Nostrum Oil & Gas PLC (NOG) Earnings Call Transcript & Summary

Welcome to Nostrum Oil & Gas Full Year 2019 Financial Results. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, the 30th of April 2020. I will now hand you over to your first speaker, Martin Cocker. Please go ahead, sir.

Thank you very much. Well, good afternoon, everyone, and welcome to this call to present the Full Year Financial Results for Nostrum Oil & Gas for 2019. As announced, my name is Martin Cocker, and I'm the Chief Financial Officer. I'm joined on the call today by Kaat Van Hecke, who is our Chief Executive Officer, and Kaat joins us from Uralsk. We'll be following the financial year 2019 financial results presentation that's available on our website both through the link and press release. Throughout the presentation, we will refer to the page numbers that appear on the bottom right-hand side of each page of the presentation just to assist you to follow where you're up to. At the end of the presentation, Kaat and I will be available for questions relating to the results. Okay. So if we turn to Page 2 on the presentation. As I said in summary, in terms of the financial results for the year, our revenue was $322 million, relating to an average daily sales volume of just over 26,600 barrels of oil equivalent, approximately 62% of our revenues by value derived from crude oil and condensate sales and the remaining 38% from gas and LPG. The average blended sales price for 2019 was slightly over $33. If we compare those revenues to 2018, they've reduced by $68 million through a combination of low production available for sale. We had slightly over 29,500 barrels of oil equivalent per day available in 2018 versus the 26,671 in 2019, as a protection from our existing wells' decline. And we also reported a lower blended average sales price. 2018 was around 26 -- [ $36.20 ], sorry, versus $33 for 2019, which reflects lower oil price throughout 2019 versus 2018, but was mitigated a little by a better gas price following the renegotiation of our gas sales contract as well as getting some positive impact rate increase in volumes being used for power generation. Moving on to EBITDA. EBITDA for 2019 was $200 million, which is a margin of just under 61.9% of revenue versus 2018, which was a larger EBITDA of $231 million, but a slightly lower margin of 59.3%. The improvement in margin is due to reduction in costs, primarily relating to repair and maintenance and well workover. The improvement in the EBITDA margin was also assisted by the adoption of IFRS 16 related to leases, which reduced our fuel transportation costs, however at the same time, resulted in an increase in our DD&A. Cash at the end of the year was slightly under $94 million. We currently have around about $65 million in the bank. The reduction in scope of our future drilling program resulted in a reclassification of our reserves, and we'll cover this reclassification a little later in this presentation. But the financial impact is that we had to recognize an impairment charge in the year slightly under $1.4 billion. In terms of bondholder engagement, we are in the process of selecting a financial adviser to commence negotiations with the bondholders and their advisers. Whilst we do believe that consensual agreement will be reached with our bondholders and shareholders, we are a very early stage in the progress -- in the process. No course of action has yet been decided and the outcome is uncertain. And with that, I will hand you over to Kaat, who will talk you through the operational and strategic points.

Thank you, Mark, and Kaat here, and good afternoon to everyone. From an operational point of view, I would say, let me start with HSE. And for me, the highlight, I would say, in 2019 was that we set up and established at both levels, a safety, health and environmental committee. And one of the key realization was that we updated there the golden rules, and we rolled them out to all the employees. And these set out clear and simple dos and don'ts on safety behaviors. From an operational point of view, the production Martin quoted already. Last year, we were at 26,000 -- just below 26,700 sales volume. For Q1, we are at 22,900 sales with a production figure of over 24,000. And our forecast internally shows clearly that we are in line to meet our production guidance for 2020, that's a sales volume guidance of 19,000 barrels. In Q4, we stopped -- we paused, I would say, all drilling activities for -- at least for the year 2020. We come back later on, on our reserves, probable 2P reserves, where we took a significant reduction of over 60%. What is certainly worth a mention is that at the end of the year 2019, we reduced significantly our headcount with over 200 employees, and that is related to the fact that one, we completed and decommissioned in Q4 our GTU3 plant, and second, because we decided to drill -- to stop drilling. From a strategic point of view, what I would like to mention is what we said end March, that we decided to end the formal sales process as we saw no merit in prolonging this process and this was issued in March. Our first priority, as communicated, is really to commercialize our spare capacity that we have in our gas treatment unit by processing third-party gas volumes. We have already one agreed, signed commercial agreement with our neighbor, Ural Oil & Gas, which I later will expand on, which is still committed, but delayed in bringing the first gas on-stream. We reduced already significantly the cost, but we embark on a further journey because we want to become a lean midstream processing company. And we need to further reduce our cost also to make sure we manage our liquidity certainly now that oil price fell so dramatically. We also communicated already that the potential acquisition of Positive Invest, which holds the subsoil user rights to Stepnoy Leopard that we will put this on hold. So let me go to Slide #3. And say a bit more about our production. So in 2019, what we could see is that our production was impacted by 2 key elements. It was a higher-than-anticipated decline rate that we have seen. And secondly, an unsuccessful drilling program. Due to that one, we actually met in the end of 2019. We met, from a production point of view, just our revised production guidance of 28,000. However, we were just below our revised sales guidance of 27,000 and only at 26,700,000 (sic) [ 26,700 ]. The delta between those 2 figures, the higher and the lower figure, it's because our own pure gas consumption, which was, last year, higher because we commissioned our new GTU3 program. We are, like I said -- we see for 2020, we see a continuation of a stable decline in our field, but we are on track to achieve our production guidance of 20,000 productions and 19,000 for sales volume. To support our production level, we have one workover rig that is currently active in the field. I will now hand over back to Martin to talk through the cost.

Okay. Thanks, Kaat. I think I'd really like to take Page 3 of the presentation and Page 4 together because they [indiscernible]. In terms of the cost management and capital discipline, in 2019, we started a process to further control our expenditures, including, as Kaat mentioned, quite a significant headcount reduction. And we also looked at a number of other areas of our operation, and tried to get our costs down. And the results of all those efforts are shown in the graph at the bottom of Page 3, which looks at the operating costs per barrel of oil equivalent. And we see that they've moved down from 11.6% to 10.8%, and primarily the transportation. In some respects, that's because we've changed our terms of contracts into more favorable. So we've reduced our transportation costs. But obviously, in the current environment, we need to ensure that we're doing a lot more to protect production, our liquidity and also our people. And if we turn to Page 4, we can see that there's a number of items highlighted under CapEx reduction and OpEx and G&A reduction. And in effect, the actions that we've taken, they don't relate to CapEx or OpEx, they relate to all expenditure. And at the moment, oil expenditure is subject to a rigorous challenge. We've halted all drilling because we can't afford to spend on drilling unless we're confident that we're able to drill commercially viable wells. As Kaat noted, we continue to operate a one-rig workover program to enhance production from the existing wells, but that expenditure must make a return within a maximum of 1 year and assuming $80 oil prices. All of the nonessential CapEx is reviewed and must be approved even if there's an existing budget, and we do that through a weekly contract management meeting where all expenditure is brought to that senior management team for reapproval. Operating expenditures have been reduced. And wherever possible, the contract is being renegotiated into more favorable terms. And in short, we are engaged in a process of strict financial management with a goal to reducing our cash outflows. And as I've noted, we had $94 million of cash and cash equivalents at the end of 2019. They've reduced slightly to around about $65 million, but we are monitoring our cash outflow on a 13-week forward look. So we're very, very tightly managing that liquidity. Our debt remains high at $1.042 million. But we have no debt maturities until 2022. Although with the current oil price and as you will recognize, we are actively engaging with our bondholders with a view to renegotiating those bonds. And with that, I'll hand over to Kaat to take us through the information on Slide 5.

Thank you, Martin. So following the subsurface study work that we did in 2019 internally and also externally and our evaluation of our own drilling results in 2019, you see that there is a significant reduction in all our reserves' categories. So for the main Chinarevskoye field, both proved and probable categories we reduced with roughly 50%. In addition, our grade of Trident fields, which is roughly 100 kilometers to the west of our processing plant, we also took the decision there to move the amount of probable reserves to contingent resources as we did not see a concrete development plan there. I will not elaborate here much further on all the reserves. And Martin, he mentioned already a lot more in our public announcements, but also on our website and also in our annual report. You see a lot more per reservoir, what are the underlying rationale, or I take the question in the Q&A. Let me go to Slide 7. So with the reduced production that you see from our own fields, we are looking heavily at monetizing the value of our facilities, as really an infrastructure hub in the northwest of Kazakhstan. I would say we are looking 360 degrees around us, and we are looking at a radius of plus 100 kilometers around us to see if we can process third party gas. If I move to Slide 8. So our focus areas for 2020. This is the first one is my #1 priority is to make sure that we can fill our great plant that we have built here with gas from third-party gas. I can say that different parties are interested. They come and ask us to talk with us. Each of these parties have different specific risks and opportunities, and we are actively working with them to see if we can fill our plants and what needs to be done. We have, like I said, already an agreement with Ural Oil & Gas on delivery of their raw gas. The good news there is that there is a new CEO in place since recently in the company. We are in talks to help and make sure that we have a good relationship on making sure what needs to be in place for the boundaries to [ posit ] their gas. However, they certainly lost a bit of time in the past, and they are now working on a new timetable to see when they can deliver their first gas. But the new management team is certainly committed to deliver. Let me then talk to the third priority on the slide before I hand over to Martin, to focus on the liquidity management. The safety and health of our people. The topic, I think, of the day is around the world is, of course, the COVID situation. I would say that here in Uralsk, we are relatively spare with only 146 cases to date. And the first case that we had here in Uralsk was only in April 1. This is largely due to the fact that the local government here took very hard measures in a very early stage, when you had it already all in Europe. To date, we have not seen any material impact from COVID on our operations. We have seen people restrictions, some logistical restrictions. We have taken internally appropriate measures to prevent it, and we believe that we have the plans in place to manage the situation if the corona arrives in our company. With this one, I would say, I hand over to Martin for the last liquidity management.

Okay. Thanks, Kaat. Well, as I said a few minutes ago, in terms of our liquidity management, we are now rigorously challenging all expenditures. Nonessential CapEx has been removed from the budget. Operating costs are being challenged. And where possible, we are renegotiating our contracts and the aim of all of this is, of course, to ensure that we manage successfully our liquidity in the near term. Linked to that, and as you know, we announced on March 31 that we'll seek to engage with our bondholders regarding a possible restructuring of the company's outstanding debt. We're in the process of selecting a financial adviser to commence negotiations with the bondholders. And whilst we believe that consensual agreement will be reached with our bondholders and shareholders, we're at a very early stage in the process and no course of action has yet been decided. And of course, therefore, the outcome is uncertain. But the whole point of this is to fix the balance sheet of the company because underneath it all, we have a very, very good business. We have a fantastic infrastructure that is in a part of Kazakhstan where there is no similar infrastructure. And so the opportunities are immense for us. And so we'll be embarking in the next short while and looking to engage with bondholders with a view to fixing the balance sheet so the company can go forward successfully. That concludes the presentation. I note that there are supporting materials at the back of the presentation, which are the income statement, the balance sheet and the cash flows. These are also found in our annual report and our financial statements. So I'd like now to hand it over to questions. But before I do, I just want to come back to a point on renegotiation of our debt. The question of [ 2 complainants ] and the question of appointment of a financial adviser. As I've noted, [indiscernible] appointing a financial adviser, we're at a very early stage, therefore, in the whole process. What happens in the next short while is uncertain and therefore, whilst it may disappoint everybody, we are not going to answer any questions on coupon payments, on bond restructuring or on appointment of financial advisers or any other advisers in this process. I apologize in advance if that upsets anybody. But I think in -- really, in reality, anything that we say now is just speculation, and I don't think that would be helpful at this stage in the process. So with that, I'll thank you for listening, and I'll hand it over to any questions that you might have.

[Operator Instructions] Your first question comes from the line of Zafar Nazim.

If I may ask a couple -- a few questions. Can you give us your estimate of the cash balance that you expect to have at the end of the year, assuming you hit the production guidance and I guess, assuming that oil price is around $25 a barrel, where the cash will be?

At what price?

$25 for the rest of the year.

I understand where your question is coming from, Zafar. And of course then, that's only 2 scenarios that the coupon is paid or the coupon is not paid. So as I said, at this stage, I really don't want to be answering questions that relate to the bond restructuring.

And I mean I'm not saying that coupon is going to be paid. So I'm actually not going to -- not implying. I'm just assuming operations continue as they are and there's no restructuring and that you pay coupon in the end?

Right. I guess we were looking at $125. And of course, maybe you've got to factor in gas prices. So our cash at the end of the year will be -- we will be cash positive at the end of the year under the $30 -- under a $30 oil price and with a reduced gas price. But as you read in the financial statements, we have a growing concern challenge because after the year-end, there's a coupon due, and that will make us cash negative under those scenarios. Yes.

Got it. Okay. So just to be clear, you will, I guess, burn cash. And by the end of the year, you will still be positive. But I guess considerably less than where you started the year?

Yes. Absolutely. Yes.

Okay. And then in terms of your production guidance, now that you suspended all drilling, and we just have 1 workover rig. What kind of a decline rate are you expecting this year? And what was your exit rate for production rate for 2019 and where do you expect the rate to be at the end of...

Yes. Kaat. Okay. Kaat, could you just take that question, please?

Yes. You may count on an average decline rather in the 20s, I would say. We are talking here about reservoirs, where fractured reservoir with lower -- medium to lower permeability. Our exit rate will be below the 19,000 guidance that we gave. So from the 24,000 production, you could say we are now in Q1. If you deduct there 20%, you see where we end with production at the end of the year.

Okay. And just one last question. I know that your company has been engaged in efforts to get third-party volume process using your GTU3 facility. At this point in time, given all the discussions you've been having, and I guess you have a pretty good idea about potential third parties, how are you feeling about actually getting some contracts in place? Is this a -- can you give us some probability as to whether this looks like a very realistic outcome that you will be able to get material quantum of third-party gas process at GTU3?

Kaat, can I hand that to you again please?