty much two years. After being debt-free, we held up pretty significant cash and working capital balance. We have had a more active capital program here over the last 12 months with concurrent capital programs happening both in Brazil and in Western Canada. We're obviously extremely happy with the results from those capital programs.
I think we're pretty well positioned to ramp up our cash flows, as evidenced by the increases in production that you're seeing here as we move into the fourth quarter. We have had a slowdown in spending levels, particularly in Brazil. I would expect to see this back to building cash and working capital moving forward. On the dividend history, we introduced the dividend back in the third quarter of 2021. We paid $0.09 per quarter through all of last year with the bump up in production that we saw. We did increase the dividend this year, and we paid three consecutive quarters at $0.10 per share. That's a yield of yesterday's closing price of just under 9%. Since inception, we've actually paid out over $60 million to shareholders or $1.70 per share.
This chart we try to always show, and it just highlights the more disciplined capital allocation model that we're following, where we're balancing organic growth and returns to stakeholders. We try to take roughly half of our cash flows and reinvest those and take the other half and return them to stakeholders. The chart on the left shows the individual quarters with the black dots and green line being the cash inflows every quarter. As Alison noted, we had funds flow from operations this quarter of CAD 10.4 million, which was pretty consistent with the prior quarter. The stacking bars are all the outflows in the various quarters, with the yellow being the organic growth or reinvestment or capital expenditures. You can see those were a bit higher here through the earlier part of this year. The green parts are the various forms of stakeholder returns.
If you look at the pie on the right-hand chart, it shows this from when we came on production in the third quarter of 2020. In total, we've generated over CAD 193 million of funds flow from operations. Just over half of that went to reinvestment in yellow, and just under half of that has gone to stakeholders. Pretty close to the model that we had implemented, even before we came on production.
We have established a strong platform, and now our focus is firmly set on our growth objectives. We are approaching our near-term goal of 18 million cu a day or 3,000 BOE to fill our current gas plant capacity. Our longer-term vision is to double this. This growth is going to come from the combination of our areas. The first being our Caburé, our core base of operations. Here, we have been tying in and optimizing the unit wells from the recent drilling campaign to increase the productive capacity for this asset. The Caburé unit has been performing well, and we can continue to produce our reserves here. The second and the biggest growth opportunity is from our Murucututu project. This 100% working interest project is just north of Caburé, and it is pipeline connected to our midstream infrastructure.
We had a very successful completion late last year on our 183-A3 well. Our 183-D4 follow-up well just came on production in August with the IP 30 rate of nearly 1,100 BOE a day, which is ahead of our expectations. Last year, GLJ had assigned a combination of 2P reserves, contingent, and prospective resource to this opportunity. We are working to migrate this production to cash flow in support of our long-term growth. I just want to review our 183-D4 well in a little bit more detail. This well was drilled 106 meters up dip on the structure following the 183-A3 success of 2024. During drilling, we identified 61 meters of net pay in three Caruaçu sequences, sequence 6.2, 6.3, and 6.4 you see on the logs on the right. This Caruaçu sequence is the same formation that.
Produces in Caburé, our other field just to the south. We brought this well on production in August from the seven intervals that we completed using North American sliding sleeve technology. As I noted earlier, we had an IP rate of close to 1,100 BOE a day, which is 5.8 million cu of gas and 97 barrels a day of condensate. This rate was almost double what we had estimated from our 2024 year-end reserves process. In October, the Murucututu field rate was 6.1 million cu a day, which is effectively our limited field capacity. We only had two of the three wells on production. We are very encouraged by the progress of this field. We continue to plan for increased egress from this field and a more fulsome field development plan given the success we are seeing from the Caruaçu reservoir.
Thank you, Adrian. Just moving on to Western Canada here. If you recall, in February of this year, we announced a strategic entry into the Western Canadian sedimentary basin. It was focused on the Mannville Stack Heavy Oil Fairway. You can see the red outline was the original area or AMI that we had. Just recently, we announced an expansion to that partnership that we have with our existing partner to cover the whole green area here. It pretty much covers the entire Western Saskatchewan portion of the Mannville Stack Heavy Oil Play Fairway. What we're doing here is, sorry, just touch on this. Once we've earned the additional lands here, we're going to have a 50% working interest in over 74 sections of land or, on a net basis, close to 24,000 net acres of land.
Obviously, a proven fairway, a lot of original oil in place per section of land that we have here. We've got stacked multi-zone potential. What we're doing is we're applying kind of leading-edge open hole multilateral drilling technology to unlock this resource that everyone's known has been here for quite some time. I think over a very short period of time, not only have we drilled four gross wells, built up a small base of initial production from Canada, but more importantly, we built a multi-year inventory of highly attractive drilling locations in kind of one of the leading plays right now. I think this is a pretty exciting opportunity for us. This here just shows on the right-hand side the initial economics that we were targeting with the farm ends. We still think $70 is a good long-term.
Kind of balancing point, considering a lot of the break-even economics for a lot of plays in North America. Obviously, we're below that right now. At the CAD 70 level, generates extremely robust economics on an IRR basis, close to 100%. Recycle ratio, so the number of times you get your payout on your investment of close to three times. On a per well basis, MPV tens of over CAD 2 million. Even at lower oil prices, or if you use a type curve that's, say, 80% of the expected type curve, we still can generate some pretty strong returns. On the left-hand side, it just shows the production forecast for those two type curves in the two lines that you see here, the blue solid one and the dashed one. And then the.
Four different colors that you see with the more jittery data is the actual production data up to the end of September from the four initial wells that we drilled. This Neilbert well here, obviously performing quite a bit ahead of expectations. Our Lashburn well in green has been pretty, we're still optimizing this, but pretty close to our production result expectation. The latest two wells, it's still early days. Those wells are ramping up, cleaning up, and being optimized, but it shows you the results from all four of those. We do expect to be drilling here again in Western Canada starting late this quarter. In conclusion, sorry. I think we still continue to deliver some pretty strong results.
Obviously, our funds flow from operations benefits from our highly attractive gas prices, and our industry-leading operating netbacks and operating netback margins that Alison walked you through. We've had a very strong year from a production perspective, with October being a record month for us. Pretty excited about that. I think we're well positioned to grow that through the end of the year here. Just from an investment proposition perspective, we do try to pitch this on a value-yield and growth basis. For value investors, we continue to trade at below our 1P NPVs, about under half of our 2P NPVs. That's before any reserve updates reflecting the success of the 183-D4 well that Adrian walked you through earlier. We do expect that to be positive. For yield investors, our $0.10 per share dividend quarterly translates into a yield of around 9%.
For growth investors, we've got exciting capital programs. We're a good way through those this year. They're unlocking a lot of potential now, both in Canada and in Brazil. I think we've significantly strengthened our disciplined capital allocation model. By combining our growth inventory in Brazil with these new opportunities in Canada, I think we've got an ability to unlock a lot of value for shareholders, especially when you consider it relative to our existing enterprise value. With that, I think we'll open the floor for a question and answer. I'll just stop sharing the screen here.
Okay. So yeah, we have a few questions in here. Given the significant increase in capital expenditures this quarter, up over 130% year-over-year, and the sharp reduction in cash and working capital, how is management balancing reinvestment in Brazil and Canada while maintaining financial flexibility and dividend sustainability going forward?
Yeah, no, that's a good question. I tried to touch on that in the slide in the presentation, but yeah, we recognize that we've went through a pretty capital-intensive period. To be frank, we did have some challenges with one of the wells that we were drilling, the 183-D4 well that we drilled in Brazil. The good news is we have that behind us. We've got an extremely exciting result. Like Adrian said, it's roughly from an IP 30 productivity perspective, it's almost double what our GLJ independent reserve evaluation from last year predicted for that well. I think we're really well positioned for growth. You're already seeing that in the start of the production for Q4. From a capital expenditure perspective, right now, we're actually not really spending much money at all, particularly in Brazil.
We're taking this opportunity where we've got a significant amount of actually excess productive capacity because of the addition of the 183-D4 well. We're in a phase here where we're planning for the next phase of drilling. We're planning for the optimization of our facilities to support our next phase of growth. We are focused on expanding our Bahiagás sales capacity to support a higher, another step up in our levels of production and cash flow. Right now, we are building cash and working capital. We benefit from extremely profitable barrels. That's the plan. We've been pretty true to the second part of the question, I think. With respect to our capital allocation model, I think over time, we've been pretty true to the 50/50 mantra, and I would expect that to continue.
Yeah, no, we'll have a short period of time where we're building cash and working capital again, and that's already happening.
We did have a couple of specific questions on whether we were providing capital expenditure guidance for Q4 and 2026.
I'll maybe get Alison to help me with the exact numbers. Like I just said, the Q4 capital expenditures will be quite a bit lower. The only things we're really doing right now, we are shooting some seismic in Canada. The early part of the next phase of drilling in Canada will start in December. There might be certainly one of those earning wells. We would expect to be drilled in December and maybe part or all of a second well. Those wells are individually, from a drilling and completion perspective, about CAD 1.6 million. From a Brazil perspective, there's not much capital happening right now. It's more focused on the next phase of drilling, which we're going to set our 2026 capital expenditure budget probably in the next 30-60 days.
We'll come out with some more detail there. But our initial expectations is that we might be back to drilling in Brazil sometime, probably no earlier than the end of the first quarter of next year.
Okay. The 183-D4 well at Murucututu delivered exceptional IP 30 rates above expectations. Can you discuss how representative that performance is of the remaining undeveloped wells in the area and what average rates or recovery factors you're now modeling?
Yeah. As Adrian noted, we drilled this well about over 100 meters up depth of the 183-A3 well. We have probably a better slide in our corporate presentation that you can see. A bit better visually the three different sequences that Adrian was talking about. At the bottom, there is sequence 6.2, in the middle, 6.3, and at the top, sequence 6.4. The 183-A3 well is only producing from sequence 6.4. That was kind of the focus of the reserve bookings at the time for that well. In our 183-D4 well, we have actually completed all three of those sequences. A significantly thicker hydrocarbon column. We have a whole, let's say, another ring of wells that we can drill similarly up depth from that location even. I think it is pretty exciting, but we are still early days on the well.
The production results are extremely strong. Just because the IP 30s are doubled does not necessarily translate into the reserves doubling, but we're pretty optimistic. Bear with us. We'll have a new reserve report out in mid-February sometime.
Yeah.
A further question on Murucututu. What work is to be included in optimizing the Murucututu infrastructure?
Yeah. That's something that we're currently working through as a team. Like I mentioned, we're running at the facility capacity at Murucututu, which is the battery at the actual field, which separates our tanks. That's something that we're looking to upgrade as we work to expand the capacity of that field. Also, the egress from that field to the UPGN is limited by a pipeline and the flow rate of that pipeline. That's the other aspect that we're looking to improve the production capacity of.
Okay. Jumping to Canada, we have a few questions. On realized pricing, what is the expected discount to WTI for the Canadian realized price? Right now, in the quarter, I can give you the actuals. WTI in Q3 was just under $66. Our realized sales price in U.S. dollars for Canadian operations was $ 49.70. A discount of around $15, which is, I think, within what we were expecting when we first looked at this. That has been consistent. The transportation expenses, we did see an increase this quarter. There was a question on the transportation expenses. Just under $4 per BOE. Our production expenses overall, it's early days. These production expenses, I think, are still very efficient. The operations are still very efficient. Overall, we're monitoring these costs. Both production and transportation expenses combined under $10 U.S. in Canada. I don't know, Corey, if you wanted to add anything to that.
No, that's great.
There was a question about the timing on the two pending Canadian wells. I think, Corey, if you want to reiterate that again.
Yeah. Indicatively, we've got four gross wells planned. Two of them would be earning wells. So we're going to pay 100% of working interest on those two to earn 50% in the whole green box, basically, that I showed on that slide. Then we'll have two additional partner wells where we're 50/50 each. On a total basis, that's three net wells to Alvopetro. The order of the wells still might be in flux. Indicatively, we could get two wells drilled in late November or early December before the Christmas break. We would look to come back after the Christmas break and finish the next two wells in the first quarter.
On Canada, do you see yourselves finding projects that you would be the operator of?
Yeah. No, we're positioned or positioning ourselves to be able to do that. We are looking at opportunities all the time. Obviously, we've chosen a strategic partner for the play fairway that we identified. I think we've got a lot of running room on that. There are a lot of opportunities out there for sure.
There is a question here. There's a few questions around the share repurchases. One of the questions is, how many shares did we repurchase last quarter? We repurchased just over 10,000, 10,100 shares this quarter. Our normal course of share bid actually expired in mid-August. There is some commentary. I don't know, Corey, if you want to talk about there's some questions around whether the stock buybacks, given they've had little effect on the stock price, is the money better spent on dividends.
Yeah. No, this is a debate that lots of our shareholders have with me and we have at the boardroom table as well. We recognize that we were in a pretty capital expenditure-heavy period. We actually made the decision to just not necessarily renew that program. That is something we'll be looking at. I think it's a good thing to have in our toolkit because I think having the flexibility to be able to use part of our bucket of cash flow that goes to stakeholders to use that in that form, it's a nice option to have. Obviously, you can see we've prioritized dividends. Is that possible that changes? It's possible. Right now, we're not buying back any shares just because we haven't renewed the issuer bid yet.
Okay. There is just a couple of questions around, which I'll combine into one, around if you can give more details on timing for expansion of processing capacity in Brazil beyond the current capacity of 18 million cu a day.
Yep. As we noted before, we're continuing to observe and monitor the D4 results, which Corey said are extremely encouraging. We need to see more data and to continue to make our field development plans for that asset. As we go through that, we'll look to the future and figure out when is the most optimal time to be expanding the plant. At this point, we're still working through that.
Okay. I think that is it for questions.
All right. Thank you, everyone. I think it's a pretty exciting time again to be an Alvopetro shareholder. We appreciate your support. If you've got any further questions, feel free to call any one of us. Another note. We do expect to release a new field tour video. There's been a lot of changes since the last one that we created. Keep your eyes tuned to social media and our YouTube channel. I expect that to be available today for viewing. Thank you.
Thanks, everyone.