Dana Gas PJSC (DANA) Earnings Call Transcript & Summary

Thank you, ladies and gentlemen, for joining us today for Third Quarter 2020 Financial Results Conference Call. I will hand you over to Mohammmed Mubaideen, Head of Investor Relations, to introduce the call.

Thank you. Welcome to the Dana Gas Third Quarter 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 the 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. What an incredible few months it has been. I remember 4 years ago, delivering our quarter 3 results the day after Trump was elected as President. 4 years later, Trump has now lost the election, and I am once again presenting our quarter 3 financial results. How much has happened in those 4 years? The last month alone has seen the company deliver on some of its key stated strategic corporate objectives, objectives that have been successfully delivered during a uniquely challenging period. Firstly, as we always said that we would, the company fully redeemed its Sukuk on maturity day. We paid the remaining $309 million of outstanding Sukuk that was due. Secondly, we recently announced the signing of the sale and purchase agreement to sell our Egypt onshore assets while retaining our exploration concessions, including the offshore Block 6, which holds exciting, material upside potential. So we have successfully delivered on these 2 fundamental corporate objectives. In addition, we continue to plan for the critical expansion of our world-class assets in the KRI. Clearly, the current pandemic has restricted the speed of the development and the EPC contractor has declared force majeure on the timing of completion of the project. However, all parties are committed to progressing the project as quickly as we possibly can, and we keep moving forward with the works that can proceed such as engineering and procurement. Plans are now being put in place to enable civil engineering works to commence on the ground under strict health protocols and controls. We head into 2021 with a strong financial base and with a clear strategy to further develop our world-class fields in the KRI, whilst we look for potential partners to farm into our offshore block in Egypt, to share the costs of exploring this highly material resource potential of over 20 trillion cubic feet. I want to take the opportunity in my opening remarks to thank our highly dedicated staff, who under strict health and safety protocols, have managed to keep our operations running uninterrupted and at maximum capacity until today in both Egypt and the KRI. Now please turn to Slide 5. I would like to remind you that all figures are for 9 months 2020, unless otherwise specified. Also, we should not forget that the world is a different place than this time last year because of COVID-19, and this has also impacted Dana Gas. So I would encourage you to review these results in the context of the current business and economic environment. Let me start with our financial numbers. Given the announced but not yet completed transaction on the Egypt assets and to give maximum transparency to our investors, we are showing our numbers split by continued operations, i.e., our KRI assets and all corporate matters and discontinued operations. i.e., the Egypt assets that have been sold. This allows investors to get a sense of how the business will look like going forward once the Egypt asset sale has completed. Chris will take you through the numbers in detail. But for now, let me give you the headlines. In the first 9 months of the year, we generated a net profit of $31 million versus $69 million in the first 9 months of 2019, excluding one-off noncash impairments and other income items. Including impairments in the first 9 months of 2020, we reported a net loss of $379 million versus a net profit of $142 million in the equivalent period last year. Clearly, there's been a large impairment in relation to the Egypt asset sale, which Chris will cover in more detail a little later. The impairment charge of $243 million is taken in relation to our Egyptian operating assets in 2020, as well as a further $163 million impairment of goodwill following the sale of the company's onshore assets in Egypt. The sale of the mature onshore Egyptian assets forms a key part of the company's strategy, which allows us to strengthen our balance sheet and focus our attention on the development of our growth opportunities in our Egypt exploration blocks and our world-class assets in the KRI. Please turn to Slide 7, where we will discuss group production. On the left, average group production for the first 9 months of 2020 was 63,000 barrels of oil equivalent per day. The slight drop in output from the equivalent 9-month period in 2019 was due to reduced production in Egypt as a result of natural fuel declines. However, in the face of natural reservoir declines of over 20%, this is testament to a huge amount of effort put into reservoir optimization and the ongoing workover drilling campaign. The KRI operations have also continued without interruption, and 9 months production there was flat at 31,900 barrels of oil equivalent per day. On the right, average group production for the third quarter was 62,750 barrels of oil equivalent per day as compared to 64,650 in the third quarter of 2019. Pearl Petroleum executed and completed a bypass project in the Khor Mor plant, which has allowed 30 million standard cubic feet per day of additional gas to be produced and sold. As a result of the completion of that project, output in the KRI grew by 6% during the third quarter of 2020 to 32,400 barrels of oil equivalent per day, helping to offset the overall decline. The COVID-19 pandemic continues to create a volatile and challenging trading environment. The bottom 2 graphs illustrate clearly just how tough market conditions have been in the 9-month period to date, and this has continued into the third quarter of 2020. The group realized average price for condensate in the first 9 months of this year was $30 per barrel, a 40% decline from $50 per barrel in the first 9 months of 2019. For LPG, prices were $28 versus $33 per barrel of oil equivalent in the first 9 months of last year. These declines are in keeping with a significant decrease in the price of Brent, which averaged $41 per barrel in the first 9 months of 2020 as compared to $65 per barrel in the same period last year, a 37% drop. Turning to Slide 8. Let me start with a geographical look at our assets and operations in Egypt. A few weeks ago, we agreed to sell our onshore operating assets to IPR Energy Group for a consideration of up to $236 million. This consists of a base cash consideration of $153 million, including the net working capital associated with the assets and before any closing adjustments, in addition to contingent payments of up to $83 million, subject to average Brent prices and production performance between 2020 to 2023, as well as the realization of potential third-party business opportunities. Upon closing, the base consideration will be adjusted by the collections received and payments made by the company during the intervening period between the economic date and the closing date. This transaction includes Dana Gas' 100% working interest in the El Manzala, West El Manzala, West El Qantara and North El Salhiya onshore concessions and associated development leases. We will retain our interest in our onshore and offshore exploration concessions, respectively, El Matariya, Block 3 and North El Arish, Block 6. The latter retains major exploration potential and material prospectivity. We have started looking for possible farm-in partners. The transaction, which is subject to a number of conditions precedent and to the Egyptian Ministry of Petroleum and Mineral Resources approval is currently expected to complete early 2021. Until then, we will continue to manage and operate these assets to maximize value to all the parties concerned. The sale of Dana Gas' Egyptian assets forms a key part of the company's portfolio optimization strategy. Completion of the sale process will allow the company to strengthen its balance sheet and sharpen focus on the development of its world-class fields in the KRI, while exploring for potential farm-in partners for the highly prospective offshore Block 6 in Egypt. Please turn to Slide 9 for a quick summary of the KRI. Our KRI operations remain unimpeded and fully functioning up to now as a result of the stringent controls and preventive measures imposed to ensure that our plant has remained COVID free. However, as mentioned previously, COVID-19 and the travel restrictions imposed by the authorities led to our EPC contractor declaring force majeure. This has delayed the entire project. The EPC contractor has continued to carry out project and engineering and procurement work. Pearl is currently putting plans in place to enable civil engineering works to be carried out under strict protocol and controls. Everyone remains 100% committed to resuming on-site project work once conditions on the ground allow. Finally, please return to Slide 10 relating to our arbitrations. We have no new updates regarding the NIOC case, which was last discussed at the AGM. At that time, I noted that the timing of an award was completely in the hands of the tribunal, and the company had no control over this. The final tribunal hearing relating to the first phase of the damages claim from 2005 to 2014 took place in August, and it is hoped that an award will be forthcoming early next year. As soon as the company has news of a damages award from Crescent Petroleum, we will inform the market and all our stakeholders. I will now hand you over to Chris to talk through the financial numbers.

Thank you, Patrick, and good afternoon, everyone. This has been an incredibly busy quarter for Dana Gas, with us finalizing 2 important transactions for the company. Firstly, we signed the agreement to sell our Egyptian producing asset. Secondly, we put in place a $90 million corporate credit facility, with this facility and using existing cash resources and fully redeemed the company's $309 million outstanding Sukuk. I'll now take you through the company's financials. As Patrick has already explained, we've decided to provide investors with the financial split into 2: continued operations and discontinued operations. Continued operations of the KRI assets, Block 6 and Block 3 in Egypt, which we are retaining, and corporate. Discontinued operations are the Egypt assets being sold. This presentation, I believe, gives investors maximum transparency on the company's financials, provides insight as to how the company's financials will look once the sale of Egypt assets is being complete. Please can now ask you all to turn to Slide 12. For the first 9 months of this year, we reported a net profit of $31 million, excluding a one-off noncash impairment of $410 million. Including the one-off impairment, we reported a net loss of $379 million. By comparison, for the same period last year, we reported a net profit of $69 million, excluding a one-off noncash impairment of $60 million on our drilling of the Merak well in Egypt and other income items totaling $134 million in relation to earn-out and deferred compensation. Including these one-off items, we reported a net profit of $142 million. This noncash impairment charge taken in 2020 mainly consists of $243 million in relation to our Egyptian operation and a further $163 million impairment of goodwill. The sale of the mature onshore Egyptian assets forms a key part of the company's strategy which allows us to strengthen our balance sheet and focus our attention on our exploration blocks in Egypt and in particular, on our world-class assets in the KRI. I will now talk you through the financial split between continued operations and discontinued operations. Our continued operations posted a net profit of $29 million in the first 9 months of 2020 versus $130 million in the first 9 months of 2019. However, it should be noted that the 2019 figure benefited from a $133 million gain in relation to earn-out and deferred compensation, although this was offset by a $60 million noncash impairment in relation to the Merak well. On a like-for-like basis, net profit was $33 million versus $58 million in the prior period, which I believe is a solid achievement, given the significant difference in commodity prices between each period. Our discontinued operations posted a net loss of $2 million in the 9 months this year versus a net profit of $12 million in the same period last year, excluding impairment charges. If we include the impairment charges, we posted a net loss of $408 million versus a net profit of $12 million. Our revenue in the first 9 months of the year was $262 million versus the equivalent figure of $357 million last year. The decrease is a result of lower prices and production in Egypt. Our revenue from our continued operation in the first 9 months was $94 million versus $126 million in 2019. Again, this is primarily a reflection of the drop in oil prices. Gross profit was $54 million in the first 9 months versus $98 million in the same period in 2019. $49 million was from continued operations in 2020 as compared to $77 million in the corresponding period last year. Please turn to Slide 13, which covers the company's expenses during the period. The company-wide efforts preserve operating expenses has been both significant and effective. 9-month G&A was $9 million, a decrease of $2 million year-on-year, demonstrating again our continued focus on cost control. Our operational expenses are in line with the first 9 months of last year of $41 million. In terms of our continued operations, operating expenses are $18 million as compared to $22 million in the first 9 months of 2019. CapEx was $37 million, 70% less than $123 million spent in the corresponding 9 months of last year. Egypt incurred $21 million and the KRI $16 million. All nonessential CapEx was deferred as part of our liquidity management and cash preservation exercise. Moving on to Slide 14, which covers the company's liquidity and collections position. Our cash position at period end was $299 million. Following the payment to redeem our Sukuk, our cash balance as of November 1, 2020, was $98 million. In the third quarter of the year, the company completed a further $71 million Sukuk buyback, bringing the total 2020 buyback program to $89 million. The overall cost saving to the company in profit payments and repayments and maturity from the 2020 buyback program was $10 million. After the end of the quarter, we also finalized a $90 million credit facility at the corporate level. Financing costs have been significantly reduced, thereby increasing future profitability. Run rate Sukuk profit payments at the time of issue of the Sukuk in 2017 were $21 million per annum, given the 4% annual profit rate. Annualized interest cost on the $90 million corporate facility will be slightly less than $3 million per annum. That's an initial margin of 3% over LIBOR. Also after the end of the quarter, we announced the full redemption of the $309 million of outstanding Sukuk. $530 million Sukuk was issued on the October 31, 2017, and we had executed $221 million of repurchases in total during the last 3 years. Redemption of the Sukuk was one of our key strategic priorities for the year. Regarding collections, the company received $127 million in the first 9 months of the year against total billings of $162 million. The share of receipt by Pearl Petroleum in the KRI contributed $74 million, and Dana Gas Egypt pulled in $53 million. The company has received $83 million in dividends from Pearl Petroleum during the first 9 months of this year. Our trade receivables in Egypt now stand at $128 million. This will be fully transferred to IPR Energy once the sale has been completed early next year. March through to September 2020, the KRG has paid all of Pearl Petroleum's invoices on time and in full. We do have receivables of $40 million. This is Dana Gas' 35% share, mainly related to as yet unpaid invoices for a 3-month period from December 2019 to February 2020. All international E&P companies operating in the KRI face the same issue. And like them, we have been in discussion with the KRG regarding settlement of this amount. With that, I'll hand you back to Patrick.

Thank you, Chris. Please turn to Slide 16, where I will conclude this presentation. It's been an incredibly tough 9 months so far. And without having a crystal ball, it is even harder to predict what 2021 has in-store for us. What I can clearly communicate, however, is that our Board of Directors set out 2 clear strategic objectives this year, and we have delivered on both of these. They have not been easy mandates. Selling Egypt after our strategic review has taken longer than anticipated due to COVID-19 restrictions and due to prevailing market conditions. We anticipate closing the sale in early 2021. We also redeemed all $530 million of our Sukuk, despite the speculation that this would not be possible. We have secured a new debt facility from Mashreq Bank, with whom we hope to be forging a deep and long-term relationship into the future and at a lower borrowing cost than the Sukuk. This clearly vindicates the company's position in 2017 and '18, during the renegotiation of the Sukuk, that the lower profit rate on offer was entirely in keeping with the market and the company's enhanced financial and operating strength. Secondly, we have put in a strong, resilient operational performance for the first 9 months of 2020. Our operations continued uninterrupted despite the difficulty of working through the pandemic. We posted a net profit of $31 million before impairment despite the ongoing low commodity price environment. This contrasts with many of our peers who have been posting operating losses over the period. This is a result of our product mix, where 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 the current oil price environment. Thirdly, we strengthened our balance sheet to better position the company for the future. Our new $90 million credit facility is priced at significantly reduced interest rates compared to our Sukuk, resulting in a significant further reduction of debt servicing costs. On completion of the sale of the Egypt assets, the proceeds will be used to pay down this debt, and the company will become debt-free at a corporate level. Lastly, despite COVID, the future looks bright for Dana Gas. When we complete the sale of Egypt, we will be left with an extremely prospective offshore block in Egypt with significant resource potential, and 2 world-class fields in the Kurdistan region of Iraq. Pearl Petroleum has a program to more than double output as soon as possible, to deliver gas under the existing gas sales agreements signed with the government in the last 2 years and to continue executing our program of drilling the development wells required to supply the gas to the new trains and to drill an exciting exploration well in Block 19. We will be back in full-on growth mode, which is an exciting place to be. With that, thank you again for your time and for listening. I will now hand you over to Mohammmed to start the Q&A. Over to you, Mohammmed.

Thank you, Patrick and Chris. We will now start the Q&A session. In the interest of time, I will ask you to kindly observe a 2-question limit each. Operator, please start the Q&A session now. .

Ladies and gentlemen, we will now start the Q&A session. [Operator Instructions] The first question comes from Nick Stefanou from Renaissance Capital.

It's Nick Stefanou from Renaissance Capital. I'm a bit relatively new to your story. But could you maybe go over again the rationale of selling down the Egypt assets? One of the reasons I'm asking this question is that, I mean, being debt-free doesn't necessarily mean that it might be the best way to sort of like use your balance sheet. And also, a lot of other operators in Kurdistan, in a way, try to like diversify their exposure, and having a footprint in Egypt, in a way was -- had a better mixture, especially if you wanted to grow a bit of outside Kurdistan as well. So maybe that you could elaborate on that? And then my second question is actually regards to the gas market in the KRI. Obviously, if you double gas capacity, is there like enough like gas infrastructure there in terms of like power stations to just absorb that overnight? I mean, what I'm trying to say is that what is the comfort that if you'd be able to put production at the level you want, gas production on the level or you will find a demand for those gas volumes?

Thank you, Nick, for those 2 questions. Let me deal with the Egypt strategy question first. I mean what we have sold in Egypt are our ongoing mature production assets. We have been producing these since we took over from Centurion in 2007. We've carried out an extensive drilling campaign, a very successful one, where we have had over a 60% commercial success rate. We have increased production by 50%. We have increased -- we increased 2P reserves by double, double the amount. But we feel that we have now more or less scraped the barrel of further growth opportunities in our onshore asset, and now it is a question of fighting the decline curve. And the Board felt and management also felt that in terms of optimization of management time, efforts and use of capital that we should be focusing on our growth opportunities and not on our mature and declining assets, which nevertheless, does require and will continue to require a significant amount of CapEx to indeed stem the decline of production going forward. So we have focused instead on our very exciting exploration concessions in Egypt, where we see very significant growth potential. We have a number of prospects in Block 6 that you can see on the slide, the Egypt slide, and we believe that in total, there is the potential for more than 20 trillion cubic feet of gas in Block 6. This is obviously a very significant and material opportunity. Just to give you a sense of scale, the volumes I quoted were for gas initially in place of over 20. That compares to the Zohr gas field of 30 trillion cubic feet of gas. So it is a very material opportunity, and we are actively looking for partners to proceed with the drilling of the exploration well in Block 6. And we have also, in the Kurdistan region of Iraq, 2 really world-class opportunities. And again, given the over 1 billion barrels of oil equivalent of 2P reserves in the Kurdistan region of Iraq as opposed to the less than 70 million barrels of oil equivalent of 2P reserves in Egypt, it's clear that we want to focus our attention on the areas where we can really significantly grow the business. So that was the rationale for carrying out the strategic review, which led ultimately to the recommendation to sell the asset. In terms of debt, whilst we will, with the sale of Egypt be net debt-free at a corporate level, we do, of course, incorporate Pearl debt on our corporate balance sheet. And that is, as you will understand, with the ongoing execution of the first KM 250 train in a phase of significant investment. So we will continue to be increasing our gearing with respect to our share of the Pearl Petroleum debt that is going to be incurred in order to execute that project. So I hope that, Nick, that addressed your question really about the rationale for selling Egypt. In terms of the [indiscernible] yes.

It does, yes. Sorry, just a quick follow-up. So that, yes, that you might inject more equity to the Pearl JV, as I understand it.

No, we're currently very happy with our level of equity interest in the Pearl joint venture currently. And just to reinforce the message that, of course, the debt that is being incurred to fund the KM 250 expansion project is being incurred at Pearl level, and that it will not -- it's nonrecourse to the shareholders. And it will, therefore, mean that the shareholders will not need to inject capital in order to fund the project. So your second question was about gas market in the KRI. So the first 250 million standard cubic feet per day gas train, there is a gas sales agreement in place with the Kurdistan government to take the full 250 million. And we -- well, we have studied it, obviously, and we can see that, that 250 million standard cubic feet per day of gas will be entirely consumed within the Kurdistan region of Iraq to generate power because they still do not manage to generate power 24/7. And they have power stations, particularly and notably in Dohuk, which are still currently running on diesel. So this 250 million standard cubic feet per day of gas will go towards displacing diesel, which is a good CO2 abatement story, obviously, and pollution abatement story. And of course, it's a good balance of payment story for the Kurdistan regional government because they are importing that diesel currently from Turkey.

Got it. And for the second train, which I think be another 250 [ scf ] per day.

Yes. So the Kurdistan region of Iraq has got enough installed power generative capacity to take also the second tranche of 250 million. However, according to our calculations, that would be significantly in excess of the domestic electricity consumption needs. And so for the Kurdistan regional government to take that additional gas, they will need to find an outlet for their power generative capacity. Now obviously, given the fact that the federal government of Iraq is extremely short of power and has even less power -- security of supply as it were through the day, clearly, that is a potential destination for electrons to go from the Kurdistan region to the federal government of Iraq. So that is a clear possibility. Alternatively, and we are still in discussions, we would like to see some of that gas at least go to export market to Turkey, notably. And we also have identified a very considerable need for domestic gas consumption for industrial players in the Kurdistan region of Iraq of more than 100 million standard cubic feet per day of gas. So we have absolutely no concerns that the 250 million will -- the second tranche of 250 million will be fully consumed, either within the Kurdistan region of Iraq by the transfer of either electrons or gas to the federal government of Iraq or through export to a very large adjacent market in Turkey.