Harbour Energy plc (HBR) Earnings Call Transcript & Summary

And those are extraordinary numbers, when you think about where you were at the start of the year to what you've been able to do is actually quite remarkable. So yes, we get that to achieve that. And just part of our -- I'm going to bring back a little bit to the operational side and because Harbour is a very different scale company to what it was even 2, 3 years ago, whether it was Wintershall DEA, the LLOG side, have you and the team have to change how you run things internally within that?

Yes. I mean, of course, we did from going -- from being a single-country company to now having 5 core countries. In particular, I've had to break down and bring in a COO because I can't do it all myself even though I would like to, but he's fantastic. So that gives us additional executive capacity. But I'd have to say nearly everyone on our senior team that we've built like myself, spent a lot of their career at global oil and gas companies, if not major oil and gas companies. And so we're actually used to running and managing more diverse global portfolios. And it's funny because when I thought about this particular point, what comes to mind is actually what I find harder is making sure that we don't turn ourselves into a mini major by implementing too many global processes and controls and introducing unnecessary bureaucracy. So I probably spend more time making sure we're keeping ourselves lean and nimble, letting the individual country business units get after what they can get after best and us staying out of their way, but providing them support and making sure the necessary, but only the necessary controls are in place. So it's a balance between the two.

And that idea of sharing things across great and best practice. It allows you to do a little bit of that.

Yes. We focus a lot on that. We get the business unit leaders and technical teams together regularly. We've already had people from Covington, Louisiana, where our LLOG operation, our U.S. Gulf operations run out of in Aberdeen, people in Aberdeen there, we're sharing ideas across between Gulf of America and Mexico or offshore Mexico projects. And in particular, when it comes to working with supply chain on projects in both just across the country line in the Gulf. I think there's a lot of synergies we can get as we go to our developments in Mexico by working with contractors across both jurisdictions. So I think we'll get and continue to get a lot of benefit out of that.

And you did touch on Aberdeen there. And in the U.K. it's been an area of operational performance for you, which is on the one hand, a really good sign. But the fiscal regime stability in the overall environment is still challenging. So how are you thinking about that U.K. business? Obviously, you talked about the EPL changes, and how it sits within the Harbour portfolio, particularly given the Waldorf acquisition?

Yes. So it is a shame given the changes there to the fiscal regime but we deal with the cards that were there. We play the cards that were dealt. And so while we continue to lobby the government for -- to accelerate a change to a more sensible fiscal framework because it's coming, it's just not coming until 2030. We continue to advocate to bring that forward. But while there's not necessarily any real signs of that happening, we continue to do everything we can on the self-help front. And so the team does a fantastic job there. on the cost structure, we've been able to drive cost down from, I think, they were $20 a barrel 3 or 4 years ago. They were $18 last year, and our aim is to keep them there, if not lower, as long as we can. That gets harder and harder to do as you pull CapEx, pull investment out of the country and take your cash flow and invest it elsewhere. But they're doing what they can, means production will continue to decline for us in the country. And we're taking the cash flow and we're reinvesting it into countries where the tax rate is more favorable. And because of that, we have higher return opportunities. It's a difficult thing to do, but that's the role the U.K. plays for us today, is continue to get as much cash flow as we can out of the existing assets, and we can redeploy it elsewhere.

And that links a little bit back to the point earlier, actually creating a business that has lower tax and lower cost ultimately...

Yes. So if we think about our production outlook going forward, we think we can keep production relatively flat at around 0.5 million barrels per day for the next several years with our existing portfolio. But that is happening while the U.K. production is declining. So that means we're replacing that with growth in production from the U.S., where we just picked up the second rig. So we'll have accelerated growth from there over time. Projects in Mexico, additional growth in Argentina as well.

And actually, watch Argentina. It is one of the areas that I am most excited about specially, monetization of that 2P [indiscernible] is actually, I think, a key catalyst for you. So can you just talk about the progress that you've made so far in Argentina and what we should be looking for as we go through the next 12 months?

Yes. So we're quite excited about Argentina, I think everybody who's there is excited about it at this point in time, it's hard not to drink the Kool-Aid, if you will, while you're there. But hopefully, we are pretty clear eyed about it all, and we're keeping our size of our investment there. Is kind of the right scale for a company of our size. So what we have today is about 70,000 barrels per day of conventional -- mostly conventional production. The majority of it is coming from conventional producing assets offshore Tierra del Fuego natural gas that feeds the domestic gas market. And in addition to that, and that goes really well. It's Total operated. The team there does a fantastic job bringing new existing discoveries on stream in order to keep the existing infrastructure full. So kind of a high return, good margin business. But the exciting part in the future is all around Vaca Muerta. And we have an interest in two really large licenses and oil license in the heart of the oil fairway, and we're in the final stages of negotiating the terms around that unconventional license with the local government. And once that's finalized, hopefully, in the coming weeks, we'll be picking -- the plan is to pick up a rig and start drilling in the oil fairway of the Vaca Muerta early next year. So that will be a big new milestone for us and something we're excited about. And then second, our second license in the Vaca Muerta is in the gas fairway, we already have a 1-rig program going there now. The gas is going into the domestic market. Wells are getting cheaper to -- every well we drill is getting cheaper and better than the well before. So the learning curve with in the U.S. is alive and well in Argentina and more and more contractors are showing up with more and better equipment. Infrastructure is being built, new oil pipelines under construction or new gas pipelines under construction. So that's happening. And in addition, the first of what will be to at least 2 LNG projects in the country is under construction. We have a 15% stake in it. It's called Southern Energy LNG, it will consist of 2 leased Golar Floating LNG, vessels, total of 6 million tonnes per annum. And as I said, we have a 15% stake. And why that's important for us is it gives us access to global gas markets for our gas instead of being confined to what the Argentinian gas market needs. And it enables us to -- we've applied for the project to be qualified under what's called the RIGI investment incentive regime and it was approved. So this is a big package of investment incentives. And in addition to the tax breaks, you're able to keep your revenues from the project offshore. So when you hear about people in the past getting burned in Argentina because they generate a lot of revenue in the country and they're unable to give -- get it out without taking a big discount on the exchange rate. If you're qualified under the RIGI, you can keep your revenues, which for us on the LNG project will be in U.S. dollars to be able to keep those out of the country and we reduce that sort of country risk that some people might think about when they think about Argentina. So a lot of milestones coming up and a lot of things we're really excited about.

And just -- I think just listening to you now is the idea of obviously, we've got LLOG with the growth coming through. We've got Argentina with growth coming through. This is really setting up for growth in free cash flow towards the end of the decade, I guess, coming, exactly. But the other part, and I want to say in Latin America, is Mexico because obviously, that's again a big growth area for you with Zama and Kan. So can you just talk through where we are on that now?

Yes, we have 2 discoveries in Mexico that we're now the proud operators of, which wasn't the case before. But we picked up interest in both through coincidentally, two different acquisitions that came as packages so that together, we're now the biggest private interest holder in both of those projects. We have a 70% interest in Kan, and we have a 27% interest in Zama. Zama is the largest undeveloped discovery in Mexico, it's shallow water, oil. Both of these are oil and both are in shallow water. And in Zama, we have Pemex also as our partner. And Pemex was the operator until late last year when they agreed to transfer operatorship to Harbour. Both projects are making some good progress now. We're about to enter FEED in both of them. And if all goes according to plan, both will be FID ready towards the end of next year. And then we'll see once we get final cost estimates in to understand what the schedule really looks like. Hopefully, then we'll be able to take positive investment decisions. But for us, these are big projects, in total, almost 350 million barrels of reserves harbor share across both of those projects together, developing them simultaneously or in close timing with each other allows us to capture some synergies, in particular, through the contracting strategy. We have a common partner in Grupo Carso in both of those projects, that's the Carlos Slim upstream oil and gas sort of entity there in Mexico. So a really strong aligned and well connected partner there. And then we also have Talos as a partner in Zama. So really strong partnerships as well that we're excited about.

There is that idea of free cash flow growth and being able to go out towards the end of the decade. But if I bring all of this together, you've got a very solid production base and really resources in place. Where ultimately do you want to take Harbour going forward? Is it harder in the current macro environment as well? Because obviously, it gives a lot of cash flow, but it gives you a lot of choices.

Yes. If you're talking about M&A, definitely harder in the current macro environment. And we have tried and fairly successfully to avoid buying high, if you will. I think what we feel good about, though, is that with the portfolio we have today, we are able to keep production flat organically, and we don't rely on our need to go out and do an acquisition right now, because of the strength of the existing portfolio. So we really like that. And there are a lot of catalysts coming towards us in the next 1.5 years that are going to help keep us that way. And I've talked about a lot of more projects coming on stream in Norway, 1- and 2-well tiebacks, multiples of them in the pipeline, the second rig in the U.S. Gulf, the projects in Mexico heading to FID and then the opportunities we have in Argentina are all very exciting. We want to keep the investment grade rating on our credit. Again, really important for us. We like to keep a mix of oil and gas that feels good to us. If we could dial it a bit back more towards oil. And I think that will naturally happen as we grow production in the U.S. and then bring the Mexico projects on stream because all of those are oil. So I think that happens will happen naturally or organically at least. So yes, just continuing to maintain our position as a global diversified independent 0.5 million barrels per day, investment-grade credit rating, distributing a lot of cash to our shareholders.

I think the idea of being an international E&P actually with a view of this sort of scale, I think, is important. And you touched on it right at the end there, the idea of the $1.8 billion of free cash flow guidance at the half year mark to market, $2.3 billion. What do you do with all the cash?

Yes, it's a good question. I think we have a good answer for it. I think there are 3 things we could do. We could increase CapEx, and I don't think that's the right thing for us to do. At this point in time, we have a team. They need to stay focused on what we're doing now, and we want to avoid that sort of knee-jerk reaction to changing your CapEx plans just because commodity prices might be higher or lower for 1 year to the next. So the other options we have are to return it to shareholders and pay down debt and our plan is to do both of those. So with the $2.3 billion, if that's where we end up this year, we have a shareholder distribution policy that we recently put in place that aims to -- or that says we will pay out 45% to 75% of our free cash flow to shareholders each year. And where we land in that range will depend on where we are with leverage and debt levels. And having just completed the LLOG transaction earlier this year, our feeling now is we need to have a priority around debt reduction. So it's likely that for the full year, we'll be paying out towards the lower end of that range, precisely where? I don't know. But if you think of, let's use 50% because it's around number $2.3 billion. It means $1.1 billion to $1.2 billion will go to our shareholders. And then we'll be able to make a big dent in our debt using the balance of it to pay down debt. We had $5.4 billion of net debt at mid-year being able to apply $1 billion to $1.2 billion or $1.3 billion against that feels like really good progress on that front. Then on the shareholder distribution, $1.1 billion, we have a commitment to a dividend of at least $300 million. So we'll for sure do that. That leaves $800 million after that. We've already approved a $250 million buyback. So that takes us to $550 million. So we have another $550 million to decide what to do with. I think, for those of you who are familiar with Harbour, now we have a major shareholder in BASF, the chemical company. They were major shareholders in Wintershall DEA. And so as a result of that transaction, they ended up with a stake in Harbour. And they own 47% of the company at the beginning of the year. We now already have them down to 24%. So their stated intention to exit is now happening, which feels good for us because it was -- everyone was sort of waiting investors, in particular, we're waiting to see when and how that was going to take place. So through 3 different transactions, we have them now down to 24%. Hopefully, they'll continue on that journey. But as they are executing their exit from the company. Being in the market with buybacks or having the firepower for buybacks and/or to the possibility of buying shares directly from them is also out there. And so I think that's sort of what makes sense for us in the near term.

And I think actually having them down further would be helpful as well. And I'm conscious of time. And Linda, this always happens we go far too quickly and there's a lot of things we haven't touched on. But if I can just go back to -- what your key message is for investors here in New York. If you want one thing for us to take away today?

Yes. I think it's a good time to think about investing in Harbour. What we hear from U.S. investors is that they're -- now that the U.S. onshore shale play has matured, they're looking at where to invest next. There aren't many companies like Harbour that have scale, investment-grade balance sheet and that good exposure to both Brent and European gas prices. And I think there's still room to run on European gas, and it may run for a while. And we have a proven -- the team has a proven track record of executing and delivering and operating well. And so I think we're worth taking a look at.

Absolutely, I cannot agree more. For me, there's a lot of upside potential there. And that's a brilliant way for us to end the session. And Linda, thank you very, very much, and thank you for everyone for coming.

Great. Thanks, Lydia.