PetroTal Corp. (TAL) Earnings Call Transcript

Good afternoon. Thank you for joining PetroTal's 2026 Guidance webcast. Your presenters today are Manolo Zuniga, President and CEO; and Camilo McAllister, CFO. Questions can be submitted via the platform, and we'll do our best to answer as many as possible in the available time. I'll now hand over to Manolo and Camilo. Thank you.

Thank you, Mark, and good morning, everyone, and thank you for joining PetroTal's 2026 budget and Guidance webcast. As mentioned by Mark, my name is Manolo Zuniga, and I am the President and CEO of PetroTal. And joining me today is Camilo McAllister, our Executive Vice President and Chief Financial Officer. If you join via the link in this morning's press release, you should see our 2026 budget presentation on your screen. Before we begin, I would note that there are customary disclaimers at the end of the presentation, which I encourage you to review after our prepared remarks. This year's webcast is a bit different from prior years. Rather than presenting a growth-oriented budget, we're outlining what we view as a disciplined reset, one that is designed to protect liquidity, structurally reset our cost base and preserve the option value of the Bretana asset while oil prices remain under pressure. With that context, let me begin on Slide 2, where we summarize the key production and financial metrics underlying our 2026 guidance. Starting with production, our 2026 guidance assumes an annual average of approximately 12,000 barrels of oil per day, which reflects the reality that any material production additions are unlikely to occur until late in the year. For context, production averaged over 19,000 per day in 2025 and exited the year at just over 15,000 barrels per day. Despite lower production, PetroTal expects to generate approximately $90 million of net operating income and $30 million to $40 million of adjusted EBITDA in 2026, supported by aggressive cost reductions across both operating expenses and G&A. Our Board has approved a capital expenditure budget of $80 million to $90 million, which includes ongoing erosion control spending and assumes a resumption of drilling in the fourth quarter, subject to market conditions. Importantly, this budget is designed to preserve liquidity. We expect to exit 2026 with approximately $60 million of available cash, which we view as a minimum operating floor for the business until production and cash flow improve. Camilo will provide more detail of the -- on the financial framework later in the presentation. But at a high level, this slide highlights the key theme for 2026, protecting value today while keeping the company positioned to grow when conditions improve. Turning to Slide 3. We have restated PetroTal's core investment thesis. PetroTal remains Peru's largest crude oil producer and Bretana is an extremely high-quality oil asset with competitive economics at $60 Brent and is still under development. Critically, Bretana can continue growing profitably without requiring external capital, something our team is committed to do. PetroTal has already returned over $150 million to shareholders, underscoring our ability to generate free cash flow and our commitment to capital discipline. Against that backdrop, 2026 represents a deliberate reset, not a retreat. The goal is to protect liquidity and asset value during a period of low oil prices while preserving meaningful upside leverage when the cycle turns. Slide 4 outlines the 3 core objectives and repeating our 2026 budget. First, protect liquidity. Capital allocation decisions are governed by a minimum unrestricted cash balance of $60 million. The capital program is aligned with internal cash flows and the budget targets approximately $30 million of adjusted EBITDA supported by improvement to our cost structure. Second, reset the cost base. The budget incorporates significant reductions in our OpEx, lifting costs and G&A expenses, including a material headcount reduction in our workforce. These are structural changes, not temporary deferrals, and they materially lower PetroTal's breakeven. Third, we position for growth while 2026 is not a growth year. The budget assumes the option to resume drilling by October 1, with two development wells planned to be spudded during the fourth quarter of the year with the second one to be completed early in 2027. This is expected to be the start of an eighth well campaign that will return production and capacity to what it was in the early 2025, assuming we're able to reset our cost structure as we aim to do. Taken together, this budget is designed to bridge the company through a period of low oil prices while preserving the long-term option value of Bretana. On Slide 5, we summarize the main elements of the 2026 budget. The approved capital program totals $80 million to $90 million, with development drilling expected to resume in the second half of the year. I say second half instead of fourth quarter as I am still hopeful that we can expect sooner than later. Approximately $30 million to $35 million relates to the remaining erosion control expenditures. The cost structure reset is significant with a targeted reduction in OpEx of more than 25% and G&A approaching 20% versus 2025 levels. At year-end, we expect to maintain approximately $60 million of available cash, assuming an average Brent price of $60 per barrel, which is the planning assumption used throughout the budget. The production chart on the right-hand side of this slide provides important historical context. PetroTal has grown production from under 1,000 barrels per day in 2018 to nearly 20,000 per day in 2025. The decline in 2026 mainly reflects a deferral in capital spending due to delays commissioning our drilling rig. With drilling expected to resume in Q4 2026, we fully expect to restore production capacity above 20,000 barrels per day before midyear 2027. In the past, we have seen similar behavior with continued drilling. Let's not forget that according to our 2024 year-end reserve certification, we still have 16 2P wells to drill. I will now turn the presentation over to Camilo to discuss the basis of our strategy.

Thank you, Manolo. Slide 6 lays out the strategic reserve for the Bretana field. Our first priority is balance sheet strength. We maintain a strict cash floor to ensure we can cover onetime costs without internal stress. This capital discipline allows us to protect our liquidity today so we can reaccelerate activity as soon as the market visibility improves. Second, we are optimizing operations before reaccelerating growth. This includes a shift to third-party drilling and a focus on execution certainty over aggressive time lines. Third, we are aggressively optimizing our cost structure. We are currently stripping out inefficiencies in G&A and operating costs while renegotiating service contracts to ensure a leaner base plan. These structural changes are designed to expand our margins regardless of the price environment. Fourth, we continue to preserve and enhance long-term asset value through phased infrastructure investment, particularly around erosion control and water handling capacity. Finally, capital is allocated to our highest return projects. The development inventory delivers strong economics even under lower oil price assumptions and growth is based to liquidity, not oil price optimism. Moving to Slide 7. I will now focus on the financial assumptions underlying the 2026 budget. First, the budget is constructed using a $60 Brent planning price and assumes no material external financing. Despite lower production, our cost reductions will allow the company to generate approximately $30 million to $40 million of EBITDA, fund the approved capital program and most importantly, maintain the $60 million cash floor. This budget restores flexibility. By structurally lowering costs and completing the erosion control, PetroTal improves its leverage to higher oil prices in future years. From a balance sheet perspective, the company enters 2026 with over $110 million of available cash, providing a strong starting position even in lower price environment. On Slide 8, we have a high-level bridge that ties together the operational and financial assumptions underlying our 2026 guidance. We are modeling our production of 12,000 barrels of oil per day, and our financial planning is anchored by a $60 Brent price assumption, which aligns with current market consensus and provides a robust baseline for our capital allocation strategy. At that price level, we expect to generate approximately $80 million to $90 million of net operating income. From there, you can see the key cost items that shape EBITDA in 2026. Erosion control operating expense is expected to be approximately $18 million, reflecting the OpEx portion of the project as it moves towards completion. G&A is budgeted at approximately $30 million, which includes an allocation for severance as we proceed with headcount reductions in our Houston and Lima offices. After these items, EBITDA for the year is expected to be approximately $30 million to $40 million. Moving down the table, total capital expenditures are budgeted at $80 million to $90 million, which includes the remaining erosion control spend and the capital framework that preserves the option to resume drilling later in the year. Accrued tax and finance expenses is expected to total approximately $19 million, resulting in after-tax free funds flow of negative $60 million to $70 million for the year. Importantly, that cash outflow is both intentionable and manageable. No cash dividends are assumed in 2026, and the budget is structured to conclude the year with approximately $60 million of cash on hand, which we view as our minimum liquidity threshold. So the key takeaway from this slide is that 2026 is a balance sheet protection year. The budget absorbs known obligations, completes critical projects and preserves financial flexibility while keeping the company well positioned for a return to growth when conditions improve. I will now hand the call back to Manolo for closing remarks.

Thanks, Camilo. To conclude, 2026 is about a disciplined repositioning. This budget protects liquidity, resets cost, optimizes our operations and preserves the ability to return to growth. It is designed to safeguard shareholder value today while maintaining meaningful upside tomorrow. We believe this approach differentiates PetroTal and positions the company well for the next phase of the cycle. Thank you for your time. We'll now open the line for questions.

Thank you, Manolo. Thank you, Camilo. First question, can you please bridge current circa 15,000 barrels a day production at Bretana to the average 11,500 barrels a day for 2026, especially the assumptions around field and well downtime. The second part of the question, is there sufficient water handling capacity at Bretana to return to 20,000 barrels a day sustainably given that the field is currently constrained by water handling throughput?

That's actually a very good question. The reduction from 15,000 currently to the 11,500 for the year, it shows the normal decline on the oil production of the wells. These wells are all set up with electric submersible pumps, so I was saying the flow rates are consistent. Some of the wells can pull up to 15,000 barrels of fluid per day. On average, they are about 12,000 per day. So as the water cuts go up, the oil production drops. And that's why at the end, we end up with an average of about 11,500 to 12,500 -- the 12,000 that we have mentioned. We do have wells that are now shut in because of the water handling constraints that the second part of the question mentioned. That gives us the ability that in case we have an issue with any producing well, we can open some of the other wells that are shut in. Right now, we have about 5,000 barrels of oil per day shut-in due to water handling constraints. So when the drilling starts again, these wells come in with higher oil cuts and what we do is we shut the higher water cut wells. And that way, we can quickly go beyond 20,000 once again. So that's the -- and eventually, we have to set up additional water handling capacity to be able to have as many wells open and that way also ensure that we can produce all of the 2P reserves.

Thank you. In light of operational challenges, please can you quantify what PetroTal's estimate of 2P reserves that will be extracted before the license expires will be?

Well, we are going to be publishing the 2P reserves next month. So work has been ongoing with Netherland, Sewell that certifies our reserves. But what I mentioned earlier sort of covers the concept, is adding sufficient water handling capacity so we can maximize the recovery of each one of the wells. As I mentioned in my remarks, we still have a total of 16 wells, 2P, 8 in the 1P category and another 8 wells on the probable category. That number may be revised and -- should revise upwards, I believe, because as we continue producing, there's much more certainty in the durability of the wells, but we will see. But the key is us being able to manage the water handling facilities in the future to be able to extract all of the oil.

Okay. Next question. You state that the Amazonia-1 rig is no longer required in the near term and that you are now seeking to negotiate an exit from the leasing arrangement. To better understand what has occurred, I would appreciate a more detailed explanation of the key lessons learned that directly informs the decision to transition to a third-party drilling contractor.

There's a couple of things. When we decided to acquire the Amazonia rig is that we could not find any similar rigs in the region. We need a 2,000-horsepower rig, and we could not find one. That's when we decided to buy the Amazonia. Now there are some rigs available in nearby countries that we are procuring at the moment. And looking at the challenges of an oil company running a drilling rig by ourselves or using a third-party rig to lower the risk, we decided to go ahead and contract a third-party rig. So that's the logic behind this.

Can you give us more detail on the financing that you mentioned in the RNS? What would be your preference?

We don't necessarily need any financing for 2026 budget, as I stated on my remarks. At the end of the day, the company has enough cash flow to undertake its program. And our objective is to obviously preserve liquidity and maintain the $60 million cash buffer that we talked about.