Dana Gas PJSC (DANA) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for joining us today for Third Quarter 2021 Financial Results Conference Call of Dana Gas. I will hand you over to Mohammmed Mubaideen, Head of Investor Relations, to introduce the call.

Thank you. Welcome to the Dana Gas Q3 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 joining our call today. Dana gas is on track to have one of its strongest years to date. Our solid performance in the first 9 months of the year has been supported by a robust operational performance, higher oil prices and an award in the first arbitration case against the National Iranian Oil Company. Thanks to our proactive approach in engaging with partner governments, the company has witnessed a strong increase in collections with the government of the KRI fully settling overdue receivables for 2019 and 2020 by the end of October. Our achievements in the first 9 months marked a remarkable turnaround from last year when the lockdowns stemming from the global pandemic and a steep drop in oil prices put historic pressure on the oil and gas industry. Our success in navigating the challenges of 2020 is reflected in the robust financial metrics that we have delivered for the first 9 months of 2021 and which you can see on Slide 5. Net profit rose ninefold to $279 million compared to a net loss of $379 million in 9 months of 2020. Chris will later take you through the numbers in detail. In the light of the company's excellent financial performance for the year-to-date, the Board of Directors has called for a general assembly meeting to be held on the ninth of December 2021 to approve a new dividend of 7 fils per year on a 6-monthly basis, thereby increasing Dana Gas's annual dividend by 27% from the existing 5.5 fils. The first dividend payment for the year of 2021 will be made following shareholders' approval in December. During the first 9 months of the year, our production levels remained solid, even as the pandemic has continued to curtail economic activity. Throughout the pandemic, our highest priority has been to ensure the health and well-being of all of our staff. Thanks to the early actions taken by our management teams in Egypt and the KRI, and the strict protocols that we put in place, the company's assets have been able to continue producing uninterrupted. Overall, group production numbers for the first 9 months were 63,200 barrels of oil equivalent per day, in line with the 63,000 in the first 9 months of 2020, driven by increased production in the KRI, which helped to offset a decline in Egypt. Pearl Petroleum continues to make good progress on the development of its KM250 gas expansion project, which is still on track to deliver first gas in April 2023. The KM250 expansion involves a total investment of $630 million and will add 250 million standard cubic feet per day of gas to current production. During the third quarter, Pearl Petroleum signed a $250 million financing agreement with the U.S. International Development Finance Corporation to support the gas expansion project. This reflects its confidence in the financial robustness of the project, its confidence in the Kurdistan region of Iraq as an investment destination, and in the operating capabilities of Crescent Petroleum and Dana Gas, that consortium. In Egypt, we are continuing our efforts to maximize returns for shareholders following the decision on the 23rd of April 2021 to terminate our agreement for the sale of our Egyptian assets. As part of the strategy, we are conducting carefully considered drilling activities, rationalizing expenditure and undertaking every effort to find means of extending the economic life of our assets. As a result of Dana Gas's termination of the sales agreement, IPR Wastani Petroleum Limited initiated an arbitration disputing Dana Gas's right to terminate the SPA. On the 17th of July 2021, the Tribunal dismissed IPR's claim in its entirety and overwhelmingly ruled in favor of Dana Gas. On another arbitration front, we are also pleased to report to you that Dana Gas has been informed by Crescent Petroleum that an award for damages in the first arbitration against an IOC has been made by the international arbitration tribunal on the 27th of September 2021. The first arbitration covers the period of the first 8.5 years of the 25 years gas sales agreement from 2005 to mid-2014. The damages sum due to Dana Gas is $608 million, which will significantly bolster the company's financial position. 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 9 months output with 63,200 barrels of oil equivalent per day, in line with the first 9 months of 2020, which was 63,000. The KRI operations increased production by 77% to 34,000 barrels of oil equivalent per day. The gains in the KRI's production outweighed the decline in Egypt, which saw a decline of 4% to 29,200 barrels of oil equivalent per day as a result of the natural decline of our Nile Delta mature onshore assets. Average realized prices are highlighted on the bottom row. In the first 9 months, condensate prices increased 70% to $51 per barrel versus $30 per barrel in the 9 months of 2020. LPG prices were higher also at $34 per barrel of oil equivalent for the first 9 months of 2021 versus $28 per barrel of oil equivalent in the first 9 months of 2020. It's also worth noting that Brent rose over 66%, averaging $68 per barrel as compared to $41 per barrel in the same period last year. This has had a positive effect on collections for the first 9 months of 2021, which I will touch upon in greater detail later. Turning to Slide 8, I'll give you an overview of our assets and operations in Egypt. As I mentioned earlier, Dana Gas has won its arbitration with IPR Wastani and will, therefore, retain its operations in Egypt. This is an excellent outcome for the company in light of the improvement in the financial performance of our Egyptian assets. As part of its strategy to manage production decline, Dana Gas Egypt has made progress by carrying out drilling and workover activities on 5 wells since the beginning of 2021. The additional production from these wells has almost completely offset the natural decline of the fields. With regard to its offshore Block 6, the company has advanced preparations for drilling the deepwater Thurya well as early as possible by completing the casing and well design, identifying manpower requirements, and mapping out the implementation strategy. It has already been awarded an extension to the second exploration phase by EGAS for 9 months until March 2022, with an option for a further 2-year extension. In the second quarter, Dana Gas sold its 26.4% interest in EGBDCO, a natural gas liquids extraction plant in Egypt for a total consideration of $11.4 million. Please turn to Slide 9 for a summary of the KRI. We are pleased with the performance of the company's KRI operations, which have delivered an increase in production and our plans to further increase daily production to 690 million standard cubic feet per day of gas are progressing well. The KM250 expansion project is on track to deliver first gas in quarter 2, 2023. Our operations, both in our existing plants and our new project activities, continue to observe and maintain the highest level of health and safety. We have promoted the vaccination of our staff and contractors, and our vaccination rate among the workforce is now very high. Civil engineering work commenced in December 2020, and we have started work to prepare for the drilling of the 4 to 5 development wells, which are scheduled to commence in March 2022. As I stated earlier, Pearl Petroleum has signed a $250 million financing agreement with the U.S. International Development Finance Corporation to support the gas expansion works currently underway at the Khor Mor gas plant. The proceeds from the 7-year DFC financing arrangement will support an increase in gas production capacity by 50% to 690 million standard cubic feet per day of gas to meet rising demand for clean natural gas electricity generation and industry use in the KRI, substituting for diesel and heavy fuel oil. The total project cost is $630 million, and the remaining financing requirements have already been secured through a regional bank facility and the EPC contractor. Now turning to Slide 10 on arbitrations. At the end of the third quarter, the company received an update from Crescent Petroleum regarding the issuance of the final award for damages in the first arbitration against NIOC, which was initiated in 2009, pursuant to which a merit award on liability was already made in 2014 finding NIOC in breach of its contractual obligations. This first arbitration award covers the first 8.5 years of the 25-year gas sales agreement between 2005 to mid-2014. Dana Gas's entitlement for the first period is $608 million. In addition, a second arbitration comprising a much larger claim for the 16.5 years covering the remainder of the gas supply period from 2014 to 2030 is currently underway. The final hearing is fixed for October of next year 2022 in Paris, and a final award for damages is expected the following year in 2023. I will now hand you over to Chris to talk through the financial numbers in more detail.

Thank you, Patrick, and good afternoon, everyone. The momentum of improvement in the operating environment during the first half has continued during the third quarter, thanks to a sustained rise in oil prices and a gradual easing of restrictions on movement. Our operations have proved resilient in the first 9 months of this year and we have seen a strong uptick in our collections due to the deeper engagement our management teams have had with our partner government. I will now run you through Q3 2021 financial results. Please, can I now ask you all to turn to Slide 12? The company's net profit rose to $279 million versus a net loss of $379 million in 9 months 2020. For the 3 months ended September 30, net profit increased to $140 million from a loss of $360 million in the same period the previous year. The key drivers were higher oil prices, improved operational performance and other income. Q3 2021 profit included other income of $608 million and a corresponding impairment of $360 million related to the UAE gas project and an impairment of goodwill of $145 million. In addition, 9 months profitability also benefited from a $78 million reversal of impairments related to the retention of Egypt assets. Excluding the other income and impairments, the company reported a 9-month operational profit of $99 million versus $31 million for 9 months 2020, an increase of 220%, reflecting strong underlying operating performance on the back of higher oil prices. These higher oil prices contributed significantly to the increase in revenues, which for the first 9 months of 2021 increased by 27% to $334 million compared to $262 million in 9 months 2020. For Q3, revenues increased by 46% to $118 million from $81 million in the same period of the previous year. If you can now please turn to Slide 13, which outlines the company's expenses during the period. The company posted its lowest G&A in 10 years. In the first 9 months of 2021, G&A was $7 million, down from $9 million in the first 9 months of 2020. OpEx, however, was slightly increased to $45 million from $41 million in the first 9 months of 2020 due to a higher allocation of Dana Gas Egypt's overheads to OpEx as a result of reduced CapEx activity. The company's capital expenditure totaled $91 million in the first 9 months of 2021 versus $37 million in the first 9 months of 2020. Dana Gas Egypt spent $27 million and $64 million was spent in the KRI. There was higher CapEx this year as work on KM250 through releasing workovers and other similar activities resumed as compared to last year when work had stopped due to pandemic restrictions. Moving on to Slide 14, which covers the company's liquidity and collections position. The company's liquidity and collections position is very robust. As of September 30, 2021, the company's cash position was $200 million, an increase of 83% compared to $109 million at the end of 2020. This is after paying a cash dividend of $105 million in May. The cash position includes $123 million, being Dana Gas's share of cash held at Pearl Petroleum. The dividend that will be proposed by the Board of Directors in December would result in a distribution of $67 million. The current commodity price environment had a significant impact on the company's operational cash flow, which increased by 149% to $197 million in the first 9 months of 2021. And free cash flow in the first 9 months of 2021 increased to $152 million versus $60 million in 9 months 2020. The company collected $256 million in the first 9 months of 2021, more than double the first 9 months of 2020. It's worthy of note that following the full settlement of overdue receivables from the KRI for 2019 and 2020, the company's total collections increased 86% year-on-year in the first 10 months of the year to $283 million. Dana Gas saw its share of collections from sales of condensate, LPG and gas in the KRI jumped 77% to $131 million in the first 9 months of 2021 as compared to $74 million in the same period last year. In Egypt, Dana Gas collected $125 million during the first 9 months of 2021 compared to $53 million in the same period in 2020, representing a 136% increase. Trade receivables are considerably lower due to the high collection rate. As of 30 September 2021, KRI and Egypt receivables stands at $43 million and $65 million respectively. Egypt's receivables are at the lowest level in the last 10 years. To further support the gas expansion work currently underway at the Khor Mor gas plant in the KRI, Pearl Petroleum has drawn down $100 million from the $250 million financing arrangement with the U.S. International Development Finance Corporation during the third quarter. And with that, I will hand you back to Patrick.

Thank you, Chris. If you can, please now turn to Slide 16, where I'll summarize the results. Dana Gas has delivered a solid set of financial results during the third quarter of 2021 supported by consistent levels of production, higher oil prices, an exceptional rate of collections and the first arbitration award in the long-standing case against the NIOC. Dana Gas is due $608 million following the damages award by the international tribunal as compensation for NIOC's breach of contract covering the first 8.5 years of the 25-year contract. The award will significantly bolster the company's balance sheet. The 9-month net profit of $279 million is a company record. We are also particularly gratified by the high level of collections from our partner governments, which has been aided by buoyant oil prices and management's proactive engagement. Collections from the KRI and Egypt have gained 102% year-on-year following the government of the KRI's full settlement of outstanding receivables due from 2019 and 2020. In addition, the Egypt receivables are at their lowest levels in the last 10 years. The strength of the current collection levels will support our business plans and expansion projects, both in the KRI where good progress is being made on the development of Pearl Petroleum's KM250 project and in Egypt where we are committed to maximizing the value of our assets for as long as possible for the benefit of our shareholders and the Egyptian state. Because of our strong performance in the first 9 months, the Board of Directors have proposed a new dividend of 7 fils per share to be distributed by annually, starting in quarter 4 2021. Finally, looking forward, the outlook for the last quarter of the year is positive, especially if oil prices continue to remain at their current levels. Even though residual risks related to COVID-19 remain, the company is now strongly positioned to weather any potential headwinds. With that, I will hand you back over to Mohammmed to start the Q&A. Thank you once again for your time. 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 2 questions limit each. Operator, please start the Q&A session now.

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

I've got a couple of ones and then a follow-up. First one is on the dividend. Chris, I usually make the opposite sort of like comments to the management teams. But just for you guys, like, I think that is a bit aggressive in just ahead of having fairly CapEx-intensive next 2 years. And does that mean that you're no longer on the hunt potentially for M&A kind of like opportunity since kind of like that extra cash will be distributed? Then the second question is on Egypt. I think the assets there are doing quite well in terms of production performance. Would it make sense for us to assume that we're potentially going to see a fairly material increase in reserves after the audit comes out for the year end 2021? And then I've got a follow-up as well, please.

Nick, can you please repeat the question on production? You weren't very clear. Thank you.

For Egypt. Yes, sure. Your production is quite -- is doing quite well and the rates are quite flat in the past few quarters. So my question is that, I mean, will it make sense to expect a fairly reasonable increase in reserves for Egypt. Sorry, there is actually replenishment to make it clear in Egypt end of this year.

So thanks, Nick. On dividend, let me pass you over to Chris, and then I'll deal with the question on production and reserves in Egypt.

Good to hear from you. The -- well, the dividend is a function of how well we've been performing production and oil price, but also the collections. So I think we have a lot of confidence in the strength of our financial and operating performance. It gave us the ability to pay that dividend. As through it, does it take away M&A? No, not necessarily. I mean, we're on the -- we always look for growth opportunities. And if the right one came up, we'd be able to look at financing it, be that from outside sources or from cash flow if it made sense. So no, it's not counting out necessarily other M&A or growth opportunities.

So Nick, in answer to your question on Egypt, yes. No, the imagery that I like to use and applies actually to all commodities, oil and gas minerals for that matter, is you're constantly running up the down escalator. As you produce away your reserves, you have to carry out activities, infill development well drilling and usually exploration activities in order to replenish the hopper front end and stem the decline curve. The situation in Egypt is that we've run out of hopper. The -- there's very, very limited, although we are still looking at 1 or 2, exploration opportunities. We've hoovered up the exploration potential of the acreage that we operate very effectively and efficiently over the course of the last 14, 15 years. We've had an amazing run. We've drilled over 40 exploration wells. We've had over 60% commercial success rate. We've with doubled 2P reserves and we've increased production by 50%. So it's been an incredible run, but Mother Nature has finite resources. And we've reckoned we've hoovered up most of what is there in our existing acreage onshore Nile Delta. So then what happens is that you have 2P reserves, that's the probability, 50% probability that you'll actually deliver on those reserves. You have 1P reserves and those 1P reserves essentially are your production profile. And then you have 3P reserves, which is the upside potential. And as you keep producing production, your reserves move from the 3P bucket to the 2P bucket and from the 2p bucket, the 1P bucket. So if absent any exploration well drilling and replenishment of the bucket, you actually simply go on diminishing your 2P reserves through time as you produce the reserves in the form of production. And that's the situation we're currently in Egypt. We have, as I say, got some exploration opportunities that we're going to look to drill in the next year or so. Hopefully, those will be successful. And that will replenish the 2P bucket. But directionally, as we produce these assets into their late life phase, you will see a gradual reduction in 2P reserves going forward.

No, I don't -- I don't disagree, I get that. But what I'm asking here is that to me it looks like that 2P number fits quite conservative given the production rates over the past few quarters. And I was wondering if you're going to see some shift from 3P to 2P in quite a material way at the end of this year.

Well, we're going through the current reserve -- external reserves audit. I don't anticipate that there will be an increase in 2P reserves, absent any exploration success.

Okay. Understood. And as a follow-up, can you make any comments on the elections in Iraq? And if there's anything that might change the situation there, both Kurdistan and the federal government, please?

Well, I think you're embarking on a topic where angels fear to tread. But clearly, what we fervently hope is that the election results will be resolved peacefully and that a new government is installed as rapidly as possible because Iraq needs that. The elections in the Kurdistan Region of Iraq election results in the Kurdistan Region of Iraq were pretty well as anticipated, and we don't see that, that will have any impact on the governance of the Kurdistan Region of Iraq and/or ultimately on the relationship between the Kurdistan regional government and the federal government of Iraq. It would appear from the results that, at least what I am being told, that it's likely that a very similar kind of government will end up by being elected as the recent departed or the current caretaker government. And if that is the case, I think that is very promising for the future of the Kurdistan Region, and particularly with respect to relationships between federal and Erbil.

[Operator Instructions] Your next question comes from Nour Eldin from Arqaam Capital.

A couple of questions for me, if I may. First one on -- if you can give us further details about the arbitration case and if there is the time line for any cash settlements over the next couple of years. Also if you can give us the details regarding the deep targets in Egypt and your plan there? Or you expect it to have a partner there or you're doing it yourself? How much you're allocating for it for next year?

Thanks, Nour. Arbitration, yes. The NIOC arbitration, obviously, is an encouraging outcome. We have been -- we have not been, Crescent Petroleum has been in arbitration with NIOC for 12 years since June of 2009. And finally, we have an arbitration damages claim award for the period 2005 to mid-2014 of which Dana Gas entitlement is $608 million. So obviously, that is a positive development because we've been awaiting this damages claim award for many, many years. There is, of course, the issue of timing with respect to receipt of funds. We are -- we understand that Crescent Petroleum has already initiated enforcement activities in order to recover the damages claim, and we are confident that this will be forthcoming within a relatively short period of time. With respect to the deep target -- sorry, then there's a second phase of arbitration, of course, covering the period mid-2014 to the end of contract life, which is 2030, so 16.5 years. That is subject to a separate tribunal. They are going to have their next hearing in October next year, 2022. And therefore, we hope that to be a damages award in relationship to that longer time frame of 16.5 years sometime in 2023. In terms of Egypt, yes, our material Block 6, which we continue to believe has potential resources of over 20 trillion cubic feet of gas, we have a very exciting prospect called Thurya. We are currently planning to drill that well as early as possible. But we are 100% equity shareholder in the block. And like all companies in similar circumstances, we are looking to dilute our equity share to get support for drilling the cost of the exploration well, and of course, for sharing the risks. So we are currently looking to find partners to join us through this very exciting opportunity.

Yes. And do you think with the recovery in oil prices and natural gas prices, is there appetite on it because I know that this has been the story for the last, I would say, 1.5 years for finding a partner? Do you think is it close enough?

Well, we haven't been out looking for a partner that long. But certainly, I think we've been looking for expressions of interest from others for the last 6 to 9 months. And, of course, higher oil prices and higher gas prices are very helpful. This is a material opportunity which sits in the East Mediterranean Gas Basin. The Egyptian current gas reserves, our calculations indicate that production will go below demand in the 2023, 2024 time frame. So there is a need for new domestic sources of gas in order to feed both the domestic gas market and the export LNG terminals. Now of course, with very high LNG prices, that makes LNG export extremely profitable and attractive. So in terms of its strategic location and indeed, the combination with high gas prices and the availability of allege in the existing LNG plants in Egypt, I think this is a very attractive and compelling value proposition.

Yes, that's clear. Just one follow-up on NIOC case. So what kind of enforcement should we see? Because I'm trying to assess here what durability can we get in terms of cash settlements and when it could come? Just trying to do some possibilities there. So can you give us more details about enforcement? How it's expected to be? What do you expect there?

Well, I can't give you further details because we're not party to the arbitration, but I can give you some speculative comments. And that is that in historically, once arbitration awards are made against the Iranian state, they have traditionally paid up. And the reason for their motivation to do so is that they own a fleet of tankers carrying oil around the world, and that makes them a very vulnerable target for attachment of those tankers and their cargoes. And clearly, that is the lifeblood of Iranian foreign earnings. So they are motivated to make sure that, that doesn't happen. So given that vulnerability, we are confident that there will be either a settlement or that there will be an attachment to deliver on these damages claims.

[Operator Instructions] There are no further questions. Dear speakers, back to you.

Thank you very much, everybody, for joining the call. Thank you for your time. You know we are always available. My contact details are on the last slide. Please reach out if you would like any further -- any further question or you want to discuss any topics in relation to the results. Have a nice evening, everybody. Thank you.

Thanks, everybody. Appreciate your participation in the call this afternoon.

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