Dana Gas PJSC (DANA) Earnings Call Transcript & Summary

Thank you, ladies and gentlemen, for joining us today for full year 2022 Financial Results Conference Call. I will now hand over to Mohammed Mubaideen, Head of Investor Relations, to introduce the call...

Thank you. Welcome to the Dana Gas Full Year 2022 Preliminary Financial Results Call. Presenting today are our CEO, Mr. 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, Mohammed, and thank you to everyone for taking the time to join our call today. Dana Gas delivered a solid set of financial results in 2022, producing some of the company's strongest annual results ever, amid resilient oil prices, prudent cost control and a focus on maintaining production. A gain in Dana Gas' operational profitability in 2022 marked the second consecutive annual increase, underscoring the company's low-cost business model and its ability to [weather] the volatile economic and financial conditions since the outbreak of the global pandemic. The solid financial metrics we reported in 2022 also reflect further measures we took to manage costs while ensuring production levels and collections remained as high as possible. If you can now turn to Slide 5, I will run through the numbers in greater detail. For the full year, the company reported a net profit of AED 667 million or $182 million as compared to AED 1.16 billion or $317 million in 2021. Excluding other income and impairments, Dana Gas reported adjusted net profit of AED 718 million or $196 million as compared to AED 469 million or $128 million in 2021, an increase of 53%. The strong year-on-year profits were sustained by higher energy prices and prudent cost control. The group's overall production was 60,200 barrels of oil per day, a 3% decrease from 62,100 in full year 2021. Production output in the KRI gained 1% in full year 2022 with production averaging 34,300 barrels of oil equivalent versus 33,800 in full year 2021. This was outweighed by a decline in production in Egypt, which averaged 25,900 barrels of oil equivalent per day as compared to 28,300 in the corresponding period, an 8% decline. Furthermore, capacity at the Khor Mor gas plant was increased in the fourth quarter by 50 million standard cubic feet per day of gas to 500 million standard cubic feet per day of gas, following a successful completion of a bypass project. I am pleased to inform you that production from the plant finally reached the 500 million standard cubic feet per day level last month in January. This expansion and output came during a period when construction work on the KM250 project was suspended. We continue to work with the local authorities to enhance safety measures. We have drilled 4 out of our 6 development wells, which are expected to be tied back to the KM250 project, and the fifth one is about to commence. In Egypt, the company reached an agreement with the Egyptian Natural Gas Holding Company, EGAS for consolidating its existing concessions on half fiscal terms. The new terms will extend the life of Dana Gas as economic assets and help the company maximize value for all stakeholders over the coming years. As of December 31, the company's cash balance stood at $151 million. Cash balance included $88 million held at the Pearl Petroleum level. The company collected $318 million in 2022. During 2022, the company also distributed a record amount of dividend payments to shareholders. Following a final dividend for 2021 of 4.5 fils that was paid in May, the company's Board subsequently approved an interim dividend of another 4.5 fils per share for the first half of 2022, equivalent to $86 million. This dividend was paid in October and represents a 28.5% increase in the company's interim dividend payment. A decision in relation to the 2022 final dividend will be taken by the company's Board at its March meeting. If you can now turn to Slide 7, I will provide you with the group's operating results in more detail. On the left-hand side, you can see full year 2022 group average output decreased to 60,200 barrels of oil equivalent per day, a 3% decline from 62,100 in 2021. Production in the KRI increased 1% on the year to 34,300 barrels of oil equivalent per day in 2022 versus 33,800 in 2021. In Egypt, production fell by 8% to 25,900 barrels of oil equivalent per day versus 28,300 in 2021, principally due to natural field depletion and reduced investment activity. Average realized prices are highlighted on the bottom row. In 2022, the price of condensate, which represents approximately 13% of the company's total production, averaged $79 per barrel versus $54 per barrel in 2021. Realized prices of LPG, which comprises 11% of our total production averaged $42 per barrel of oil equivalent compared to $35 a barrel of oil equivalent in 2021. If you turn to Slide 8, I'll give you a quick summary of the KRI operations. Production in the KRI remained uninterrupted throughout the year and reached record levels of production. In the second half of the year, production capacity at the Khor Mor gas plant was successfully increased by 50 million standard cubic feet per day of gas following the completion of a further plant debottleneck enhancement. All activities were executed without incident or injury and have brought the total Khor Mor plant capacity to 500 million standard cubic feet per day. The project has added 11% of sales gas capacity following a planned partial shutdown of the plant in order to carry out the required modifications and other planned maintenance activities. I'm pleased to inform you that the additional production from the latest expansion is being supplied to local power parts in the KRI. And this took [ oil ] production to a record 500 million standard cubic feet per day in January of this year. EPC works on our KM250 gas train expansion project were temporarily suspended as we took the required security mitigation measures necessary in order to resume construction activities. We are also closely coordinating with the KRG and security authorities and actively taking all necessary steps to enhance security measures in Khor Mor to protect the personnel and facilities. Drilling activities to supply the additional gas required for the KM250 project continues to progress with the drilling of the project's first 4 development wells completed successfully. The fifth is currently underway. Turning to Slide 9, I'll give you an overview of our assets and operations in Egypt. In 2022, the company's year-on-year output in Egypt fell 8% to 25,900 barrels of oil equivalent per day due to natural field declines. This production consisted of an average daily production of 125 million standard cubic feet per day of gas, 2,757 barrels of condensate and 206 metric tons per day of LPG. The decline is significantly lower than the 20% production decrease that is expected from Nile Delta fields. And this was the result of active reservoir management and optimization of production from the existing well stock. On a quarterly basis, the operational performance of the company's field in Egypt and the El Wastani processing plant declined marginally on a sequential basis to 24,600 barrels of oil equivalent per day from 25,800 barrels of oil equivalent per day in quarter 3, 2022. To boost production and reserves, Dana Gas, has identified several exploration and development opportunities in its existing onshore acreage. Since these opportunities are marginal on the current concession terms, the company has negotiated new terms with EGAS in order to unlock the remaining potential and extend the life of the assets. The new agreement was approved by EGAS and is currently being finalized by ratification by parliament. The agreement includes better fiscal terms and will allow Dana Gas to unlock the remaining potential of its successions and to extend the life of its assets by 2 years. This will allow the company to make meaningful investments in the future and to restart its drilling activities, which will have a positive impact on the company's production in Egypt and will further enhance shareholder value. Now turning to Slide 10 on arbitrations. Following the first award was $608 million that was received in 2021 with regard to the first phase of the NIOC arbitration, in relation to the first 8.5 years period of gas supply contract, a second arbitration involving a claim for the remaining 16.5 years is currently underway. The final hearing was fixed for October 2022 in Paris, but had to be postponed to March 2023. A final award of damages in relation to the second arbitration is expected at the end of 2023 or early 2024. In separate arbitrations, Dana Gas have filed claims in February of 2020, along with Crescent Petroleum, against MOL, Hungarian Oil and Gas Public Limited Company and OMV Upstream International GMBH. OMV, to recover reserve-based earn-out payments claims to be due to the claimants in accordance with the terms of the sale and purchase agreement entered into between the parties in 2009, through which MOL and OMV acquired their 10% shareholding in Pearl Petroleum. Dana Gas has now received the final awards in both arbitrations from the LCIA. The arbitration panels dismissed the claims and ruled that the claimants are not entitled to the earn-out payments. The carrying value of the MOL and OMV earn-out payment amounts were fully written off. I will now hand you over to Chris to talk through the financial numbers.

Thank you, Patrick, and good afternoon, everyone. I'm pleased to report that Dana Gas delivered a strong financial performance for last year. The higher energy prices during 2022 had a positive impact on our results and improved our financial position. Please turn to Slide 12, where I will cover the financial results. As you will see, the company reported a net profit of $182 million in 2022 as compared to $317 million in 2021. Excluding other income and impairments, Dana Gas reported an adjusted net profit of $196 million as compared to $128 million in 2021, an increase of 53%. On the back of higher realized prices, increased production in the KRI and cost control measures, the company's revenue, gross profit and EBITDA all increased by 17%, 28% and 23%, respectively. With regard to the fourth quarter results specifically, I would highlight the following: Net profit for Q4 2022 was $21 million as compared to a net profit of $38 million in Q4 2021. Excluding other income and impairment, adjusted net profit for Q4 2022 was $32 million as compared to $29 million in the corresponding quarter. Q4 2022 gross revenue decreased 3% to $114 million versus $118 million in Q4 2021. EBITDA increased to $91 million versus $90 million in the prior equivalent period. Now please turn to Slide 13, which outlines the company's expenses during the period. For the full year 2022, G&A was $12 million compared to $11 million in 2021. This remains extremely competitive on an industry-wide basis for a company of Dana Gas' size. In addition, OpEx was reduced by $3 million to $57 million in 2022 from $60 million in 2021, demonstrating again the company's success in keeping costs under strict control. The company's capital expenditure totaled $139 million in 2022 versus $126 million in 2021. This CapEx was split $38 million in Egypt and $101 million in the KRI. Moving on to Slide 14, which covers the company's liquidity and collections position. As at December 31 last year, the company's cash position was $151 million as compared to $185 million at the end of 2021. The cash position include $88 million being Dana Gas' share of cash held at Pearl Petroleum versus $67 million at the end of 2021. The company distributed in October, an interim dividend payment to shareholders for the first 6 months of 2022 of 4.5 fils per share, equivalent to a total of AED 315 million or $86 million. At the same time, the company's borrowings stood at $216 million, consisting of $57 million currently outstanding from our corporate credit facility and $159 million of nonrecourse project debt at Pearl Petroleum. During 2022, Dana Gas received $318 million in collections, of which $233 million were in the KRI and $85 million in Egypt. At year-end, the company's Egypt and KRI receivables increased to $30 million and $64 million, respectively. The increase in the KRI receivables is a result of delays in the payment of invoices. In Egypt, the macroeconomic situation has resulted in restrictions in the repatriation of U.S. dollars. As a result, investment will remain in line with collections and foreign currency availability. The company will be taking appropriate measures to ensure recovery of all delayed payments as soon as possible. And with that, I'll hand you back to Patrick.

Thank you, Chris. If you can please now turn to Slide 16, where I will summarize the results. Dana Gas delivered another set of robust annual financial results in 2022, driven by strong hydrocarbon prices and a robust operational performance. The company's adjusted net profit of $196 million reflects our ability to increase production in the Kurdistan Region of Iraq to record levels, while maintaining our low operational cost base. The financial results have also reinforced the strength of our financial health and balance sheet. Our KRI operations continued uninterrupted. In the fourth quarter of 2022, we completed a plant debottlenecking project, which saw our gross capacity increased by 50 million standard cubic feet per day of gas to 500 million standard cubic feet per day. The incremental gas production will go to increased power generation in the KRI. Once complete, the KM250 expansion project will raise our daily production capacity to 750 million standard cubic feet per day of gas, enhancing our revenue and profitability. We are continuing to discuss with the KRG authorities, how we can safely resume construction work on the KM250 project. In Egypt, we have finalized new concession terms with EGAS and are looking to increase investments in our fields next year. The new agreement will extend the economic life of Dana Gas' assets and help the company maximize value for all stakeholders over the coming years. While the company's collections in 2022 was strong, and this allowed us to pay a $172 million dividend during the year. We are currently facing some challenges with collections in the KRI and foreign currency withdrawals in Egypt. To resolve these issues and to ensure recovery of all delayed payments, we continue to engage with our partner governments. The outlook for this year remains encouraging, especially if oil prices remain at current levels. We remain vigilant as we look at our top priorities for the year, which are in addition to securing timely payments to develop the vast potential represented by our world-class assets in the KRI and to maximize the value of our Egyptian assets once the new concession consolidation agreement is ratified by the Egyptian partner. With that, I'll hand you over to Mohammed to start the Q&A. Thank you again for your time. Over to you, Mohammed.

Thank you, Patrick and Chris. We will now start the Q&A session. And then this is time, I will ask you to kindly observe the 2 question limit each. Operator, please start the Q&A session now.

Thank you, ladies and gentlemen, we will all start Q&A session. [Operator Instructions]

So we've just received the first question on the webcast from [ Gus ] from [ Sector Capital ]. So I will just read it out. Patrick and Chris, congrats for the results. Can you please give us your perspective on the macro and political situation in the KRI as it stands today. So Patrick, can you please address this?

Yes. Thank you, Gus. Not an easy question to answer because it's quite a fluid situation in Iraq at the moment. Obviously, from a macroeconomic perspective, they had record collections because of high oil prices last year. So their cash reserves are extremely high over $90 billion. So that is at least one concern that can go away. The recent revaluation of the Iraqi Dinar is, of course, a concern because that's essentially a political decision, not a market-driven decision, and that will, of course, open up possibilities of arbitrage, which is not beneficial to the country or the economy. With respect to the relationships between Kurdistan Region of Iraq and [arability] arrival of the Mohammed Shia' Al Sudani government, all the right noises are being made. There are -- appears to be a concrete and real desire to support [Reprosmon] between the 2 positions of the 2 sides and finally come to an agreement with respect to the oil and gas law. Unfortunately, some political actors in Iraq see this, for whatever reason, as a threat or something undesirable and are interfering with that reconciliation process, which is, of course, undermining and delaying the process. But I'm overall confident in the direction of travel. This new Iraqi Federal government does appear to be genuinely motivated to resolve these long-standing disagreements between the Kurdistan Region and the Federal government. And I think, during the course of 2023, we will see that resolution taking place.

Thank you, Patrick. So I guess, you're not on the call, you're on the webcast. So I hope this answer is satisfactory. I'll go to your second question also and then I move to other question. So the second question from Gus is, can you please elaborate on our -- on your new agreement in Egypt? And how it should impact your profitability and cash flows in the country in the long term. So that's in relation to the consolidation deal with EGAS. Patrick, can you please address this also as well?

Sure. I mean I think the bottom line is that we've been discussing the fiscal terms with EGAS and have reached a set of agreements on changes to those fiscal terms related to the production sharing, contract levers that you can pull and change. And we have also agreed that rather than having separate cost pools, we can consolidate the cost pools into a single cost pool, which also has cost recovery advantages. So these terms that have been agreed have been approved by the EGAS Board in beginning of December of last year. We are now finalizing the revised concession agreement between -- for the new consolidated concession together with EGAS. Once that is done, it will go to the minister and cabinet and finally, to Parliament for ratification. The impact is going to be an addition of nearly [$100 million] in PV10 value to our assets. And it will extend the economic field life of our fields by at least 2 years. So this is a really positive win-win step in the right direction.

Thank you, Patrick. So the follow-on question comes from Mr. Shadab Ashfaq, and he's asking about guidance on the 2H '22 dividend.

Yes. So the Board of Directors will make a decision about that in the March Board meeting, taking into account the current -- the company's current financial position and its future well-being and future cash needs. So that's a decision has not yet been made and will be made by the Board of Directors in the March Board meeting. Chris, do you want to add anything?

No, Patrick, I think you've summarized that well. Obviously, it's subject to the Board's approval in March, April.

Thank you, Chris and Patrick. So we have a question on the status of Block 6, Patrick, how do you like to address this, please?

Sure. Yes. So as you know, we had a concession -- an offshore concession Block 6, the North El Arish concession. The concession expired in March 2021. We extended the concession to March 2022. And according to our interpretation of the concession agreement, because of a series of force majeure issues, we believe that we were entitled to a further 1-year extension, which would allow -- have allowed us to drill the Thuraya prospect in March of this year. The government in Egypt took a different interpretation and a different approach and declared that the concession had expired. The exploration license period has expired and they subsequently awarded the block to someone else.

Thank you, Patrick. So I'll move, there is a question in relation to the KM250 from Jamie. So let me read it out. Thank you for the call regarding the KM250 expansion, what assurance are required to resume the EPC work on the train. When is now the earliest that the project might be completed? Patrick, can you please address this question?

Yes, sure. So clearly, following the various attacks that took place on the KM250 project area and the Khor Mor plant, whilst we continued to produce gas condensate and LPG without interruption, our KM250 project operations were suspended temporarily. We have been in discussions with the KRG authorities, with the Federal government entities and with security authorities on both sides to come with a plan that will allow us to resume our operations safely. So those -- we continue with those discussions on a regular basis. We are hopeful that we will be able to get to first gas by May of next year. So that is slightly more than 12 months of delay because we had originally hoped to be able to deliver first gas from the project by April of this year.

Thank you, Patrick, for your answer. So there's a question from Mr. [ Ali Hatefi ]. Can you please confirm the additional value figure you are getting if this agreement with EGAS is finalized? Chris, can I address this question to you, please?

Yes. Thanks, Mohammed and Ali. Not at this stage is a short answer. We have EGAS approval, but it isn't ratified. Until it's fully ratified, we won't be giving further details on the details of the deal. What I can say is it's obviously positive for us. And moreover, it's obviously positive for EGAS and Egypt because we hope to be improving our NPV, but also extending the life of these fields, providing further gas resources to Egypt and extending employment for the country. So it's a win-win for everyone. And I do look forward to giving more details in the future when I can.

So thank you very much, everybody. So that -- please, if you have any further questions, please refer back to me. You have my e-mail on the presentation. Happy to address any questions in detail. Thank you very much, and have a good day.

Thanks for joining, everybody.

Thank you. This concludes today's conference call. Thank you all for your participation. You may now disconnect.