Keo Capital AB (publ) (KEOC) Earnings Call Transcript & Summary

[Foreign Language] Jonas, thanks for taking the time in this challenging environment. But before we enter the Q&A, where I'm sure there will be questions about the personnel's health, the oil price war and the demand situation, please walk us through the latest press release.

Thank you, Kaarlo, and thank you, everybody, that's tuning in to watch this live. I'm coming to you today from Calgary, where we are also feeling the effects of the coronavirus. We are under quarantine across the city here pretty much. Things have slowed down quite significantly. We are, in my opinion, unprecedented in modern history here with respect to our situation. I think we have to go back to the late '60s to find an equivalent in terms of this pandemic. We are Maha. We are suffering like everyone else not only because of the very low oil prices that has been a result of this, but we're also suffering from restriction in movements of people. We have quite a lot of expatriates working and living down in Brazil, doing operations down there. And with borders being shut down, even inside Brazil, provinces are closing their movement of people, it is causing some logistical challenges for us. But we are strong. Maha is in excellent, strong cash position. We have a very low OpEx in our fields in Brazil and the devaluation of the reais compared to the U.S. dollar has been some sort of a remedy for these low oil prices. But we'll get more into that in a minute. We are getting a lot of questions on e-mails with concerned shareholders. They obviously want to try and figure out what levels we are profitable and where does the company start going into some trouble. And we have been somewhat reluctant to answer those questions because they're not -- it's an easy question to pose, but it's a very difficult question to answer. And I will try to answer to the best of my ability here, and hopefully, that will give satisfaction to people that want to understand sort of what they call our breakeven point. But before we go into that, I want to remind everybody that we have sent out 2 press releases in the last 14 days. The first press release we sent out, which was on the 12th of March, oil prices were hovering about $34 per barrel. We could see where things were going, and we implemented some steps with respect to the safety and health of our personnel but also monitoring the situation. And to that end, we started doing stress tests on our economic model to see how the company will fare over the next 12 and 18 months, depending on different oil prices. The second press release, which we sent out here on Friday, oil prices are now low to $25 per barrel for Brent and that has prompted us to take some certain measures that we didn't deem to be required at the higher oil prices. So I'll go through that press release a little bit. I'll put some more color on to that. We have decided to reduce our capital spend for 2020. Now luckily, that reduction will not impact our production guidance. In other words, the fact that we are postponing some expenditures into 2021 will not immediately affect our 2020 production. That is not to say that other things might impact the production, but the reduction in capital spend will not impact our guidance for 2020. We have further reductions that we have in our back pocket that we can do. The first thing we did was we postponed the drilling of the Maha-2 well on Tartaruga until next year. That was an $8.3 million expenditure that we do not have to make this year. We have further reductions in terms of -- or I should say, postponements in terms of one of the wells on Tie Field, which is a water injector that can be postponed into 2021 if required. We do not want to do that because that may impact future production in 2021 and onwards. We also have reductions, possible further reductions in our operating expenses. And of course, the Brazilian reais decreasing in value against the U.S. dollar is helping us quite a lot since most of our expenditure in the company is in Brazilian reais. It's -- just over 3 months, it's lost 25% of its value, which is obviously impacting us positively in that respect. So we have lots of, what I call, knobs to turn. We have lots of things that we can do even at lower oil prices to remain profitable. We also made an operational update. We have immediately stopped the testing of Maha-1. We decided that in order to allow us to deploy that capital elsewhere in the organization, if necessary. The objective of Maha-1 on Tartaruga was an appraisal well. We wanted information in order to design the full field development plan for Tartaruga. We are in not immediate need of that information at the moment at these low oil prices, and we will resume those tests once oil prices have stabilized and we can see that there's a good recovery on the road. We also started a workover on GTE-4 over at the Tie Field. That well was free flowing for many years. In fact, when we purchased the field in 2017, the GTE-4 was one of the wells that we were watching very closely to turn into a pumping well. That has surprised us. It's continued to free flow for an additional almost 2.5 years. But finally, the time came now to convert that well from free flowing to a pumper. That should add another 400 to maybe 600 barrels of oil per day. We also received the final environmental permits for the drilling of TS-1 and TS-2, which is our South sweep wells. TS-1 is a producing well, and we will need that in order to maintain our plateau production, plateau at the Tie Field. TS-2 is a water injection well, and we would like to drill that as well this year because it will impact future production volumes from the Tie Field. Work continues both at Tartaruga and the Tie Field to upsize and increase production volumes at both fields. That will still continue. That's a relatively minor cost with respect to the overall budget. Right now, there are 1,620 people infected with the coronavirus in Brazil, I'm told. And we have a total of 40 people working at the Tartaruga field. We have 58 people working at the Tie Field. Both installations will see quite a drastic reduction in personnel, particularly at Tartaruga, where we demobilized the testing unit and the testing rig. We will go down to a minimal staffing level there. And at the Tie Field, our operational team are making plans to operate that field, a skeleton staff so that we have a backup team ready to go in case the coronavirus hits us quite literally at the Tie Field. So we are making plans to continue producing oil even during these tough times. If we turn attention to the breakeven, I know a lot of people are asking these questions, and I can tell you that all the answers are available in the quarterly reports. So all the information that you need to figure out the profitability and the cost of the company is readily available in these quarterly reports, but I will help. If we assume an oil price of, say, today, I just checked, it's just over $25 per barrel for Brent, at the Tie Field, we have to deduct an $8 per barrel, roughly, discount. That is marketing cost and transportation cost that we pay to Petrobras. Then we have to deduct an 11% royalty, now 11% on the gross price, which is $2.75 a barrel. Then we deduct another about $6 per barrel OpEx and another $6 cost for G&A costs. That leaves you with a $25 per barrel Brent. That leaves you with $2.25 of marginal profit. Now I must stress, though, that not all costs are per barrel. So we have lots of things that we can tweak. And we expect also, for example, that the discount that we pay to Petrobras, that contract comes up for renewal here at the end of this month. That discount will probably be reduced from $8, where the current level is, to a lower level. We don't know what that level is yet, but we expect it to be reduced. We can also affect changes in our operating costs and our G&A costs. So you should not take that number as a hard number. It is a floating number. It will go up and down depending also on the production of the field. Remember, you're talking about a per-barrel cost. So therefore, if you only produce 1 barrel in 1 year, then that cost per barrel is very, very high. So you have to always keep that in mind. At Tartaruga, we receive a slight premium to Brent. So there, the profitability per barrel is a lot better than, say, at the Tie Field. But I want to underscore again that even though -- if you work these numbers out, as I've just done, your breakeven point is about $21 to $22 per barrel. There's still room to operate at lower prices. To that end, we do a stress test now every week. We go through the production profiles. We go through the costs. And based on a $25 Brent price for the rest of the year, flat, so in other words, just use $25 per barrel per day for the rest of the year, we come up with a positive EBITDA of just over $10.8 million. That should be compared to $35.8 million for 2019. And we have an after-tax operating cash flow being positive of almost $7 million. That really shows the resilience and the strength of the company. At $25 flat for the whole year of 2020, we're still able to show positive numbers. From our model, we can back calculate the breakeven cost, and that comes at about the same as I just sort of did at the back-of-an-envelope calculation here. Now remember, we do this at $25 per barrel flat for the rest of the year. As you know, oil prices go up and down every day. I just came out of my office. I checked the future curve for Brent oil price. June oil price is sold for $29.90; July, $30.63; August, $31.98; and December of this year is going for $35 per barrel. SpareBank 1 out of Norway recently announced that they revised their annual average oil price to $38 per barrel, and the Energy Information Agency out of the U.S. came out last week and revised their oil price guidance for 2020 down from $61 per barrel to $43.30. So we do not expect to be running at $25 per barrel for the entire year. But your guess is as good as mine. I've said many times, we are better at predicting the weather than we are the oil price. But be rest assured that the company is well capitalized. We have good cash on hand. We got $22.5 million at the end of the year in cash. You see from these numbers I just gave you that we would still have a positive EBITDA. We will still make money even at these low oil prices. Speaking of oil prices, I want to finish off here. Just a comment about the oil price. We are in a perfect storm. We're seeing a huge demand erosion because of the coronavirus sweeping the globe. As you all see, airlines are canceling flights. Countries are closing their borders. Movement of people and movement of goods are being severely restricted. And we're also, at the same time, in a huge oversupply situation because of OPEC and Russia deciding to open their taps and not regulate the price like they have in the past. I estimate that we're about 4.5 million to 5 million barrels a day oversupplied today, which is quite significant. Keep in mind, Canada, right now, produces about 4.9 million barrels of oil per day. They cannot sustain production at these low oil prices for any significant period of time. I expect oil production will start to be shut in across North America here pretty much as we speak. Rystad Energy, they recently came out with a breakeven chart like this for the U.S. shale producers. U.S. is currently producing just over 14.5 million barrels of oil per day. 9 or 10 out of those are coming from shale. Their median breakeven price is $42 per barrel, which coincidentally is also Russia's. If you believe the press that's the price they need to break even. And in Saudi Arabia, they need about $75 to $85 per barrel in order to balance their national budget. So I don't believe that we will stay at these low oil prices for a very long time. I believe in the near future, it will be very challenging for us. But as you can see, with our very strong cash position, our profitable oil, even at these low oil prices, Maha is strong. What keeps me awake at night is potential shutdowns because of delays in clearing equipment that we're bringing in, delays in permitting because of the authorities shutting down and working from home and, of course, also, if we have workers that fall sick, and we don't have physically have workers that can come to work and turn the taps. Those things keep me awake at night, more than oil price. Last, Brazil is a net importer of oil. We do not expect Brazil to become oversupplied with oil. But that, of course, is a possibility in the near term. But we don't expect that. So we are in an excellent cash position. We're still profitable. And I'm looking forward to all these opportunities that are presenting themselves as more and more companies and assets become distressed. So with that, I think, Kaarlo, I think maybe I spent a little bit too much time going through that, but maybe it's time for some questions.

Yes. Excellent. One question here is more or less related to the oil price. I just got a question from the Internet here. Chile is closed, apparently, I don't know. And what about Brazil? And my thinking is this that, obviously, some countries will have a shutdown, but that doesn't necessarily mean that you will shut down important production or...

Well, like I said, Brazil is a net importer of oil, 220 million people. They are closing their borders. It's a little bit confusing in Brazil. Some areas are taking upon themselves to close their sort of city borders, so it is a little bit chaotic. For us, it impacts us more not so much in terms of oil production and oil delivery. In fact, we speak to our customers weekly now with respect to inventories and their demand. And I believe that the information that we're getting is current. But as we all see, things happen very quickly in this environment. I mean, who would have known 3 weeks ago that we will be sitting here, and transatlantic flights are being canceled. So it's an evolving situation. But for the time being, we see no reason why Brazil will be oversupplied with respect to oil, but that can happen.

And continuing on production here. You mentioned that you're suspending testing on back of less -- less of third-party personnel at Maha-1, and that went quite quickly. What if the situation changed? How fast can you, well, put on the tap again?

Well, on Tartaruga, that was -- we were testing Maha-1. And the precipitating factor there was we require explosives in our work there when we perforate the casing. And the army had gone ahead and changed the procedures in which you are allowed to transport those explosives. And with the coronavirus and all these restrictions being placed with respect to movement of personnel, and then also the personnel not -- people being allowed to work from home, et cetera, it became very apparent to us that we would start to face logistical issues, and we were not prepared to pay the standby rates and the expensive rates for having equipment sitting whilst we're waiting on all this paperwork. So it was an opportune time. We were pretty much halfway through our testing program. And we had just finished testing a zone. And so it was an opportune time to suspend that. And when the time is right, we will go back and we'll resume testing.

And the follow-up question there is, basically, how long will that take? You will then revise your capital expenditure program and it will be as previously according to the plan.

Yes. The cost will be the same, but obviously, we will have to wait and see. And when the dust settles here, that's when we will make the decision. Right now, the #1 priority has got to be in cash flow and production, right? So this Maha-1 information is great to have. We need to have that in order to organically grow Tartaruga, but we don't necessarily need that right now. There are much more important things for us to do than to obtain flow information from the Penedo sandstone.

Yes, of course. But -- and also just a quick one on Tie South-1 and 2. Your -- despite the reduction in CapEx, you say you will continue as planned with Tie South-1 and 2. So back on that statement, and as things stand now, would we expect an update on that in June? Or...

Well, we will continue to give operational updates as required, obviously. But right now, the plan is to -- we've got the environmental permits. We're ready to go, we have -- with contracting a drilling rig. But again, I have to stress, I mean, when we start seeing borders being closed, not only external borders in Brazil but also internal borders between Bahia and Sergipe, for example, it makes it very difficult to operate because you can move equipment, but personnel are not allowed to go between the 2 states. So we're going to have to reassess this as we continue to go forward. It's an evolving situation. The plan is to drill those 2 wells. One is a producing well and the other one is a water injection well. The water injection well, we have the ability to postpone until next year. We don't want to do that because it will impact future production. And on the flip side of that, it really gives us a great leverage against the contractors at the moment as well. We are really able to negotiate down prices for services in this environment. So we have to weigh all these things up. But I suspect what's going to drive this is going to be the inability to move people and, eventually, maybe even goods across borders. It's going to be a real problem. It's going to be a real challenge for us.

And then on financials, and you gave us an excellent rundown on the netback and so on and so forth. But is there a change in the customers' behavior? Are they delaying the payment? Obviously, demand is one thing, but is there any arrears? And what's the situation?

Right. So we have not seen any of that, no signs of that. And our largest customer, he prepays. So when he stops prepaying, I guess that's when we'll see. But Petrobras, they pay -- they've been paying very regularly, but we don't expect any issues there.

And obviously, you mentioned the falling -- well, the currency that is working in favor of you. Would you dare to make any predictions on going forward? A 25% cut is severe.