International Petroleum Corporation (IPCO) Earnings Call Transcript & Summary

[Audio Gap] The Lundin Group companies over the past 6 months, we've done a series of virtual town hall meetings, and I think the format works very well. We hope to be back one day to see you live in Stockholm. But for now, we'll do this virtually. And at the end of the presentation today, there will be a Q&A session. But you can write your questions by pulling up the Q&A tab at the bottom of the screen whenever you want and I will then make sure to turn those questions over to Mike at the end of his presentation. And without further ado, I would like to hand over to the CEO of IPC, Mike Nicholson.

Thank you very much, Robert, and a very warm welcome and good evening to everyone. I would just like to echo the comments that Robert made in his introduction. It's always been a great pleasure to have the opportunity to stand up face-to-face and talk with all of our shareholders in Stockholm. But hopefully, next time and next year, we can have the opportunity to get together again. What I was going to do this evening was -- we had our year end results presentation this morning. And then we had a long series of presentations this afternoon on our Capital Markets Day, which sets out our forward-looking guidance and really the strong position that IPC finds itself in today. So I'm going to give you just a brief one slide introduction on the highlights from the 2020 performance. But then the rest of the presentation, we'll focus on the forward-looking outlook for our company. So to begin with the 2020 highlights. We had a very strong finish to 2020. And it was obviously a rough year with some huge challenges with oil price weakness on the back of collapsing demand, and we had to curtail some of our production to preserve cash flow earlier in the year. But I feel really positive about how production has recovered as we've brought some of our core Canadian oilfields back on stream. And if we look at our fourth quarter average production of just below 45,000 barrels of oil equivalent per day, that was a 7% increase on our third quarter levels. And that allowed us to drive our full year production up to in excess of 42,000 barrels a day and gives us a nice entry rate into 2021 as we see oil prices recovering to continue the good trend that I'm going to talk about on our cash flow generation. Good cost control. We cut all discretionary operating cost expenditure through 2020 in response to weak oil prices. And our full year average operating cost per barrel were -- was $12, which was exactly in line with the latest guidance that we'd given to the market. I think one of the most impressive things that the team was able to achieve through 2020, when we saw the weakness in late Q1 is we very, very swiftly moved to rapidly reset our business plan. And basically, that meant cutting our capital investment program in half. Originally, we'd estimated we'd invested in excess of $160 million, and that was reduced by 50% to just over $80 million. And really, the target then was to ensure that we could preserve the balance sheet strength and still generate free cash flow through 2020. And If we look at the cash flow numbers, that's exactly what that business reset strategy was able to achieve through 2020. Our full year operating cash flow was just below USD 120 million, and we're able to generate a free cash flow of just below USD 10 million. I think more importantly, to draw your attention as production was recovering through the fourth quarter, and we're seeing oil prices increase in the fourth quarter. Our cash flow generation was accelerating. And we were just under $50 million of operating cash flow and just under $30 million of free cash flow during the fourth quarter. And as I mentioned, that sets us into a really strong position to keep that free cash flow momentum as we move into 2021. The balance sheet was perhaps slightly higher debt levels than we'd anticipated at the beginning of the year, just over $320 million. But when we look at our leverage ratio, we were still able to exit the year at just under 3x net debt to EBITDA and we have significant liquidity headroom under our existing bank facilities. And Christophe, the CFO, and the team did a really good job in refinancing and extending all of our credit facilities in the summer of 2020. So the company has got an extremely strong balance sheet to support the company in the years ahead. Reserves and resources. I'm going to come back to in excess of 270 million barrels of 2P reserves at the year-end and in excess of 1.1 billion barrels of contingent resources. And we also had a very strong 2020 performance on the ESG front. We didn't have any material incidents to report. And we really ramped up our non-financial disclosures and issued our first sustainability report and made good progress on our emissions reduction strategy to reduce our net carbon intensity by 50% over a 5- year period. So all in all, I think it's been an extremely satisfactory performance for 2020. But as we see production recovering and oil prices recovering, I think you should get more excited when you look at the outlook for IPC in the years ahead. So turning to the next slide. I really feel like the company has never been in a better position to create long-term shareholder value. And in parallel with the short-term business reset that I touched upon in the previous slide, we've taken a lot of time and effort to really optimize our reserve base and make our free cash flow generation much more resilient in a lower oil price environment. And if we just look at the highlights, we estimate that we can keep our production flat on average at around 45,000 barrels of oil equivalent per day over the next 5 years. And if we look at a range of oil prices between $55 per barrel and $65 a barrel, we can generate a huge free cash flow of $600 million on that lower oil price forecast and as much as in excess of $900 million in a $65 oil price environment. And when you translate that into free cash flow yield, we're looking at somewhere between 28% and 42% on average, which I think you'll find screams extremely favorably with the rest of our peers in the sector. Now what's the plan for that free cash flow generation? The first priority is to deleverage. So as we move through 2020 (sic) [ 2021 ], the immediate priority is to pay down debt. But IPC has had a strong track record of share buybacks and returning money to our shareholders. We bought back 25.5 million shares in 2017. And last year, we finished the share buyback program, retiring 8.5 million shares. So as we move into 2022 and beyond, with the significant free cash flow generation, certainly, shareholder returns will be a top priority. IPC has been very successful in taking a countercyclical approach. And as we've seen weakness in oil prices since the company has been launched back in 2017, we've completed 3 acquisitions in less than the last 4 years. And I think as we hear the narrative in the upstream oil and gas space and in the energy transition, we're going to see far more assets coming to the market in the years ahead, in my opinion, and IPC will continue to be opportunistic with respect to additional value-accretive acquisitions for our shareholders. And not forgetting the organic growth story. As I mentioned, we've got in excess of 1 billion barrels of undeveloped contingent resources. And that's going to be important for us in the years ahead as that becomes our fuel for replacing organically our existing reserve base. But huge, huge reserve base, resource base to work with there. So if I turn now on to the 2P reserve story. And I think if you look at the chart on the right-hand side of the screen, we'll all agree that there's been a huge increase in our reserve base, both organically through reserve replacement and inorganically through the 3 acquisitions that we've made. The Suffield acquisition from Cenovus back in 2017, the BlackPearl acquisition in late 2018 and the Granite acquisition that was completed at the end of 2019. And when you take the reserves growth in context with when we launched the company back in 2017, production-wise alone, we've produced more than 1.5x our original reserve base, and we've increased our 2P reserves ninefold. And where we stand today is a very low decline, highly developed, 2/3 of our reserve base is developed producing, which means we need relatively limited capital expenditure to monetize those reserves, and I'll touch upon the long-term cash flow -- CapEx forecasts in the coming slides. I think it's also important to draw your attention to the fact that we've significantly increased the longevity of our reserve base from 8 years to 18 years, which stands us in very, very good stead to be generating cash flow for many years to come. Turning to the contingent resource base. I think this has been an even more impressive story. When we started life in 2017, we didn't have any contingent resources booked after the first acquisition of our Suffield asset in Canada and organically working our assets in France. In Malaysia, that was increased to 63 million barrels. And then with the acquisition of BlackPearl and some additional land acquisitions, we've been able to amass now a contingent resource base in excess of 1 billion barrels. And our teams in each of our countries of operations are working hard to mature all of those contingent resources in Canada, and we've launched a third pilot project to increase the productivity of our Phase 1 development of our Blackrod project, and we've seen very, very encouraging results as production has ramped up ahead of schedule from that project. Our Ferguson property, which was the Granite acquisition, we did take the decision to pause all investment on that project last year. We did plan to drill 6 wells, and we have high hopes that the contingent resources that come with that property can be matured into reserves as we move forward with our development plans on our Ferguson asset. In Malaysia, we've had 3 very successful development campaigns. We plan to drill a sidetrack on our Bertam property either towards the end of this year or early 2022, and that will give us important information to look at further infill drilling potential on our Bertam property. And lastly, in France, we redeveloped one of our core producing properties called the Vert La Gravelle project, and we drilled one of the longest horizontal wells ever into Rhaetian reservoirs, which has delivered a well that's producing well in excess of our predrill expectations. And we hope to deploy that horizontal drilling technology in the 20 million barrels of contingent resources that we have in France and again, further grow and replace the reserves that we have in France. So moving on to the short-term production guidance. For 2021, we announced this morning that we planned a guidance range of between 41,000 and 43,000 barrels of oil equivalent per day. The one thing I do want to draw your attention to is our exit rate potential does show some growth. So we feel confident that we can exit 2021, above the high end of that 43,000 barrels a day guidance range. And the reason we feel that way is twofold. The first is on our Bertam project in Malaysia, where we currently have a 75% ownership in the field and a 100% ownership of the FPSO, which is the host facility, our partners, Petronas Carigali, have decided to pass their 25% interest to us from April because it's not material for them. So we will see an increase in our production levels of in excess of 1,000 barrels a day from April of this year. The second in our capital budget, which I'll talk about in the coming slides, is we're planning to ramp up production on our de Prime drilling pad at our Onion Lake Thermal project in Canada, which should slowly ramp up to between 1,800 barrels and 2,000 barrels a day by the end of the year. So those production adds in the second half of this year should see us exit in excess of 43,000 barrels of oil equivalent per day. When we turn now and look at the cash flow guidance, so this is our operating cash flow. So this is how much the assets in our company are going to generate to allow us to fund our development projects and also to deleverage or return money to our shareholders. And if we look back to the brighter times in 2018 and '19 when oil prices were in that $65 to $70 per barrel range, we were generating significant operating cash flow between $280 million and $300 million. Clearly, 2020 was a year of weak oil prices, $42 per barrel on average, but I think the team did a great job. We still generated $120 million of cash flow. And when you put that into context with the guidance that we gave in early 2020, which was $125 million, assuming a $50 per barrel oil price, we weren't too far off the bottom end of that cash flow guidance, notwithstanding the fact that oil prices were much, much lower. Turning to look at the 2021 cash flow guidance. We've come up with a Brent oil price forecast range of between $45 per barrel on the low side and $55 per barrel on the high side, and that will allow the company to generate somewhere between $100 million and $220 million of operating cash flow. One thing just to draw your attention to the top end of that guidance range is we're assuming that Canadian crude differentials will be around $17 per barrel. And notwithstanding the fact that today, the forward price for the differential is around $12 a barrel. There's clearly some upside beyond those cash flow generation forecasts if we continue to see strong crude prices in the months ahead. So how are we going to allocate that cash flow? So our investment strategy is very simple for 2021, is really minimize our capital expenditure and maximize the free cash flow generation. And when we look at the capital expenditure budget that we announced this morning, it's a USD 37 million budget, which is a decrease of 55% from 2020. And it's worth mentioning that last year, we cut that 2020 CapEx budget in half already in response to weaker oil prices. And the investment strategy behind the $37 million is to complete the spending on our Onion Lake Thermal project, 70% of the spend when that project was actually undertaken in 2020 by moving forward and tying in those wells and bringing them on stream in the second half of this year. As I mentioned, that should increase our Onion Lake Thermal production by up to 2,000 barrels per day. One of the things that the Onion Lake Thermal team have been successful in working up in the last year is an infill drilling potential campaign, and we've identified up to 5 potential drilling locations on that property. So what we've done as part of the capital budget is allocate some funding for the drilling team and for some long lead items, such that if we see oil prices continue to improve, then there is some growth activity that we can add into the program in the second half of 2021. Very similar story in Malaysia. We have the potential to sidetrack our A15 well, which has a production potential above 1,500 barrels per day. We've ordered the long lead items and the pump equipment. And again, if we see continued strength in oil prices in the second half and a recovery in demand, then that preserves our drilling flexibility to be able to complete that well before the end of the year. But I think when you look at the expenditure program that we've put forward for this year, it is fairly conservative. It's fully funded at Brent oil prices below $40 per barrel. And you're going to see that on the next slide, that positions IPC very, very strongly to generate material free cash flow across all price decks in 2021. And you can see this in hard numbers on this slide. If we look in a weaker oil price environment of $45 per barrel Brent, we're expecting to generate somewhere between $37 million to $39 million of free cash flow. And as we see oil prices increase to $55 and up to $65 per barrel on that higher oil price scenario, we can generate in excess of $150 million of free cash flow. When you put that in context with today's IPC market capitalization of around $430 million, that's a significant free cash flow yield of between 9% to 35%. Turning now to the longer-term outlook for the business as well as resetting our 2020 business plan, the team has taken a lot of time and effort to optimize our long-term capital funding that underpins our 2P reserve profile. And what we've been able to do is to reduce the 5-year capital expenditure program by $100 million. That translates into sustaining CapEx figure to keep production on average at 45,000 barrels a day of only $4.50 per barrel. And as I mentioned, the focus as well as the in short-term for 2021 is to maximize that free cash flow generation in the long term over the next 5 years. And I think it's worth reiterating, we did in 2020, but the timing and the size and scale of our investment program over the next 5 years, because we operate all of our assets, we do have a significant degree of discretion either to accelerate or to defer that forecast capital expenditure program, whilst at the same time, preserving the free cash flow generation of the company that I'm going to talk about in the next couple of slides. Before I talk about the cash flow generation, I think it's worth just spending a moment to talk about the significantly improved position in Canadian markets with respect to pipeline export of Canadian production because that really feeds through into the discounts that we receive on our Canadian crude production relative to international crude benchmarks. And for the first time in many, many years, we're moving into a window where we're going to see materially more export capacity compared with production, and that should see crude price differentials tighten. And we've seen that already in forward markets and the pricing that we're seeing through to the end of '21 and also into '22. Enbridge is Line 3 project, which was -- received all the final approvals in December of last year, is moving forward with construction. The Canadian section has been complete. The remaining U.S. construction through Minnesota is underway, and that pipeline is expected to be operational in the fourth quarter of this year. That's going to add 370,000 barrels a day of incremental export capacity. In addition to that, in the Trans Mountain pipeline expansion project, which again was approved in the first half of 2020, has been under construction. It was more than 20% complete by the end of last year, and that pipeline project is due to come on stream at the end of 2022. And if you look at those 2 pipelines coming on stream, which is shown on the chart on the right-hand side of the slide, that's the orange and the blue addition, and you compare that to the reset lower long-term supply growth expectation in Canada, you can see that from now to 2025, you're going to have close to 1 million barrels a day of incremental export capacity, and we haven't seen that in Canada in these last 5 years. That was why IPC took the contrarian view to move into Canada to make these acquisitions, 3 acquisitions, in the last 3 years because we believed that the fundamentals of Canadian crude prices were going to improve. And we're seeing that happen today with differentials having tightened from in excess of $20 a barrel to $12 per barrel today. And what that means is when we see improving oil prices and improving differentials, the free cash flow potential of IPC becomes significant. With 45,000 barrels a day on average of production over the next 5 years and $55 per barrel oil price, we'll generate more than $600 million of free cash flow or a 28% per annum average yield. And at $65 per barrel Brent prices, we expect to generate more than $900 million of free cash flow or a 42% per annum annual yield. And to show that these numbers are grounded in reality, if you look back just to 2018 or 2019, we're generating free cash flows in the 12% to 38% per annum range. So very, very exciting future ahead in terms of cash flow generation. And to put that in context with where the market value and the enterprise value of IPC stands today, enterprise value, the company is around USD 750 million. And based upon those numbers that I touched upon in the previous slide, assuming oil price is around $60 per barrel, that effectively means that we can repay all of our debt and buy back every single share, we'll still be generating close to 45,000 barrels a day of production by the end of the 5 years. And we'll have a billion barrels of continued resources undeveloped. So from a cash flow perspective, those metrics look extremely favorable. And you also see a same story if you look at IPC through the valuation lens. When we launched, our net asset value was just over $540 million. And when you look at our latest year-end reserve auditors' price deck, which is $10 per barrel lower than where spot prices are today, IPC's net asset value stands in excess of -- asset values in excess of $1.6 billion. And when we deduct our net debt, that gives us a net asset value of more than $1.3 billion. Today, IPC is trading at $430 million. So that represents a 70% discount to our 2P net asset value. It doesn't assume a single dollar of value associated with our contingent resources. So whether you look at cash flow or whether you look at value, I think you have a very interesting investment proposition on both of those measures. And this just translates the net asset value into U.S. dollars per share. Since we spun off, that's increased 15% per annum compound from $4.80 per share up to $8.40 per share. And that $8.40 translates into around SEK 70 per share just upon that 2P do nothing only scenario. So a huge uplift in share price potential from where the stock is currently trading at today. In terms of sustainability in ESG, this has also been an extremely important part of the IPC growth strategy. The first point I think I'd like to make on the safety side is, I think, when we look at, obviously, a hugely challenging year last year, the coronavirus protection protocols that we put in place in all of our operating sites were extremely successful as we didn't have any major illnesses and we didn't have any interruptions to our operations at any of our sites in Canada, in Malaysia or in France. So that was a huge achievement by our teams of people on the ground. When we look at the -- our emissions reduction strategy. Last year, we announced our intention to decrease our carbon intensity by 50% over the 5-year period, and that's aimed to be achieved through a combination of reducing our operational emissions as well as through carbon offsetting. And I'm pleased to report that last year, we secured carbon offsets of 50,000 tonnes. We also announced a number of key partnerships. We signed up to the United Nations Global Compact, which is one of the most important corporate sustainability initiatives worldwide. And we also joined the Lundin Foundation, a nonprofit organization with a huge amount of experience and community sustainable investment projects operating in more than 12 countries, and we can tap into that expertise as we look to secure new projects in the years ahead. And First Climate, we partnered with them as the company who can source some of the carbon offset projects for us. So I think huge steps have been made, and I was extremely proud in the third quarter of 2020 to publish our first annual sustainability report. That was a big step forward in our non-financial disclosures. It sets the baseline for us to measure our continuous improvement in the years ahead, and we look forward to reporting our progress on all of our ESG initiatives. So finally, just to conclude, I think the company has never been in better shape. I think when we look at the recovery we've seen in oil prices, if we cast our minds back to this time 12 months ago at our last Capital Markets Day presentation, actual Brent prices were $6 per barrel less than they are today. Our Canadian crude price was $13 per barrel below where we are today. And we're producing similar amounts of oil, and our share price was 50% higher than where it is today. So I think we're in a phenomenal position to create a lot of shareholder value. And if we cast our eyes, as mentioned, over the next 5 years, at $55 per barrel, we will generate $600 million of free cash flow, at $65 per barrel, in excess of $600 million of free cash flow. And the whole enterprise value will be liquidated at $60 per barrel. So that gives us a tremendous financial flexibility to repay debt, to return the money to our shareholders, to continue opportunistically with our M&A strategy and to mature the significant contingent resource base that the company has. So I think IPC has got a very bright future ahead of us, and I can't wait to start reporting our results through 2021. So thank you very much for your attention, and I'd like to hand back to Robert. I'm sure some people would like the opportunity to ask some questions.

Thank you, Mike. Very impressive presentation. And over the course of the day, I think many questions have been answered, but we have a few that we received. [Operator Instructions] But we'll start with the first question that is about hedging of the WCS price. What does it look like? What kind of plans do you have?

Yes. And it's a very hot topic, and I think a very good question. So as I touched upon in the presentation, with improving fundamentals, with the export pipeline situation improving and I think what we've also seen with the OPEC curtailments, a significant volume of heavy oil has been kept off the markets. And that's also coincided with declining Venezuelan production and the main Mexican export blend, which is the Maya, which is similar to WCS is forecast to drop by 50% to 70% as there's an increased demand to supply domestic Mexican refineries. So that's really fundamentally improving that WCS position. And as I mentioned, we've seen differentials tighten to sub $12 per barrel. So it's something that we're very actively and proactively discussing internally as we feel these are getting levels that we're certainly at least considering locking in a portion of those historically tight Canadian crude price differentials. So watch this space is what I would say.

Thank you, Mike. And the next question is about CapEx and reduction in CapEx. It's been quite drastic reductions taking place in 2020 and also reductions than we see in 2021. Can you elaborate a little bit more how that will affect the future revenues?

Yes. So I mean, clearly, future revenues will decrease. And when we -- if we go back 12 months ago, our long-term reserve business plan was looking at keeping production flat on average at around 45,000 -- around 50,000 barrels per day. So really, the work that we've done on our CapEx program by reducing it by $100 million, it really was aimed at making the free cash flow generation of the company more resilient at lower oil prices. So when we look at last year's guidance, notwithstanding the fact that we had higher production in a $55 per barrel oil price, we were guiding in excess of $500 million of free cash flow over the 5 years. By lowering production and deferring capital expenditure, we've actually been able to increase the free cash flow generation by $100 million in that lower oil price scenario. And of course, we can bring those projects back and accelerate those again if we see higher oil prices. But I think, although revenues are down, we've been able to increase our free cash flow generation in that lower oil price scenario, and that was absolutely the aim of the exercise to optimize the portfolio.

Thank you. And we have a question about M&A activity and possible potential acquisitions. You say that you're going to be opportunistic. And in terms of geographies, what is it that is most interesting for IPC?