Meren Energy Inc. (MER) Earnings Call Transcript & Summary

Hi, everyone. My name is Nadia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Africa Oil Management's Presentation on the strategic farmout of Impact's Namibian interests. [Operator Instructions] Please note that this event is being recorded. The recording will be available for playback on the company's website. I would now like to pass the meeting to Mr. Shahin Amini, Africa Oil's Investor Relations Manager. Please go ahead, Mr. Amini.

Thank you, Nadia. On behalf of management, I thank you for joining us today for the presentation of the strategic farmout of Impact's Namibian assets. On the call today, we have our President and Chief Executive Officer; Dr. Roger Tucker; and our Chief Financial Officer, Mr. Pascal Nicodeme. I would like to remind everyone that remarks made during this session are subject to forward-looking statements, including comments on the exploration, appraisal and development outlook for the assets offshore Namibia. This involves significant risk factors and assumptions and have been fully described in the company's continuous disclosure reports. The information discussed is made as of today's date and time and Africa Oil assumes no obligation to update these unless as required by law. I will now turn the meeting to Roger. Roger?

Thank you very much, Shahin. Before getting into what is for us an extremely exciting transaction that we've completed, I just wanted to put this transaction in the framework of what we've been telling the market and many of you will have been through presentations with me for the past 2 or 3 months. And so we are redescribing Africa Oil and repositioning Africa Oil to be focused on the 4 principal assets, which I've emphasized, which is Nigeria Equatorial in Namibia and Block 3B/4B in South Africa. And what we've said is that the company is differentiated very significantly by being assets -- in assets which are of very significant potential and are all of interest and at a scale to be of interest to the Majors. So our production interest in Nigeria are operated by Chevron and Total, producing 200,000 barrels a day. Our Equatorial Guinea interests, which is currently being farmed out, are at a scale which will be interesting to Majors. Our Block 3B/4B is an exploration block, which is going through a farmout and is at scale which will be interesting to Majors. The biggest difficulty -- the challenge that we faced was bridging the gap in the development phase, which was the Namibia position. And this transaction that we've done, does bridge that gap in that we will have no further cost to ourselves be able to anticipate in what is going to be a world-class development with a full carry-through to the production phase. And it is a significant value-enhancing opportunity, which fits with the strategy we outlined to you over the last 2 months. So the next slide. And as I said, it is actually an extraordinary transaction that we managed to pull off. We do manage to maintain a 9.5% interest in Impact in Blocks 2912 and 2913B. Impact's remaining interest in both those Blocks is fully carried with no cap for all joint venture costs, including exploration and appraisal, which is a critical thing for us. We wanted to continue with these Blocks right through to first production. Impact in addition will be reimbursed for its past costs on the piece that it is farming out to Total. And that is approximately $99 million. However, this $99 million has been picked up in the market. But in the context of the scale that this carry, that is actually a fairly trivial number. Next slide, Shahin. In terms of why this is so important, it significantly derisks the portfolio of Africa Oil. The Namibia position is fully funded now until first oil. We retain exposure to the exploration appraisal and the development in the 2 Blocks. And as I'll show you a little later on, the exploration side of this is of significant importance to us because we see very, very interesting upside in the Block. We recover out our full cost, as I mentioned, for historic expenditure and it significantly enhances Africa Oil's capital balance sheet flexibility to accelerate the strategy delivery that we've highlighted to you before. So I will say that this is the first step down the strategic direction that we're trying to take the company on. As a fifth point, but I think a very important point. The fact that the counterparty is Total, who are, of course, the operator of the Blocks in question, we think further enhances and underlines the strategic importance of this asset to Total and the likelihood that they're going to go ahead and pursue this as a development. And we think the counterparty here is of critical importance to underlying the value of the assets. Next. In terms of where we are, we've said to you before, the block in red is that which is we found out. We do have the Venus discovery on that, Total have said that it's at least 1 billion to 2 billion barrels and it will be developed. You therefore should be able to work out the value of this carry because you know the cost of the wells, which are revenue of $30 million each. We know the cost of an FPSO and on a single FPSO basis, if that was the only thing to be developed in this Block, you can work out that this is a very, very significant carry that we have managed to negotiate here. But the most important thing for us is that we're currently drilling a well just to the north, which is called Mangetti and the results of that will be through in the next week or so. We're also drilling a Venus-2A appraisal well, which is drilling to the north of Venus as well. But for us, the great excitement in sort of the historic DNA, if you like, of Africa Oil is now in the south of the Block where 3D seismic is currently being shot down there. And we have 2 very significant features in Damara and South Damara, which on 2D seismic look extremely attractive in terms of their amplitude anomalies, et cetera. And so we are going to be completely carried through everything, and we will be in this all the way through to the production phase. Next slide. And with that, we're going to pass over to the principal terms of the transaction, which I'm going to pass over to Pascal and then we'll get into Q&A, where I'm sure you've got an awful lot of questions.

Thank you, Roger. So yes, let me go through quickly the main terms of this farmout transaction. So Impact is going to farm down 10.5% in Block 2913B, which contains the revenue discovery and 9.4% or so in Block 2912 so that ultimately Impact will go with 9.5% in both licenses. So this is effective 1st of January 2024, which means that TotalEnergies is basically going to pay from the January cash flow. And conditions to closing are very customary for this sort of transaction with third-party approval required by Namibian authorities and the 2 other joint venture parties, which are Qatar Energy and NAMCOR, the national oil company of Namibia. So in consideration for that farm down, we are receiving a non-capped carry loan from the effective date until the first oil sales proceeds are received by Impact, and that could cover all joint venture costs, which means exploration, appraisal and development. The return of that carry loan is going to be in kind. We are basically getting a fixed portion of Impact after tax cash flow converted into entitlement barrels and which will be deducted after tax or any tax costs, including capital expenditures are going to be deducted from these proceeds before repaying the carry loan. So we are planning to offtake the oil together with TotalEnergies in order to have access to more regular cargoes, which is going to minimize Impact's working capital requirements. But also, we are going to benefit from TotalEnergies marketing and sales capacities. So that's a benefit for Impact. And as Roger mentioned, so Impact is also getting reimbursed for their past costs in both Blocks, which amounts approximately to $99 million. So I think this arrangement is very favorable to Impact and its shareholders. It's been very -- it will be a very efficient way to fund these assets going forward until the first oil and as you probably know, I mean, the access to capital is key for company like us at the moment. And I think this solves the funding dilemma we had for these assets going forward. Next slide, please...

So just to reaffirm what we have stated in the past. We stated that we wanted to consolidate, streamline and financially derisk the portfolio. We've been saying that ever since I started with the company. And on a going-forward basis, as I mentioned, we are in the process of farming out 3B/4B in South Africa and EG-31 and 18 in Equatorial Guinea. We believe that we are trading at a significant discount to the underlying value of the company. And you are aware that we put an NCIB plan in place, which is fully ready to be deployed. And at the moment, we are trying to minimize the amount of capital coming out of the company over the next 2 or 3 years by doing these farmouts. And so we are actively reviewing that share buyback program as we speak. We have always said that we don't need to be leaping into new opportunities that the quality asset base underlying this business gives us significant additional organic growth opportunities, and we are actively pursuing those opportunities part, which I've outlined to you in the past. But we are always going to be disciplined. You're not going to see us jumping out of where we said that we're initially going to be focused. And this transaction and the strength in the existing balance sheet means that it's critically important to us that we maintain balance sheet strength. And as the topline says, this transaction is actually ideal for us because it keeps us in a very exciting asset and completely derisks the Africa Oil growth portfolio. We're in bed with a partner of incredible scale in Total, and we've got every confidence as an operator to operate this incredibly complex development that we're getting into. And with that, I think that we terminate and open up the floor for questions.

Thank you, Roger. Thank you, Pascal. Nadia, over to you.

[Operator Instructions] And the first question comes from the line of Matt Cooper from Peel Hunt.

Congratulations on the farmout. I'm just going to firstly ask what the current plan is for the 2 rigs following Venus-2A and Mangetti-1?

Well, the current plan is the drilling will continue. And obviously, the actual location of the drilling is going to be dependent on the results. Now it may be that Total decides to drill a further appraisal well on Venus to accelerate the developments on [indiscernible] decision. It does depend on -- and it's a very active work really. It does depend on the results of those 2 wells. Here we would like the 3D shot in the south of the block and then to high grade at least warm exploration well, frankly, next year down in the south -- sorry, this year, down in the south. Is this helpful?

Yes, yes, that's helpful. And just to check. So is it possible that the next exploration well post Mangetti-1 could be back to back on one of the existing wells? Or do you need a bit more time for drilling another exploration well?

Matt, there's a lot of stuff going on in the area. And one of the rigs, we may go up and drill another well somewhere else, which we can probably maybe think about, but it could be back to back, yes.

Okay. Got you. And then in terms of the farm down, and third question, do you pay any interest on that carry loan?

Okay. Yes. So I mean as we said, the carry is the consideration for the farm down itself. What we -- so there is no additional cash cost, if you wish on the carry and the farm down that have been signed with TotalEnergies.

Okay. And just in terms of that $99 million of past costs, do you expect that to be redistributed back to the shareholders of Impact?

It's going to go obviously into Impact. But we are looking at other things that can happen to migrate our portfolio into a cleaner position. But within a period it will be redistributed. But there's a whole series of activities going on in relation to what we did in Impact, Africa Oil, et cetera, et cetera, et cetera. But in principle, it will get back to shareholders, yes.

Okay. And then finally, just when do you expect the farmout to close? And is there any potential of any tax implications with the farmout?

We don't expect any complication in terms of completion. You probably saw that Total has announced that they were considering back-to-back with Qatar Energy on that deal. So we expect the approval from Qatar Energy, which will be forthcoming. And given Total's relation with Namibian authorities, we also expect the approval from NAMCOR and the government to be very quick to obtain. In terms of taxes, no, we don't expect any tax to be paid.

Great. So hopefully, completion some point in 2Q, 3Q, something like that?

There is a 9-month long update in the farmout agreement that we expect to be able to compete with...

Critically, the costs are being covered from the 1st of January, yes.

Okay. That's great. Congratulations again on farmout.

Thank you, Matt.

And the next question comes from the line of Tom Erik Kristiansen from Pareto.

Congratulations on the deal. Can you please talk a bit about how big you see the remaining exploration potential to be on the Blocks if you take not only according to this year, but the period until we actually reach [indiscernible]? How many wells could be drilled down, kind of what is the total potential? And then secondly, this obviously frees up a lot of capital for you. Do you have any strategic priorities on that, thinking to buying back, more M&A? And if you say more M&A, can you speak a bit more about the opportunities you see to consolidate the Impact interest into something bigger?

We'll deal with the exploration side first of all. I think on some of the previous presentations that we have done, we have shown sort of AVO and amplitude images of the area to the south. Now actually, we're obviously deeply in bed with Total, we're going to be able to show a little bit more of that stuff. But in the Damara and South Damara area, the areas of the amplitude anomalies exceed the size of those that we have around these. There's obviously a huge amount of work to be done on delineating those. And as I said, we haven't got 3D seismic, but we've got fairly dense grid of 2D, and we would be extremely hopeful that there are going to be several Venus' scale drillable features in those 2 areas. In terms of the cash on the balance sheet and what we're going to do with it, I've indicated that we are actively reviewing share buybacks. And we are actively in discussions at the moment with the principal shareholder, and that's one of the critical things that comes out of this, is we now have a newly found relationship with HCI in Impact. And we may well do some short-term activity in potentially trying to increase our position in Impact. But nothing is guaranteed at the moment and we will need some cash for that. But we are actively looking at that as a potential option now we've got this deal over the line. Does that answer the question? I got to be very diffused on this, as you can imagine as this day has maybe just gone through, but we are actively looking at other ways of deploying capital into this asset.

[Operator Instructions] And at this moment, I would now like to hand the call over to Mr. Shahin Amini for any written questions.

Thank you, Nadia. And there are quite a lot questions. I want to be absolutely clear that all the questions about specific operational data points from Namibia, such as well results, flow rates, size of the reserve base, I'm sorry, we're just not going to tackle that in this session. This session will focus on the transaction. And we will update you in due course on an operational update. Obviously, that will be fully aligned and coordinated with our investor company, Impact and our operator, TotalEnergies. So on that note, I will go to a couple of questions on the deal itself. And there's a question for you, Roger and Pascal. Can you provide more color around the carry to multi-developments? How does that work? If you -- say, parallel developments on these Blocks?

So all capital expenditures are going to be funded into first oil. So if several developments are carried out in parallel, it would be funded until the first cargo is basically sold and the proceeds are received to us.

Okay. And if there's no development or if something happens in the future, do you have to repay the loan?

The loan is not repayable. So we are not taking any technical risk in relation to the development.

And are there any guarantees from Africa Oil to Impact for this carry?

The loan is purely on Impact, it's non-recourse.

And in terms of repayments, once you achieve commercial oil production, how long could they carry to actually be repaid?