Jadestone Energy plc (JSE) Earnings Call Transcript & Summary

Good morning. I would like to welcome you all to the Jadestone Energy 2024 Guidance and Corporate Update Webcast. My name is [ Brika ], and I will be your moderator for today's call. [Operator Instructions]. I would now like to pass the conference over to your host, Paul Blakeley, Chief Executive Officer of Jadestone Energy to begin. So Paul, please go ahead.

Very good. Thank you very much, [ Brika ]. So ladies and gentlemen, good morning or good afternoon to you, and thank you very much for joining this conference call to discuss our 2024 guidance release and the corporate update, which was issued earlier today. I'm Paul Blakeley, Jadestone's CEO, and I'm joined on the call today by CFO, Bert-Jaap Dijkstra and by Phil Corbett, Investor Relations Manager. On this webcast, we'll take you through the presentation, which was recently uploaded to the Investor Relations section of our website or you can view it by the link on the webcast. And after that, let's try and take some questions. Okay. So turning to Slide 2, which just outlines our standard disclaimers and moving quickly on to Slide 3. Let's start with the summary of the 2024 guidance that we issued earlier today. 2024 is a transformational year for Jadestone, where we have made great progress towards our strategic aim of building a leading Asia Pacific upstream business. This is the year we make the leap to over 20,000 boes per day as a business, a key milestone, which represents around 55% growth over 2023 at the midpoint of the range. As important as the growth is, for us, the diversification in the portfolio is also a critical step as we seek to move away from the 2 older legacy assets to newer, higher-margin production streams. By the middle of this year, we expect to be producing from 7 fields across 4 countries, a diversification that strengthens the business and provides greater resilience to single events. This has been a key objective of ours over the past 2 years. And once Akatara is on stream, no single asset will be contributing more than 25% of production. Another key feature of this strategic shift is the benefit on operating costs. Our guidance is within the range of $240 million, $290 million, excluding royalties and carbon taxes, which we estimated around $30 million this year. And on a comparable basis, i.e., those fields which we're producing last year and this year, OpEx is broadly flat with the anticipated increase in total OpEx year-on-year primarily due to the addition of Akatara post first gas and the additional CWLH interest, which we anticipate to complete soon. But importantly, the new additional production streams come on at a significantly reduced cost base. And so we expect group unit operating costs to decrease 30% as a result. CapEx is estimated at $80 million to $110 million, with the primary drivers being $40 million of CapEx at Montara, $20 million spent at Akatara prior to first gas and the remainder being growth CapEx being largely predrill costs for future infill wells at Stag in Malaysia. Moving to Slide 4, which gives more detail on 2024 production guidance. The first point to make is that 2023 ended strongly notwithstanding the Montara shutdown earlier in the year. And while we're still finalizing year-end data, we do expect to average around 13,800 barrels of oil equivalent per day in 2023 significantly above the top end of the guidance range -- slightly above, I should say, the top end of the guidance range of [ 13,700 ] boes a day. That positive outcome has been driven by robust production from Montara, from CWLH and the Malaysian assets into the year-end while Sinphuhorm and Stag have also been reliable contributors during the period too. The largest driver of growth in 2024 is Akatara. The project remains on schedule to produce first gas during the first half of the year, and we currently sit at 92% complete on project activity. But I'll tell -- we'll talk about that more later. At Montara, production rates are currently at [ 7,000 ] barrels a day, largely due to continued outperformance of the Montara platform wells and as we move into 2024, we have assumed an annual average between 5,000 to 6,000 barrels a day, allowing for natural declines and scheduled downtime during the course of the year. We also anticipate that the Skua-11 well will be offline for all of this year, which again, I'll touch on later. We expect to close the acquisition of MIMI's interest in the [ CWLH ] fields in quarter 1 this year, as previously guided, doubling our exposure to this asset, which continues to perform ahead of expectations with gross production averaging in excess of 13,000 barrels a day during the fourth quarter last year. The operated Peninsular Malaysia assets have been producing at around 7,000 barrels a day net at the start of this year, boosted by the significant additional volumes from the successful fourth well campaign on the PM323 license in the second half of last year. While these wells will decline, we expect that PenMal operated production will continue significantly up year-on-year. And elsewhere, we aim to maintain Stag production within the 2,000 to 3,000 barrels a day range throughout the year, maximizing uptime and looking for greater efficiency in our workover activity. And then finally, Sinphuhorm which remains highly reliable at around 1,500 barrels of oil equivalent per day, dry gas, essentially, low-cost production with the booster compression project nearing completion, and therefore, expected to maintain this level of production out and into the midterm. Okay. So let's turn to Slide 5 which touches on OpEx guidance for 2024. As discussed earlier, the range of total OpEx, less royalties and carbon taxes, is $240 million to $290 million. Montara in the mix, the cost there reached a high watermark of $120 million this year. This is driven by the shuttle tanker remaining in the field until September 2024, while our FPSO tank maintenance program continues. We've told the market about this already. It's going to add a one-off this year of between $10 million and $12 million. Higher logistics costs, mainly due to lower share in capacity in the year and repairs and maintenance activity being -- that we will maintain them probably at these elevated levels as we've seen in the past couple of years as we catch up on maintenance backlogs, some of it actually related to the era of COVID. Stag also slightly up this year at $70 million in 2024. Again, partly due to higher levels of repair and maintenance activity and inflation in tanker rates and other logistics costs. However, as touched on earlier, the addition of low unit cost production at Akatara, CWLH and Malaysia is driving group OpEx downwards quite strongly with the midpoint of the guidance range of 2024 down at approximately $33.50 per barrel, which is around 30% reduction year-on-year. Moving to Slide 6, which gives some detail of CapEx in 2024. Completion of the Akatara project during the first half of the year at around $20 million is really important to us, of course and then spend at Montara plus long lead drilling materials coming into the second half of 2024. We expect to spend around $40 million at Montara comprising around $15 million to replace the mooring change of the FPSO due to ongoing wear and tear, but also some long lead items for the Skua-11 well which will be redrilled late this year or early next after being offline since October last year. And we'll talk a bit more about that, too. Also included in the CapEx guidance is certain long-lead equipment for future infill drilling campaigns on Stag and at both Malaysia assets, particularly encouraging after the successful '23 campaign, 2023 campaign there. And now turning to Slide 7. I wanted to show how much the portfolio is changing as we have consciously, deliberately started a shift away from older and more mature production and towards lower OpEx and higher-value assets as we execute on our strategy of building a leading independent upstream business in the region. To be clear, this is not a simple exercise since you only get to choose from assets that come to market, and this opportunity that we see emerging is a more recent feature of what we see happening across Southeast Asia and Australia and we want to take full advantage of that. Now Stag, of course, was the original driver to give us immediate cash flow and operating credentials, got us into business as a production company from the outset. Then Montara was the next key step up in a journey which has generated a lot of free cash for building out the business in Malaysia, in Indonesia and further growth in Australia. We gained a great deal of experience in the region with these early assets. We bolstered both our operating credentials and our balance sheet. As a result, I do believe that this operating platform is now a key differentiator for us in the region, allowing us access to opportunity, which is denied to many and with intrinsic value that's not recognized by the market. The assets we've added to our portfolio in recent years are either earlier in their lifespan or low-cost, onshore and/or have other value characteristics which simplify -- sorry, around simplicity and around reliability, location, fixed gas price and/or larger in-place resource potential. These characteristics combined to provide a far more reliable, lower-cost, higher-margin asset base, which will increasingly define Jadestone going forward. As we continue to chase growth, we will be focused on assets with this type of profile. But I want to be clear, we're not deemphasizing or writing off Stag at Montara as I have just noticed, we'll continue to invest in both with a view to maintaining safe and reliable operations and maximizing cash flow over the next several years. However, we are well down the path of a redefined and a more resilient business in the future. And with that thought, let me hand over to Bert-Jaap to take you through a quick update on liquidity and debt position. Bert-Jaap.

Thanks, Paul, and good morning or afternoon to everyone. Please note that the 2023 financial and operational data we're discussing today is preliminary, unaudited and it's subject to review and change. Over to Slide 8, where we provide an update on our net debt and liquidity positions as of the 31st of December 2023 as well as the upcoming redetermination of our RBL. Our net debt as of the 31st of December 2023 stood at circa $5 million. This came in better than our internal forecast, which we currently expect is due to payables crossing the year-end in the ordinary course of business. Also, the cash enhanced net debt positions benefited from the lifting sequence in the latter part of the year, combined with the optimization of working capital, most notably for the December lifting of Montara, where we ensured we received the cash in 2023. Our liquidity position as of the 31st of December 2023 was around $220 million based on the current borrowing base of $200 million, which is valid until the 31st of March 2024, there was circa $43 million available in our RBL. And the company also had a position of circa $145 million unrestricted cash. And finally, the $32 million working capital facility remained undrawn at year-end 2023. We will continue to proactively manage our liquidity, as we have done in the past, while planning and preparing for a range of scenarios. We have operational levers to pull, such as flexing our CapEx budget in order to optimize liquidity. Importantly, as Paul highlighted just now, we are projecting significant production growth year-on-year and the associated increased operating cash flow generation of the business will also see a step change once Akatara is on stream. We have started working with our banks on the March 2024 redetermination of the RBL, which will set the borrowing base for the second and third quarters of this year. As a general comment, both before and after closing the RBL last year, we have worked constructively with the RBL banks to optimize our borrowing capacity and those efforts, of course, will continue. To address the impact of the revised Montara and Stag cost profile on the borrowing base, we are looking at the following options, which are subject to lender consent. The removal of Stag as borrowing base assets and integrating CWLH 2 in its place. As highlighted previously, using the bank's oil price assumptions, Stag's contributions to the borrowing base is negative. This means that removing Stag would result in a higher borrowing base. The integration of the CWLH 2 acquisition is expected to have a significant positive impact on the borrowing base. This assumes a successful closing of the transaction in Q1 2024. And as discussed previously, and as a normal feature in RBL, we also plan to initiate an interim redetermination when Akatara has passed its completion test, which is anticipated in Q3 2024. Once integrated as a producing asset, Akatara is expected to have a significant incrementally positive contribution to the borrowing base. As presented previously, the profile of our borrowing base has always shown a temporary dip between April 2024 and when Akatara is added to the borrowing base as producing asset forecasted in Q3 2024. We are continuing to work constructively with our RBL banks to address this, which previously resulted in a waiver approval in the September 2023 redetermination. We will keep the market updated on the RBL redetermination process and our liquidity position in the months ahead. With that, I will hand back to Paul.

Super. Thanks a lot, Bert-Jaap. So we're turning now to Slide 9. And let me just cover comments that we've made earlier about Montara and Stag operating costs with a little bit of detail. Previously, we had been anticipating that repairs and maintenance activities on these assets would, by now, have peaked and in decline, consistent with other similar type development schemes that we have experience of. However, insights into recent inspections, particularly at Montara, and as you're aware, have concluded that original build and subsequent conversion quality just simply will require an elevated level of repair and maintenance activity, which we are now reflecting in our forward plans. This is in order to maintain the FPSO and its top size production facilities in appropriate conditions and to be able to deliver safe and reliable production operations. We have assessed a number of alternative options such as dry docking the vessel or replacing the FPSO with a newer ship but all of these options are less economic than continuing to manage the repair and maintenance in situ, consistent with the original design of the Montara venture and the overall development concept. It's important to note that both industry inflation and increasing logistics costs for both assets are also contributing factors as well as the one-off requirement to replace mooring chains at Montara and a redrill of Skua-11, but repair and maintenance costs will be the single most significant factor. The Skua-11 well has been offline since October last year due to an integrity issue within the wellbore. We plan to address this by redrilling Skua-11 later this year or early next, with a well path that will be designed to efficiently access some of the reserves that have been previously associated with the future Skua-12 well. This well is currently planned to spud late in the fourth quarter at an early estimated cost -- total cost of around USD 50 million to USD 55 million, with most of that expenditure actually planned to occur in 2025. While we see '24 being a peak year of OpEx for both assets, we also expect that future reductions in operating costs may be smaller in the near term due to the continued requirement for high levels of maintenance activity. The ongoing challenges at Montara have been disappointing for us, of course. And while the market, I believe, has recognized this, not least in the current share price, we've also reflected a similar view with the path that we've chosen to take over recent months and years on our successful M&A activity. There are no shortcuts here, no easy options nor any compromise to appropriate asset integrity management. But importantly, Montara has become already a much less material part of our business, and we'll continue to expand into higher quality and higher value opportunity, making it even less so. So finally, moving to Slide 10. Let's walk quickly through an update on our main drivers of growth for this year. It's great to see the excellent progress at the Akatara development project as we move towards completion and first gas. And my thanks go to the teams in Jakarta and at the site, including all contractors on an incredibly fast track, yet safe and effective delivery of key project milestones so far. The commissioning phase has already begun and with over 1,700 workers on site, we are active on numerous work fronts while still maintaining schedule to introduce commissioning gas into the processing facility by the end of this quarter. Earlier this month, we commenced the first of 5 workovers on the wells, which will provide the raw feed gas to the plant. The first well is already in final completion phase prior to the rig move onto the second well, which could begin as early as tomorrow. The sales gas pipeline is currently 91% complete with just less than 1.5 kilometers to go representing about 2 weeks of work, good progress despite bad weather during the current monsoon season. And again, we do expect to finish the pipeline around the end of this month. As we mentioned earlier, we also remain on track to complete the acquisition of the second stake in the CWLH field by the end of this quarter. Just today, we received one of the key government approvals from the Foreign Investment Review Board, which keeps us on schedule and the M&A team are working hard to complete the final details coincident with the planned March lifting, which will also, of course, fund the first tranche of [ DCOM ] security. We now anticipate that the abandonment funding associated with this transaction will be less than the $102 million that we announced in November. We expect the liftings attributable to the interest to largely self-fund these payments, not just this first tranche, but over the next 12 months or so, after which we then have a long and unencumbered cash flow stream from this very high quality and low decline asset. And last but not least, I wanted to congratulate our team in Kuala Lumpur for the outstanding results of the drilling program on the East Belumut field late last year. The 4 wells that we drilled are still currently producing around 7,000 barrels a day gross, significantly ahead of predrill expectations. And the results, importantly, are really encouraging and as a result, we're assessing several new drilling targets, especially to the Southwest of the field where up to 8 million barrels of gross 2P reserves or 5 million barrels net to our 60% working interest have been identified. Further infills underneath the current platform and also to both Northeast and Northwest locations of follow-on opportunities for us as well. So this has turned out to be a really exciting asset for us. And with that, it's -- I'll just close with the thought that as we enter 2024, we've made significant progress in growing the business and creating value after an uncertain period with Montara for [indiscernible]. However, as the team continues to work hard on providing a reliable and efficient operating model for Montara, we have in parallel, successfully diversified the business with far higher value and higher-margin assets. This is our future. And as we see more and more quality opportunity in the region, we will selectively and prudently continue to shape Jadestone to be a great success story in Asia Pacific. We've covered the hard yards and reaching 20,000 boes per day gives us the scale and horsepower to do more. I now look forward to great optimism to an exciting 2024, a turnaround to strong cash generation, strengthen the balance sheet and further success. Thank you very much. And with that, operator, please, can we open up to some questions.

[Operator Instructions] We have the first question from the phone lines from David Round of Stifel.

I've got 3, please. The first one on Akatara which seems to be going well, just wonder what still needs to happen once the wells are completed, I think you say at the end of March, is there still a critical part item after those are completed? The second question just on production guidance. It's quite a tight range, I thought for '24. And actually, is smaller than last year, which I thought was interesting. I mean, does that reflect the increased confidence in your production base now? And the third one, just on the debt levers you have, are you able to quantify how big a negative Stag is in the RBL, please? And how easy it is to remove?

Great. David, and thanks very much for the questions. Perhaps I'll deal with questions 1 and 2 and Bert-Jaap, perhaps you'll manage the question on Stag within the RBL. And so to the first question of Akatara what's less critical and so on. What I would say is -- and we talked about this late last year, we have now all the key components of equipment on site all placed in situ and being finalized, commissioned and so on. And because this has sort of come as a series of components, the work that's left really is plumbing it all together. It's small and medium [indiscernible] pipe work, lots of small flanges and so on to be bolted together along with wiring and control system integration. But all of that is going ahead at a very rapid pace. If I ask the team, where concerns lie, they would probably say, look, the monsoon weather has got us not completing as many of these small [ spool ] loops and tie-in pieces as we'd like, but they're putting more people to keep that schedule going. So there's no single large component and then the only 2 other aspects; workovers, which we touched on. We don't see that as trickled path. We only need 2 wells to deliver the first gas volumes out of the 5, and we've already finished the first and the rig will move to the next well pad starting tomorrow and, of course, completion of the pipeline. And we have a relatively short section left. And given the amount of crew we have available, it's around 2 weeks' work. So there's no slack in the schedule, there never has been from the beginning. The team have done a fantastic job, and I expect we'll continue to see the right amount of progress towards first gas. So no slack, David, but the team are doing great, and we're pretty confident. Guidance, narrow range. I think the only thing I would say is we're not so prone to single events, given we have a number of different producing levers. And I suppose the key one for us, in our thinking, was Akatara first gas and we spent a lot of time thinking about the recent progress if I'd had to pick a date 2 months ago, we might have made the range a bit wider. But as we are getting so close now, I think that's one reason why we have a pretty high level of confidence. And of course, as we touched on in our notes, we are also relying on good performance from Montara. And I have to say, and I don't want to, I'm touching wood, as I said, of course, recent performance has been great. Reliability has been strong. The team are working tremendously hard on those aspects. And we have provided ourselves some extra assurance around Montara by having the shuttle tanker there. So there's a lot of mitigations in the way we set up the business. And I think as a result of that, we do feel confident with the range -- the guidance range that we have projected.

So on the dents -- thanks, David. So first of all, there's a bit of that complexity of the development cap, which in terms of the quantification of the negative impact of Stag on the previous estimate, which still used the development cap at 40%. We had a negative impact. We estimated that $30 million to $50 million which is very significant. So let's call it very significant rolling forward, which is, of course, the reason why we're keen to, of course, swap it, if you will, for CWLH. How easy is it to remove? This does require an all bank consent from all of our RBL banks. Of course, we've already taken this to the banks. There's no certainty of the outcome yet because we just got started on the redetermination in our [indiscernible] that we have discussed with all our RBL banks and they do, of course, see a pathway and the feedback that we got back was that this is a reasonable request. And of course, then we need to work this through. But it's safe to say that the banks do see CWLH 2, and the swap at Stag as a logical step, Stag with its big negative contribution doesn't help us, and that's really a bit of an understatement. It was here before. We've discussed at length in a previous discussion with all of the banks back in the September redetermination, which led to the -- as I described it in the webcast, it led to the waiver. The banks then opted for the development cap, but we also discussed there to potentially take a look at Stag because it's so negative. It doesn't make -- from our perspective, it doesn't make a lot of sense to keep it in the borrowing base. And finally, I think the logic is quite compelling also because we have a temporary dip in the borrowing basis, we always had it in the structure of the RBL, which is, of course, unfortunate. Straight after we have completed the Lemang -- all the investment done on Lemang, which is really the key reason why we had the RBL in the first place. We then faced this crunch in the RBL mechanics, if you will, and also, of course, the banks see this as a temporary crunch as well with X months after the March redetermination getting Akatara on stream in the third quarter passing its tests. It basically means that we're looking at -- had a temporary blip would dip in this borrowing base. And I think the banks have been. And of course, we're expecting them to remain as constructive as they were before and working with us on getting at the 2 elements in the borrowing base in terms of its improvements to get that approved. So that's where we're at.

Your next question comes from Matt Cooper of Peel Hunt.

So I want to start off with 2025 plus Montara and Stag OpEx. So are you able to split out the increase into inflation versus additional activity? And do you think there's more upside or downside risk to these forecasts now?

We have taken a very thoughtful line-by-line assessment in far greater detail in the out years than we've ever done before to be absolutely clear in our own minds about work scope and scale in order to maintain facility. And in many ways, we're doing that now because of the real detail that we've gone into understanding Montara tank condition and so on and so on in light of calling over every incubator over the last year or so. So I think to your question, we have a very, very detailed assessment on -- not just through this year, but perhaps into the year after and the year after that. In the outer years, it really depends on what we find over the course of the next 2. And to put that in context, if I think about the tank program of Montara, the level of -- and the depth and level of detail to which we are repairing the tanks, one would imagine that 5 years from now, when you reenter that tank or 3 years from now or whenever, you would see far less rework to be done because of the extent that we have repaired. And therefore, the theory is that we will see a reduced work scope over time. I don't think we have cycled in and out of tanks enough to be able to quantify whether that's real or not. And so 2 years from now, when we're back into some of these tanks, we will, I think, be able to more reasonably define whether this is like forever or whether we can genuinely say we've reached a point at which costs, repair and maintenance, particularly will come down. So that's sort of the thought processes and the level of detail to which we've assessed maintenance work program and cost. In terms of splitting inflation, I'd say we are seeing inflation in certain areas, but not everywhere. Logistics, perhaps an area of concern tanker costs, certainly. And whether or not those rates remain high in the long term or whether it is short term, it's hard to judge. We have probably taken a slightly more conservative view in the long term, which would be nice if it could reverse at some point in the future. But we see Montara particularly as an asset where we just take a very cautious view. I don't want to have to report further adverse changes in the future. So I hope we have our arms around it. We certainly have a far better understanding of the facility than we ever have or any previous operator has. And I hope with that comes far greater certainty of what we're projecting.

Okay. Yes, that's helpful. And I was just asking around of the increase, roughly the percentage that's down to inflation versus [indiscernible].

Yes, I did. I just -- I'm not sure that I can give you that detail. We might take that thought away. And if we can share that with the market, we will. To the specific question, Matt, what I would say is cost increase that we show is more work program than inflation, certainly, inflation is a lesser component than an increase in activity that we're projecting if that helps.

Okay, great. And I saw in the presentation, you also flagged the CWLH 2 abex funding, you now think could be less than the $102 million. I don't know if you can say yet by how much less and the reason for that?