Dana Gas PJSC (DANA) Earnings Call Transcript & Summary

Gentlemen, thank you for joining us today for Dana Gas 2019 Preliminary Financial Results Conference Call. I will now hand over to Mohammmed Mubaideen, Head of Investor Relations, to introduce the call.

Thank you. Welcome to the Dana Gas Full Year 2019 Preliminary Financial Results Call. Presenting today are the company's CEO, Dr. Patrick Allman-Ward; and the company's CFO, Chris Hearne. Please note that the presentation for today's call can be found on our website. I would like to draw your attention to our disclaimer on Slide 2, which we would encourage you to read carefully. After the presentation, there will be time for a Q&A session. I will now hand over the call to our CEO, Dr. Patrick Allman-Ward to begin.

Thank you, Mohammmed, and thank you to everyone for joining the call today. I'm pleased to be able to report on another year of very strong performance by Dana Gas. The company's full year results reinforce our position as the leading private natural gas producer in the region. We delivered both increased production and increased earnings, and 2019 saw us post our highest annual profit in over 7 years. I would emphasize that this positive performance was delivered in the face of the geopolitical challenges in our key operating regions, that everyone on this call already being all too familiar with as well as the economic headwinds, notably, lower energy prices. Despite these challenges, we were still able to execute successfully on our goals for the year. I will now take you through a summary of the key achievements. Please turn to Slide 5. Please also note that unless otherwise specified, all figures refer to the full year period rather than the fourth quarter. Let me start with our financial numbers. Our net profit for the year increased to $157 million versus a net loss of $186 million in 2018. This is our highest annual profit in 7 years. Net profit from core operations increased by 80% to $115 million compared to $64 million in 2018. These figures are on a like-for-like basis, so exclude one-off impairments, earn-out amounts and deferred income. The increase in profitability in 2019 was supported by a significant increase in production from the KRI, which added $40 million to the top line and helped partly offset the impact of lower realized prices. In addition, during the year, the company recognized both earn-out and deferred income entitlements, which also contributed positively to the bottom line. Our revenue was $459 million as compared to $470 million in 2018. This minor decrease is essentially due to lower realized prices and lower production in Egypt. Before I turn to the company's operational accomplishments, I would like to note that our strong financial performance underpins the company's ability to continue to pay a dividend. A proposal on making a dividend payment in 2020, in line with previous policy, will be put to the Board at this meeting in March. Let me now provide you with some color on our operational accomplishments. We are pleased to have achieved a full year production of 66,200 barrels of oil equivalent per day, a 5% increase. A key factor driving this performance is the significant production increase from the debottlenecking project in the KRI. The increase in the KRI more than compensated for production declines in Egypt and the UAE. The KRI operations remain highly exciting and the key focus for the company going forward. We were very active in the KRI during the year. We completed a workover program on 5 out of 6 existing development wells and the drilling of 2 appraisal wells in our Khor Mor Field, and completed the drilling of an appraisal well in our Chemchemal field. We also signed a new 20-year Gas Sales Agreement with the government for 250 million standard cubic feet a day of gas, representing the first phase of additional production from the Khor Mor expansion project due to come on stream early 2022. I'm also very pleased to report that we also increased our KRI 2P reserves by 10%. The increase is based on Pearl Petroleum's updated reserves certification from Gaffney Cline Associates, its independent reserve auditor. In the second half of 2019, we finished drilling our first deepwater well offshore Egypt. I will talk about the well in more detail later. However, it is worth reminding everyone that Dana Gas operates this well to the highest safety and environmental standards as well as efficiently, as the well was delivered without incidents, on time and below budget. Staying with Egypt. As many of you are already aware, last year, we engaged financial advisers to carry out a strategic review of the company's Egyptian business, including looking at the possible sale of our assets. Financial offers were submitted at the end of last year from a number of interested parties. Evaluation, clarification and due diligence of the offers continue, and a Board decision will be made by the end of the first quarter this year. In the case that the sale of the Egypt assets goes ahead, first pour on the proceeds will be on paying down our Sukuk. Chris will discuss this in a bit more detail later on in this call. Now turning to Slide 7. As I mentioned earlier, our group production number was 5% higher at 66,200 barrels of oil equivalent per day as compared to 63,050 barrels of oil equivalent per day in 2018. Driving our production success was the KRI, up 18% year-on-year to 31,500 barrels of oil equivalent per day. This was the result of our debottlenecking project that came on stream in quarter 4, 2018 and lifted our output close to 400 million standard cubic feet per day of gas. This was a very notable achievement by our KRI team that delivered this project safely and efficiently and with such a positive impact for the company, directly increasing the company's bottom line. In Egypt, our team put significant effort into reservoir management in order to maintain maximum output. It was a great effort, and our overall year-on-year output only fell slightly by 4% to 33,000 barrels of oil equivalent per day, against a much higher natural field decline rate. We have just started production from our new development lease, East South Abu El Naga, and this will have a positive effect on our output in 2020. The Zora Field in the UAE saw its average production fall to 1,000 barrels of oil equivalent per day. As of the 3rd of September 2019, the company ceased production from the Zora Field and gave notice of relinquishment. Final decommissioning and abandonment activities are underway, with an expected completion before the end of 2020. The bottom 2 graphs illustrate the average realized prices. The group realized average prices for condensate was $49 per barrel, a sharp decline on $59 per barrel in 2018. And LPG was $30 per barrel of oil equivalent, representing a 12% year-on-year drop. Please turn to Slide 8, which highlights our Egyptian operations. I have already mentioned our strategic review as one of the highlights. The other major activity that took place was the Merak-1 deepwater offshore well. We completed drilling operations, testing the shallow objective Miocene section in mid-July, reaching a depth of 3,980 meters in 755 meters of water. The well was temporarily plugged and abandoned as a dry hole. This was our first offshore deepwater well. And despite all the challenges, we drilled the well on time and below budget. Major exploration potential still remains in the deeper Oligocene reservoir section in the Merak structure, which can be accessed cost effectively by deepening the well. There is further material exploration potential in other prospects, including in multiple reservoir target levels in the [ Suria ] prospect, previously Lead 8. The Block 6 exploration acreage, therefore, remains highly prospective. And despite the result to date, I anticipate further successful exploration activity in this area in the future. More recently, production from the recently awarded East South Abu El Naga development lease in the North El Salhiya concession commenced in January 2020, 2 months ahead of schedule. In addition, a drilling program comprising 4 wells, of which 3 exploration wells and 1 development well will start mid this year, together with the program of well workovers. Should the exploration drilling be successful, any new fields can be tied back quickly to existing facilities. To complete the Egypt activity's roundup, since July 2019, Dana Gas stopped direct exports of condensate, and at EGPC's request started delivering all of the condensate to the refinery in kantar, against a revolving irrevocable letter of credit. In the fourth quarter of 2019, Dana Gas sold its full incremental production of El Wastani condensate totaling 305,000 barrels for USD 17 million. Since the cargo shipments under the GPEA program was initiated, and up to July 2019, the company has received $104 million for all 11 cargos it has sold. Onto the KRI now, so please turn to Slide 9. Pearl Petroleum's expansion plans are in full swing. Earlier in the year, Pearl Petroleum signed a new 20-year Gas Sales Agreement with the KRG to enable production and sales of an additional 250 million standard cubic feet per day of gas. The first train will raise Pearl's output to 650 million standard cubic feet per day by early 2022. The second gas train remains an integral part of Pearl's future development plans. The additional 250 million standard cubic feet per day of gas train will see output rise to 900 million standard cubic feet per day by 2023, from the current 400 million standard cubic feet per day at present. In May 2019, the company announced that its share of the proven plus probable, i.e. 2P hydrocarbon reserves, at Pearl Petroleum, Khor Mor and Chemchemal fields in the KRI, had increased by 10%, following the recent certification of reserves by its independent reserves auditor, Gaffney Cline Associates. The independently audit external report showed that the total share for Dana Gas is equivalent to 1,087 million barrels of oil equivalent, up from 990 million barrels of oil equivalent when gas declined, first certified the fields in April 2016. The certification of reserves was boosted by the booking of oil reserves in the Khor Mor Field for the first time. The certification confirms these 2 KRI gas deals is likely to be the largest in the whole of Iraq. In 2019, drilling activities were completed on 2 appraisal wells in Khor Mor and 1 appraisal well in the Chemchemal field. In addition, workovers were completed on 5 out of 6 Khor Mor development wells. We are working with the KRG to put together a development plan for Chemchemal in the light of the appraisal well results. Very excitingly, we plan to drill an exploration well called [indiscernible] in Block 19 with significant potential. The well should spud by the middle of this year. I'll provide you a very brief update on our arbitrations. So if you could turn please to Slide 10. In May last year, the company, together with Crescent Petroleum, received an award from the London Court of International Arbitration. In the arbitration initiated against the MOL Group in September 2017. The Tribunal's award was a welcome vindication for Dana Gas and Crescent Petroleum, finding in their favor on all key points and awarding them their legal costs. Regarding the NIOC arbitration. We have nothing new to report. Crescent will notify Dana Gas of the award as soon as it is issued. The timing of that is up to the Tribunal. But Dana Gas hopes that the notification will be received as early as possible, and we will update the market accordingly. However, Crescent Petroleum has informed us that they have commenced a new arbitration to address damage claims from 2014 until the end of the contract in 2030. I will now hand you over to Chris to talk through the financial numbers.

Thank you, Patrick, and good afternoon, everyone. I'm pleased to report that Dana Gas has delivered a strong financial performance for 2019. Please turn to Slide 12, so that I can take you through the numbers in some detail. Starting with our revenues. Our annual revenue was 2% lower at $459 million as compared with $470 million in 2018. Lower realized prices and declines in production in Egypt and the UAE were the main contributors. Production, however, increased in Pearl Petroleum by 18% and added $40 million to the top line. This increase helped to partially offset the impact of lower prices in production in Egypt, which combined to north of $51 million from our top line. Our full year gross profit was also lower at $127 million versus $140 million in 2018. This was due to a one-off reversal of $13 million in the first half of 2018. On a like-for-like basis, gross profit remained flat on the year. Whilst gross profit was flat, our full year net profit was significantly higher. Our reported headline net profit is $157 million as compared with 2018, when we reported a net loss of $186 million. Just to remind you, the loss in 2018 was largely a result of a one-off noncash impairment provision of $215 million, largely for the Zora project in the UAE. However, our net profit on a like-for-like basis, so excluding one-off items, was $115 million versus $64 million in 2018, an increase of 80%. The results reflect the strong underlying operational performance, which has underpinned this year's financials and allowed us to post our highest profit in 7 years. Please turn to Slide 13 of the presentation, which covers the company's expenses during the period. G&A and OpEx for the full year totaled $70 million. We have maintained costs at or below this level since 2016. This performance is a result of the strict cost control, which has been in place since 2014. In terms of capital expenditure. 2019 has seen us incur cost of $70 million in Egypt and $57 million in the KRI. The bulk of the Egyptian CapEx was spent on drilling the Merak-1 well, whilst the CapEx in KRI was incurred on drilling activities at Khor Mor and Chemchemal. As a reminder, Dana Gas has no funding requirements in the KRI as the capital requirements were sourced from contractor financing, operating cash flow and third-party financing at the Pearl Petroleum level. Moving to Slide 14, which covers the company's liquidity and collections position. At year-end, our cash position stood at $425 million, an increase of 4% compared to $407 million at the end of 2018. Our inflows for the year totaled $412 million, and our outflows were $258 million. In addition, $136 million was used for debt and equity payments and included $23 million of Sukuk buyback and servicing, $8 million of share buyback and the payment of a dividend of $105 million to shareholders. Our Sukuk is due for repayment in October. Patrick mentioned earlier that any proceeds from the sale of our Egyptian assets will be used to pay down the Sukuk. In case we don't sell Egypt, we will be using our cash position to partly pay down the Sukuk, and we are considering various options to make up for the shortfall, if any. Regarding collections, the company collected $285 million during the year. The breakdown is $138 million from Egypt, $139 million from the KRI and $8 million from the UAE. Our billings and collections were good this year, even though we were disappointed that an industry payment from the Egyptian government did not materialize at year-end. The company billed $109 million and collected $138 million, successfully reducing our receivables to $111 million. This represents a 21% improvement as compared to the same period last year. In the KRI, it is good to be able to report that Pearl Petroleum continues to receive regular payments, and we have no outstanding overdue receivables. The KRI is paying on time, which is excellent and gives us strong confidence for our planned future investments. Total dividends received in the KRI in 2019 amounted to $121 million and included a special dividend of $42 million, which was paid from the funds held for development following successful raising of additional financing for the expansion of the Khor Mor field. I will also add here that our share of borrowings at the Pearl Petroleum level at year-end were $59 million, all of which is nonrecourse to Dana Gas. And with that, I'll hand you back to Patrick.

Thank you, Chris. Now please turn to Slide 16, where I will provide a summary of what has been a very good year and give you an exciting preview of the growth opportunities that are in store for us in the coming few years, as we drive forward with our expansion program in the KRI. Firstly, we delivered a strong set of financial results for the year. Net profit, on a like-for-like basis, was up 80% in 2019, despite the drop in revenue from lower realized prices and lower production in Egypt and the UAE. Our profits are at their highest level in 7 years. Secondly, the KRI operations continued to outperform, with production up 5% to 31,500 barrels of oil equivalent per day. Our next phase of expansion is due to start imminently, resulting in production increasing to 650 million standard cubic feet per day of gas by early 2022. We hope to follow that very shortly with work on the next 250 million standard cubic feet per day of gas processing, which will take output up to 900 million standard cubic feet per day of gas by 2023. Our reserves increased by 10%, following the recent certification by Gaffney Cline Associates. And with over 90% of our 2P reserves now in the KRI, our strategy in 2020 and beyond is to focus on exploring, developing and expanding production from the region. Finally, the strategic review of the Dana Gas Egypt assets is ongoing. And the decision on whether we sell it or keep it will be made in quarter 1 of this year. The decision to sell is a strategic one based on managing Dana Gas' portfolio of assets to best deploy management time and the company's resources to maximize value to our shareholders. However, if we do not achieve a fair value for the Dana Gas Egypt assets, we have the alternative option to continue to manage our reservoirs and production to generate greater value. The exploration growth potential of the offshore Block 6 North El Arish concession remains outstanding, despite the disappointing results from the shallow objective section in the Merak-1 well. We have also successfully reduced our receivables further to $111 million, a 21% drop compared to the same period last year and the lowest level since 2011. Thank you so much for listening to Chris and myself, and I'll now hand you back to Mohammmed to kick start the Q&A session.

Thank you, Patrick and Chris. We will now start the Q&A session. [Operator Instructions]. Operator, please start the Q&A session now.

[Operator Instructions] The first question comes from [ Abdul Kaserachin ] from [ RCoM Capital ].

Good set of results. Just 2 questions, as Mohammmed said. The first one on the Sukuk repayment. I know that you are waiting for the review of the Egyptian situation and then you're exploring potentials, other potential refinancing options. I just wanted to get a little bit more color also, particularly in light of the fact that you obviously will declare or look to declare your dividend. I'm just wondering, will we have any clarity on what sort of refinancing options you might look at by the time you declare your dividend? And secondly, in terms of the KRI expansion, I know the funding is done at Pearl. Pearl decided not to pursue the public offering earlier in the year that they were -- or late last year, that they were looking at to fund the expansion. Have they secured the funding for the expansion now that they decided not to go ahead with that bond deal? Just wanted to get clarity on those 2.

Thanks, Abdul. And on the Sukuk repayment. Obviously, our needs, with respect to borrowing requirements will depend very much on the decision with respect to the sale of the Egyptian assets. If that does go ahead, the assets are secured against the Sukuk. So first call of proceeds will be on repaying the Sukuk. If that does not go ahead, and we decide to retain the Egyptian assets, then clearly, we will use some of our existing $425 million of cash reserves, but we will also look, of course, to raise additional debt because we don't want to go ahead necessarily as a 0 leverage company. Chris, do you want to add any comments on that?

No. I think that's a good summary. Obviously, we have the cash in bank at the moment. We'll wait to see the outcome of the sale of Egypt. And beyond that, we'll look at other sources of finance available to us. Obviously, we'll be looking at the bank debt market and other options as they materialize. But we can't say much more than that at the current moment.

Would you like to continue and answer the second question, Chris, around the KRI expansion funding, particularly the Pearl bond offering?

Sure. The Pearl bond offering is still a possibility. We looked at doing that last year. Pearl is in a strong position. It has a good track record now of collections within Kurdistan and has a strong EBITDA. So it has a number of financing options available to it. One of those was the bond. At the time, we had offers of bank debt that were more attractive. And also, we're looking at contractor finance. So those were more attractive at the time. The bond is something that we are continuing to look at. And we may well come back to later in the year.

The next question comes from [ Subramanian Hariharan ] from [ Al Nazir Investments ].

In fact, my question was also pertaining to the Sukuk repayment, and what's the plan for the company in case the asset sale doesn't go through in Egypt. I think it has been fairly answered. Thank you.