Energean plc (ENOG) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining our results call today. In a very challenging time with COVID keeping us away, we're very happy to be giving you an update on our financial results and operational matters that are all going according to plan, in general. I will start with the key messages of today's results. And for those of you that have the presentation, I'm on Slide 5. The key messages of today that I would like to leave you with is that our main flagship project, Karish, is on schedule to deliver first gas in the second half of 2021, as we have previously guided. Work in Singapore is progressing very well. So we are on track for the big milestone of first gas next year. On the second front, which is the Edison E&P acquisition. Again, we are on track to close in the fourth quarter of 2020. We will be covering it in more detail later. All items now are under control, and we are working with various governments to finalize all required that's -- to get to closing. Our strategy to have limited exposure to commodity price has paid off. All our gas contracts in place give us a lot of comfort with cash flows secured with long-term gas agreements in place throughout the portfolio. Our guidance for production in 2020 remains above the initially planned numbers. And on the funding side, which is a key item for us, we remain fully funded. We have an optimized funding structure and enhanced liquidity. We are continuously staying ahead of the game and making sure we have ample liquidity to cover any eventuality. Last, but not least, strong capital discipline is a key characteristic of Energean, and we remain totally focused on our long-term target to deliver cash flows and dividends to our shareholders in the near future. So going into a little bit more detail, and I am moving to Slide 6. On the Karish project, in the first 6 months of the year, we've had tremendous progress. The development wells were successfully drilled and tested. We have 3 fantastic wells from the tests that are capable to deliver 300 million scf a day. These are world-class wells. The pipeline, the 90-kilometer pipeline that will connect our FPSO to the Israeli coast has been installed and precommissioned, ready to go. The FPSO hull and topside integration campaign has commenced. The first heavy lift took place a couple of weeks back, and we are continuing in Singapore the works. On Karish North, we have a significant upside or an uplift on previous resource estimate by 32%. We see a lot more resource in our portfolio across the licenses. And the development plan that we've submitted to the Israeli government has now been approved. So again, we are moving forward to the stated goal of taking final investment decision on a very exciting project, Karish North, by the end of this year. On the second front, on Edison, as we have announced when we published our prospectus, the gross consideration has been reduced to $284 million following the further amendments to the SPA. The Algerian and Norwegian subsidiaries have been excluded from the transaction perimeter leaving us with Italy, Egypt, U.K., Croatia, Malta and Greece to add to our portfolio of assets in Greece, Israel and Montenegro that we have today. We have cleared the Italian Golden Power government approval, which was a key milestone. And now, as I said earlier, we're moving forward to close in the fourth quarter. Funding and liquidity, probably the most important part of any business in these challenging days that we live, pro forma CapEx guidance is reduced by approximately $350 million. Panos will give you more details on that. We have signed a $220 million reserve-based lending facility to fund the Edison E&P acquisition. And we have upsized our project finance facility for Israel by $175 million, not that we need it, but it is the -- it's our strategy to have liquidity in place for every eventuality. Moving to Page 7, which is an extremely important part of our strategy, ESG. It's becoming even more important post COVID. We remain totally committed to all our ESG actions and goals. Our portfolio is 70% gas. We were the first company to commit to be a net zero emitter by 2050, reducing our carbon intensity continuously, linked executive pay to ESG goals, committed to adhere to the 17 United Nations Sustainability Development Goals. And from now on, I will be reporting to everyone our actual actions every year and every quarter on what we're doing to achieve our goals. The long-term goal has been set. We will try to bring it forward, but it is more important now to talk about specific actions every quarter and every year. So the first target is to reduce our carbon intensity over the next 3 years by 70%, and this is going to be achieved through the milestones and the projects that we bring on stream. By 2022, we will be below 10 kilos of CO2 per barrel of oil equivalent, and we will continue, obviously, until we get to the desired target of net zero. Our strategy has been acknowledged by the market, and we are very proud and happy to show what we've received, which is a Gold level index by Maala, the rating agency in Israel, and awarded as the best ESG Energy Growth Strategy in Europe by CFI. So this remains a top priority for us. We are in a changing world for this industry. And we are and we will remain leaders on this front as well as providing growth for our business and our shareholders. So I'll hand over to Panos to go through our financial results.

Good morning from me as well. We move to Slide 11, where we have summarized the key metrics for our first half 2020 results. I have to say, it's one of the most difficult market environment we have to operate since we listed. And we're very proud and confident about the delivery of the team, both operationally as well as cost discipline wise, and this is reflected to the numbers we're presenting today. You can see that our production performance is just above our high end of our guidance. Revenues of more than $175 million. Cost of production, $125 million. $20 million of those are G&A. And adjusted EBITDA of just above $55 million. Operating cash flow even in that -- in this environment is a solid $70 million, just south of $70 million. Development expenditure, $250 million, and we'll talk a little bit more about how this has been adjusted in 2020. And our exploration expenditure reflects effectively an exploration commitment that we had in the Edison portfolio in Egypt of $70 million. Our net debt position is at $860 million on a full consolidated basis. And when adjusted for the minority interest of Kerogen, it's just below $600 million. I'd like to emphasize, as with all our calls and discussions we're having together, that this includes the Israeli project finance, which is a greenfield nonrecourse financing. If you exclude that, we're sitting in a net cash position of over $20 million. Our guidance, I think, for the rest of the year reflects the confidence we have in our asset performance, ability to manage the costs and, of course, our liquidity position. We expect our production to stay within the 50,000 barrels a day range. Cost of production at around $10, $11 per BOE. Our G&A, since we will not have the chance to apply our cost optimization practice in Edison portfolio for this year, will set around $40 million. We're doing our best to keep it below that number. Our development CapEx is revised down to around $550 million to $600 million. This is a significant reduction to what we said in January and that reflects both the reprofiling of the capital expenditure in Israel, given the delays we had in the second quarter in Singapore as well as deferral of CapEx in our developments in the rest of the portfolio. Our exploration capital expenditure is down to $95 million, even though we have included the appraisal well for Glengorm. Again, we think this may be different for 2021, but we're not ready to commit to that yet. A page that we have shown a number of times. I think we will keep it there as a point of reference to reflect our limited exposure to commodity price volatility. 70% of our portfolio is based on fixed price contracts, especially in Israel and Egypt. 10% of our gas, which reflects Italian gas production, is open to PSV prices, and 20% of our portfolio is open to Brent price movements. Page 14, a little bit more details about our liquidity position, balance sheet position. Our net debt position was $860 million. Total cash we're sitting is just above $230 million and a debt -- gross debt of just over $1 billion. In Israel, only the net debt is $880 million. Again, this reflects the project financing -- nonrecourse project financing we have. And this is a construction finance that will be refinanced at first gas, and we are in advanced discussions to accelerate this before we get to the final stages. In terms of excluding Israel, the rest of the portfolio sits at a net cash position of $20 million. We will be repeating that we have lines -- committed lines for our acquisition to -- with Edison. The target acquisition price, as we said previously, we expect it to be south of $200 million. We will keep our guidance of around $200 million for the time being, although we're getting more and more confident that this will be lower than that. We have secured $220 million for this at what we consider to be extremely good terms given the market environment with a 3-year grace period. You well know we have described a lot our Israeli project finance. The only change here is the upsize we achieved in the middle of the COVID-19 crisis, and that reflects, of course, the confidence of our bankers and all the stakeholders of this project. Finally, the Greek RBL we're servicing, it is -- it has entered the amortization period, and we're servicing with $19 million repayments every 6 months. For the avoidance of any doubt, there's no redetermination of that RBL until October 2021. Slide 15, just a little bit more details about our CapEx guidance and how has this changed versus the initial years. And I think it well reflects our ability to shift capital-intensive projects according to market conditions, and especially as we get to what we feel is the final strait for our big projects in Israel and entering a year that we have a number of deliverables. So we have shifted the Abu Qir infill campaign and the NEA/NI FID. The Cassiopea first gas now has been shifted to 2023. And of course, we have deferred Zeus and Athena exploration campaign.

Moving now to Slide 17, talking about reserves and resources growth. We have continuously increased our reserve and resource base. We're now sitting at 830 million barrels of oil equivalent representing a 37% kind of growth rate compounded from -- just in the last 4 years. We made a note in our release today that we see significantly higher liquid content than originally expected in the wells in Israel. This is a very exciting prospect for us. The third well Karish main field that we drilled shows a significantly higher liquid content. We will be releasing a new CPR very shortly in the next couple of weeks, and we will be giving more details. Unfortunately, I cannot disclose any more at the moment until that is finalized. But we're very excited about the oil prospectivity of our Karish project. On guidance, on Page 18, as Panos said, first 6 months, the portfolio did 52,000 barrels of oil equivalent a day across the board. And a very important notice that this happened in the middle of COVID problems, COVID restrictions. And our operating teams across the geographies have done a fantastic job to keep all our operating sites continuously working without losing a single day of production. We are confident that we will continue. But for the time being, we're keeping guidance as per originally announced between 44,000 and 51,500 barrels a day. Looking at the long term, Page 19, from our current level of about 50,000 barrels of oil equivalent a day, when Karish comes on stream, our medium-term target is to exceed 130,000 barrels of oil equivalent a day. And then a very clear target is to fill the FPSO. We are continuously making efforts to sell additional gas in Israel and in the region. If that is achieved, then hopefully, we will be able to give you news on additional gas sales contract soon. The target would then be moved to exceed 200,000 barrels of oil equivalent a day with the FPSO filled up and the development of U.K. discoveries that we expect to take place. With respect to Edison and the outstanding government approvals, as I mentioned at the beginning of the call, we have all the approvals that we need in place. Norwegian and Algerian assets have been excluded. So we are now finalizing Egypt primarily, which has to be the last approval. This is for logistical reasons. I don't want to give too much details, but we do not expect any further issues from any of the governments, and we expect to close in the fourth quarter of 2020. With respect to Karish, a quick project update. I'm now on Page 23. We will start -- we're starting today, and we will be giving to the market a much more detailed analysis now on milestones and next steps. And you can see what has been achieved until now in the first 1.5 years of this project. And we are now moving to a sale away from Singapore, which is targeted for the summer of 2021. Once the FPSO has sailed away from Singapore, it goes to Israel for hookup and commissioning in the summer of '21, with first gas targeted for second half of 2021. Important to note that with this timetable, we do not have any issue with any of our contracts, any concern about termination rights. So we feel very secure with all our gas sales agreements that are in place. Page 24, some pictures from the first heavy lift, an important milestone because you know that Singapore had imposed restrictions on older shipyards. The shipyard that we're working with, Sembcorp Marine, has done a great job to increase resources. On Page 25, you can see a ramp-up. We have more than 500 people working in the yard today, and we expect those numbers to continuously increase over the next weeks so that we can catch up on the time that was lost because of COVID. On Page 27, our vision, where we see this company going, as I mentioned earlier. Base case production of 130,000 barrels a day. That's the clear target that the management team has set once our project is on stream in Israel. And now that is very visible. It is 1 year away from today. We will be in Israel ready to hook up and commission our FPSO and start producing gas and filling the pipelines and selling gas through our contracts. Filling up the FPSO brings us to more than 170,000 barrels of oil a day, and that is excluding any upside from other projects in the portfolio. Page 28, a few words on our contracts. Today, we have 5.6 Bcm a year of contracts -- firm contracts with floor pricing, take-or-pay provisions, no price reopeners with very high quality counterparties in Israel. If you add the option that we have with Or, we exceed 6.3 Bcm, and we have a spare capacity of 2.4 Bcm. We are highly confident that we will be very quickly spilling up the capacity with additional gas sales either in Israel or in the region. Medium-term targets based on the production that I mentioned earlier, revenues will exceed $1.4 billion. And this is primarily based on gas contracts with pricing that we know in Israel and Egypt. We have very good visibility of our prices, so very limited exposure to oil price or commodity prices. Our cost of production is targeted to be around $8 per barrel of oil equivalent across the portfolio. Our G&A, and Panos mentioned earlier that we haven't had the chance yet to apply our cost optimization process to the Edison portfolio, we expect that to be around $30 million a year for a company that operates in 9 countries and has 2 listings. EBITDAX, following all of the above, we'll -- we plan -- we're targeting to exceed $900 million, again, from very stable cash flow predictions from the gas sales agreements we have in place. Key question: what's next? What to expect beyond what you already know? We will be publishing our new Karish CPR in the coming weeks. And we will have there the information that I mentioned earlier about liquids and also revised gas figures from the portfolio. We will continue the integration of the FPSO topsides in the Admiralty Yard in Singapore, which is ongoing, and we will be reporting solid progress over the next month. Final investment decision we expect to take on the Karish North project. And we have now the development approval by the government. So it is in our hands to take the final investment decision based on the resource numbers. Our plan to give priority to Karish North over Tanin, giving us huge uplift in FDP terms. And as we've stated before, this is a project that is in order of magnitude lower cost than Tanin. So it will be taking priority, obviously. In the U.K., the operator is planning to start the first Glengorm operational well in the fourth quarter of 2020. We anticipate approximately 180 days of drilling, so second appraisal well could be drilled in 2021. Edison will close in the fourth quarter of 2020. And in the portfolio of Edison, we have an investment decision on the NAE/NI project in Egypt that, again, will be taken in the fourth quarter of 2020. We have now received all the offers from the various contractors, and we will be awarding the final contract very soon. On Greece, as we've announced before, we have started a Prinos strategic review, which is being completed. We are in discussions about the future also with the Greek government. It is a very important and strategic asset for the country, not only because of the social impact, but also because of its importance of being the only producing asset in Energean, and this is a very important asset for the Greek government. In Israel, probably the most important date for us coming in 2021 will be the sail-away of the FPSO from Israel, which we expect in the summer of 2021. So a very busy year coming up, but with very solid progress from very specific milestones that we will achieve to deliver the results that we promised to our stakeholders.