Dana Gas PJSC (DANA) Earnings Call Transcript & Summary

Thank you, ladies and gentlemen, for joining us today for Dana Gas First Quarter Financial Results 2021 Conference Call. I will now hand over to Mr. Mohammmed Mubaideen, Head of Investor Relations, to introduce the call. Thank you.

Thank you. Welcome to the Dana Gas Q1 2021 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 taking the time to join our call today. Dana Gas delivered a robust performance in the first quarter, aided by higher crude oil prices amid an improvement in the outlook for the global economy. Despite the ongoing operational challenges posed by the COVID-19 pandemic, production, revenues and profits all continued to increase on a year-on-year basis, thanks to the strong and decisive measures we took last year to limit the impact of the global pandemic on our business. The strength of our performance over the past year allowed us to pay a AED 0.055 dividend to shareholders on 2020 profit, our fourth consecutive dividend distribution. And we are delighted to have been able to maintain our full dividend payment to shareholders without cuts during such challenging times. In the KRI, which holds 90% of our proven reserves, we continued to reap the benefits in quarter 1 from the Khor Mor bypass debottlenecking project that was successfully completed in July 2020 and which led to record levels of production in the fourth quarter. Our KRI production was up 6% versus last quarter and 9% compared to quarter 1 2020. While the pandemic led to the declaration of a force majeure, which restricted the speed of the development, we are now moving ahead with the critical expansion of our world-class assets, following the full resumption of the expansion project at the Khor Mor field, and the new April 2023 timetable has been set for first gas. Just after the closing of our first quarter, the Board decided to retain our onshore assets in Egypt and terminate its agreement for the sale of these assets. After a number of conditions precedent to the transaction were not completed to the satisfaction of both parties prior to the 14th of April 2021, the sale and purchase agreement's long stop date. Meanwhile, we are continuing as quickly as possible with plans to drill an exploration well in our highly prospective acreage offshore Block 6. If you can now turn to Slide 5, I will take you through the highlights of our performance for the first 3 months of the year. As we did for full year 2020, we will continue to present our numbers split by continued operations, namely our Kurdistan Region of Iraq assets and all the corporate effects and discontinued operations, the Egypt assets that had been slated for sale in the first quarter. We will return to our usual reporting in the second quarter when the termination of the SPA occurred. Chris will later take you through the numbers in detail. For the first quarter, we generated a net profit of $24 million, an increase of 41% as compared to $17 million in quarter 1 2020. Meanwhile, revenues increased 2% year-on-year to $106 million compared to $104 million in Q1 2020. Our revenues and profit were aided by our ability to significantly increase our year-on-year Q1 production in the Kurdistan Region of Iraq. If you can now turn to Slide 7, I will provide you with the group's operating metrics in more detail. On the left-hand side, you can see that average group production for quarter 1 2021 increased by 2% year-on-year to 64,900 barrels of oil equivalent per day. The improvement came as an increase in production in the KRI outweighed 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 Q1, production in the KRI increased by 9% year-on-year to 35,300 barrels of oil equivalent per day while production in Egypt fell 5% to 29,050 barrels of oil equivalent per day. The improvement in oil prices is clearly illustrated in the graphs on Slide 7. In Q1, the group realized an average price of $44 per barrel for condensate, a 7% increase from $41 per barrel in the same period last year. Sequentially, the increase in average realized prices was more significant when compared with last quarter, with the group realizing a 47% increase in quarter 1 from the average realized condensate price of $30 a barrel in quarter 4 2020. The average realized price for LPG rose 10% to $33 per barrel of oil equivalent in quarter 1 2021 versus $30 per barrel of oil equivalent in quarter 1 2020. The decrease in LPG prices in the KRI is a reflection of the devaluation of the Iraqi dinar against the U.S. dollar. It is worth noting that dated Brent averaged $61 per barrel in Q1 as compared to $50 per barrel in the same period last year, a 22% gain. If oil prices remain at their current levels, we expect realized prices to have a more significant impact on our profitability in future quarters, reflecting significantly lower oil price in these equivalent quarters in 2020. Turning to Slide 8. I will give you an overview of our assets and operations in Egypt. Dana Gas strove in good faith to complete the sale and purchase agreement we signed in October 2020 to sell our mature producing onshore operating assets for a consideration of up to $236 million. Since the signing, however, the completion of the conditions precedent in the SPA were not able to be realized in a manner satisfactory to both parties. In accordance with the terms of the SPA, Dana Gas exercised its right to terminate the SPA after the expiration of the long-stop date for satisfaction of those conditions on the 14th of April 2021. While the company is still assessing the financial impact of the termination of the SPA, it is expected that the changed circumstances in the global economy and energy markets will have positive consequences on how the company's profitability and balance sheet and improvement in its cash flow in the coming years. IPR was Stanley Petroleum Limited, the counterparty to the terminated SPA, has notified Dana Gas that it has submitted a request for arbitration at the London Center for International Arbitration, disputing Dana Gas' right to terminate the SPA. Dana Gas will rigorously defend these proceedings. We will provide more detail on our strategy and outlook in our next call. Regarding our offshore exploration concession in North El Arish Block 6, we are still interpreting the 3D seismic data we acquired last year that will help us choose a drilling location. We will then 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 as quickly as possible. Please turn to Slide 9 for a summary of the KRI operations. We are very satisfied with the company's solid operational performance in the KRI in the first 3 months of 2021, which has had a very positive impact on our profitability at current oil prices. Gross gas production in the KRI increased by 12% to an average of 439 million standard cubic feet per day of gas in the first quarter compared to 391 million standard cubic feet per day of gas in the same period last year. Our operations in the KRI have continued uninterrupted during the first 3 months of the year, even amid the stringent controls and preventative measures we have imposed to ensure that our plant remains COVID free. In late April, Dana Gas and Pearl Petroleum announced the full resumption of the expansion project at the Khor Mor field in the KRI following a suspension due to COVID-19 and a declaration of force majeure by our contractor, which delayed the project. The KM250 expansion involves an investment by Pearl of USD 600 million to add 250 million cubic feet per day of much needed additional gas production to supply the local power stations. The project is now on track for a new target start date of April 2023. Meanwhile, the Kurdistan regional government remains committed to paying down past receivables, and we expect to receive the balance of the overdue receivables from the KRI midyear or shortly thereafter. Now turning to Slide 10 on arbitrations. In April, a new arbitration between Dana Gas and IPR Energy was initiated following the termination of the SPA for the sale of our onshore Egypt assets. IPR disputes our entitlement to exercise a right of termination, but we are confident of our legal position and will defend the proceedings. With regards to the final procedural hearing regarding the NIOC arbitration, we continue to hope that an award will be made 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'll now hand you over to Chris to talk through the financial numbers.

Thank you, Patrick, and good afternoon everyone. Following a challenging 2020, the first 3 months of 2021 have been extremely positive for us and for the rest of the industry, thanks to the sharp recovery in crude oil prices. Even though there has been a marked improvement in markets, COVID-19 remains an ongoing threat. And despite continued restrictions on movement, our operations have continued unimpeded and our collections have improved. I will now run you through the Q1 2021 financial results. We've provided investors with the figures split by continued operations, which comprise our KRI assets and the corporate effects and discontinued operations, which comprise the onshore assets in Egypt that were earmarked for sale as of 31 March 2021. Please can I now ask you to turn to Slide 12. For Q1 2021, we reported a net profit of $24 million compared to $17 million in the same period for the previous year. The increase in net profit was the result of improved revenues from higher production in the KRI and a reduction in finance costs due to lower borrowings in Q1 2021 as compared to Q1 2020. I'll now talk you through the split in the numbers. Our continued operations posted a net profit of $24 million in Q1 2021 versus $18 million in Q1 2020. Our discontinued operations posted a net profit of 0 versus a net loss of $1 million in Q1 2020. This was mainly due to the fact that our Dana Gas Egypt assets continued to be recorded as held for sale in Q1, and hence, no profit was recognized from these operations. You will see this change in Q2 of this year. Our total revenue in Q1 2021 rose 2% to $106 million versus $104 million in Q1 2020. The increase was due to a production increase in Pearl, which was partially offset by reduced production in Egypt. Nonetheless, higher prices added $3 million to revenues. Our revenue from continued operations in Q1 2021 was $45 million versus $39 million in Q1 2020, reflecting the increase in KRI production. Our discontinued operations posted $61 million in revenue versus $65 million in Q1 2020. Our gross profit was $45 million in Q1 2021 versus $33 million in Q1 2020. This included $30 million from continued operations versus $25 million in the corresponding period due to the higher production. If you can now please turn to Slide 13, which outlines the company's expenses during the period. We continue to take a prudent approach to operating expenses. G&A during the period of Q1 was $3 million, unchanged from the same period last year when we launched a company-wide effort to contain costs. Our operational expenses increased to $15 million in Q1, mainly due to a higher OpEx allocation to Egypt due to reduced activity. During the quarter, Egypt incurred $8 million and the KRI $15 million of CapEx. Moving on to Slide 14, which covers the company's liquidity and collections position. Our cash and bank balance at the end of the first quarter stood at $149 million, a 38% increase from the $108 million at the end of 2020. This cash balance includes $39 million held at the Pearl level. The company will shortly be making $105 million dividend payment for the fourth consecutive year. With the termination of the Egypt onshore asset sale agreement, we will be looking to keep in place our current bank facility. The facility was arranged as a 1-year loan with a further 4-year extension of the company's option secured against the Dana Gas assets. We now intend to exercise the option to extend at the appropriate time converting the facility into an overall 5-year term. The facility only required earlier repayment in the event of the sale the Egypt asset. This loan provides a low cost of funding, 3% plus LIBOR during the first year and 4% plus LIBOR thereafter. The first repayment installment of $4.7 million was paid as scheduled in April '21, and we will continue to meet our quarterly amortization payments over the remaining life of the facility. Besides this facility, the company's share of project at the Pearl Petroleum level stands at $83 million. Now turning to collections. The company received $58 million in Q1 2021. The share received by Pearl Petroleum in the KRI contributed $35 million and Dana Gas Egypt reporting $23 million. Our trade receivables in Egypt now stand at $131 million. It will be one of the management's key priorities to work to reduce this outstanding receivable now. As you will have seen in our announcement last month, year-to-date, Dana Gas share of collections from the sale of gas, condensate and LPG in the KRI was $53 million. Of the company's total collections in the year in the KRI, $8.6 million net share to Dana Gas comprised overdue receivables from the KRI leaving the balance of overdue receivables from KRI at $14.8 million, again, Dana Gas' share, following the most recent payment. It's expected at current prices that the remainder of the overdue receivables will be settled soon. It is also worth noting that despite extremely difficult fiscal challenges faced by the KRG, they have made full and regular monthly payments since March 2020 and have delivered on their commitment to pay down a small amount of overdue receivables still outstanding. Pearl Petroleum continues to engage constructively with the KRG to ensure timely payment. And with that good news, I will hand you back to Pat.

Thank you, Chris. If you can, please now turn to Slide 16, where I will summarize the results. While the global pandemic is yet to be fully behind us, an uptick in crude oil prices and the measures we took last year to protect ourselves against the global economic downturn have started us off on a firm footing for 2021. The global vaccination campaign has made strong progress in the past 3 months and a continuing trajectory of higher oil prices positions us to increase our profitability in the following quarters. In the KRI, our production continues to increase on the back of the successfully executed plant bypass project last year. The recent lifting of the force majeure will allow us to move forward with our KM250 expansion plan, adding 250 million cubic feet per day of much needed additional gas production to supply power stations in the KRI. We are also very excited by our offshore exploration concession in North El Arish or Block 6, which we believe contains material gas resource potential of more than 20 trillion cubic feet. We look forward to continuing to invest in Egypt, maximizing the value of our onshore producing assets and realizing the enormous potential of our offshore Block 6 concession area, which we are planning to test by drilling an exploration well as quickly as possible. While risks remain, we are confident that our robust financial health and strong balance sheet will allow us to accelerate 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. Our achievements in increasing our production from the KRI and the steady collections record gives us confidence to invest in our future growth plans. With that, I will hand you over to Mohammmed to start the Q&A. Thank you again 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] We have a question from Gus Chehayeb from Sancta Capital.

Gus, are you on mute? We can't hear you very well.

Gus, we can't hear you at all.

Yes. Are you hearing me okay?

Yes. Gus, good to hear from you. We can hear you now.

Okay. Okay. Fantastic. I was just asking about the expansion CapEx for KRI, the $600 million. Is that above and beyond what has already been invested for the second train in KRI? That's one. And then two, the financing that you're trying to get from the Development Finance Corporation. Will that be refied out to EPC contractor? Or is that also above and beyond what they've already financed?

Yes. Good question, Gus. There hasn't been too much spent already. So essentially, that $600 million is the amount of money that we still need to spend. It's been relatively small spend so far. We're still working on that project finance at the moment. That's not completed yet. But no, that really will sit alongside the existing funding that we have already in place.

And if you are able to confirm, I mean, how much has been committed by the EPC contractor just to know that you can get started before having to secure the DFC financing?

No, no, no. We got more than enough already in the bank and committed from both the contractor and our bank facilities to allow us to get started. Don't worry about that. We're already on it.

And just a final question for me, just on NIOC. So the last hearing was in August by the new tribunal and then a decision that's expected to hear on the damages. Is there any room at this point whatsoever for any rebuttals or follow-on hearings? I'm just curious -- because this has obviously been going on for some time, I mean what room is left now for NIOC to come back and delay the process further?

Well, you're asking a non-lawyer, and there aren't any in the room. But as far as I understand it, we really are just waiting on the quantum of the damages, and that's something that we're -- as we've announced, we're hoping to hear this year. We're one removed from that. But as far as I understand, though, it's a -- that's what we're waiting for, the quantum.

[Operator Instructions] The next question comes from Nick Stefanou from Renaissance Capital.

It's Nick from RenCap. I have 2, if I may. I mean if I think of Egypt, going back last year, you had Sukuk maturing. That disposal have allowed you to deleverage like quite fast at the corporate level. But now you've got a quite attractive cost of debt plus a very manageable amortization schedule. So given what has changed now, what is the strategy for Egypt? I mean, to me, it looks that there's a lot more like room and flexibility now started by you. But I'm not sure if this is something that you might want to put back in the market. So you could talk a bit about your strategy in Egypt now. That'd be helpful. And the second question is on the realizations. I think you mentioned that -- I think that Iraqi dinar devalued by 23%, and that is what impacted your LPG prices in Kurdistan. If I recall correctly, your credits passes once a year. So should I assume that from next year, that LPG price will recover to -- I mean, will also take to account the devaluation and recover to a higher amount? Would that be the case?

Yes. Thanks, Nick. Both good questions. I mean -- yes, I mean, we're pleased that we are retaining the Dana Gas Egypt assets. The strategy there now is to focus on the onshore assets. There's a natural decline, as you know, for those onshore assets, and that's something that we are constantly working over wells and infill management all the time to try and fight that decline. But we have a program of work to do exactly that, and we're confident we can continue to fight the decline as we have done. In addition, obviously, we have a facility that is now not full to capacity, so it would make sense for us if we can to look at additional production nearby that we could put through our plants, and we'll be looking at things like that in the near term. But obviously, as Patrick said in his talk, the key focus for us in Egypt at the moment is Block 6. It's a very exciting block with some substantial discoveries in the near vicinity. So we're pushing on the 3D seismic is being interpreted at the moment. Obviously, we'll then be looking for a partner. But our key part of our strategy there is to try and drill well on that block going forward.

So I was going to pick up the first question. I wasn't quite sure I heard all of the second question, but I think it was around the devaluation.

Yes, it was about the LPG realizations due to the devaluation of the Iraqi dinar part. But that was a question basically by -- and sort of it wasn't like the part of the question. But the absolute question was, is this exchange rate devaluation going to be reflected from next year when you will be reoccurring on your LPG prices?

Well, I'll leave -- Azfar is going to kind of tackle that question.

So yes, as you rightly said, the LPG prices, they are somewhat linked to the local currency. Whilst our contracts are denominated in U.S. dollars, the LPG is sold to local traders and any devaluation in the Iraqi dinar has an impact on the market price. So the prices they want to pay us in dollars becomes a bit less and this is what happened last year. We don't expect the prices to go down further. So at the moment, we see pretty much stable LPG prices throughout '21.

Okay. But if your prices are linked -- sorry, are quoted in dollars, then this devaluation shouldn't have an impact to your realizations?

Yes, it shouldn't, and it doesn't. What it does have an impact on is because the local traders buy from us in dollars and then they sell in the local market, and they have some contract prices agreed on the local market, that's how they -- the impact really comes on them and then they come and renegotiate the prices with us. But for us, it doesn't really matter.

The next question comes from Suleman Soorani from Tricap Investments.

The first question is on the Egypt SPA termination. So now that it's been terminated, would you be looking at the reversal of the impairments that you took last quarter, both on the goodwill and on the asset? That's number one. And especially in the light of the current oil prices. And secondly, on the capital commitment on Pearl Petroleum, I remember the original understanding was that whatever capital commitment that Pearl has, it will be met through external financing, and it will not impact the dividend flow or the cash flow that the shareholder gets. So if the strategy is still there and all the 600 that you want -- that is required will be raised from external sources and cash flow from the existing production will be paid out as dividend to shareholders.

Two good questions. With regard to the first one on Egypt and a potential write-back of the impairment that we took, that's -- it was a 2Q event of the termination. So the turnaround will be -- the adjustment will be in the second quarter. Yes, we'll be looking at reversing some of that impairment. We're going through an analysis at the moment, so we can't tell you exactly how much that will be. It will be in the 2Q announcement, but it will be around the assets rather than goodwill. But again, as I say, we'll announce more on that in the next quarter. With regard to your second question, yes, that's still the same position. All external -- all capital requirement for the KM250 is being sourced from external financing sources. And as you know, we've been successful so far, and we're working on a third leg to that financing, which we hope to complete soon. But yes, we are still confident of financing the project externally and thereby leaving the dividends to flow up to Dana Gas.

[Operator Instructions] There are no further questions.

Thank you, everybody, and best holiday for everyone. Please feel free to contact me if you have any further questions.

Thank you, everybody. Bye-bye.

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