Dana Gas PJSC (DANA) Earnings Call Transcript & Summary

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

Thank you. Welcome to the Dana Gas Preliminary 2020 Financial Results Call. Presenting today are our 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 a time for the Q&A session. I will now hand the call to our CEO, Dr. Patrick Allman-Ward to begin.

Thank you, Mohammmed, and thank you to everyone for joining the call today. 2020 will undoubtedly be a difficult year for the world to forget, given the world's pandemic and the enormous effect it has caused. Many, many people have been negatively impacted, and our thoughts are with them and their families. Despite all the challenges faced by Dana Gas, we have made significant achievements, even as the global pandemic has raged on and markets have witnessed unprecedented volatility. During the last quarter of 2020, we successfully delivered on some of our critical corporate objectives. If you could now turn to Slide 5, I'll give you a quick snapshot of performance for the year. Please note that all figures are for full year 2020, unless otherwise specified. I'd also like to remind you that we are showing our numbers split by continued operations, namely our Kurdistan region of Iraq assets and all the corporate effects and discontinued operations, namely the Egypt assets that have been sold. This will give a better sense of how the business will look like once the sale of Egypt has been completed. Later, Chris will take you through the numbers in detail. Excluding one-off noncash impairments and other income items, we produced an adjusted net profit of $36 million versus $88 million in the full year 2019. However, a total of $412 million of impairments were incurred during 2020, principally in relation to the sale of our Egyptian assets. Including impairments and other income, we reported a net loss of $376 million versus a 2019 net profit of $157 million. In Egypt, the sales and purchase agreement was signed in October for our onshore assets. We are retaining our offshore Block 6 concession area, which holds exciting material upside potential. We are moving ahead with plans to drill an exploration well in 2023. In the KRI, we reached a new milestone hitting record levels of output in the fourth quarter due to the successful completion in quarter 3 of the plant bypass project and increased gas demand due to seasonal weather conditions. It is also a testament to the tireless efforts of our staff at the plant to optimize plant efficiencies and reliability. We also continue to plan for the critical expansion of our world-class assets. While the pandemic has restricted the speed of the development, we are moving ahead with the civil engineering works, and a new Q1 2023 timetable has been set for first gas. The company also fully redeemed its Sukuk on the day of its maturity, paying the remaining $309 million. Concurrently, it signed a $90 million credit facility with Mashreq with a significantly reduced financing cost compared with the Sukuk. The group's cash balance at year-end stood at $108 million. The Board is considering transferring voluntary reserves into retained earnings to support the company's dividend payment capacity, subject to shareholder approval at the AGM in April. None of our achievements in 2020 would have been possible without our highly dedicated staff, who have managed to keep our operations running uninterrupted throughout the pandemic. We head into 2021 on a firm financial footing, and with a clear strategy to further develop our world-class fields in the KRI, while preparing for the drilling of an exploration well in our highly prospective Block 6 concession area, offshore Egypt. It is worthy of note that throughout this challenging period, the Kurdistan regional government continued to maintain monthly payments to the oil industry. These achievements give us great confidence in our future growth plans, which includes more than doubling our production in the KRI. Please now turn to Slide 7, where I will take you through the group's operating metrics in detail. On the left-hand side, you can see that average group production for 2020 decreased by 5% year-on-year to 63,200 barrels of oil equivalent per day. The decline came as an increase in production in the KRI fails to outweigh a decrease in Egypt production due to natural field declines. Despite the challenges imposed by the global health pandemic, operations in the KRI and Egypt have remained fully functional. During the full year, production in the KRI increased by 2% year-on-year to 32,250 barrels of oil equivalent per day, while production in Egypt fell 8% to 30,300 barrels of oil equivalent per day. For the fourth quarter, average group production rose 2% to 63,600 barrels of oil equivalent per day, boosted by a 9% increase in the KRI to 33,250 barrels of oil equivalent per day. This was driven by record levels of production in the KRI in quarter 4, reaching 440 million standard cubic feet per day of gas output in December following the successful completion of a further plant bypass project in July. The COVID-19 pandemic continues to create a volatile and challenging trading environment. The bottom 2 graphs illustrate clearly just how tough market conditions were in 2020. The group realized an average price of $28 per barrel for condensate, a 43% decline from $49 per barrel in 2019. LPG average realized prices declined by 7% to $28 per barrel of oil equivalent versus $30 per barrel of oil equivalent in 2019. It is worth noting that dated Brent averaged $42 per barrel as compared to $64 per barrel in the same period last year, a 34% drop. Despite the unprecedented rapid and sharp decline in oil prices, it is important to understand that Dana Gas' predominant gas production acts as a natural hedge against low oil prices. The company's position as a low-cost producer also gives it additional resilience. Hence, our operations continued to be profitable despite the challenging operating environment. Turning to Slide 8. I will give you an overview of our assets and operations geographically, starting in Egypt. In October, we signed a sales and purchase agreement to sell our onshore operating assets to IPR Energy Group for a consideration of up to $236 million. This comprised a base cash consideration of $153 million, including the net working capital associated with the assets and before any closing adjustments. It also included contingent payments of up to $83 million, subject to average Brent prices and production performance between 2020 and 2023 and the realization of potential third-party business opportunities. 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. The transaction is subject to a number of conditions and the Egyptian Ministry of Petroleum and Mineral Resources' final approval. We expect the sale to be completed in the first half of 2021. And until then, we will continue to manage and operate these assets for the benefit of all the stakeholders. Following the sale of our onshore Egypt assets, we will remain committed to our remaining Egyptian exploration assets. With regard to the onshore exploration concession, El Matariya or Block 3, our operating partner has decided to discontinue its operations. And as a result, we relinquished this concession in January. We retained our 100% equity interest in our offshore exploration concession in North El Arish Block 6, which contains material gas resource potential in excess of 20 trillion cubic feet. In mid-2020, we acquired 345 square kilometers of infill 3D seismic data over-the-top ranking prospects in the block, which are now being interpreted and will help us choose a drilling location. On that basis, we will be able to make all the necessary preparations, including finalizing the well design, which will allow us to order long lead items that will lead to drilling the exploration well in the block in 2023. The sale of Dana Gas' Egyptian assets forms an essential part of the company's portfolio optimization strategy. The sale of these assets will allow the company to strengthen its balance sheet, and sharpen its focus on developing its world-class fields in the KRI, while exploring the material growth potential in the highly prospective offshore Block 6 in Egypt. Please turn to Slide 9 for a quick summary of the KRI. To-date, our operations in the KRI have continued uninterrupted even amid the stringent controls and preventative measures we have imposed to ensure that our plant remains COVID-free. Pearl Petroleum restarted expansion plans in the KRI on the 15th of December 2020, following a suspension due to COVID-19 and the declaration of force majeure by our contractor, which delayed the project. All the parties now working on the project are fully committed to executing the expansion project as quickly and as safely as possible. Even during the suspension of the expansion activities, the EPC contractor managed to continue with engineering and procurement work. As from December, plans have been put in place to enable civil engineering works to commence, carried out also under strict COVID protocols and controls. We anticipate getting our gas train online in early 2023, though we are examining ways to speed this up. Pearl's overall expansion plans will add 500 million standard cubic feet per day of additional production via 2 250 million standard cubic feet per day gas processing trains. This will more than double the existing plant capacity. Funding for the project has come from multiple sources. In addition to the bank loan that was obtained in 2019 and contractor financing, Pearl Petroleum is in the final stages of reaching a loan agreement with the U.S. International Development Finance Corporation. The loan will finance as processing facilities development costs and the drilling of up to 5 wells in the Khor Mor gas field, slated to start in 2023. The expansion plans follow on the heels of 2 key de-bottlenecking projects on the existing Khor Mor plant, but has increased production from 305 million standard cubic per day of gas in 2017 to 440 million cubic feet per day of gas today. The first project de-bottlenecked the early production facility in quarter 4 2018, adding an additional 80 million to 90 million standard cubic feet per day. This was followed by the installation of a plant bypass system in July 2020, which has allowed production to reach record levels of 440 million standard cubic per day of gas in recent weeks. This is the result of the continued efforts to maximize plant production, combined with increased gas demand due to seasonal weather conditions. It is also a testament to the tireless efforts of our staff at the plant to optimize plant efficiencies and reliability. As a result, our fourth quarter 2020 average gas production was 407 million standard cubic feet per day of gas, a 10% increase on quarter 4 2019. Now turning to Slide 10 on arbitrations. The final procedural hearing regarding the NIOC arbitration took place in August, and we hope for an award to be made in the first half of this year. As soon as Crescent Petroleum informs us of the outcome of the damages claim, we will notify the market and all our stakeholders. Crescent Petroleum has also commenced a new arbitration to address the 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. 2020 was a tough and eventful year for Dana Gas. However, despite the market volatility, I'm pleased to report that our operations continued unimpeded and that we achieved 2 significant financial milestones. First, we signed a sale and purchase agreement to sell our onshore producing assets in Egypt. Second, we fully redeemed the company's $308 million Sukuk as well as securing a $90 million corporate facility with Mashreq Bank. The new facility is a significantly better interest rate for the company. I'll now take you through our 2020 financials in detail. Please note that we've provided the figures split by continued operations and discontinued operations. Continued operations comprise our KRI assets and corporate effects, and discontinued operations, which include the assets in Egypt that are to be sold. I believe that this presentation gives investors maximum transparency on the company's financials and provides a good insight into how the results will look after the Egypt asset sell is being completed. Now can I ask you to all to turn to Slide 12. For the full year 2020, we reported a net profit of $36 million, which excludes a one-off noncash impairment of $412 million. Including that one off impairment, we reported a net loss of $376 million. For the full year 2019, we reported a net profit of $88 million, which excluded both a one-off noncash impairment on our offshore Merak well in Egypt as well as other income items in relation to earn-out and deferred compensation. Including these one-off items, we reported a net profit of $157 million. This year's impairment charge results in the sale of the company's assets in Egypt and associated goodwill. The disposal of these mature onshore Egyptian assets forms a key part of the company's strategy, allowing us to strengthen our balance sheet and focus our attention on developing our growth opportunities, namely our offshore Egypt exploration block and our world-class assets in the KRI. I'll now talk you through the split in the numbers. Our continued operations posted a net profit of $32 million in the full year 2020 versus $144 million in 2019. In 2019, the company had benefited from a $134 million gain due primarily from earn-out and deferred compensation. This gain was, however, offset by a $60 million noncash impairment of the Merak well. On a like-for-like basis, net profit was $37 million versus $76 million, a robust result in the light of the significant difference in realized prices during each period. Turning to our discontinued operations. These posted a net loss of $408 million versus a net profit of $13 million. However, without the impairment charge, we would have posted a net loss of just $1 million. [Audio Gap] 2020 was $349 million versus $459 million in 2019. The decrease was due to both lower realized prices and lower production in Egypt. Our revenue from our continued operations in 2020 was $122 million versus $164 million in 2019, reflecting the significant drop in oil prices. Our gross profit was $86 million in 2020 versus $127 million in 2019. This included $62 million from continued operations versus $102 million in the corresponding period. Again, this was due to depressed oil prices. If you can now please turn to Slide 13, which outlines the company's expansions during the period. The company-wide effort to preserve operating expenses has remained both significant and effective. Full year G&A was $12 million, a 20% drop from $15 million in 2019. This reflects our continued strict focus on cost control. Our operational expenses are in line with 2019 at $55 million. Our full year CapEx was $56 million, 56% less than $127 million spent in 2019. Egypt incurred $29 million; and the KRI, $27 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. Following a dividend payment of $105 million in May 2020 and the payment to fully redeem our Sukuk, our cash position at the end of 2020 stood at $108 million. This compares to $425 million at year-end 2019. The year-end 2020 cash position includes $39 million held at Pearl Petroleum leaving $69 million at the Dana Gas level. We also completed a $90 million credit facility at the corporate level in the fourth quarter with Mashreq Bank. By way of a reminder, our Sukuk profit payments was some $21 million per annum, given the 4% annual profit rate. Now the annualized interest cost on the Mashreq facility will be slightly less than $3 million per annum at an initial margin of 3% plus LIBOR. As a result of the new loan, the company's total borrowing stands at $163 million, including $73 million of consolidated nonrecourse debt from Pearl Petroleum. We also announced the full redemption of the $309 million of outstanding Sukuk during the fourth quarter, a key priority for the company. The $530 million Sukuk was originally issued on the 31st of October 2017, and we have executed $221 million of repurchases below par in total during that 3 years. Turning to collections. The company received $182 million in 2020. Each share receipt by Pearl Petroleum in the KRI contributed $102 million and Dana Gas Egypt for an $80 million. The company received $100 million in dividends from Pearl during the period. Our trade receivables in Egypt now stand at $130 million. This will be fully transferred to IPR Energy once the sale has been completed along with the payable. In the KRI, Dana Gas' receivables of $39 million, mainly related to as yet unpaid invoices for a 3-month period from December '19 to February 2020. Other international E&P companies operating in KRI faced the same issue. And we have been in discussions with the KRG regarding the settlement of this amount and have recently been notified by the KRG of a mechanism by which outstanding receivables will be paid over the course of 2021. It's also worth noting that despite extremely difficult fiscal challenges faced by the KRG, they have made regular monthly payments since March 2020 and have maintained their commitment to pay down past receivable. And with that, I will hand you back to Patrick.

Thank you, Chris. If you can, please now turn to Slide 16, where I will summarize the results. The world experienced unprecedented shocks in 2020 as the global COVID pandemic put the brakes on global economic growth. Oil prices collapsed to levels not seen for 20 years, weighing heavily on the global petroleum industry. Yet, despite the challenging environment, Dana Gas has shown real resilience, both from an operational and financial perspective. When the pandemic struck, our first priority was the health and safety of our staff, and we implemented stringent health and safety measures to protect all our employees. The seamless execution of our contingency plans allowed us to keep our operations fully functional and maintain production. We also carried out a de-bottlenecking project on our Khor Mor in July, on time and on budget, adding a total of 50 million standard cubic feet per day of additional gas production capacity. Thanks to that successful implementation, we consistently achieved record production levels of over 440 million standard cubic feet per day of gas in December. However, travel restrictions imposed as a result of the pandemic, meant that we had to declare force majeure on the implementation of the KM250 expansion project. But after careful planning, we managed to get the civil engineering work restarted in December, putting us on track for first gas from the new train in quarter 1 2023. This extraordinary operational performance under the most testing of circumstances is testament to the commitment, dedication and hard work of our staff who have been outstanding in this challenging time. Inevitably, in the light of the extraordinarily low oil prices, we had to review our business plans, postponing projects where necessary and reviewing our organizational needs. As a result, we once again demonstrated our capacity to deliver capital and operating cost discipline, reducing both by a further 57% and 20%, respectively. Our net profit of $36 million before impairments during a low oil price environment, reflects the company's solid business performance. Natural gas constitutes 75% of the company's production, and it is sold under long-term gas sale contracts with both governments at fixed prices providing a natural hedge. One of the key financial outcomes of our Egypt sale and the redemption of our Sukuk was that we strengthened our balance sheet, positioning the company for future growth. Once the sale of the Egypt assets is complete, we will still have an extremely prospective offshore block 6 in Egypt. And 2 world-class fields in the Kurdistan region of Iraq to be further developed. Under Pearl Petroleum's direction, the first tranche of 250 million standard cubic feet per day of gas from the Khor Mor expansion project will be delivered under the gas sales agreement signed with the KRG last year. Pearl will also continue to mature marketing opportunities to allow the second train of 250 million standard cubic feet per day of gas to be executed, leading to doubling of our gas output. As we enter 2021, we are in good financial health, with a strong balance sheet. We aim to advance the development of our world-class assets in the KRI, where over 90% of Dana Gas' proven reserves of over 1 billion barrels of oil equivalent are located. At the same time, we are moving ahead with our plans to prepare for the drilling of the next exploration well in Block 6 in Egypt, which holds exciting material upside potential. With that, I'll hand you over to Mohammmed to start the Q&A session. Thank you once again for listening and for your time. Over to you, Mohammmed.

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 Nick Stefanou from Renaissance Capital.

It's Nick from RenCap. If I may, I'm going to ask you 3 questions against Mohammmed's request. So I'm going to ask 2 and then a follow-up. On the first one, Patrick, you made an interesting comment about a U.S. bank looking to project finance Khor Mor. And I was wondering if that could imply that we might be seeing the opening up of reserves-based lending market for Kurdistan, which has not been available in the country yet. And if so, I mean, this could potentially mean that there could be a bit more like levering in general for Khor Mor in the future for a more like efficient capital structure and better dividends in the future? That's my first question. And the second one, I could have noticed in that there was no mention of Block 19 and that exploration well you guys were supposed to drill this year, but it was postponed due to COVID. I hope that will be quite an interesting prospect given that you've got these attractive fiscal terms in Khor Mor with -- sorry, with Pearl and analysts cover will be quite material and valuable. So you could talk about that as well, please.

Yes. Thanks, Nick. So let me deal with the first question around the DFC, the Department Financial -- sorry, the Department of Finance Corporation, sorry. The -- that's a ticket size of $250 million. The whole process was kicked off last year, and it's been continuing. We are hopeful that it's in the last phases of ratification. Obviously, there's been some delays as a result of the change in administration, but this is a bipartisan-supported project. Given that additional gas production in the Kurdistan Region of Iran -- of Iraq, sorry, will displace Iranian gas imports in the future. So this is understandable, it has cross-aisle support. In terms of your question about reserves-based lending, this is not a reserves-based lending structure. This is pure project financing structure. And it's -- in order to fund the Khor Mor expansion project, the first KM250 expansion train. Block 19, we indeed had originally planned to drill that this year in 2021. That is currently being pushed out to 2023, but we are obviously reviewing the situation with respect to COVID. And if we can, we will obviously be interested in trying to accelerate that expiration well if possible. But clearly, the restrictions imposed by COVID have meant that we had to push out that activity for a while.

Okay. And then my follow-up. Can you talk a bit about the realizations for the condensate? It looks like it's something like $20 discount to Brent. But if I look at Tanta who is not -- it's again like light oil not that far from Khor Mor, that's a $6 discount to Brent. What's that additional discount? It's more like shaken realizations that Khor Mor is getting there?