Recording in progress.
Corey Ruttan, President and Chief Executive Officer, and once again, I'm joined by Alison Howard, our Chief Financial Officer, and Adrian Audet, our Vice President of Asset Management.
Good morning, everyone. Just a couple of administrative matters before we begin. We are recording this webcast today, and there will be a copy of it available on our website later on this afternoon. We are hosting a Q&A session, so if you are participating via Zoom on your computer or your phone, you can submit your questions through the Q&A button on Zoom, and we will get to that at the end of our presentation. If you're dialing in, you can submit your questions to socialmedia@alvopetro.com. Lastly, we will be going through some non-GAAP measures and forward-looking statements, so I encourage you to review all of our cautionary statements at the end of our corporate presentation, which is available on our website.
All right. Thank you, Alison. Just talk a little bit about our production. You know, since coming on production on July 5, 2020, I think we've posted some pretty strong results. You can see our first couple of quarters of coming on production and our most recent few months, we've been pretty much right in line with the pre-commercialization expectations that we set, which was equal to the firm's sales volumes within our Bahia gas sales contract, and also equal to our share of the Caburé unit production at roughly 1,800 barrels of oil equivalent per day.
The period in between there, you can see we were able to significantly exceed those production levels just because we were able to, to, to nominate for more than our working interest share of, of the production from the Caburé unit. We also expanded our gas plant last year, that allowed us to, to increase our production further there. Going forward, we'll focus on this a little bit. Our strategy is to add more 100% working interest production from our near-term capital program, so that we can maximize the throughput through our gas plant and, and really get back up to up to and, and hopefully above the levels that you, you saw in some of the more recent quarters there.
We're looking to add 100% working interest natural gas production from our Murucututu project, as well as an oil component from our recent Bom Lugar success that we'll talk about later in the presentation. Just to talk again about our gas sales agreement. We just had a recent price reset under our agreement. A reminder, it gets reset every twice a year, every February 1st and August 1st. Our price formula is based on three different international benchmark prices, and those are the gray dashed lines that you see on this graph. There's Henry Hub Natural Gas in the U.S., NBP Natural Gas in the U.K., and Brent Oil Equivalent.
You kind of blend those together and average them over a period of time, and the net effect is, is our realized price, which is the, the darker, thicker black line that you see there. We also have a floor and a ceiling within our contract. That's the red and the green lines that you see there, and both of those escalate based on U.S. inflation. Left of the red dashed line that you see there is all the historical pricing, and right of that is the forecast pricing. We are using inflation estimates for this year of 3% in the U.S. and 2% thereafter.
The benchmark price forecast that you see, right of that line are based on the August 7th future strip pricing, the net effect of all that, as you can see, the black line, we're expected to remain at the ceiling within our contract out through to, you know, well into 2026 that you, that you see there. Just talk about our realized price. In the Q2, we, we realized an average over the quarter of $12.86 per Mcf, with that most recent price redetermination effective August 1st of this year, our price reset up to, to U.S. $13.25 per Mcf.
Yeah, just building off of what Corey was speaking to there, we had our highest realized sales price in the quarter, due to that, our gas price being at the ceiling price in our contract, so that $12.86 per Mcf. Overall, our realized sales price increased to $77.41, so an increase of almost $4.50 on a per barrel of oil equivalent. Then what you see is our Operating Netback, which is the green bar, that measures our operating profitability per barrel of oil equivalent, was a record again this quarter at $69.61, which is $3 above what we achieved in Q1. That's attributable to that higher price that we realized in the quarter.
Our royalties remain low at $1.97 per BOE, about 2.5% of our realized sales price. Our operating costs, our production expenses in the gray at $5.83, those were higher this quarter. The majority of our costs are fixed in nature, so with that reduction in production in Q2, you saw our costs per BOE go up, but despite that, we still achieved achieved record net backs in Q2. From a profitability profit margin perspective, again, that's, you know, 90% of our realized sales price is, is profit there on Operating Netback, you know, quite remarkable and, and what we like to say, best in class among other entities, and we show that here.
Comparing to other Latin American energy producers and some North American natural gas weighted companies that have released Q2, the average netback margin among those is 60%, and Alvopetro at 90%, you know, that's 50% better. That translates into, you know, very high profits overall on this production. The reason we're in Brazil, and that highlights the strength of the fiscal regime there, especially when you consider the low tax rate that we have until 2030 at 15.25% on our natural gas profits. Moving on to funds flow. Yes, we did see a decrease in our funds flow from Q2. That's mainly because of that 29% reduction in production in the period.
Despite those higher prices, our sales volumes were down, partially offset by lower royalties and lower current tax. Overall, funds flow of just over $11 million in the quarter, which is still, you know, quite amazing for Alvopetro on that production. Similarly, on the net income, you know, with those lower funds flow, our net income also decreased in the period, but that was partially offset by some reduced depletion, depreciation expenses, and then lower current and deferred tax, and then also higher foreign exchange gains in the period. Overall, net income up just under $10 million in Q2. From a balance sheet perspective, we continue to have a very strong balance sheet. Again, we're debt free as of last September. Our, our working capital, you know, we did see a slight decrease from Q1.
We did have more capital spending in the period, but still very strong at just over $18 million as of June 30th.
Great. Thank you, Alison. Just talk about our dividend. We did introduce the dividend back in the Q3 of 2021. You can see that we've been able to increase that three times now, and we're paying currently $0.14 per share quarterly. That translates into a current yield of around 7.4%. We're pretty proud that we can say that we've already returned $27 million to shareholders, or the equivalent of $0.76 per share back to our shareholders over this period of time.
So one of the things we always talk about, and, and this is something we developed many years ago, long before we even came on production, is just, you know, a stakeholder return model where, where we're looking to reinvest roughly half of our cash flows, in growing our business and, and returning the other 50% to stakeholders. If you focus on the bar chart on the, on the top left, what you see there is our cash inflows are the green line with the black dots. Like Alison said, in the Q2 of 2023, we had cash flow of $11 million. Then each of the individual back stack and bar charts there represents our cash flow, cash outflows during each quarter.
You can see in the first, kind of year or 15 months of, of production, we really were focused on prioritizing our, our debt repayment, that Alison showed you. That's the green cross hatch bars that you see there, and very little in the yellow, so not much capital expenditures. We were able to do that because we pre-invested all the capital in our Caburé project, and we didn't have a lot of need to be spending any money during that period of time. The strong results that you, that you've seen did allow us to start the dividend, I think, ahead of what we originally would have expected, and that's in the dark green, bars that you see there, starting in Q3 of 2021.
More recently, you can see a more investment happening in our organic growth. That's, that's the yellow bars that you, that you see on there. On the pie chart on the top right, this now measures exactly, almost exactly three years of being on production from our project. You can see about 38% of the cash flow has been reinvested. Almost exactly, or just, just shy of 50%, has gone out to stakeholders in the various forms that you see in green. Over the first three years of operations, we've actually had funds flow from operations of $109 million U.S. now, so pretty proud of this.
Speaking of the yellow bars that you saw on that chart, you know, we're really quite focused on, on our next phase of growth here. We've got a near-term goal of, of getting to the 18 million cubic foot equivalent per day level, or roughly 3,000 barrels of oil equivalent per day. The, the growth is planned to come from a combination of areas from our core existing base of operations. Like we said, we expanded the gas plant last year. Our goal with that target is to, to get that full and then, then ultimately, with a goal of, of doubling that again. In addition, at the unit, we are looking to drill some additional development wells this year and further expand the, the unit productive capacity, which has been performing quite well.
Our two main growth assets, the first of which is our Murucututu-2 project, again, 100% working interest. This is a project that sits immediately north of our core Caburé asset base. All of, all of the infrastructure is now in place to really start a multi-year development program that we've got planned for this asset. We did complete the stimulation of the 197(1) well and brought that on production in May. We talked about that in some detail on our last earnings call. You know, I think that was a pretty big milestone for us, and we're now in a position that we can start drilling fit-for-purpose wells. We've spot our, our first one of those, the 183-A3 well, we just spot that in, in July.
Looking forward to results on that. We also recently announced an exciting result from our BL-06 well on our Bom Lugar block. We're just in the process of getting ready to complete and test and bring that well on production here. I'll have Adrian talk a little bit more about what we've, what we found here.
Thanks, Corey. Yeah, this Bom Lugar six well, we're quite excited about it. The results you can see on the screen here, we had higher porosity and higher net pay than we were expecting going into this project. We're looking to begin testing and then put this well on production to our existing production facility here in the Q3 . As we get those results, we'll be planning follow-up locations, BL seven, from the existing surface location, and keep you updated.
Thank you, Adrian. Just in summary, you know, we certainly think Alvopetro Energy continues to offer a pretty attractive investment proposition, no matter what your investing focus is. We've been delivering strong results. We've got attractive gas pricing and leading operating profit margins. Our clean balance sheet and free cash flow generation capacity really helps underpin our more balanced and disciplined stakeholder return model that we talked about. For value investors, we're trading at about 0.75 of our 2P NAVs. For yield investors, a yield over 7%, with dividends paid in U.S. dollars quarterly. For growth investors, I think, you know, we are in the middle of implementing a pretty exciting and organically funded capital program.
If you look at the potential of what we're targeting there relative to our current enterprise value, I think it becomes even more exciting. With that, I think we're ready to start the question and answer period.
Sure. The first question is, is with respect to production expectations. What are production expectations for the second half of 2023? Do you expect partner nominations to continue at the same levels?
Yeah. Just given the nature of our company, we don't typically give out production guidance per se, but what I can say is, you know, we are working with our partner to, to increase those nomination levels, but we are planning our, our budget, you know, our cash budget based on assuming that we're, we're staying at these production levels, with a strategy of adding a hundred percent working interest natural gas production from Murucututu-2, and a hundred percent working interest oil production from, from our Bom Lugar property. That, you know, our, our expectation is, is to try to get back up to our, our near-term goal of, of that 18 million cubic foot equivalent, you know, over, over the next few quarters.
Do you have specific guidance on what production contribution is expected from Murucututu-2 and Bom Lugar?
Yeah. Again, we've got in our corporate presentation, kind of a typical type well for our Murucututu-2 wells. We are looking forward to the completion of, of our next well here, because we're doing it in a way that we can really optimize the simulations and maximize the results from that. I think, you know, we'd like to kind of be able to show what that looks like, and then hopefully that's a model for the kind of the, the base going forward. Frankly, it's a, it's always a continuous improvement type process for, for these types of opportunities. For our Bom Lugar well, again, we're just about to, to, to complete that and put that on production. We're gonna have actual news pretty soon.
You know, the only thing we'll probably we can provide guidance on, is what our reserve evaluators assumed in their 2P reserve forecast. The first year of production from that well from these formations, they had assumed, 200 barrels a day average for the first year, approximately.
What is the second half of 2023 CapEx expected to be, and how will it be allocated?
Yeah. The main projects that we have, you know, will really depend on the pace of drilling and completions. At our current pace, you know, we would expect similar spending levels going forward. The focus right now is on drilling the 183-A3 well and completing the BL-06 well. Then we'll have our current plan is to drill a follow-up well off of the same 183-A3 well pad for a second Gomo well. And then depending on the timing of that, we may start an additional well closer to the end of the year. That's kind of how it's balanced.
You know, the other thing we didn't talk about is the 183-A3 well is also targeting some shallow exploration potential in the Terra 2 formation. That's the same formation that, that is the main producer from our, our Caburé unit. If we have success there, it's quite possible that, you know, we shift our, our, our capital program around, as well. It's really dependent on the results that we see over the, over the coming quarters.
In February, the gas sales agreement set gas prices at $11.88 per Mcf, or approximately $71.28 per BOE. This quarter's realized price was over $77. Does the higher pricing reflect higher BTU content or is there another explanation?
Go for it.
Yeah, when we published our expected natural gas price, recall that it sets locally in local currency. We do disclose an estimated equivalent in U.S. dollars. That's based on that natural gas contracted price, but it, it, it takes into account an estimated foreign exchange rate. I think the $11.88 was, was disclosed prior to the sales tax credits that we also get, that's why it ended up being, like, closer to $13. That was part of it, is their sales tax credits, which increases our overall realized price. Then the other component is the foreign exchange.
The Brazilian currency, the real, appreciated in comparison to the time that we would have disclosed. I think we would have used the February, January 31st spot, spot price or the February average price in determining that Mcf amount. It, the currency, appreciated relative to that. In equivalent U.S. dollars, our realized price was higher. Hopefully, that makes sense. I think on the heat content basis, it's been in line with expectations at around, is it 7%, Adrian?
Yes.
Yeah.
Above contract, yes.
Would you explain the decline in royalty costs again, and is $2 per BOE a good rate to expect going forward? I can take that one again. Our royalty rate, generally speaking, on most of our fields is about 8.5%, in Brazil, of our, of our, of our production. In Brazil, the natural gas volumes, the royalties are based on the value of the raw, unprocessed natural gas. They use a reference price for that, and it's closer to Henry Hub. It, it's more dependent on what you expect Henry Hub to be relative to what we think are, what, what our contracted price is or our forecasted contracted price at the ceiling. I think our ceiling price is $10.60 something per MMBtu.
Henry Hub was, I think, $2.16 per MMBtu on average in Q2. I think it's closer, over $2.50 now. I didn't— haven't looked in the last few days, but it's more a function of that, taking into account our 8.5%. Hopefully that makes sense. Yeah, if, if Henry Hub stays at these levels, then our, our royalty rate could be, in the, you know, 2.5%–3% on an effective basis of our realized sales price, but it just really depends on how our contracted price moves and how Henry Hub moves on the natural gas. On, on our oil and condensate, it's, it's more based on the sales, the sales price, so it more ties to Brent from that perspective.
When do you expect to get production to near the capacity of the 18 million cubic feet per day?
Yeah, I, I think we answered that question earlier with, with. It's really just a function of the timing of, of drilling the wells and, and, and completing them, and, and in what order we drill the wells. You know, I think, you know, yeah, it's.
We have a couple questions kind of in line with that. Do you have any timelines on when you expect to double the gas plant or build a second processing plant?
Yes. Again, I think we. Let us get a couple of more wells drilled into our Gomo project here or Murucututu project. We do show in the corporate presentation, kind of indicatively, a call it a four-year development plan, that would target the 2P reserves and the contingent and prospective resource that we have. You know, we paced that in a way that we feel that could be organically funded, and if we can achieve those types of results, that gives you a sense on the ramp-up of that asset alone. That gives you a good sense.
What it shows you is that over that kind of three to four-year period, earlier than the fourth year, but within that time period, that asset alone has the potential of, of delivering 18 million cubic feet a day. Then layer that on top of whatever we're producing from, from the Caburé unit. We do disclose that as, as Mcf equivalent. You know, hopefully, we've got some exciting results from our Bom Lugar oil project to, to layer in there as well, so.
When will the 182 C and 183 B have a restimulation or a stimulation?
Yeah, no, we're, we're just continuing the evaluation of that and evaluating what the, the, the best enhancement is, and then we'll schedule that in within the context of all of our other activity and, and our rig availability, et cetera. You know, practically speaking, it's, it's probably something, you know, later this year.
You have a lot on your plate this year. Does this mean any M&A is not a priority at this time?
Well, we don't typically comment on M&A. I think if there's the right opportunity, we'll obviously pursue it. I think from a shareholder value perspective, I think if we can fund the, these capital programs organically and they're, you know, as effective as we hope that they're going to be, I think we have the ability to add a lot of shareholder value by just focusing on, on the opportunities we have in front of us.
Okay, that is all we have right now.
All right. Once again, thank you everyone for joining, and, and, if you have any questions after the call, feel free to reach out to, to any one of us. Again, thank you for your support, and we look forward to updating you next quarter.