Inpex Corporation (1605) Earnings Call Transcript & Summary

I am Takayuki Ueda, President and CEO of INPEX Corporation. Thank you for attending our investor meeting despite your busy schedules today. I will begin by giving you a report on our corporate activities for the 6-month ended June 30, 2020. So please turn to Page 4. I'd like to start with the highlights of the half year period. Details of our financial results will be explained by Mr. Yamada in his part. However, I would like to inform you that we posted consolidated net sales of JPY 391.6 billion and net loss attributable to owners of parent of JPY 120.7 billion for the 6-month period. Because the Brent oil prices showed an upward momentum towards June after hitting the bottom in April and because we achieved stable production and sales for the half year period with net production volume reaching 582,000 barrels per day, which was an increase of 9% compared to the same period last year, our income before onetime profits and losses came to a positive JPY 36.4 billion. However, the significant drop in the oil price caused us to reevaluate our assets and, as a consequence, we booked an impairment loss of approximately JPY 192.4 billion for the half year period, which led us to post a net loss of JPY 120.7 billion. Our full year forecast is also impacted by this impairment charge, and we are now projecting to end the full year with net sales of JPY 730 billion and a net loss of JPY 136 billion. Income before onetime profits and losses for the full year is expected to reach JPY 36.2 billion. As for dividend, despite the significant deterioration in our forecast due to onetime factors, we will still maintain our previously announced level of JPY 24 per share for the full year, consisting of JPY 12 interim and JPY 12 year-end dividend. In preparation for the possibility of the low oil prices environment continuing, not just in this year, but also in the next and subsequent years, we will continue to focus on reducing investments and costs as well as securing liquidity and free cash flow. Furthermore, we will do our utmost to enabling stable supply of energy by implementing thorough measures against the COVID-19 infection. Regarding projects, Ichthys maintained a stable operation by continuing to ship around 10 cargoes of LNG per month during the first 6 months of the fiscal year. Abadi experienced some delays due to countermeasures being implemented against the COVID-19 pandemic. However, we are continuing to advance preparations for us commencing FEED at an early stage. As for the Abu Dhabi oil project, we will continue to work on increasing production capacities at our offshore and onshore oil field. I will explain the highlights of individual projects in the latter part of my presentation. Please turn to Page 5. Using this slide, I would like to explain about the impairment losses, full year forecast and dividend expectations. The spread of COVID-19 pandemic caused energy demand to fall and this, amongst other reasons, led to a significant drop in oil prices. Accordingly, we conducted impairment tests regarding our entire group's assets and consequently booked an impairment loss of approximately JPY 192.4 billion in the second quarter of fiscal 2020. Impairment losses were recognized for 4 projects, which were JPY 130.8 billion for the Prelude FLNG project and JPY 8.9 billion for Bayu-Undan, both in the Oceania region, and JPY 33.6 billion for Eagle Ford and JPY 18.9 billion for Lucius Oil Field, both in the United States. As for the full year forecast, we are projecting a net loss attributable to owners of parent of JPY 136 billion, which is a drop of JPY 146 billion compared to the previous forecast. This is mainly due to onetime losses such as impairments. Income before onetime profits and losses expected to come in at JPY 36.2 billion. Since we took the impairment charge this fiscal year, we expect our profit to improve from next fiscal year onwards. Even if we see low oil prices of around $40 continue throughout the next fiscal year, we will still do our utmost to generate profit. In this respect, we will strive towards further cost reductions so that we, as the entire company, will be able to respond to the expectations of our stakeholders, including our shareholders. Regarding dividends, we intend to uphold our shareholder return policy outlined in our medium-term business plan and realize a stable dividend payment of no less than JPY 24 per share, despite the significant deterioration in our full year forecast due to onetime losses. Accordingly, we will maintain our full year dividend forecast of JPY 24 per share, which consists of JPY 12 interim and JPY 12 year-end dividends. Please turn to Page 6. Next, I'd like to explain the progress regarding investment and cost reductions. Previously, in May, I explained that, in fiscal 2020, we will aim to reduce capital expenditure by more than 20% and exploration expenditure by more than 40% in comparison to the initial forecast. Due to our determined efforts at this interim period, it is looking more likely that we will exceed these targets for the full year, with the reductions reaching more than 30% for capital expenditure and more than 50% for exploration expenditure. We will continue to maintain our focus so that we can achieve reductions that exceed the levels targeted for the full fiscal year. Our cost reduction efforts will continue without any exceptions. All costs, including OpEx and management costs, will be subject to review going forward. Specifically, we'll seek to reduce OpEx regarding all projects located around the world. Inclusive of outsourcing expenses, we will also endeavor to downsize various management costs in our administrative divisions, including our Tokyo head office, such as by realizing great efficiencies in terms of office space utilization in anticipation of employees continuing to work from home in the future. Regarding projects, we will implement all possible means to reduce costs targeting all parts of individual projects. For example, in Ichthys, we will seek to lower cost to keep the impact of reduced oil prices to the bare minimum by improving operational efficiencies while still ensuring to maintain safety and operational stability. More specifically, in addition to revising operations and streamlining logistics, we will consider postponing or reducing investments by reformulating our investment plans. And please go to the next page, it's Page 7. Next, I would like to explain about our liquidity position and about securing free cash flow. To begin with, INPEX continues to maintain abundant liquidity on hand and has also secured sufficient levels of commitment lines from its core banks. As at the end of December 2020, we expect to have available funds of approximately JPY 200 billion. Despite the continuation of low oil price environment, we are projecting to secure approximately JPY 160 billion of free cash flow for the fiscal year, benefiting from our investment and cost reduction efforts. We will respond appropriately to weak oil prices by securing liquidity and by generating sufficient levels of free cash flows from our business activities. Please go to the next page. Next, I would like to explain about our response to COVID-19 and the states of operation at our various production sites. We have taken various initiatives so as not to stop production at our sites due to COVID-19. For example, at Ichthys, which we operate, we started implementing various measures from the early stages of the pandemic. We introduced special shifts, where operators had to be quarantined for a certain period prior to commencing work. Employees' health conditions were checked and temperatures taken before they were allowed access to work sites. We developed a questionnaire that needed to be filled by incoming LNG vessels, and we made it obligatory that the crew remain on board. Through these initiatives, we have made considerable efforts to prevent infection. As a result, so far, we have been able to continue stable supply of energy without being impacted by COVID-19. Furthermore, we established a crisis management taskforce at our head office in Akasaka, Tokyo in February this year in response to the COVID-19 pandemic. The task force initiated various measures, such as strongly encouraging employees to work from home and implementing restrictions on business trip, both in and outside Japan. During the state of emergency declared by the Japanese government, work from home was implemented in principle to 100% of our employees. Even after the lifting of the declaration, about 70% of the employees continue to work home. In addition, we introduced staggered commuting and flexible working arrangement in order to enable the employees to avoid crowding, thereby minimizing the risk of infection. We will continue to focus on ensuring employee safety and sustainability of operations. Now let me explain our net production in the first half of this fiscal year. The net production was 582,000 barrels of oil equivalent per day, BOED, in the first half, an increase of 48,000 BOED compared to the same period last year. By swiftly introducing the countermeasures against COVID-19 pandemic in our operational sites, we not only did not experience any unexpected shutdown, but also were able to increase our production volume year-on-year, particularly due to the steady ramp-up of the Ichthys LNG project. In fact, we shipped a total of 56 LNG cargoes from the Ichthys project in the first half of this fiscal year. As INPEX is shifting from crude oil to gas, the production ratio has changed from 70% oil versus 30% gas to 60% oil versus 40% gas due to the ramp-up of Ichthys project. And when the Abadi project reaches plateau production, the ratio is expected to be closer to 50-50. Next is the status around our Ichthys LNG project. The average production of the Ichthys project from January to June 2020 was around 209,000 barrels per day on 100% crude oil equivalent basis. As for the number of LNG cargoes, as mentioned, we shipped a total 56 cargoes between January to June this year. This means we have been successful in shipping nearly 10 cargoes per month. Also, we completed our project loan refinancing in June this year, which leads to a reduction in the financial commitment and an expected increase in the project value. Regarding OpEx, we were able to achieve a competitive level of production costs compared to other producing assets in our company. Although we plan to have maintenance work necessary for safe operation, we do not have plans for any large-scale maintenance work in this fiscal year. Now let me touch on the exploration blocks in the vicinity of the Ichthys field. From the past, INPEX has paid a particular attention to the high potential surrounding areas of the Ichthys field, has aggressively acquired the participating interest of the exploration blocks in this area as well as made progress in their exploration works. At present, we hold participating interests in 18 exploration blocks in the vicinity of Ichthys LNG project, including the Ichthys field, while we discovered gas reservoirs, including Crown, Lasseter, Mimia and Burnside. So far, we have confirmed that these gas reservoirs extend across at least 9 blocks. Moving ahead, we will continue and conduct the appraisal works for these discovered gas reservoirs. In the mid to long term, we will proactively study these gas reservoirs in the vicinity using the existing Ichthys facilities to ensure a competitive development and production. Let me turn to our Abadi LNG project. This is a large-scale project, producing approximately 9.5 million tons of LNG per year and up to approximately 35,000 barrels of condensate per day. Depending on the demand of gas in the surrounding area, it will supply a total 150 million cubic feet of natural gas per day via pipeline. With the Indonesian government's approval of the revised POD as well as the 7-year addition and the 20-year extension of the PSC in 2019, the term of PSC of the Masela Block is extended to 2055. In February 2020, we signed the MoU with the state line PT PLN and PT Pupuk Indonesia for a long-term domestic LNG and natural gas supply from the Abadi LNG project. In regards to the initiatives today, although some delays are expected due to the impact from COVID-19 pandemic, we are preparing for the FEED work, which we aim to commence at an early stage. At the same time, we are continuingly targeting the production start-up in the latter half of the 2020, and we are continuing our work to realize the Abadi LNG project. As for other businesses, which are the foundation of our operation, including Abu Dhabi, Kazakhstan and Azerbaijan, we are continuing a stable production in these projects. As for Exploration Block 4 of Abu Dhabi, we are currently conducting the block appraisal work and the preparatory work for drilling. Next is our natural gas business in Japan and our initiatives in the renewable energy business. Regarding the domestic natural gas business, the sales volume in the first half were approximately 1.07 billion cubic meters, while our forecast for the full year is approximately 2.06 billion cubic meters. We are experiencing a drop in demand due to reasons, including the spread of COVID-19. And through our sales activity, we are working to stop or mitigate this decline. We are targeting the supply volume of 2.5 billion cubic meters per year and are putting our efforts to achieve that target. As for the initiatives in renewable energy business, we are continuing the commercial operation of the Indonesian Sarulla Geothermal IPP Project. In Akita Prefecture of Japan, we are continuing the environmental impact assessment for the construction of geothermal power plants while the flow tests commenced in 2020. Within the INPEX-operated Koshijihara plant in Niigata Prefecture, we completed the construction and commissioning of a methane synthesis test facility, which produces methane from CO2 and hydrogen. Various test operations are ongoing while we are studying the possibilities, including the scale-up of the plants. In May 2020, we joined the consortium for an offshore wind power project in Akita Prefecture, Japan. We will continue to aggressively strengthen the initiatives for renewable energy going forward. Thank you very much.

I am Daisuke Yamada, and I'm responsible for the finance and accounting division. I'd like to explain the financial results for the 6-month ended June 30, 2020. Please turn to Page 16. I'd like to begin by explaining the change to our accounting period. From fiscal year ending December 2019, we changed the accounting period for INPEX and consolidated subsidiaries, aligning the fiscal year-end at December of each year. Because of this change in the accounting period, there were only 9 months in the fiscal year ended December 31, 2019. However, from the fiscal year ending December 31, 2020, the fiscal year will cover the entire year from January to December. Now when we refer to year-on-year comparison in this presentation material, we are referring to the 6-month period from January to June 2019. Please turn to Page 17. This slide outlines the highlights of financial results for the half year period. Because the average Brent oil prices fell by $42.10 or by 36.4% compared to the same period last year, net sales dropped by JPY 171.4 billion to JPY 391.6 billion. Operating income decreased by JPY 145.3 billion or by 54% to JPY 123.7 billion. And ordinary income fell by JPY 121.4 billion or by 44.9% to JPY 149.2 billion. Moreover, because we recognized an impairment loss of JPY 192.4 billion for the period, net loss attributable to owners of parent for the half year period came to JPY 120.7 billion as against net profit of JPY 82.4 billion we posted in the same period last year. For your information, profit contribution from the Ichthys LNG project was between JPY 20 billion and JPY 25 billion. Please move to Page 18. Next, I would like to describe net sales in terms of crude oil and natural gas. Net sales of crude oil decreased by JPY 175 billion or by 41.5% year-on-year to end the half year period at JPY 246.3 billion. The main reason for this decrease was the $28.94 or 43.7% drop in the unit price of overseas production per barrel on a year-on-year basis, which was caused by weaker oil prices. Sales volume increased by 5.4% year-on-year to 60.894 million barrels, mainly as a result of sales volume picking up in Eurasia and the Americas. Please turn to Page 19. On the other hand, net sales of natural gas increased by JPY 5.8 billion year-on-year to JPY 136.7 billion for the 6-month period. The main reason for this increase was the higher sales volume despite being negatively impacted by the lower average unit price of overseas production and lower average unit price of domestic sales. Sales volume increased by 20.3% year-on-year to 222.856 billion cubic feet helped by improved sales volume in the Asia and Oceania region, which is mainly from the Ichthys project. Please turn to Page 20. Different factors contributing to the movement in net sales from the same period last year are expressed as a waterfall chart on this page. An increase in sales volume pushed up net sales by JPY 38 billion and a decrease in unit prices pushed down net sales by JPY 201.9 billion. After reflecting stronger yen and others, net sales for the period came to JPY 391.6 billion, decreasing by JPY 171.4 billion from JPY 563.1 billion recorded during the same period last year. Now Page 21. This is the statement of income. I will explain the movements in net income or loss attributable to owners of parent using the waterfall charts in the next few slides. So please refer to this slide later if needed. Now Page 22. I'd like to explain the movements in consolidated net income compared to the same period last year in terms of income before onetime profits and losses, which excludes onetime factors and in terms of net income, including onetime factors. Mainly due to lower unit prices, net sales caused net income to drop by JPY 171.4 billion. Cost of sales fell by JPY 20.8 billion due to lower net sales and had a positive impact on net income. Exploration expenses, excluding onetime factors, decreased by JPY 7.2 billion and had a positive impact on net income. SG&A essentially remained flat. Allowance for exploration increased by JPY 2 billion and impacted net income negatively. Other income and expenses, excluding onetime factors, pushed up net income by JPY 14.5 billion due to improved equity earnings of affiliates and foreign exchange gains. Income tax payable, excluding onetime factors, decreased by JPY 87 billion and helped improve net income. And net income attributable to noncontrolling interest, excluding onetime factors, also contributed positively and increased net income by JPY 5.4 billion. As a consequence, income before onetime profits and losses for the period decreased from JPY 75 billion recorded during the same period last year to JPY 36.4 billion, dropping by JPY 38.6 billion over the 1-year period. Now Page 23. Next, I would like to explain the impact of onetime profits and losses. Income before onetime profits and losses for the 6-month ended June 30, 2020, came to JPY 36.4 billion. During this half year period, the spread of COVID-19 pandemic caused energy demand to fall. And this, amongst other reasons, led to a significant drop in oil prices. Accordingly, we conducted impairment tests regarding our entire group's assets and consequently booked an impairment loss of JPY 192.4 billion. Impairment losses recognized were JPY 130.8 billion for Prelude, JPY 33.6 billion for Eagle Ford, JPY 18.9 billion for Lucius and JPY 8.9 billion for Bayu-Undan. After reflecting JPY 29.7 billion from tax effect on impairment loss, onetime gain of JPY 14 billion associated with excess refinancing, loss on valuation of investment securities and others, onetime profits and losses for the 6-month period came to negative JPY 157.2 billion. After subtracting JPY 157.2 billion of onetime losses from JPY 36.4 billion of income before onetime profits and losses, net loss attributable to owners of parent for the half year period came to JPY 120.7 billion. Now please turn to Page 24. This is our consolidated balance sheet. Total assets at the end of half year period came to JPY 4.671 trillion, reducing by JPY 178.9 billion in comparison to the end of the previous fiscal year. This was mainly due to the impairment charge we recognized regarding fixed assets. Incidentally, total assets of the Ichthys downstream JV, which is not included in our consolidated balance sheet, came to JPY 3.7112 trillion. As for liabilities, total at the end of the half year period came to JPY 1.6169 trillion, which was an increase of JPY 64 billion in comparison to the end of the previous fiscal year. This was mainly due to additions in loans. Net assets came to JPY 3.0541 trillion, decreasing by JPY 243 billion in comparison to the end of the previous fiscal year. This was mainly due to a decrease in shareholders' equity caused by loss recorded and a reduction in accumulated other comprehensive income. Incidentally, impacts total net loans, including net loans of the downstream JV, came to approximately JPY 2.2 trillion at the end of the 6-month period. Next, the statement of cash flows. The net cash provided by operating activities was JPY 173.5 billion, up from the reference of JPY 154.5 billion as of Q2 in the previous fiscal year. The net cash used in investing activities was JPY 167.7 billion, which was an outflow due to capital expenditure and payments for time deposits. The net cash provided by financing activities was JPY 124 billion due to borrowings, et cetera. Now I would like to explain the consolidated financial forecast for the fiscal year ending December 2020. First is the difference between the actual results in the first 6 months versus the initial forecast for the first 6 months announced in May 2020. Regarding the oil price assumption, the initial consolidated forecast was $40.40 per barrel, but the actual in the first half was $42.10. In summary, the net income attributable to owners of parent was initially JPY 35 billion in the May forecast, but the actual result was a negative JPY 120.7 billion, down JPY 155.7 billion versus the forecast in May. Next is the financial forecast for the full year. As for the oil price and exchange rate assumptions, we have increased the oil price assumption by $10 from the initial $30 to $40 per barrel in the second half based on the mild recovery seen today. This sets the full year forecast to an average $41.10 per barrel. Regarding the exchange rate, we revised the second half assumption from JPY 110 to JPY 105 to $1 and the full year assumption to JPY 106.6 to $1, considering the recent Japanese yen appreciation. The full year forecast is the following, as shown on the slide. Consolidated net sales is revised up from JPY 710 billion to JPY 730 billion, up JPY 20 billion or 2.8%. Consolidated ordinary income is revised up from JPY 163 billion to JPY 200 billion, up JPY 37 billion or 22.7%. Although we expect an increase in income in the second half due to the revised oil price assumption, the impairment losses that we recognized in the first half will have a significant impact, and thus, the net income attributable to owners of parent is revised down from a positive or net income of JPY 10 billion to a negative or net loss of JPY 136 billion, down JPY 146 billion compared to the previous forecast. The profit contribution of the Ichthys project is expected to be around JPY 22 billion on a full year basis, which amount was JPY 12 billion previously, thus we expect an increase of around JPY 10 billion in the profit from the project. However, due to the refinancing that we conducted for the Ichthys project, accounting-wise, we expect to book a one-off profit of approximately JPY 6 billion on the full year. Thus the profit contribution from Ichthys project, including the one-off profit, is around JPY 28 billion or so on the full year basis. As for the dividend for the fiscal year ending December 2020, we plan to pay JPY 12 per share at the end of the second quarter as initially announced. As our CEO, Mr. Ueda mentioned earlier, we also expect a JPY 12 per share at the end of the fiscal year. No change from the announcement we made in the first quarter. As for the difference between the previously announced forecast and the latest revised forecast, we have shown them in the waterfall chart based on the impact to net income attributable to owners of parent. To understand the real capability and profitability of INPEX, we defined the base profit as the income before one-off profit or loss, such as impairment losses. Using this slide, I would like to explain the factors that impact the income before one-off profit or loss. From the previously announced forecast of income before one-off profit or loss, which was JPY 10 billion, the loss on valuation of investment securities of JPY 7.7 billion was booked in the first quarter. So adding the reversal of such loss will lead to JPY 17.7 billion of the previously announced income before one-off profit or loss. We then have a positive impact of JPY 31.8 billion from the upward revision in the oil price assumption, while a negative impact of JPY 6.8 billion from the revised exchange rate based on the stronger Japanese yen. We also have a positive impact of JPY 2.9 billion due to drop in exploration expenditure and the negative impact of JPY 16 billion coming from individual projects as well as positive impact of JPY 7 billion due to drop in depreciation costs in the second half due to the impairment losses booked in the first half. Including other factors, the full year forecast of income before one-off profit or loss is revised up from the previously announced JPY 17.7 billion to JPY 36.2 billion, an increase of JPY 18.5 billion. Continuing to the next page with that income before one-off profit or loss of JPY 36.2 billion, we have shown another waterfall chart to illustrate the impact on the net income or loss attributable to owners of parent. There is a negative impact of JPY 192.4 billion due to the impairment losses booked in the first half and a positive impact of JPY 29.7 billion due to the adjustment of corporate tax, which turned out to be positive. As a matter of fact, the negative impact from impairment losses explained earlier will be JPY 162.7 billion on the net after the positive impact from tax is factored. We then had a project loan refinancing for the Ichthys project, which leads to a positive JPY 6 billion as a one-off profit or loss accounting-wise, while there is a negative impact of JPY 2.7 billion due to the valuation loss of investment securities, which we booked in the second quarter. At the same time, we expect to book expenses related to the exit of some projects in the second half, which is a negative impact of JPY 7 billion. And including other factors, the negative impact from the one-off profit or loss came to JPY 172.2 billion. As a result, the forecast net income or loss attributable to owners of parent is calculated by deducting this negative impact of JPY 172.2 billion of one-off profit or loss from the JPY 36.2 billion of income before one-off profit or loss. And thus, the forecast net loss is JPY 136 billion for this fiscal year. This is a drop of JPY 146 billion versus the previous announced net profit of JPY 10 billion. This concludes my presentation. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]