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

Ladies and gentlemen, thank you for standing by. Welcome to today's Nostrum Oil & Gas H1 Financial Results. [Operator Instructions] I must advise you that this conference is being recorded today, Tuesday, the 18th of August 2020. I would now like to hand the conference over to your speaker today, Martin Cocker. Please go ahead.

Thank you very much. Good afternoon, everyone, and welcome to this call to present the half year 2020 financial results for Nostrum Oil & Gas PLC. As the announcer said, my name is Martin Cocker. I'm the Chief Financial Officer. I'm joined on the call today by Kaat Van Hecke, our Chief Executive Officer, who joins us from Uralsk. We will be following the presentation of our financial results for the 6 months to June 30, 2020, that's available on our website or through the link in the press release. Throughout the presentation, we will refer to the page numbers that appear in the bottom right-hand side of each page in the presentation. And at the end of the presentation, Kaat and I will be available for any questions relating to the results. I would like to request that all media inquiries go through our PR advisers, Instinctif Partners. In addition, and as you will have noted from the presentation, we will make some statements during the next few minutes covering the restructuring of our bonds, but we'll not be answering any further questions on that topic at the end. Should you have any further queries following the call, please contact our Investor Relations department or Instinctif Partners, both of whose contact details are also on the press release and on our website. Okay. Moving to Page 2 of the presentation and dealing with the financial position and the financial results. You can see that our revenues for the 6 months ending 30th of June 2020 were $92.6 million versus $174.2 million for the first 6 months of 2019. On a quarterly basis, revenues for quarter 2 2020 were just over $32 million against $78 million for the same quarter last year. The reduction in revenues is partly caused by a reduction in volumes available for sale in the first 6 months of 2020. Our volumes available for sale averaged just over 22,600 barrels of oil equivalent per day from an average of 29,200 barrels of oil equivalent in the first half of 2019. Kaat will cover production in more details in a few minutes. However, the largest impact on our revenues was in the prices achieved for our production. The oil price rebounded a little from the low seen at the end of March and into April to finish on an average, about 30% down in the first half of 2019 versus 2020. However, the rest of our products saw a reduction in gross sales prices achieved of around 40% to 50% versus 2019. This obviously had an extreme impact on the revenues. The prices for most of our products have continued to recover, albeit slowly as oil prices recover. However, under existing gas sales contracts, the price achieved for gas sales has remained relatively low and will remain at a low level for the remainder of the year and possibly beyond. Dry gas accounted for approximately 40% -- 47% of our sales by volume and around about 24% of our sales by value in the period. Moving on to our EBITDA. The decrease in revenues of just over $81 million is the overwhelming contributor to the reduction in EBITDA of $71.5 million. However, the impact of the lower revenues is mitigated by the reduction in costs as we continue to reduce our costs across the board as we continue to focus on cost and liquidity management. Closing cash at the end of the period was $75.7 million, with a net debt of $1.064 billion. Our cash position at the end of July 2020 was $76 million. So you can see that just at the moment, we're relatively cash neutral. And now I would like to hand you over to Kaat to go through the operational and strategic points.

Thank you, Martin, and good afternoon, everyone. Here is Kaat speaking from West Kazakhstan. So from a production point of view, our first half average production volume was 23,500 barrels of oil equivalent, and our sales volume was 22,600 barrels of oil equivalent. Today's volume available for sale is still well above 21,000 barrels per day, and we have a good production performance and uptime level in the field. As you know, we decided to pause our drilling activities for 2020. We have, however, executed a targeted well intervention and workover program in the field, which ran from February to end July. The results are positive. And due to these jobs, we currently have a higher production level than what we expected at the beginning of the year, that I will tell you a bit more on the next slide. We continue with our focused cost management program, and we work rigorously on all fronts. We do the service contracts, materials, people. Especially on the service contracts, we have booked already significant savings that start to become visible. It's hard work, and we continue going after all optimizations. As you know, at the end of last year, we had a significant headcount reduction of over 200 employees after the commissioning of our gas treatment plant and due to the pause of drilling. During the first half of 2020, we had further headcount reductions, mainly now with a focus on our expensive expats, and we further streamlined our organization in line with our new strategy. From a health and safety point of view, it all centers around corona these days. We have in West Kazakhstan, the Uralsk region here, as per today, around 6,500 COVID-19 cumulative cases. And in our company, we have so far had around 50 cases, meaning that some 8% to 10% of our staff have contracted corona to date. Thankfully, the vast majority of those affected have recovered and they are now back at work. Although the situation was quite severe in West Kazakhstan in July, it is now flattening out, and we are slowly starting to manage COVID-19 as the new normal business. Quarantine measures in the country are being imposed and relaxed as required. And since yesterday, August 17, they are relaxing again very slowly. To date, we have seen no material impact from COVID on our operations, only some logistical supply disruptions and limitations to people traveling within Kazakhstan and in and out of Kazakhstan. Several measures have been taken to prevent COVID-19 from entering into our organization. We believe that we have the plans in place to manage the situation, and we keep monitoring closely. Strategically, you know that we closed the formal sales process earlier in the year as we saw no merit in prolonging the efforts. Our strategy is now explicitly to commercialize the spare gas capacity that we have in our world-class gas processing plant by utilizing third-party volumes. We have already one signed commercial agreement in place with Ural Oil & Gas. And during last quarter, we had 2 technical meetings with UOG to align on interface items. And we also see that they are actively making progress on the technical work. One of the indicators is that they launched a tender for the front-end engineering and design study, and they now should be very close to nominating the contractor, if not already done. Overall, this is a positive sign that the UOG management is committed to deliver the gas before April 2023, which means before any penalties arise under the existing agreements. As you know, we appointed financial and legal advisers to engage with the steering committee of bondholders to agree on a restructuring agreement. Martin will then elaborate further on this. Let me now move to Slide 3, where you'll see the trend of our production and sales figures of 2018, '19 and the first and the second quarter of 2020. The difference between the bigger and the smaller number is our own fuel gas consumption and, to a lesser extent, also some inventory effects. As said, between February and end of July, we had a focused well intervention and workover campaign that now came to an end, and we have some first indications of the results. We -- into some 25 wells to make improvements, and we have seen an incremental production of over 1,000 barrels. A variety of jobs were performed, such as additional perforations and a stimulation job. And although also some had no results, which is to be expected with this type of well in the branches, there were several with good results. I want to be very clear, there is no game changer here in any of the jobs. So there is no material additional reserves found. The outcome is mainly a reduced rate of the decline of our fleet, which is now not anymore in the high 20s, but rather just below 20%. Also, the sustainability of the gains need to be further assessed. In any case, the total campaign has already paid itself back. We screen the jobs at $30 per barrel and we also do our cost performance review at $30 per barrel, and still, we have positive economics. The total campaign was estimated at $2.8 million, and it came in at an actual cost of $2.5 million, so 10% below estimate. At the moment, the campaign is finished and we are demobilizing the equipment, and we will start to properly plan the work for next year campaign. So the production guidance we provided at the beginning of the year of 20,000 barrels for production and 90,000 barrels for sales, it seems like we will beat it. However, we want to remain very cautious. As with the COVID-19 pandemic, you may never know, plus [ the asset is about ] early days to assess the full outcome of the well intervention campaign. Martin, I now hand over to you for the cost.

Thanks, Kaat. Turning to the cost per barrel. It's pleasing to see the downward trend, even with the reduction in production and sales. As Kaat noted, we're continuing to proactively manage the costs and challenge all expenditures. As we've noted on these calls before, largely third-party contracts have been reviewed and where possible, renegotiated or terminated. Headcount has also been addressed and, where appropriate and safe to do so, reduced. We are reducing our London office space by nearly 2/3. And so the IT third-party support has been terminated. We start to see the benefits towards the end of quarter 1 this year, and we've continued to see those benefits during the second quarter. And as the graphs show, we're bringing the cost down per barrel from a total of $10.1, which was financial year 2019, to just around $9.4 per barrel of oil equivalent in the second quarter of 2020. Therefore, we remain confident that we can beat our target operating cost of 2020 below $45 million, a G&A target of below $15 million. The G&A target of $15 million, of course, is before any cost of restructuring the loan notes. If I can now turn to Page 4, as already stated, our cash balance at the end of the quarter was slightly under $76 million, with a net debt of $1.064 billion. Under conservative oil and gas prices for the remainder of 2020 and excluding financing costs and the cost of debt restructuring, the group will remain cash positive at the end of 2020. As already commented and as reported on earlier investment calls in April, capital expenditure has been pared back. The 2020 CapEx to date is around $18 million for the half year versus significantly more in the last 2 quarters of 2019. Of course, the reduction in CapEx is due to the GTU3 project now being completed and the suspension of the drilling program in 2020. We'll continue to do what we do to protect production, liquidity and our people. Turning to Page 5. In respect to the possible restructuring of our debt, you will be aware that we have appointed Rothschild & Cie as our financial advisers and White & Case as our legal counsel. And we have engaged in preliminary discussions with the steering committee of the bondholders who have been advised by PJT and Akin Gump. The objective of those discussions is to enter into a restructuring agreement with the bondholders. You will also be aware that we did not pay the coupon due on the loan notes on July 25 and August 16 this year. This was at the guidance of our advisers and was designed to take advantage of the applicable grace periods for these interest payments so that our advisers could continue with active discussions with the lead of the financial advisers of the steering committee of bondholders. The objective of those discussions is for the company to enter into a forbearance agreement with the holders of the notes in relation to the interest payments. At this stage, we cannot share any further information about the process except that the company remains committed to preserving value for all the stakeholders involved and the restructuring will be driven by this objective. We expect to share more updates on the process as soon as it's practical to do so and, of course, having regards to disclosure and any other legal obligations. Kaat, I'll hand over to you, please.

Well, thank you, Martin. So turning to Page 6. I think this is a picture that by now most of you, I think, are very familiar with. So with our current production level from our field, we only filled 20% of our plant capacity. So we are looking at monetizing the value of our facilities as an infrastructure hub in West Kazakhstan. Our facilities are saturated here in an area with a lot of hydrocarbons around. And we are talking with third parties in a radius of around 100 kilometer around us to secure additional volumes to fill the spare capacity at our gas treatment plant facilities. In addition, we also continue to evaluate the Stepnoy Leopard fields. We progress the different development options we have available in parallel as we assess in the coming months which ones will be due to a stage of final investment decision. Moving to the next, Slide 7, where you see our key focus areas for this year. #1 priority for the company, maximize the commercial potential of our gas plants, like I just mentioned. This is where I spent most of my time over the last few months. Weekly meetings are taking place to discuss the many issues that are involved for each of the development projects we have in our portfolio. As we are talking about big volumes and about different gas and liquid compositions from the different fields, each of the development projects has their own specific risks and opportunities. Some have more technical-related issues, it could be subsurface or surface lines. Others show a lot more commercial and political risks. The program, I have to say, goes with ups and downs, sometimes at a very fast pace and then suddenly slow, but we can guarantee that we are driving all of them as top priority for the company. Before I hand over again to Martin for our second priority being liquidity management, I would like to close with one remark on the third focus area being safety and sustainability. This remains at the heart of all the decisions we make. And now more than ever, the health and the safety of our employees and contractors is our first operational concern. Thank you. And Martin, back to you, please.