Dana Gas PJSC (DANA) Earnings Call Transcript & Summary

Thank you, ladies and gentlemen, for joining us today for our second quarter 2020 financial results conference call. I will now hand over the call to Mr. Mohammmed Mubaideen, Head of Investor Relations, to introduce the call. Sir, please go ahead.

Welcome to the Dana Gas Half Year 2020 Financial Results Call. Presenting today are CEO, Dr. Patrick Allman-Ward; and 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. We last spoke in mid-February when we announced our full year 2019 financials, and a lot has changed since then. On the macro front, the effect of COVID-19 has created unprecedented economic and social challenges to governments across the world as well as material near-term uncertainty in global energy markets, resulting in significant volatility in oil prices in 2020. While Dana Gas is somewhat insulated from oil price volatility due to our gas-focused portfolio, the company has not been fully immune to this global crisis. Despite the challenges we have faced over the last 6 months, the company was still able to generate a net profit of $18 million before impairment charges, which is a remarkable achievement. These results demonstrate our very low-cost structure that we have continued to improve since 2014, allowing us to deliver profitability and positive returns, even during such extreme price cycles. Currently, natural gas constitutes 75% of the company's production, which is sold under long-term gas sales contracts with host governments at prices unaffected by falling oil prices. These gas sales account for approximately half of the company's revenue, providing us with sustainable revenues and cash flow. Our number one priority has been the health and safety of our staff. We immediately implemented stringent COVID-19 health and safety protocols across all our assets, which has allowed our operations in the KRI and Egypt to continue uninterrupted to this day. I wish to express a big thank you to our teams in the KRI and Egypt, in recognition for the huge efforts made and the dedication shown by them. At this point, can I ask you all to turn to Slide 5, where I'll take you through our activities and accomplishments during the first half of 2020. Please note that unless otherwise specified, all figures refer to the half year period rather than the second quarter. Let me start with our financial numbers. Our net profit for the half year 2020 was $18 million versus $52 million in the first half of 2019 on a like-for-like basis. On an adjusted basis, including a $37 million noncash impairment charge, the company posted a loss of $19 million. We reported $181 million of revenue as compared to $242 million in the first half 2019. The majority of the decrease of $61 million was as a direct result of lower realized prices. The company's group production numbers for the half year were 63,250 barrels of oil equivalent per day, a 7% decrease on the first half of 2019. Production in Egypt has fallen by 9% over the last 6 months. Operations have continued despite the pandemic and the reductions in Egyptian production levels was as a result of natural field declines. The only operational impact the company has felt as a result of the COVID-19 pandemic has been a delay in Pearl Petroleum's KRI expansion plans. The EPC contractor declared force majeure on delivering the project to the agreed time line on account of the difficulties in moving people and equipment into and out of the country. Whilst commencement of all construction work has been delayed, the engineering and procurement work has continued, and all parties remain committed to executing the project as soon as practically possible. As previously announced, the company engaged financial advisers last year to carry out a strategic review of its Egyptian business, including looking at the possible sale of the assets. The process continues, although it has been delayed as a result of the COVID-19 pandemic. I can confirm, however, that the company's onshore and offshore exploration concessions are not part of the contemplated transaction. We remain very excited about the prospectivity and growth potential, particularly with respect to the Block 6 North El Arish concession area. The company expects to make a further announcement during the second half of the year. Regarding the Sukuk. The company continues to explore the various financing options available to it. And as previously announced, has hired financial advisers to assist it in evaluating these options. Chris will go into some more detail later on this subject. Turning to Slide 7. As I mentioned earlier, our group production number was 7% lower at 63,250 barrels of oil equivalent per day versus 68,200 in the first half of 2019. Egypt's production was 30,950 barrels of oil equivalent per day, a 9% fall as a result of natural field declines. Production declines are a natural part of the business, and therefore, require investment and active reservoir management to offset decline. The fields declined 9% as against the natural decline rate average of around 20%, reflecting a lot of effort being made by our reservoir engineers and field operators to optimize production. KRI production was 31,700 barrels of oil equivalent per day, a 2% fall as compared to the equivalent period last year. This is a reflection of the metering issues previously reported at the Khor Mor field, which resulted in an over-reporting by around 6% of the volume of gas supplied by Pearl to the KRG during the equivalent period in 2019. We also had no production from the UAE's Zora Gas field, which contributed 1,000 barrels of oil equivalent per day to group's production in the first half of 2019 before operations were suspended in early September. The bottom 2 graphs illustrate the significant decreases to average realized liquids prices and also paints a picture of just how tough market conditions were in the first half of 2020. The group realized average price for condensate was $30 per barrel, a sharp decline on $51 per barrel in the first half of 2019. And for LPG, it was $28 per barrel of oil equivalent versus $33 in the first half of 2019. It's also worth noting that Brent averaged $40 per barrel as compared to $66 per barrel in the same period last year, a 40% drop. I would now like to provide some more details on our operations. Please turn to Slide 8, where we start with Egypt. I have already mentioned our ongoing sales process. We will update the market when we have something concrete to report. Operations proceeded as usual during the last 6 months. We have strict protocols in place to maintain the safety of our team and assets. And this played a crucial part in our ability to carry through our planned program of well workovers, which I am pleased to report is successfully underway. We completed a Phase 2 compression project on our Faraskur field in April, which has added approximately 8 million standard cubic feet per day or 1,500 barrels of oil equivalent per day to our daily production output. The effect of this increase will be more pronounced in the second half of the year, and will help offset further natural field declines. We plan to start drilling an infill well in the Balsam Field imminently. As soon as it has been completed, it can be tied back quickly into the existing facilities and provide significant incremental production before year-end by accessing additional gas volumes updip from existing producing wells. We are continuing with our regular condensate delivery as part of our GPEA program. In the first half of 2020, we delivered 635,000 barrels of additional condensate EGPC and received $22.75 million against an irrevocable letter of credit during the period. We'll move on now to the KRI. So please turn to Slide 9. Our KRI operations started the year strongly. Pearl Petroleum appointed an engineering, procurement and construction, EPC contractor, for the first of the 2,250,000,000 standard cubic feet per day gas processing trains planned at the Khor Mor gas processing plant. The appointment of a contractor marked a key milestone in Pearl Petroleum's long-term expansion plans and ambitions and followed the final approval by the Ministry of Natural Resources of the Kurdistan regional government, which oversees the project. The implementation of the first 250 million standard cubic feet per day gas processing train was due to be carried out immediately, and first gas was expected by quarter 1 2022. However, the COVID-19 pandemic struck and brought a delay to the entire project as well as the planned drilling of the much anticipated block 19 exploration well as well as the additional development wells, which were scheduled to start later this year to provide the incremental production for the additional gas train. The EPC contractor declared force majeure on delivering the project against the original time line as a result of movement restrictions, both within as well as into and out of the region. These and other preventative measures still in place means that project work has not been able to be resumed as yet. Meanwhile, the project and basic engineering work is ongoing, and everyone remains 100% committed to resuming on-site project work once conditions on the ground allow. The EPC contractor has assured Pearl that it remains committed to the EPC project and is taking all commercially reasonable steps to mitigate the impact of COVID-19 on the project. We are fortunate that, like in Egypt, we have been able to keep our operations fully functioning during this challenging period. We have imposed stringent controls and preventative measures to ensure that to date, our plant has remained COVID free. Now turning to Slide 10 and our arbitrations. We have no new updates regarding the NIOC case which was last discussed at the AGM. At that time, we made the following observations. Firstly, there is no deadline as to when the tribunal must issue an award. The tribunal previously gave an indication as of the timing of the issue of an award, which the company disclosed. Unfortunately, the tribunal did not issue its award within that period and still has not to date. Timing is completely in the hands of the tribunal, and the company has no control over this. However, in the first damages claim covering the period 2005 to 2,014, the new tribunal has agreed that they can issue a damages award on the basis of the existing evidence and documentation. And that a limited additional hearing would be needed to clarify certain questions. This final hearing was postponed due to the COVID-19 pandemic. That has now taken place. We would, therefore, hope for an award to be made by early next year. Secondly, as you are aware, Dana Gas is not a direct party to the arbitration with NIOC. The arbitration case remains between Crescent Petroleum and NIOC, and is subject to the usual confidentiality requirements of arbitrations to which Dana Gas is not a party. As soon as the company has news of the award from Crescent Petroleum on damages, we will inform the market. I will now hand you over to Chris to talk through the financial numbers.

Thank you, Patrick. Good afternoon, everyone. Please turn to Slide 12, which provides an overview of our financial numbers. This set of results noticeably demonstrate how resilient our business is. Despite the record low oil prices, the company has managed to release a decent set of results. Let me start with reporting on net profit, which is $18 million, excluding one-off items. Our disciplined approach to cost control since the last price downturn in 2014 and our ability to operate in low-cost environments meant that we were able to endure this sudden downswing in the market conditions. The critical point here is that we made a profit despite the lower realized prices and the exceptionally weak macroeconomic environment. This is a remarkable feat for a company of our size and scale. On a non-adjusted basis, we posted a net loss of $19 million. The company took an impairment charge of $37 million during the first half of the year. This included $30 million related to the oil and gas assets in Egypt as a result of the lower prices being forecast and a further $7 million related to financial assets. In Q2 2020, data Brent averaged $30 per barrel and touched a low of $9 per barrel on 21 April. Despite historic low prices, Dana gas ended Q2 close to breakeven with a small net operating loss of $3 million, demonstrating our ability to stay resilient even in a low oil price environment, given our fixed price, long-term gas contracts. Our revenues this half were down 25% to $181 million. The decrease is attributable to lower realized prices and lower production numbers. The impact of lower realized prices was $42 million while a decrease in production impacted revenue by $19 million. Gross profit reduced to $39 million as compared to $74 million in the corresponding period, which was due again to the same reasons as above. Please turn to Slide 13, which covers the company's expenses during the period. There was a company-wide effort to preserve operating expenses during the first half of the year. We decreased our G&A by $2 million, demonstrating our continued focus on cost control. We expect further savings in the second half of the year as well. Our operating expenses was in line with 1H 2019 at $27 million. Together, G&A and OpEx for the first half totaled $33 million versus $35 million for the same period last year. Our CapEx for 1H 2020 was $25 million, 72% less than the $89 million spent in 1H 2019. This was evenly split, with Egypt, incurring costs of $15 million and the KRI, $10 million, respectively. Moving on to Slide 14, which covers the company's liquidity and collections position. Our cash position for the half year 2020 stood at $366 million, a decrease of 14% compared to $425 million at the end of 2019. This cash balance includes $58 million held by Pearl Petroleum. During the period, the company paid a dividend of $104 million, bought back Sukuk amounting to $18 million and made a Sukuk profit payment of $8 million. As of June 30, the company's debt position stands at $452 million, consisting of $318 million outstanding Sukuk and $72 million of nonrecourse project debt at the Pearl level. In the period since the first half results ending June 30, 2020, the company completed a further $71 million Sukuk buyback, bringing the total 2020 buyback program to $89 million. The overall cost savings for the company in profit payments and repayments of maturity represent circa $10 million. The outstanding total for the Sukuk is now $309 million, with a full amount due for repayment on the 31st of October 2020. We had made an announcement a few weeks ago that we have hired Houlihan Lokey as our financial adviser to specific look at various financing options. I will add here also the proceeds received from the sale of Egypt would also be used to set the Sukuk. We expect to reach a resolution on the preferred course of action on financing in the coming weeks, and we will update the market accordingly at that time. Regarding collections, the company has received $90 million in the first 6 months of the year against total billings of $111 million. Its share receipts by Pearl petroleum in the KRI contributed $47 million and Dana Gas Egypt brought in $43 million in collections, respectively. The company received $50 million in dividends from Pearl during 1H 2020. Our trade receivables in Egypt now stand at $117 million, edging up by $6 million as compared to year-end. However, when comparing our receivables position in 1H 2019 versus 1H 2020, they remain the same at $117 million. As the pricing outlook improves, we anticipate that this receivables balance will continue the same downward trajectory demonstrated prior to the COVID-19 crisis. The KRG has paid all of Pearl Petroleum's invoices on time and in full from March 2020 onwards. As of the 30th of June, our KRI receivables is $39 million, principally related to the as yet unpaid invoices for a 3-month period from December 2019 to February 2020. All international E&P companies operating in the KRI have faced the same issue. And alongside all these companies, we have been in discussion with the KRG to agree a mechanism and timeline to settle these outstanding payments. And with that, I'll hand you back to Patrick.

Thank you, Chris. Now to sum up our discussion. Please turn to Slide 16. The company has put in a strong and resilient financial and operational performance in the first half of 2020. We have demonstrated our company's ability to operate successfully in low-cost environments, and that is clearly evident in our quarter 2 results, where we recorded only a marginal loss despite historically low oil prices. We were able to swiftly execute safety measures to ensure our assets and people remain operational and safe despite the great difficulty of continued working under the restrictions put in place as a result of the pandemic. I would like to thank again our employees for all their efforts, staying safe while enabling us to continue serving our customers, especially the KRI's critical energy needs. We also remain focused on strengthening our balance sheet to better position the company for the future. And now before handing back to Mohammmed to open the floor for questions, I know many of you will have lots of questions regarding the Sukuk and the Egypt asset sale. There are certain strategic actions that we will be taking in due course, which we believe will benefit all our stakeholders and enhance the company's long-term value. However, as it currently stands, we have nothing more to add regarding these 2 issues than what Chris and I have already discussed during this call. Thus, could you please refrain from asking questions related to these topics as we will not be able to elaborate any further. Thank you again for your time and for listening. Over to you, Mohammmed.

Thank you Patrick and Chris. We will not start the Q&A session. [Operator Instructions]

[Operator Instructions] Our first question comes from [indiscernible], JB Capital.

Gentlemen, congrats on the decent set of results during such difficult times. I know you don't want us to ask about the Sukuk, and I'm not going to ask about the Sukuk specifically. However, I would like your take on the dividend that was distributed in May this year knowing that you have a Sukuk maturing in October and given the difficult times that we have been living. We have seen other companies in the region with very strong balance sheet refraining from paying dividends, cutting them or delaying them. How would you justify such an action by Dana Gas given the timing and the Sukuk maturity?

Thank you, [indiscernible]. When the Board took the decision to issue a dividend for 2019, it was in the context of an extremely strong set of results that the company had delivered for the year 2019. And the Board decided that those results justified the payment of the dividend to the shareholders. We also, at that time, believe that, and continue to believe, that we have the financial strength to pay down both the dividend and also the ability to meet all of our future payment obligations. Chris, do you want to add anything further?

No, Patrick, I think you've developed for that very fully. Thank you.

Our next question comes from [ Suman Somani ], [ Jackup Investment ].

Two questions. Firstly, what is the revised time line you're looking at now for the 2 expansions, given what happened in the last, say, couple of months, the force majeure and all that? And given the fact that things have sort of started to normalize. So what time lines do you see now in terms of bringing online those 2 expansions, number one? And number two, just want to -- an update on the spin-off transaction that was announced a couple of months back on the exchange, whereby you were going to spin-off the Iranian distribution assets. So any update on that?

So thanks for that question. With respect to the revised time line for the 2 expansions, as you will recall, the original time line was for first gas from the first production train to be coming onstream by the first quarter of 2022. That was, therefore, 2 years essentially from the award of the EPC contract. Clearly, and as we've said, there has been a delay since the beginning of this year. And we still anticipate, however, that as soon as we are able to get back to work, that the project will take a similar amount of time to deliver. So whatever the elapsed time between the beginning of this year and the time that we actually start getting back to work will be the same amount of a elapsed time from the first -- start of first gas from the first train. Clearly, we're monitoring this on a regular basis. The situation in the Kurdistan region of Iraq has not improved to the same extent that it has in some other countries. So we are constantly updating our plans and seeing what we can do in order to be able to get the project back on track as soon as possible. However, having said that, in the meantime, we have been able to continue with all of the front-end engineering design work, and that is almost completed. And we have also been able to make progress on procurement aspects. So it's not that the project has come to a complete halt, but certainly, as far as the on-site civil engineering works, that has not started as we had originally hoped it would in the first quarter of this year. So I hope that's addressed your questions about the first expansion. And the second expansion plan, we would hope to be able to run back-to-back and with the same kind of delivery time frame as we had originally expected. So we originally expected the second train to be producing by 2023. So again, it would be about a 12- to 18-month period following the completion of the first train. In terms of the demerger, we are continuing to study that. We are in discussions with [ ESCO ], and we will, again, advise the market when we have something of note to communicate. Chris, do you want to add anything to that?

Not really. You're right. We're still discussing the structuring and related issues of the demerger with ESCO. It again is somewhat delayed given some of the pandemic related issues but as you rightly say, we'll report back to the market as soon as we have some tangible to say.

Sure. So just a clarification on the time line. So is it fair to say that at least the first phase has been delayed by, call it, 6 to 9 months? And then secondly, can't you sort of combine Phase 1 and Phase 2 now? And maybe instead of having 12 to 18 months from the point of delivery of Phase 1, you can maybe do something together so that at least the time period between the 2 expansions can be curtailed?

So with respect to the time line, yes, for whatever -- as I said, the time lapse between when we had expected to start the civil engineering works in the end of the first quarter of this year and when we actually start those several engineering works, that will be the equivalent delay in the start up of first gas, assuming, of course, that the normal kind of work practices can continue. But that will clearly depend on the trajectory of the COVID pandemic. We'll have to obviously see that as we go along. Yes, we are always looking to optimize the delivery of the time line and where we can, we will. The issue with respect to the second train is that we need to have the gas sales agreement in place for the second tranche of 250 million standard cubic feet per day of gas. And whilst we've made good progress in terms of our marketing, we are not yet in a position to have that gas sales agreement signed off. And so the actual decision to press the button on the second train has not yet been taken. But certainly, we believe that the market is certainly there, in the Kurdistan region of Iraq and also in the country of Iraq itself. We have no doubt about that. But again, negotiations around this have been somewhat impacted by COVID-19.

[Operator Instructions] Our next question comes from Gus Chehayeb, Sancta Capital.

Chris, Patrick, this is Gus from Sancta Capital. Hope you're both well. I just have a couple of questions. Are you able to clarify what the company's cash balance is as of now? I know that -- we know what it was at the end of June, but given cash flows and scoop buybacks since then, it's obviously -- it's changed since then. So that's the first question. And secondly, how much of that cash is usable? Meaning how much of it is locked at Pearl? If there is money at Pearl, are you able to use that as well for your needs outside of KRG? And then finally is how much cash do you need in the business right now in terms of how much would you want to keep on the balance sheet post delevering?

Thanks, Gus. I was just checking that I wasn't on mute. Let me hand those questions -- thank you for your good wishes, and indeed, maybe we should have started our discussions today with the hope that everybody and their families on the call remain well and safe. Chris, do you want to handle that? Give me a bit?

Sure. Hi, Gus, good to hear from you. Yes. So you've got the mid-year numbers, I think, should have been in front of you, that's $366 million of cash and $452 million of debt, $380 million was a Pearl balance -- sorry, $72 million was a Pearl and the balance was the Sukuk at that time. The only number that we've given you beyond that was the amount of Sukuk buybacks we've done and the cash position around the 13th of August, which is around $295 million. Then you asked about how much is locked at Pearl, just over $50 million, from memory, is approximately that. Although we will, I think, get a dividend quite soon from Pearl up to the parent. So well, we've traditionally tried to keep a cash balance of approximately $100 million in the business. That was when we had a very large amount of Sukuk outstanding. We now have considerably less. I mean, that was a target that we used to have internally when the Sukuk was $700 million. We can revise that down. Obviously, given the current pandemic and the instability around oil price, et cetera, around then, we don't want that cash balance to get too low, but I'm not going to put a definitive figure on that at the moment.

Got it. I appreciate it, Chris. And yes, just if I can just follow-up. Do you have any cash needs at Pearl? Would you need to inject cash into Pearl at all for this? I know that wasn't the case before the whole pandemic and the EPC build, so is that still the case?

Yes, Gus, it's still the same. In fact, as I said, we're going to get a dividend quite shortly up from Pearl. So some of the money I mentioned being stock up pull actually will transfer to HO pretty soon. So no, we're still financing at Pearl, no need for monies to come down from parent to Pearl itself.

So Gus, just if I'd add just a brief additional comment there because, as you know, and of Pearl operates a system of cash sweeping so it maintains sufficient capital in its -- for its own needs, covering a certain number of months, operational and CapEx requirements. And over and beyond that, the monies are dividended out to the shareholders, which is why Chris indicated that we are expecting a dividend payment shortly. And I think maybe I can also add to that the good news that other than the 3 months of nonpayment for gas and condensate between December and February, that since March, the Kurdistan regional government has been current with all of its gas and condensate payments, and we continue to get regular payments, obviously, from our local traders who are lifting and selling our LPG.

[Operator Instructions] We have no further questions. Mr. Speaker, back to you for the conclusion.

Thank you very much, everybody, for being with us on the call. Please feel free to follow up with me if you have any further questions. And please be safe, you and your families, are looking to stay in touch with you guys soon. Thank you.

Thanks, everybody, for joining. Stay well. Stay Safe.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you all for attending. You may now disconnect.