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

Good day, and thank you for standing by. Welcome to Nostrum Oil & Gas 2021 Full Year Results Conference Call. [Operator Instructions] Please be advised today's conference is being recorded. [Operator Instructions] I would like to hand the conference over to our speakers today. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to this call to present the financial results for Nostrum Oil and Gas for the full year ended December 31, 2021. As the operator said, my name is Shane Drader, and I'm the Chief Financial Officer at Nostrum. I'm joined on the call today by our Chief Executive Officer, Arfan Khan. We'll be following the presentation of our full year financial results that's available on our website and also through the link in this morning's results announcement. As usual, throughout the presentation, we'll refer to the page numbers that appear in the bottom right-hand corner of each page. And at the end, we'll open the line for any questions. I refer listeners to Page 3 of the presentation. I will now hand over to Arfan.

Thank you, Shane. Welcome, everyone. I want to sort of cover -- provide a really high level, first of all, a message about where we are. Some of the challenges we faced at the global level, some unprecedented challenges actually in '21 that have continued into 2022. Of course, the pandemic continued to spread in '21 with the various regional and national restrictive measures. The political and social unrest, as you're aware, in Kazakhstan in the early part of '22 has led to a change in the auto care administration and policies that we feel have a strong domestic agenda. Of course, adding to this is the Russia-Ukraine war, which has led to substantial sanctions that we have to comply with as a British publicly traded company. I'm very proud of our workforce and the company for rising to these challenges. Business has continued with minimal disruptions and none of our employees have been harmed through COVID or due to the recent geopolitical events. And we remain fully compliant with all the international sanctions against Russia. A quick update on the restructuring. I'm pleased that we achieved the signing of the lockup agreement with our noteholders and larger shareholder, and that these terms were supported by a majority of shareholders at the recent general meeting. Whilst negotiations and negotiating the terms of the restructuring has taken longer than anticipated, we now have a clear path to resetting the group's balance sheet and unlocking the capacity to pursue our strategic goals. The new debt structure is much more manageable for a company of our size, allowing us to generate free cash flow from our operations. On the production side, the field production has continued, of course, to decline at circa 20-plus percent owing to the absence of any drilling since 2019. We did meet our 2021 production guidance, averaging just over 17,000 barrels of oil equivalent per day. Our workover and rigorous well intervention campaign, however, produced mix results with a limited impact on arresting the overall feed production decline. Sales volumes came in slightly below guidance at 15,330 barrels of oil equivalent per day. However, this was largely due to a buildup of condensate inventory at the year-end, which was sold earlier this year. Financially, we performed well in '21, achieving revenues close to $200 million. We optimized successfully our netbacks and took advantage of the favorable commodity price environment across crude, condensate and LPG. We also manage effectively our liquidity through cost discipline, generating over $86 million in free cash ending the year with a cash position of over $165 million. Before I wrap up, I want to focus a little bit on -- touch on the sustainability aspects, which, of course, as you know, is part of the ESG framework. It's -- for us, this has always been at the forefront of our operations. It includes health and safety as well as environment, social and governance measures. We're pleased to report there were no fatalities nor serious injuries to employees or contractors during operations in '21. Safeguarding our workforce will always remain a key priority. We have continued our trend in reducing the absolute Scope 1 and 2 emissions, releasing 20% lower greenhouse gas emissions from the 2018 levels. We're also exploring emerging technologies to help improve our surveillance of CO2 emissions while further reducing our operating footprint. We also inaugurated a task force that will develop a fit-for-purpose ESG road map for the group in 2022. Furthermore, we had -- substantial improvements were also made in our disclosures and transparency related to CDP, and we made our first TCFD disclosure in our annual report. Last year's strategy to monetize our 4.2 bcm world-class gas processing infrastructure. We have continued to mature dialogue with potential stakeholders and partners. We're optimistic these efforts will bear fruit post restructuring when we can enter into formal commercial negotiations and contracts. I'll now hand over to Shane, who will provide an update on the bond restructuring process.

Thank you, Arfan. I refer listeners to Page 4 of the presentation. We reached an agreement with our noteholders and largest shareholder on the 23rd of December, of last year in the terms of the restructuring. In January, a total of 77.73% of the noteholders in aggregate principal either signed or ceded to the lockup agreement. On the 13th of April, we gave notice convening a general meeting for our shareholders to vote on the agreed restructuring terms. The general meeting took place last Friday on the 29th of April, and we are pleased to announce that 99.99% of voting shareholders voted in favor of the restructuring resolutions. We now have the support of noteholders and shareholders alike to pursue the restructuring via U.K. scheme of arrangement. Under this restructuring, our existing principal noteholders will have their notes split into 2 component parts. The first is a reinstatement of 2 notes, a $250 million senior secured note with a 5% cash coupon payment and a $300 million senior unsecured note with 1% coupon payment and 13% payment in kind. Both sets of reinstated notes will have a maturity in June 2026 and the interest on these notes begin accruing from the first of this year. The second restructuring component is a conversion to equity of the remainder of the notes and accrued interest. Upon closing of the restructuring, existing shareholders will be diluted to 11.11% of the expanded share capital of the company. Attached to the reinstated notes or warrants which if exercised upon certain conditions will further dilute existing shareholders down to 10% of the expanded share capital of the company. There are also a number of agreed corporate governance arrangements, a cash sweep mechanism will be put in place for free cash flow above a certain amount to be swept into a restricted account administered by a trustee and controlled by the independent directors. There will also be a debt service retention account where future coupon payments will be held. The group will have access to an operating account with cash sufficient to conduct business operations. We will still have access to the restricted accounts under certain conditions with the approval of a majority of independent directors. The company's listing will also move from the premium segment of the London Stock Exchange to a standard listing. We'll still be required to follow the guideline for the U.K. corporate governance code on a comply or explain basis, but the transfer of listing will remove certain listing requirement obligations, which will ease the administration burden of the company. Finally, our initial Board post restructuring will comprise of 7 directors from the 5 that are currently in place today. We still have several other milestones to reach, including court sanction of the scheme and the necessary Republic of Kazakhstan government consents to complete our restructuring. However, all the work streams are progressing in parallel as we speak, and our current expectation is to close out the restructuring in early Q3 of this year. I refer the listeners now to Page 5, where I'll briefly go through our financial review. As Arfan has already pointed out, 2021 was a relatively strong year for the group financially. Brent oil from which our crude and condensate prices referenced averaged $71 in the year compared to $43.2 in 2020. LPG markets were also buoyant with strong and sustained upward movements in pricing over the year. This strong hydrocarbon pricing environment more than offset the production decline and the results of our revenues was that they grew by 11% to $195 million. Our EBITDA for the year was $112.5 million for the year, which is 40% higher than in 2020 and represented an EBITDA margin of 58% versus 46% in the prior year. In part, this was due to strong cost control and discipline across our entire cost base. Our cost management has been a key feature over the last 2 years as we look to preserve liquidity. Total costs of operating our business, including G&A, sales and transport, and production taxes fell by approximately $6 million year-on-year. We worked extremely hard to keep costs in check despite fixed cost base and inflationary pressures in our supply chain. We'll continue our question-everything mindset in 2022 and beyond as we seek to keep these costs in check and maintain profitability. Our ability to generate cash from the Chinarevskoye asset is demonstrated on Page 5 in the 2 charts at the bottom of that page. We have added cash to the balance sheet for the first time since 2017. Over $86.6 million was added to our balance sheet from our business operations. Our cash has increased every quarter from year-end 2020, and we now sit on an unrestricted cash pile of just over $165 million at the end of the year, and we have an additional $22.7 million sitting in a restricted bank account under the terms of the original forbearance agreement from our restructuring. It's clear with a more appropriate and manageable capital structure that the Chinarevskoye field is able to generate cash even as the field continues to mature and decline in its production levels. Moving forward, our aim remains to preserve cash and grow our cash reserves through continued netback optimization and cost discipline, the ultimate purpose of which will be to provide returns to our stakeholders and help fund strategic projects. I'll now pass back to Arfan, who will walk through our operational review from Page 6.

Thank you, Shane. So Page 6, there's sort of a number of charts, and I'll just voice over some key elements and messages on those. The first chart on this page highlights the mature -- which is the production chart highlights the mature nature of our key producing asset, the Chinarevskoye field. The production has declined around 23% year-on-year for the last 2 years, with production volumes dipping below 20,000 barrels of oil equivalent per day. As you know, arresting production declines materially is not feasible in the absence of any drilling that stopped in 2019. However, we continue to conduct subsurface studies to identify low-risk infill drilling opportunities. Some of these will be considered for investment in the future post restructuring. Our workover rigless intervention programs whilst progressing are also maturing and expect to have only a limited impact on arresting production decline. Total production for the year averaged over 17,000 barrels of oil equivalent per day, which, as previously mentioned, is mostly in line with our guidance for 2021. Our production split remains largely consistent: 40% is crude and condensate, 12% LPG, about 48% dry gas. Our sales for the year came in slightly below guidance of 16,000 barrels of oil equivalent per day. However, as we noted previously, that was due to a delayed shipment of condensate. Total condensate inventory at the end of the year was approximately 260,000 barrels of oil equivalent per day that was sold early 2022. Our annual reserves audit yielded a 2P reserves of 34.3 million barrels of oil equivalent. For the first time, we also evaluated and added possible reserves of 9.7 million barrels of oil equivalent, bringing the total 3P reserves to 44 million barrels of oil equivalent. We have managed to stabilize our reserve base and ended the year with a nominal reserve replacement ratio of about 25%. I'll now move to Slide 7, which is covering our health and safety aspects. Integral to sustainability, obviously, is health and safety that includes all staff and contractors both at field and office sites, providing a safe work environment for all our employees and contractors is mission-critical for Nostrum. I'm pleased to report we had 0 fatalities and severe injuries in '21, a trend we are committed to sustaining. Our incidence rates have continued to fall since 2018, both lost time injury rates and total recordable incidents were reasonably low in '21 at a total of 8. We did, in fact, work on full year to April '21 without recording a lost time incident. COVID-19 in Kazakhstan was quite severe with cases elevating in second quarter and then the summer months, after which the number of cases began declining. In accordance with our own COVID measures as well as Kazakhstan guidelines, we implemented stringent measures to ensure the safety of our employees and contractors. Within Nostrum, the vaccination of the staff started in April '21 and reached about 78% of employees by fully vaccinated by the end of '21, which was considerably higher than the national average of about 43%. Lastly, we've conducted HSE audits of our contractors and began to embed our HSE requirements into the existing contracts and we will ensure that all future contracts in excess of $100,000 would include HSE requirements and standards. Furthermore, we also require our suppliers and contractors to report any unsafe working practices and conditions to hazard observation cards. Our overall aim here is to instill adoption where our employees and contracts alike are mindful of health and safety throughout their time at Nostrum. I'll now move on to the topic that is near and dear to everyone related to ESG. We began putting into motion our plans for ESG road map to pave the way for a sustainable business. An internal task force was set up last year and is being chaired by Shane. Step 1 in our ESG journey is increased transparency in reporting. For environment, specifically, we have considered -- considerably increased our disclosures in both our annual report and website showing investors how we report and measure air emissions, gas flaring, wastewater, waste management. We refer readers to our annual report for further environmental data points, but key trend to note is a sustained reduction in Scope 1 and Scope 2 greenhouse gas emissions since 2018. 2021 saw 187,000 tonnes of CO2 emissions from operations, a drop of 26% from levels seen in 2018. We also saw a significant increase in the percentage of waste sent for processing and recycling. So nearly 94% of all our waste was sent for processing compared to about 70% in the prior year. This underscores our commitment to the environment and operating in a more environmentally friendly way. From a reporting and transparency perspective, we reaffirmed a C grade in our climate change disclosure under the Carbon Disclosure Project, also known as CDP. Our goal is to improve on this in 2022. Certainly, we have the ESG road map that we will be developing this year. We also reported under the water security questionnaire for the first time and we received our first rating in '22. We compiled with the -- we complied with the required disclosures also against each task force for climate-related disclosure -- recommended disclosure in our annual report. And I think from our social aspects, the group has contributed immensely to a Northwest Kazakhstan region over the years through numerous social initiatives. In '21, we helped finance the payer of secondary schools near our operations, we sponsored to school children to participate in republic and sports events, help poor households, the school supplies and support the local hospitals in the region to name but a few. Furthermore, education and training is an obligation under our PSA, and we take pride in ensuring our workforce get the right training and skill development they need. And lastly, governance is an area the company has lagged behind its peers. But as part of the internal ESG task force, we intend to change the way our governance is perceived by our investor community. Our expecting management pay is not linked to improvements in ESG factors. We welcome the new corporate governance arrangements agreed under the terms of the restructuring and belief that we will only strengthen the governance pillar in our ESG road map. On the final slide, Page 9, just want to wrap up with a summary of what we aim for in terms of '22 in achieving our growth objectives. On this slide, you can see that the map, it shows all our own infrastructure in the region as well as routes to markets for all our products. Our 4.2 bcm gas processing infrastructure is unique to the surrounding region and provides us with a significant strategic advantage towards becoming a world-class processing hub. Given this context, I would just focus on the key priorities, how to deliver our long-term vision. From the delivering, we plan to commercialize our spare capacity by advancing ongoing discussions with third party interested in supplying raw gas. And you may be aware that Ural Oil & Gas consortium achieved their field investment decisions or final investment decision last year and we understand they have competed the EPC tender phase. So that project is on course for first gas delivery late '23, and we will shortly begin our own facility upgrade work to improve the sulphur recovery unit to accommodate the gas from the UOG field. As I mentioned earlier, we plan to develop a comprehensive ESG road map to create a sustainable future for the group. We also want to restore investor confidence through continuing to deliver on our promises and by allocating capital and resources in a prudent manner. The second element of our strategy is around optimization. Finalizing the restructuring in early Q3 is a key milestone that will unblock a number of commercial pathways for the group. This includes our ability to raise further capital and pursue our growth projects. We also continuously evaluate our existing sales routes to optimize product netbacks in a flexible manner. Further, we intend to remain and continue to be cost conscious to improve and safeguard group liquidity. And lastly, maximizing as an upstream E&P operator, we will continue to maximize production from the Chinarevskoye field by utilizing our best-in-class well and reservoir management practices. And finally, we are maturing and building an inventory of low-risk infill drilling opportunities that we will review for execution in the future. And with that, I will conclude the presentation. Thank you so much for listening. And if anybody has any questions, we'll be pleased to answer them. Operator, I'll pass this back to you.

[Operator Instructions] And your first question comes from the line of [indiscernible] from ICU.