Energean plc (ENOG) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Energean Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I now like to hand the conference over to your first speaker today, Chief Executive, Mathaios Rigas. Please go ahead.

Thank you, and thank you all for joining us today. I'm sure you've seen our announcement this morning of fantastic deals that we've done to sell our Egypt, Italy and Croatia portfolio to Carlyle for a consideration of up to $945 million, close to $1 billion coming to us from the sale of those assets. A deal that consists of a number of elements, starting, obviously, with the upfront cash consideration of about $504 million, EV to equity adjustments of $177 million. Vendor Loan note over the next 6 years of $139 million and a contingent payment into minimum production threshold in Italy and commodity prices of another $125 million. And over and above this, a contingent payment from our new discovery in Location B, which obviously, is fresh news. So we need some time to define reserves and resources. So overall, $1 billion is coming in from the portfolio outside of Israel, Greece, U.K., and of course, Morocco, which is remaining in our business. Very important point to note Energean before this deal had 1.1 billion barrels of 2P reserves, and Energean post the deal is sitting at 965 million barrels of oil equivalent of 2P reserves. So we continue to be a very strong and big gas-focused E&P company in the market. In terms of our production, our guidance for the year was, and remains, in the same range of 155,000 to 175,000 barrels of oil equivalent a day -- production, since we are talking is as per our plan. We are getting now into the hot season in Israel. So we're seeing big production from our FPSO, which is producing exceptionally well. Obviously, with the sale of Italy and Egypt and adjusting pro forma, our new guidance, excluding Italy and Egypt is going to be 116,000 to 133,000 barrels of oil equivalent in terms of our medium-term targets from 200,000 barrels a day, excluding those countries, probably, we will be closer to 150,000 barrels of oil equivalent a day. But from a portfolio of assets that has a fantastic future, since we are selling today most of our mature assets in the business. Moving to Page 5 of the presentation just to highlight some of the matrices of this transaction. I remind you back in the day that we bought those assets from Edison. We paid $284 million. And today, we are achieving a 3x exit. Obviously, we've invested. Obviously, we've created value but this is exactly what Energean is all about, doing the right deal at the right time and monetizing value for our shareholders. The deal in terms of 2P multiples is also a great success in our view. We bought the assets at $1.2 per barrel of oil equivalent, we're selling them at $5.4, more than 4.5x increase. The deal is immediately cash flow accretive. And it will allow us to reduce G&A, we anticipate at least $7.5 million per annum to be reduced from our G&A. And very importantly, it reduces our decommissioning liabilities, especially from the Italian portfolio by more than 60% of what we have today. All of that strengthens the balance sheet and allows us to repay up to $450 million PLC corporate bond, which we expect to be fully repaid. But beyond that, to do what we promised and continue to do what we plan to do as an E&P company, which is to return money back to our shareholders. We plan to pay a special dividend of up to $200 million upon closing, in line with our stated dividend policy to bring to our shareholders' dividends from the existing portfolio. Of course, we will need to work with our Board to redefine the dividend policy when we close the transaction, when we take stock of what we have achieved from our -- well in Morocco which is the next growth area for us and the revised conditions of our business post this transaction. Moving to Page 6. Talking about strategy and what we look like post this sale. We still -- enhances returns to our shareholders. It's cash flow accretive, as I said before, and it brings what we promised dividends to our shareholders. I mentioned about decommissioning. The divested assets represent more than $0.5 billion of decommissioning liabilities that will not be burdening our balance sheet going forward. Of course, we've done whatever we could to push the commissioning liabilities to the right. And throughout the last 4 years when we own the Edison assets, we have continuously undershot the budgets for decommissioning, but there is a day when we would have to pay for decommissioning of the platforms and wells, and that is no longer with us, but the business will continue to grow. We are, as I've said many times to you when we meet, we are builders. We built a business from zero when we started from Prinos back in 2006 to a company which is worth $2 billion today. In the market, both in London and Tel Aviv, we have built the business based on successful acquisitions, and we will continue to do that. The pro forma business after the transaction, as you can see on Page 6 has the capacity and the capability to be stable at 150, if not more, thousand barrels of oil equivalent a day, excluding any production upside from the development of Morocco, assuming that are well very successful. Last but not least, we are totally focused on achieving our net zero commitment. And this deal brings us now down to below 5 kilos of CO2 per barrel of oil equivalent produced in line with our strategy to get to net zero, as we've committed to back in 2019. Our new entity EnEarth, which focus on creating carbon storage hub will continue to be the growth vehicle for our decarbonization business. Page 7, just to focus a little bit on Israel, which was and continues to be dominating our business. A lot of people, we think that we've increased our exposure to Israel, but in fact and in reality, Israel dominated and continues to dominate our business. Israel is performing exceptionally well. As I said earlier, we are now in the peak season. We are producing at maximum rates. The market is absorbing as much gas as it can take, to deal with the electricity needs of the country. We are now turning our focus on the Katlan development to extend the plateau and even export gas to other markets since we have no export restrictions on our Katlan project. Our liquids production is going also exceptionally well. We've -- we're exporting a new cargo every 4 to 6 weeks, and we do see further upside in Israel in our Arcadia and Hercules areas, which our exploration team is working on to define the next areas of growth for us. I remind you all, Israel has a 20-year reserve life, with a lot of opportunities to extend it via Katlan and our exploration assets. And this is what we're going to be focusing on. With the management team able to focus a lot more on the core asset of Israel, Morocco and Greece, we have the human capital and a stronger balance sheet to focus on our core business, our core areas of growth. Israel, Morocco, and turning now to Page 8 of the presentation, on Morocco. We've discussed this before, together with our partner, Chariot, we have already contracted the drilling rig with Stena. It's a fantastic rig. We know the rig very well. We know Stena very well. We did all our wells in Israel with Stena. We're expecting to spud the well in August and have results as we promised in the third quarter, that will allow us to define the next development legs of Energean outside of Israel. Greece, we announced very recently a new subsidiary called EnEarth that is going to play a central role in our carbon storage projects. That's going to be the vehicle of growth. I remind you, we started with Prinos 15 years ago, and grew this business into what it is today. We're going to repeat the same in the carbon storage business, but without any burden on our balance sheet, since $150 million of grants have been committed by the European Union. So think about this as a fantastic option for us, until European policy on carbon is defined that will allow us to develop the first project in Greece and then move on to our other projects. We will not stop there. This is part of our DNA. On Page 9, you see a summary of all the deals we've done so far. And as you can see, all acquisitions: Prinos in 2007; Karish Tanin in 2016; Edison in 2020; the 30% acquisition of Kerogen in 2021; and the 45% interest in Chariot's Morocco have all been done at exceptional levels in terms of dollars per barrel of oil equivalent. And now that we are selling for the first time a major part of our portfolio, we are achieving a price, which we consider to be a very good price for the assets that we're selling. We will continue to be focused on gas. We will continue to focus on development of gas assets in the region, but the region will get wider. We used to be focused only in the Mediterranean, our first venture out of the Mediterranean was in Morocco in the Atlantic side. We will continue to look for opportunities in the EMEA region, where we believe we have a very strong advantage, knowing both the subsurface and the above surface issues and being able to deal with them. Last but not least, and speaking also as a shareholder of this business and a major one, we will continue to protect our dividend policy and our dividend per share, this is always our driver. And we, unlike many other E&P stories of the past, will continue to deliver and return money back to our shareholders. I know a lot of you may ask the question, what is going to be our new dividend policy? How will it be defined? I think, today, we need to take stock of a fantastic deal. We need to give credit to the team that has created this value. We need to thank all our employees that will be working under the Carlyle vehicle for what they've achieved so far, and wish them good luck for the future. We will be obviously supporting them, since we will have a vested interest in that portfolio through the various transaction structures. And, of course, together with our Board in the next period in the coming months, we will define the future in terms of the growth, in terms of the policy and of course, the deleveraging, which continues to be the three pillars of Energean as we've always said. With that, I want to thank you all for joining the call today and open the floor to any questions. Panos Benos, our CFO, has played a major role in this transaction. Kudos to him. He has been driving this deal and his team has done an amazing job to bring us where we are today. He's available also on the call to answer any questions.

[Operator Instructions] And your first question is from the line of David Round from Stifel.

I mean to me, it feels like you're saying if the market doesn't give you credit, you're going to monetize what you think is a fair price. I just wondered does that thinking, if that is the case, apply to the rest of the portfolio? And hence, do you think that this tidy-up today makes you more attractive to third parties?

David, we don't think like this. I mean we -- whether the market gives us the correct value, now that's a market to decide. And I'm not there to judge markets or investors. I think investors in the market know very well how to price risk, and how to price companies and assets. We are continuously committed to do what we know how to do well, which is to buy assets at the right time, to sell them at the right time, create value in between and find the right opportunities to develop gas assets or other assets like CCS in our region. Whether we become more attractive or not, again, this is something for others to judge. We are here to create continuous value to our shareholders. I'm not going to speculate. I never do. You know that very well. And we are not running any process as we never run a process for these assets. This was an inbound from Carlyle. We never looked for -- or we never ran a process. They approached us. We had a very open and honest discussion. The consideration, we believe, is a very fair deal for both sides, a great deal for us, given where we are in our process and our life cycle, and we decided to take the deal. That doesn't mean anything for anything else. We are committed to Israel. We are producing more than 50% of the country's gas consumption at the moment, in a very challenging situation. But we are there to do our job, which is to produce oil and gas. We don't get involved in geopolitics. And we don't get involved in issues that we cannot control.

Okay. That's very clear. And secondly, just a clarification, please. You talked about the focus very much been on the gas-weighted assets. Obviously, you do still have liquids at Karish. I know they're very valuable to you. So I mean, when you look at M&A now, are you still going to look at liquids opportunities? Or really, is it just gas? And maybe if it's a gas target, you'll be happy if liquids comes along with, but predominantly, you are looking for gas targets.

We're looking for anything that makes money for our shareholders. Of course, our focus is gas because we believe as long term, gas has a brilliant future in the regions that we operate. So that is why gas is a focus. Of course, if you look at our portfolio today, it is dominated by the Israel gas project. Of course, we have the liquids, and I mentioned earlier, a cargo every 4 to 5 weeks and that is very valuable with the commodity prices we see today. If there is a deal that keeps the identity of being a gas-focused company that can make a lot of money for our shareholders, we will consider it. Don't expect from us to go out and buy pure oil mature assets around the world. That's not our style, because we believe that there's a brilliant future for gas, both as a business, but also from what we sense from investors, banks and policymakers. So that's where we see the opportunities. I've said it before, we see opportunities from majors that have made discoveries that they cannot or do not want to develop them, because they are either too small for them or not strategic. We see opportunities in smaller companies that don't have the financial or technical capability to develop major projects like we do. So those are the two key areas of focus for us in the wider geographical region that I mentioned earlier.

We will now take our next question. This is from Werner Riding from Peel Hunt.

Mathaios, you mentioned that you're not in a position to say more about your dividend policy yet, but you are committing up to $200 million in a special. So just wondering if you could talk through the allocation decision to pay this and wondering if there was any thought of perhaps considering allocating amount of it to -- an amount of it to a buyback and improving your per share metrics even further?

I will give you my take, but Panos, please jump in on the allocation. We continuously have discussions about this, whether we should be considering buybacks or dividends. We've made a commitment to our shareholders from a gross dividend policy, that we would pay up to $1 billion from the existing portfolio. And this is what we are later focused on. And this is why we are announcing a special to date because we believe that if there is excess cash in the balance sheet, it should go back to shareholders. If we need more money, we can always come to shareholders and ask for money for any new project, but what we don't want to do is keep cash idle on the balance sheet just in case something pops up. That's from a strategic standpoint. And we believe that one of the major problems of the E&P sector is that other E&P companies have forgotten that we're here to return money to our shareholders whatever we can -- keeping, obviously, a strong balance sheet and keeping growth opportunities. And then shareholders can decide if they want or not to participate in future ventures that we may come up with or negotiate. Panos, do you want to comment on locations?

Yes. On the point about share buybacks, we have been having this discussion individually with a number of person holders. I think the jury still out what's the preference of each one and it is -- it depends on which jurisdiction is one is investing from. What we have said since the beginning is that the dividends are like very close as coupons for us. We want people to have an absolute number, and we want them to know where it's coming in -- the sell buybacks do not provide the certainty. This number that we provided for the time being, be up to $200 million. It is something that we consider to be pretty firm and should be treated as part of our dividend policy as announced 1.5 years back with 1 billion at the end of 2025 [indiscernible] to the shareholders. The share buybacks is what we consider them, and I think pretty consistent with that would be considered as part of over and above the progress of our absolute dividend range. We're not there yet. As Mathaios said, we will take a stock of what we have and the actual cash -- the final cash that will be coming at completion. And at that time, we will try to be as clear as we are always, I think, when it comes to distribution to shareholders and not surprising.

Okay. All right. Just a quick one on G&A savings as well. You referenced minimum $7.5 million. So from -- you had G&A, corporate G&A, $43 million on your P&L last year. So just stripping that out as a run rate, $34 million is about right from 2025. Is that fair?

We'll aim for lower. We do want the G&A to stay well under control, our aim is to stay at $30 million. If I were to provide and bringing that in range, I would advise people to be running $30 million to $35 million, but that's the range, if the business stays as it is today. Obviously, that's what you just said, our rising focus are obviously in two products Katlan and for development in Morocco, even under further opportunities to grow that we change. But as of today, the current business has a $30 million roughly G&A.

We'll now take our next question, this is from James Carmichael from Berenberg.

Just a couple of quick ones. Just following up on the special dividend. Obviously, that's up to $200 million. So I was just wondering what might cause it to sort of fall below that level and what sort of underpins that number? And then just on the deal structure, obviously, there's that vendor loan to Carlyle in there. So just wondering what the sort of -- what the rationale is for including that Carlyle feels like they've got a decent balance sheet. So just some color around that would be helpful.

All right. Let me -- Mathaios, let me get the first one. But if you can repeat the second part of the question as well, I'd appreciate it. But let me start with the first. The outlook is more to do with technicality unless there's something hardly happening in the whole sector on our assets or something like that. The $200 million you can consider it pretty firm. We're not in a position, obviously, to announce firmly a specific amount today. So you can call it more of a technicality given that the visibility of the completion. It is later in the year. If you can repeat the second part of the question, please?

Yes, so just on the inclusion of the vendor loan to Carlyle in the transaction structure, just a bit of color around why that's in there.

Yes. So the vendor has been sized at around $140 million is a fair consideration. This has been fairly priced. It gives us opportunity to either go to the market and monetize it earlier if we need to. You consider the counterparty wish to be pretty robust Carlyle has a fantastic reputation of handing oil and gas assets. That's not only Carlyle. We know those assets, we know what they can deliver, especially now with the Egyptian project has been completed at Cassiopea, very close to midstream. So as part of the transaction, it improves the metrics, but always it gives us the flexibility to monetize it earlier if we need to do so.

[Operator Instructions] We will now take our next question. This is from the line of Mark Wilson from Jefferies.

Congratulations on this, you're very clear to say you're approached on this deal and decided to take it once negotiated. So just interested on the future opportunities beyond this. You mentioned moving and looking beyond the EMEA or rather on the Mediterranean area that has been your focus. And so given you've been successful at creating value in that Mediterranean area, is it a case that you now see a lack of opportunities in that region or better value elsewhere? That would be my first question.

Well, Mark, undoubtedly, our major exposure to Israel, limits our ability to access certain countries in the Mediterranean. And as I'm sure you know very well, Algeria did not allow us to include the Algerian assets of Edison in the portfolio and the same applies to a number of other countries. So I think there are certain limitations on what we can do in the Mediterranean. Since in the North African countries, there are some that do not like what is going on at the moment in Israel and do not want to do business with Israeli-related entities. At the same time, the European countries of the Mediterranean have been sending mixed signals about policy, and what they intend to do going forward in the E&P sector. And since we can't wait for people to make up their minds, knowing the need for gas, knowing the need for hydrocarbons around the world, we will go to countries that are open for business and have a clear policy to support the hydrocarbon exploration and production. . I've had this discussion with many leaders in countries around Europe. I always ask the question, you will be -- what do you prefer to do? Import or produce the hydrocarbons, because you will definitely burn them. And the European leaders at the moment are not giving a very clear answer about what they want to do. Obviously, everybody's focused on green deals and environment and ESG. And as you know very well, we are in the forefront of that, and we were the first to make a commitment to a net zero target. But at the same time, our shareholders can't wait for governments to make up their minds. And that has to do with policy, it has to do with politics, it has to do with populism. And at the end of the day, we are judged by how much return we bring to our shareholders immediately. We're not here to wait for the next decade for people to make up their minds. That's why we're widening the circle. I think by exiting the Egypt and Italy assets today frees up a lot more management time to focus on identifying new business opportunities, and we will do what we know to do best, find the right deal, buy at the right time and at the right price and create value. So Mediterranean is there, and we know the Mediterranean very well. We see -- still see a lot of opportunities in Israel. We see a lot of opportunities in Greece. I remind you, we have a very exciting exploration asset in the West part of the country, Block 2, which we just finished the 3D, and we really like what we see there. We have the CCS business in Greece. We have Katlan coming up in Israel. We have the Morocco development. So we have a pretty full plate even on the existing portfolio, and we don't need to do a deal. And this has always been our policy. We don't do deals under pressure. We only do deals when we see that there is the right value creation for our shareholders. If we see a deal that we like it, we do it. Otherwise, we will be very happy to maintain a business that has a 20-year reserve life that has a very strong predictable cash flow, that doesn't rely on commodity prices because we are, I remind you, contracted with our buyers in Israel. We will have a lot less risk on payments, since all the receivables issue in Egypt is going to be outside this perimeter. We have much better credit quality buyers in our Israel business. Morocco, we really like. The well will tell us the extent of the reservoir and how big the development is going to be and then we'll define the next area of growth. So even if we do nothing, we still have enough to continue the growth and continue to pay the dividends to our shareholders and continue the successful journey that we've started. But we're equally happy to strike a good deal.

Mathaios, I think that's a very candid and clear answer. And I do note that the U.K. assets are still in the portfolio, I believe. And I recall them being -- something I'd take on Edison, but we'll see about those. So two questions then on -- well, just a follow-up on then the drivers from here. Two things, I think, that are key: #1, obviously Israel production. Where do you think the timeline to get to a continuous above 7 bcm production is? Do you think that is possible with Israel's current setup? And then secondly, what does success look like at that and shows well? And what sort of minimum volume do you feel you need to bring that development forward?

Well, I don't like to leave an answer, then you mentioned the U.K. I'll pick up first on that. The U.K. was part of the portfolio we work from Edison. It was never strategic for us. We never said we would be a U.K. player. I think with recent announcements about increases in windfall tax makes it even more difficult for more business to be done there. We are managing the portfolio. The portfolio actually is doing much better than we expected, decommissioning of the assets there is being pushed to the right. Scott is doing very well. We have taken over operatorship in record time, and we did it at the right time before the problems are [indiscernible]. So we're now in control over the decommissioning of our Southern North Sea assets. In terms of the rest, it is obvious that we can -- we have, at the moment, a production, which is stable at or above 7 bcm a year. The drivers there are the weather. And if you can tell me how long we will have a heat wave in Israel, I can tell you how long we will continue to be selling at about 7 bcm. The facility and the FPSO is at maximum uptime. We have sold a long time ago, all the issues. It's the prime FPSO, and it's producing exceptionally well to maintain the level of production at 7 bcm. As you have seen in the presentation, and we're very clear about that, we need to bring Katlan onstream. And we have already secured all the long lead items. We're working very closely with our contractor, and we will be announcing FID, although effectively, we have taken FID, but strictly speaking, the FID will have to be taken after we complete all negotiations on the lease and the contract with our counterparts. That's what we need to do to maintain the level of production above 7 bcm for the longer term. In terms of market, there's another privatization coming up in Israel. We do see increased demand from our existing buyers. Every privatization has happened so far, we were successful in backing the bidder. There's a new one coming up. we have to decide if we want to sell more gas to Israel or we want to keep some for exports to Egypt or other countries in the region. This is a pipeline that is being discussed then it's [indiscernible] pipeline. We have already expressed an interest to take up to 2 bcm in that pipeline that will give us the midstream capacity that doesn't exist today to access the huge Egyptian market that is very thirsty for gas, as I'm sure you know. I'm sure you've read in the news that Egypt is now planning to import LNG, because it needs continuously more and more gas. So it is a huge market sitting next to us that we can access. But at the same time, we're very comfortable to continue selling gas to our Israeli buyers who are very strong credit quality buyers, pay on time and keep going with a commercial strategy we have so far. So we don't need to do much to continue producing 7 bcm, except from hope for warmer weather and invest in Katlan to keep going at the maximum rates.

There are no further questions at this time. So I will now hand back to the speakers for any closing comments.

Well, thank you all. Thank you for your questions. This is a great deal for us. As I said earlier, and I'll sum it up like this, we are selling assets at 3x the price we bought them for. So we are doing, again, what we believe we're very good at, which is to create value for our shareholders. We will continuously focus on deleveraging, paying dividends and growing the business. We've built a fantastic business in Israel. We will continue to build a fantastic business in Morocco, and we will continue to look for new opportunities to grow Energean into the business and the company that we aspire the company to be. Thank you all and look forward to meeting you face-to-face very soon.

Thank you. This concludes today's conference call. Thank you for participating, and you may now disconnect.