BW Energy Limited (BWE) Earnings Call Transcript & Summary

Good day, and welcome to the BW Energy Second Quarter 2022 Presentation. [Operator Instructions] I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Carl Arnet to begin the presentation.

Good morning or good afternoon, as the case may be. It's a pleasure to welcome you to this BW Energy's Second Quarter First Half 2022 presentation. The presentation will be hosted by Lin Espey, our COO; Knut Sæthre, our CFO; and myself, Carl Arnet. Please note our disclaimer. The highlights we will go through in this presentation is our acquisition of the Golfinho and Camarupim clusters, including the FPSO that would add significantly to our production from 2023. And more details on that will follow later in the presentation. We also -- as we also showed in the first picture on the first slide, we have a BW MaBoMo, which is the new name of the Hibiscus, on its way to first oil in Gabon, and we will cover that in more detail as well. We have also signed an inaugural RBL facility, roughly $300 million, to finance our planned growth, and that will also be covered in more detail. The first half of 2022 gave us an EBITDA of $71 million and a net profit of $19.2 million. We had strong operational cash flow through the first half of 2022, which gave us a cash position of $123 million at the end of the second quarter. The second quarter gave us an EBITDA of $5.5 million with a net loss of $16.5 million as there were no liftings in the quarter. The Q2 gross production was 975,000 barrels. And we will also, of course, cover that in some more detail later on. On People and Environment, we still have some effects of the COVID-19, expecting to work predominantly FPSO-related. And we have some modifications that are affected, but it should be under control. We had no recorded LTIs in the second quarter. We are very pleased that we managed to perform the full conversion of the MaBoMo facility, totaling 1.9 million man-hours without any LTIs. The security risk at Dussafu remains low. We are in a quiet corner of the [indiscernible], so that's good. And we had no environmental incidents. Our production outlook is shown on the current slide. We had net production estimates showing the development 2023, '24 and '25 when we are expecting to get the Hibiscus/Ruche Phase 1 and 2 online as well as Maromba Phase 1 and 2. This is not showing the yet-to-be-closed transaction on Golfinho and Camarupim cluster, but it shows the current expected production profile with the projects that we are undertaking. Then on to Dussafu. Production at Dussafu in the second quarter was 975,000 barrels gross which equals to 10,700 barrels per day. Our OpEx was at $35 per barrel, and that's including the additional COVID costs that we are still carrying. We -- as we have related to COVID, we need additional gas lift capacity to reach full potential on the wells we have drilled. We are awaiting eagerly, of course, the installation of the gas -- new gas lift module on Adolo which is progressing, but not as quickly as we would like to. But we are carrying out some periodic test with nitrogen for intermittent supplement to the gas lift. So we have periods where we do achieve higher production. The long-term recovery rate from Tortue remains unchanged, so this is -- again, as I mentioned before, this is deferred production. Dussafu production forecast for 2022 is 4 million barrels. We will get the additional gas lift capacity additional to Ruche up in first quarter of '23, which will then increase production significantly. We will drill, the program is for 6 wells. And of course, we will add production as we add wells. For the OpEx, we expect $35 per barrel for the full year as well as we had for the second quarter. We had no lifting in the second quarter as was planned. You can see that from the lifting schedule in the bottom right-hand corner, and we completed -- had completed our lifting for August, and we will complete one further lifting in the fourth quarter. We are extremely pleased with the development of the BW MaBoMo facility. Here, you can see the unit loaded on the heavy lift vessels following the conversion at Lamprell. The Yard and our team did an excellent job. And we -- the unit is leaving with very, very minimal residual work. So the work that is left basically work that is associated with the work that we are doing with pipelines and tying it into the field infrastructure. We had an exceptionally strong HSE preference, again, very pleased with the performance of the Yard and our team, 1.9 million man-hours without any LTIs. The unit is scheduled to arrive in Gabon, end September. And as you can see from the calendar, we have plenty of time to undertake the remaining installation work and time for drilling to [indiscernible]. So we are on track for first oil and first quarter from the Hibiscus/Ruche development. This will -- when the drilling is completed at -- up to 30,000 barrels of oil production, which, of course, will be a significant increase to our production as a company. We are expecting somewhat later start in the drilling activities than previously planned, as we expect the company that is using the rig currently will declare options, which will lead to us getting the rig a bit later than anticipated. We will have -- we have a program of a total of 4 plus 4, 4 firm and 4 options. We are planning to drill 6 Gamba wells, 2 in Ruche and 4 in Hibiscus. And then we have an additional 2 potential slots for exploration wells, and we are currently working on these exploration targets. The pipeline will be installed by Technip upon the arrival of the unit in late September. So we expect, as I said, to have the infrastructure all in place and ready to go as soon as we get the wells up and ready. The CapEx, I'm very pleased to announce, is holding. We did see some price creep towards the end of the project, mainly related to increased fuel costs and some expediting we had to undertake to maintain project schedule. But we are still very much below the original FID budget of $490 million. So we are extremely pleased with the financial outcome of these projects. Then on to Maromba. Maromba will unlock material production increase as well when we expect first oil in 2025. And of course, based on a significant increase in our 2P reserves of 105 million barrels. We are working diligently on our development plan and its approval of same. Right now, we are working full steam on the completion of the project financing activities. We have, in the meantime, put the FPSO Polvo in lay-up pending yard selection and pending completion of these project financing activities. Then on to Kudu. We are continuing the work on our Gas to Power project based on the already discovered and proven resources in the Kudu name structures. We have progressed extremely well in negotiations with power off-takers, and we are progressing on signing up MOUs so that will allow us to go back and start work on the financing activities. Recent oil and gas discoveries made by Total and Shell in Namibia has, of course, put a lot of new focus on Kudu as well. We have acquired additional 2D seismic to evaluate the subsurface potential. Kudu is up-dip on the very significant discovery of [indiscernible]. And that is, of course, making these structures that we see in the last Kudu North province extremely interesting. So we see both oil-bearing potential in the Kudu North as well as additional gas from gas horizons in the same region. So we are putting a lot of activity into this at the moment with the information we can glean from public sources. Today as more and more is known about the discoveries made by Total and Shell. Then on to Golfinho. I'm sorry for this somewhat hazy slide, but we are summing up the transaction that we have agreed with Petrobras here on this first slide. We are -- have agreed to acquire 100% working interest in Golfinho and Camarupim clusters as well as 65% in Brigadeiro. current production at the -- production we expect is about 9,000 barrels when we take over in first quarter of 2023. And that's from an estimated 38 million recoverable resource. We also see gas potential in this poster. And we see 0.7 Tcf with further potential. The total consideration for the field is $75 million that we expect to pay. That's including contingent payments with the oil price production and future successful developments. With respect to abandonment liabilities, Petrobras takes responsibility for all existing hardware that we're not going to use, we take responsibility for the hardware that we are going to use as well as any new hardware that we decide to put in this -- basically the scheme. We have also agreed to acquire the FPSO Cidade de Vitoria from Saipem for a total consideration of $73 million. The takeover of the Golfinho and Camarupim operations will allow us to build a solid relationship with the government ahead of the Maromba -- the significant Maromba development. And we see these as excellent synergies. The transaction will be covered through existing liquidity and cash flow from operations. Golfinho is today producing from 6 wells. And we have, in our pre-work leading up to this agreement, identified 2 initial well opportunities that will add significantly to production. The acquisition also includes a gas line -- export pipeline to also gas processing facility. And we see Brazil as a very interesting market for gas in the future. It's a growing market. The reservoirs are with the progress that's quite a good quality sandstone reservoirs. So we see a very good potential and only minimal risk to further development. If we sum up what this is doing to BW Energy, we have made a kind of before and after. So if we look at production, we win with the acquisition, more or less doubled the production of the company. We will increase the 2P reserves by 22%. We will increase the Tcf with potential reserves by almost 200%. So we consider this to be a very accretive acquisition for the company. The planned production from the Golfinho cluster is depicted here in this slide, resource base current 38 with a potential of 116 -- [indiscernible] from nearby opportunities and easy routes. And we see -- we are estimating a CapEx for in-fill opportunity for approximately $200 million with a significant add to production with gas lowering in 2026. Then some details on the payment structure. The Field transaction, we expect to pay $75 million, as I previously said. There is -- we have $3 million at signing. There is a further $12 million to pay at closing and then we have conditional payments of $60 million, continuing upon project development and production, and production duration and Brent oil price. So we totally expect to pay that in the current oil price environment. The FPSO transaction is $73 million total, $25 million closing, $13 million at take over and $35 million in installments over a period of 18 months from takeover. So in total, we expect to pay $148 million for the Golfinho and Camarupim cluster, and the [indiscernible]. I will then leave you to Knut, who will take you through the Q2 financials.

Thank you. Yes, I will take you through a few slides on our Q2 financials. And just to add, we have also issued the half year results today in a more formalized report where you can find all details on income statement, the balance sheet, cash flows and also the notes on our website. We also have supporting price with earnings table. So if you would like to see more details, you can go in there. So going to the income statement. We had a quarter -- we issued a trading update early July. So these numbers shouldn't come as a surprise to you. We have very low operating revenues due to the fact that we didn't have any liftings. We had 1 lifting in -- a big lifting of 950,000 barrels in March. And then the government had their lifting in June this year. So there were no liftings for BW Energy in the second quarter. We had one in August, as Carl just mentioned, and we will have another one in the fourth quarter. But this quarter is very low on revenues and also operating expenses due to the fact that we didn't have any liftings. So -- also to add here, we had the hedges that we explained in detail in the previous quarter. We had another $4 million in losses on those hedges, bringing EBITDA down to $5.5 million in the second quarter. The depreciations are following sales volumes. So they are much lower, but the other differentiations on the right-of-use assets follow production, so they are more in line, giving us an operating loss of $3.5 million in the quarter. On the financial items, we have just mentioned a slight increase in the lease liability interest expenses due to the fact that we report Polvo in the previous quarter, that is accounted in the forward income statement as a lease expense. So there was an increase there. Bringing the profit before -- sorry, the loss before tax, $5.5 million. And the tax expense is again following production, giving us a net loss for the quarter of $16.5 million. To the balance sheet. We -- as just mentioned, the Polvo purchase comes into the right-of-use assets. Then on the E&P tangible assets, we are adding because of our investments in Ruche Phase 1, mainly. Then in the tangible assets, we have also some increases, and that is explained here. We had a very high increase in the inventories since we didn't have any liftings. So we had an underlift position. On the trade receivables, we had a very high decrease because of the March lifting that was in freight receivables. Now that has turned into cash. And on the other side of the balance sheet, we have the long-term lease liabilities increasing due to the full Polvo purchase, some settlements on trade tables and then also some transactions leading to changes on the derivatives with realized losses on hedges and also some unrealized losses in Q2. We are very pleased with the developments on cash flows. We had -- starting with the quarter, we had cash position of [ $10.8 million ] and a very good operating cash flow of $72.4 million, mainly the payment done of the March lifting offset by the investments of [ $52 million ], as you can see here, bringing our cash position to $123.3 million. We also had a high activity on the financing side in the second quarter, where we finally in August signed an international reserve-based lending facility of up to $300 million. The funds will initially be used to finance further development of Ruche Phase 1 and 2 in the Dussafu license. We have an initial commitment from banks of $200 million, which can be extended then up to an additional $100 million with an accordion facility. And we are currently working with banks to see if we can get the full commitments up to another $100 million. This secured long-term debt facility is provided by a syndicate of 5 international banks and has a tenure of 6 years. Then we come to the summary. So to our strategic priorities and imperatives. On the production and exploration side, it's to optimize product output, including the new gas lift capacity, the compressor that we have under construction that we -- will be transported to Gabon and installed on the BW Adolo. Then we will continue to evaluate the Dussafu exploration targets in the time to come. On the development side, of course, bringing Hibiscus-Ruche to first oil at the end of Q1 2023 is very important to us and a very high focus. In addition, we're working hard on Maromba to get to FID and to finalize the project financing. We are currently working with a set of banks in the Middle East, and hope to give you some updates there in the coming quarters. And then maturing new right-sized Kudu Gas power project with a new, let's say, low CapEx and improved timeline. On the corporate side, we are very pleased to have maintained a very strong balance sheet and the liquidity is now further supported by the RBL. Now that we also have Golfinho, Camarupim. We are working hard to get that closed in about 5 to 6 months. And both the increase in production from the Dussafu license and Golfinho will then give us very good operational cash flows to also fund new projects and shareholder returns. And our intention is still to pay the dividend of up to 50% on net profit when we have Dussafu and Maromba in full operation. We also added a graph on the right-hand side, where you can see what this is doing to our production and also the cash flows in the time to come. So we will more than double our production with the start-up of the Hibiscus-Ruche wells and Golfinho during 2023. We will even further increase production as we go along. So to sum it all up, we expect to create significant value for our stakeholders going forward. In the shorter term, the focus is obviously bringing Hibiscus-Ruche to first oil and closing the asset transactions in Brazil. And these are milestones that will really change the company from 2023 and onwards. So this will then further support our cash flow. At current oil price levels, it looks extremely good and also giving us a very solid capital base with the RBL and additional funding for new accretive projects. So then, we are ready to go into Q&A. And then I'll leave it back to the operator for questions. And then we can also see if there are any questions from the web. So over to you, operator.

[Operator Instructions] Your first question comes from the line of Teodor Nilsen from [ GCC ] Market.

Three questions for me, if I may. And just on the size of the orders lifted, if that's something that you can disclose. The second question is on general CapEx to say that the Hibiscus-Ruche CapEx is [indiscernible]. I just wonder what you see your general cost inflation in the industry? And do you see any more cost inflation in some parts of industry than others? And the last question is on Maromba and your current stake of 95%. Any thoughts around that? Then we will continue to farm down closer to first quarter maybe after first oil. And that's all.

Okay. This is Carl. I can take -- try to take your questions one by one. The size of the obvious lifting, I think it's around 680,000 and some barrels, 680,000. Cost inflation. Here, I have to give a little bit more qualitative answer because, as I'm sure you appreciate, a lot of the contracts were spying ahead of, let's say, this last turn of rapid inflation that we've seen. So -- the -- my guess is that what we have seen or what we will see is that cost inflation in the range of 10% to 20%, depending on what you're talking about. Labor rates have not gone up dramatically, but the equipment have. So I would say 10% to 20% would be a kind of range of the cost inflation that we're seeing. We do not see the same cost pressures now. So we expect this to be holding for -- let's say, if we were to start a project today, we would estimate that. Farm-down, we do -- we were always open to have discussions -- meaningful discussions. But of course, we are very -- let's say, we are very aware of our own capabilities. And we are very aware of our own -- of the value of our assets. So we're not going to make any fire sale just to get some money in the door that we have absolutely the capability to finance Maromba. And yes, in the future, we will, of course, always look at our portfolio and the entertaining discussions as long as they are meaningful with respect to valuation.

[Operator Instructions] There are no further questions from the phone lines. I'll turn the call back over to Knut for questions from the webcast platform.

Thank you. we have several questions, and I'm trying to structure them together. There is one question. That's the first one. With regards to BW Energy's low valuation, is there a danger that BW Energy will be bought out by a larger player? And the answer to that is that we normally not comment on any mergers or acquisitions initiatives, either way. But what I could add to it is when you look at the shareholder structure of the company, you would have to agree with someone at least before that could be done. Then we have some questions to Golfinho. I don't know whether Lin, I know you had issues on -- with your line, if you're on -- I...

Yes. I'm here, if you can hear me well enough.

Yes. Loud and clear. Thank you. So there are a few questions on Golfinho. First one is, is it -- no -- it is normal for oil acquisition to have an effective date sometime prior to completion with a working capital adjustment to the price. Your deal only has an effective date when you complete. Why was it structured this way?

Well, this was the protocol that we had to go through with Petrobras. They have a very regimented formula for their transactions and we had to adhere to that. So that's the short of it.

But I think we can add that for the time being, the fuel was shutdown due to some remedial work that Petrobras is doing. So -- in one sense, that's good for -- or in 2 senses, that is good because, first of all, they do the remedial work; secondly, they're not producing at the moment, leaving barrels in the ground for us.

Yes. And then there is another question which is at what price or linked to what index would you expect to sell gas on Golfinho in Brazil?

If I heard the question, what's the gas price we hope to achieve?

That's correct.

All right. Right now, the gas market is very robust in Brazil. I don't think it's quite on par with what Europe is seeing, but it's higher than what's happening in North America. So with that in mind, it's part of the interest and excitement that we got into Golfinho because, as Carl mentioned in the presentation, there was a large gas potential upside close to 0.7 Tcf of gas. So our intention is to commercialize that and bring that to bear. And -- as for a specific gas price, I gave you a range there about what we're seeing right now.

Okay. And then what is the main timing constraints that means it will be 3 years before you expect production from 3 in-fill wells that you expect to do. I believe it's...

Correct. Two in-fill, one 1 in-filled oil well that we're very excited about and one in-fill gas well we're very excited about. These wells are in the Golfinho license and they're already part of the existing Petrobras development plan. So that's part of the planned wells. I think we're being very conservative on the timing. I think we've got a stretched target to bring that forward. But this is our first time operating in Brazil. So I think we're taking a measured approach, and we will bring these wells on. But at the same time, once we become operative, we'll be advancing the concepts to commercialize the gas accumulations in Camarupim and potentially Brigadeiro as well.

Okay. And then there is a question, how is the taxation on the Golfinho production. So that is a standardized tax machine in Brazil, where there is a royalty part to it and then there is corporate income taxes. Royalty is currently 10%. There might be a reduction there for our future production due to the fact that this is a mature and smaller field. So it might come down to 5% for new production. But we've done 34% corporate tax. And then the final question for Golfinho is on the FPSO. Yes, the gas from Camarupim will then be tied back to the existing FPSO on the field. So there is no need for a new FPSO. And the timing of that is in early '26. I believe that covered the Golfinho questions, and then we might jump over to Kudu. There was a question about seismic that we had acquired seismic. And the question was whether we had analyzed any of new 2D seismic and if we could give the audience some [indiscernible] about standard outcome.

Well, maybe you, Lin, take that one?