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

Hello, and welcome to the Nostrum Oil & Gas H1 2022 Financial Results Call. My name is Judy, and I'll be your coordinator for today's event. Please note that the call is being recorded. [Operator Instructions] I would now like to hand you over to your host, Shane Drader, to begin today's conference. Thank you.

Thank you, and good afternoon, everyone. Welcome to this call to present the financial results for Nostrum Oil & Gas for the second quarter and 6 months ended June 30, 2022. As the operator has said, I'm Shane Drader, the Chief Financial Officer at Nostrum. And today, I'm joined on the call by our Chief Executive Officer, Arfan Khan. We'll be following the presentation of our first half 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 side of each page. And at the end, we'll open up the floor for any questions that you may have. I refer listeners to Page 3 of the presentation, and we'll now hand over to Arfan, who will provide some opening remarks.

Hi, everyone. Thank you, Shane. So we are on Page 3, summary page. During the first half, we have continued to navigate our operations successfully and without any major safety incidences despite the geopolitical risks and the ongoing restructuring of most outstanding notes. We are expecting to complete the restructuring within the next 2 months. Shane will provide more details later in the call. I am confident that our new capital structure will provide us the right balance sheet to pivot towards growth. In line with our strategy, we are continuing to identify and mature various growth initiatives that will help fill our gas treating facilities, and we hope to be able to progress a number of these post the restructuring. I will touch on it a bit more later. Key operational and financial highlights are shown on this page. We averaged between 14,000 barrels of oil per day -- oil equivalent per day and 13,000 barrels of oil equivalent per day of production and sales volumes, respectively, for the first half. Overall, this allowed us to generate over $107 million in revenue, maintain robust EBITDA margins in excess of 60% and generate over $43 million in free cash flows. We entered the period with a cash position of over $208 million. More importantly, I'm pleased we concluded this half year without any major HSE incidences. Health and safety is our top priority, and we continuously strive to ensure operations are conducted in a safe and professional manner. We've also commissioned a task force on ESG that will perform a full ESG review of the group. The results of this initiative will help us improve the way we operate across the business. I now move on to Page 4, which is the operational review. The first chart exhibits a steady decline of the quarterly production over the last 5 quarters. Arresting production declines, while maintaining financial discipline, it is a constant focus of our team. Since drilling stopped in 2019, we have continued to conduct subsurface studies to identify low-risk infill drilling opportunities. Some of these will be considered for investment in the future, after post-restructuring or after restructuring that is. We are continuing the well workover intervention strategy in the field. And while the success rate has been mixed, the strategy continues to be a cost-effective way to manage the production decline without committing large amounts of capital to riskier subsurface activities. Total production for first half averaged 14,167 barrels of oil equivalent per day. Our production split remains largely consistent, 42% is crude and condensate, 12%, LPG and 46%, dry gas. Total sales volumes for the half year averaged 13,102 barrels of oil equivalent per day. Sales volumes are largely influenced by timing of condensate sales as the minimum volume is required to fill the tanker for sale. As of June 30, we had over 200,000 barrels of oil equivalent worth of inventory ready to sell in future periods. Given the ongoing situation, which in Russia-Ukraine, we are constantly monitoring the markets and the evolving situation to ensure we have sufficient alternative routes in case existing routes are blocked. At present, our export sales routes to markets remain unaffected. Our full year '22 guidance remains, as we had provided previously, at 12,750 to 13,750 barrels of oil equivalent for production and 11,500 barrels of oil equivalent per day to 12,500 for sales volumes. I now turn to Page 5, which essentially gives you what the situation opportunity look like for gearing up for the future. As you know, monetizing the 4.2 BCMA world-class gas processing infrastructure that we own and operate remains our top strategic goal. We have continued to mature dialogue with potential stakeholders and partners and are optimistic these efforts will bear fruit post-restructuring. At which point, we will be able to enter into formal commercial negotiations and contracts. And lastly, the Ural Oil & Gas project is now progressing towards the timetable, and we have begun upgrading our facilities to receive the gas from Ural field on schedule in late 2023. The tieback CapEx is around $5 million for us. And the UOG consortium earlier has, in fact, signed a turnkey contract for complex construction works to progress the field development on their end. So we remain now relatively optimistic that, by end of, say, fourth quarter or towards the end, we will have the start-up of Ural Oil & Gas field. I will now hand over to Shane, who will run through the first half financial performance on Page 6.

Thank you, Arfan. As Arfan mentioned at the start of the presentation, the first half of 2022 was a relatively successful period for the group despite the challenges and uncertainties underpinning it. We've generated strong revenues off the back of a strong hydrocarbon pricing environment despite our falling production. Q2 revenues were around $48 million, which is higher than the same period last year, but slightly lower than our Q1 performance. This is largely due to a widening Brent-Urals differential, which has widened to historical levels following Russia's invasion of the Ukraine and the resulting effects on our netbacks on crude and condensate sales. While the Brent reference price continued its upward trend to around $112 per barrel average in Q2, the Brent-Urals differential has widened to around $35 per barrel at the end of June from a pre-conflict amount of around $3 to $4 per barrel. As Arfan previously mentioned, we are working on optimizing our sales rigs for our products and corresponding netbacks for crude and condensate. So it's a benefit from the historically high Brent price environment. EBITDA was $29 million for the second quarter or $68.8 million for the first half of the year. Both of these results are respectively 10% to 30% higher than for the same comparative period last year despite having lower production. Furthermore, as a company, we benefit from having a high operating leverage. Our cost base is largely fixed, and we have done extremely well to keep those costs in check in an inflationary world. We continue to remain operationally cost-conscious despite rising prices in our supply chain, and we have maintained a healthy 60-plus percent EBITDA margin in 2022. We have a target cash operational and G&A cost base of USD 45.5 million projected for the year, and we are confident we will come in below this amount. We've continued to build cash on our balance sheet in the absence of any debt interest payments on the existing notes. The group generated over $28 million in free cash in the second quarter and overall, $43.4 million in free cash for the first half of the year. This resulted in our total unrestricted cash balances being at the level of $208.7 million as of June 30. As a reminder to our listeners, we also have $22.7 million sitting in a restricted bank account under the terms of the forbearance agreement. This reflects the cash generative nature of the Chinarevskoye field with the right capital structure in place. I note to listeners that the annual interest payments under the proposed restructuring will be between $16 million to $20 million per annum, which is a more manageable debt service level for a company of our size and performance than where we were at in the past. Moving forward, our aim remains to preserve and grow our cash reserves through continued netback optimization and cost discipline. The purpose of which will be to provide returns to our stakeholders and help fund future strategic projects. I'll now move on to Page 7 to provide listeners an update on where we're at in restructuring. At our Q1 results call, I spoke about how both of our noteholders and shareholders agreed on the terms of the restructuring through the lock-up agreement and general meeting, respectively. I also provided details on the terms of the restructuring itself. As a reminder, and in summary, we'll be collapsing our current $1.125 billion of existing note debt into $550 million secured senior notes and a $300 million senior unsecured note. The remaining portion of existing notes will be converted into up to 90% of the issued share capital of the group. The new notes will mature in June 2026, and the senior unsecured note will effectively be convertible into equity at maturity, if not repaid before then -- from the premium listing segment of the London Stock Exchange on the 31st of May. We reached a number of key milestones during the second quarter as well as in early Q3 pursuant to implementing the restructuring plan by late Q3, early Q4 of this year. On the 20th of June -- this was a significant milestone and paved the way for the next round of hearings and court dates. At the end of July, we received the necessary consents from the Kazakhstan Ministry of Energy with respect to the issuance of new shares and warrants as part of the restructuring and also the waiver of the state's priority right to acquire these new shares and warrants. Again, this was another key milestone that allowed the restructuring to progress unobstructed. In light of the Russian sanctions, regulations across a number of jurisdictions involved in the scheme, we've had to obtain authorizations and licenses to allow creditors to vote at the scheme meeting. A key license from the U.S. Office for Foreign Assets Control, OFAC, was received very recently, and this allowed us to open the scheme website to creditors to begin the voting process. The scheme voting will take place next week on the 22nd of August, with creditors able to vote by proxy or in person. To pass, a majority number representing 3/4 in value to creditors who vote in person or by proxy at this meeting is required. Given that 77.73% of creditors signed up to the lock-up agreement late last year, we expect the scheme to be approved at the 22nd August meeting. Shortly after this date, a final hearing will be held at the U.K. court where the judge will sanction the restructuring. Once the scheme is sanctioned, there will be a number of implementation documents that need to be signed and filed, including the issuance of new shares, warrants and new notes. In addition, a condition precedent to closing will be the receipt of the remaining Russian sanctions-related licenses from other jurisdictions involved in the scheme. We expect all of the mentioned items to be gathered and closed by the end of Q3 or the beginning of Q4, at which point we will finally completed the restructuring. Therefore, overall, as Arfan has said, this has been an arduous journey, complicated by a number of issues outside the group's control. However, we are approaching the end goal. Once implemented, we are confident we can turn our attention to creation of stakeholder value as we maintain financial discipline, while pivoting towards growth. This brings us to the end of the presentation. I'll now hand back to the operator to open the floor to any questions.