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

Hello and welcome to the Nostrum Oil & Gas Full Year 2022 Results. My name is George, and I'll be coordinator for today's event. Please note this conference is being recorded. [Operator Instructions] I'd now like to turn the call over to your host today, Mr. Ulugbek Makhmadiyarov, the Head of Finance at Nostrum, to begin today's conference. Please go ahead, sir.

Thank you. Good afternoon, everyone. Welcome to this call to present the financial results of Nostrum Oil & Gas for the 12 months ended 31st December 2022. I'm Ulugbek Makhmadiyarov, the Head of Finance at Nostrum. I'm joined on the call today by Arfan Khan, our Chief Executive Officer. We will be following the presentation of our 2022 full year results that's available on our website in the Reports and Presentations section. As usual, throughout the presentation, we will be referring to the page numbers that appear on the bottom right-hand side of each page. And at the end, we will open up the floor for any questions. Let's turn to Page 3 of the presentation. And now I hand over to Arfan, who will start with some opening remarks.

Hello, everybody. Thanks, Ulugbek. Welcome, everyone, to our '22 full year results call. Summary of the key strategic financials and operational highlights for full year are set out on Page 3. I'll start with the -- an overview of some of the strategic aspects that we've been looking at. Having completed the restructuring in early '23 with a healthy balance sheet, cash reserve and a new high-caliber Board. Nostrum has entered a new stage of its development that we call Nostrum 2.0 and launched our mixed-asset energy strategy to capitalize on the advantaged position of our existing infrastructure and attract third-party volumes. On Slide 4, essentially, it's an infographic that illustrates the -- our 4.2 bcma facility GCU and 4 key upstream midstream assets that we'll be looking at to source the gas from. And Nostrum has been a single-asset company for a long time at the Chinarevskoye field. And I'm pleased to say that we have, in fact, succeeded already in transforming it from a single-asset to a mixed-asset company by adding another upstream field, which you are aware is Stepnoy Leopard, sanctioning last year, the upcoming start-up of the midstream tieback project by Ural Oil & Gas, the Rozhkovskoye field. And we have also completed an internal feasibility assessment of a possible midstream project from the Karachaganak field. In March 23, we agreed to acquire 80% of positive invest for $20 million. We estimate that the Stepnoy Leopard fields hold between 50 million to 150 million barrels of oil equivalent recoverable volumes, which presently are classified as continued resources. Upon completion of the proposed acquisition, we plan to implement appraisal programme, later 2023. So that's a bit of a strategic overview. On the financial highlights side, average production and sales volumes were 13,200 barrels of oil equivalent per day and 12,524 barrels of oil equivalent today, respectively. With these volumes, we were able to generate close to $200 million in revenues while improving our EBITDA margins by circa 33% that helped maintain free cash flows of $68.3 million during this period. We ended '22 with $233.6 million in cash, which is a solid base to invest into economically favorable strategic projects. I would like to jump to Page 5 now, where I would like to give you a bit of an update on the operations -- from operations of the Chinarevskoye field specifically. And so we'll -- I'll cover Chinarevskoye and Stepnoy as part of the upstream portfolio and then later the -- UOG, Karachaganak as part of the midstream portfolio. The Chinarevskoye field, as expected, our production has continued to decline from the maturing primary reservoirs with a decline averaging 23% annually over the past 3 years. As you know, Nostrum stopped drilling in 2019 after significant subsurface failures. Further, the primary producing reservoirs also experienced premature water breakthrough, rapidly rising water cut and pressure depletion. The majority of the producing wells require gas lift to sustain production and to reduce abandonment pressures as high as possible water cut. Even some of the gas wells are now being placed on gas lift to help remediate waterlogging a boom hole. To keep up with the rapidly rising demand for gas lift, our compressors have been operating near their design limits with combined capacity of 500,000 cubic meters per day. Early in '22, we funded the addition of further compression to raise the capacity to 900,000 cubic meters per day for circa $8 million to help safeguard the production against equipment failures and to keep wells from going off-line. The delivery of the new compressor experienced significant delays due to Russian sanctions, and this has created significant challenges for the production technologies and judicious allocation of gas lift to optimize production. After a nearly 9-month delay, we expect the new compressor to start up in Q3 '23, and that should start to help our -- so certainly, most of our wells that have water cut, that additional gas lift will help sustain their production. Lastly, our capital workover program that targets behind-pipe proved-undeveloped reserves has been largely exhausted. The focus of the well intervention campaigns in the field has shifted to well surveillance and maintenance, including corrosion management and well integrity management. We do keep on standby both a workover rig and a qual tubing unit to mitigate delays in reacting to well failures. Slowing the production decline with best-in-class well and reservoir management while maintaining cost discipline remains a constant focus of our team. We succeeded in holding our costs flat or slightly lower and delivered exceptional OpEx and G&A performance against mounting geopolitical pressures on supply chain and inflation, and you're well aware of that. Operations also delivered production system availability of better than 98% with under 5% production deferment. Our exports were executed without interaction despite the Russia-Ukraine conflict and delivered circa 4.6 million barrels of oil equivalent in sales volumes. To protect and improve our netbacks, we renegotiated the sales price and completed new offtake agreements for crude and condensate. In '22, we also initiated subsurface studies to update the geologic and reservoir models with the additional information gained since 2019 and completed reprocesses of the 3D seismic. This is over the Chinarevskoye field. This work will also be used to determine low-risk reservoir infill targets that will enable the company to resume limited scale of drilling operations later in 2023. And that will be targeting the 1P and 2P reserves of 20.2 million and 28.3 million barrels of oil equivalent, respectively, as of December 31, 2022, as completed by the RyderScot audit report. So if I could just -- so that's sort of summarizes the Chinarevskoye field production operations activities. I'd like to jump back on to Page 4, where we can touch on the Stepnoy Leopard field and its -- how will be linked to our main facilities at Chinarevskoye as well as the midstream projects. The Stepnoy field post completion of our acquisition will undergo a principal campaign later this year. And following that, we will evaluate a broad range of developing concepts that will include a smaller-scale early production system for fastest production start-up, the full field development requiring installation of the tieback infrastructure to our existing facilities. Stepnoy Leopard located by 100 kilometers west of our world-class for process infrastructure. The field is potentially an attractive Nostrum upstream tieback project that could deliver material reserves addition to the group's rapidly depleting resource base at Chinarevskoye field. So this is -- we see that as a very strategic acquisition and will ensure long-term supply and source of [indiscernible] to our processing field infrastructure. And we'll provide more updates as we complete our -- both the completion of the acquisition as well as the appraisal campaign. Switching to the midstream portfolio, which is the Rozhkovskoye field, about 20 kilometers Southwest of our infrastructure offered by Ural Oil and Gas. In 2022, we sanctioned the midstream project at $5 million that connects our process facilities at the Southern Manifold to the tieback infrastructure that is under construction by Ural Oil and Gas. First gas from the Rozhkovskoye field is expected in Q4 2023 with ultimately 5 wells producing ramping up to potentially 0.02 -- 0.2 to 0.5 bcma of production. Nostrum will process the gas under the process agreement that covers gas, LPG and condensate. This inaugural midstream project demonstrates the efficacy of our mixed asset strategy. And lastly, the additional midstream opportunity that we're looking at, which is, I think everyone in the world knows about it, is that we are about 100 kilometers northwest of the giant gas field, which is Karachaganak, operated by KPO. Full utilization of our 4.2 bcma gas process facilities will require additional third-party raw gas sources beyond what is currently available from the Chinarevskoye, Stepnoy Leopard and Rozhkovskoye fields. We have been conducting internal technical electronic evaluation of potential tieback concepts, concepts from the Karachaganak field that currently produces over 18 bcma with half of such gas injected for liquids recovery as sort of a gas recycling project, and half is exported to the Orenburg plant in Russia. So this presents a material opportunity to capitalize on our 4.2 bcma gas process facilities. With the rapidly rising demand for commercial gas expected to double by 2030, we believe that our underutilized 4.2 bcma state-of-the-art gas plus infrastructure can provide an immediate solution as well as make a significant contribution to Kazakhstan's long-term gas patient scheme. I would like to -- so that sort of wraps up the strategic part of it, the operational aspects and, of course, the financial aspect. I'd like to close with some comments on our safety performance, which is summarized on Page 6. The safety of every person working for Nostrum has always been at the top of our priorities. 2022 marks the fourth consecutive year with 0 fatalities among employees and contractors during operations. The year 2022 brought many important milestones in improving ESG, including our ESG task force, which got kicked off in '22. And the task force has been working closely with Sustainalytics, an internationally recognized rating agency, which performed a full ESG review of the company. And as a result, we received the first ESG Risk Rating of 40.5, which is only about 0.5 from moving into a high-risk category, which is -- which for us is a significant achievement. In 2022, our greenhouse gas emissions were reduced from 187,000 tonnes to 170,000 tonnes emissions in CO2 equivalent in the year, which is considerably ahead of Kazakhstan's national greenhouse gas plant. We are fully committed to strengthening our ESG performance and being part of the solution for Kazakhstan's strategy to transition to cleaner energy and achieve carbon neutrality by 2060. This kind of wraps up my quick summary, and I'll be happy to answer any questions. In the meantime, now let me hand over to Oliver please to run through our financial performance.

Thank you, Arfan. Looking at Page 7 of our presentation, I would like to quickly recap a summary of our post-restructuring position. Over the past 3 years, the company went through an onerous process of restructuring its $725 million senior notes due July 2022 and $400 million senior notes due February 2025. As you are well aware, the restructuring was completed in February 2023 and included the partial exchange of a portion of those legacy notes for new $250 million senior secured notes and $300 million senior unsecured notes and conversion of the remainder of the old notes and accrued interest into shares. Also, as part of the restructuring warrants we issued, a new corporate governance requirement is implemented. Details of those are described in our annual report. Implementation of the restructuring has helped the company to optimize its balance sheet and reduce the cash debt servicing requirements from $86 million to around $16 million to $17 million annually. This enabled us to maintain liquidity and focus on future growth and unlocking the full potential and value of the company's existing infrastructure funds and acting in the best interest of our investors and other stakeholders while strengthening the energy security of the region. Now if we pay -- if we turn to Page 8 of the presentation, which is the last one for today, we can see dynamics of Nostrum's key financial indicators over the past 3 years. The financial performance of the company during 2022 was stable with positive results despite macroeconomic volatility and natural decline in production, as mentioned earlier. Such results were achieved by virtue of tailored product prices throughout the year as well as strong cost discipline maintained throughout the organization during the year. For instance, Brent reference prices remained relatively favorable during 2022, averaging around $100 per barrel. And at the same time, OpEx plus G&A cost base has been further optimized down to $43.1 million, which is almost 2% lower compared to previous year, 2021. This helped the group to offset the production decline and impact, and nonetheless, increased the revenues in 2022 by 2.3% compared to previous year and record almost $200 million of revenues, resulting in EBITDA of $115 million also increased by almost 3% compared to last year and with a healthy margin of almost 58% of revenues. These results could have been even better if not for the brand or differential worth noting, which fluctuates between $3 per barrel at the beginning of the year and the highest level of almost $35 a barrel in the middle of the year. This has a corresponding negative impact on the crude oil and condensate revenues in 2022. We've analyzed the alternative export routes with export prices unrelated to EOS quotation for oil and gas condensate supplies and met all necessary efforts to address this widening euro spread?. On the basis of the above mentioned, as you may see, the company added further $68 million in net cash to its understated cash balance reserves and ended the year with almost $234 million of cash. This includes, of course, the $22.8 million held in an escrow account at that date. The strong cash flow performance, combined with the successful restructuring of existing debt in early 2023, put the company in a strong position to be able to invest in economically favorable strategic projects. Moving forward, our aim remains to preserve and grow our cash reserves, to provide returns to our stakeholders and help fund strategic projects. This concludes our presentation today, and I pass the word back to our operator to open the floor for Q&A. Thank you.

[Operator Instructions] First question today is coming from Michael Jivkov from Argo Capital Management.

Two questions. Firstly, when will the Nostrum shares relist for trading on the London Stock Exchange? And second question is, what would the total CapEx be to connect the Karachaganak field to the Nostrum gas processing facility?

I can take the first question, Arfan, and then maybe the second one, if you could comment.

Yes, that sounds good.

With the results released today, the company to submit a request for lifting the suspension of the shares, and we expect that timing to happen early next week.

Okay. Thanks for the question about Karachaganak. The work that we're doing really is internal, the company in terms of looking at various options, tieback strategies and volumes and whatnot. So it's a very broad range of solution space and -- when we think about the tieback possibility. And it's all being done internally at the moment. So I'm very sorry, but I wouldn't be able to give a precise figure to the market as this is something that is still very much internal work that we're doing.

[Operator Instructions] We have a question coming from [indiscernible] from Stifel.

I have a couple of questions. The first one is about CapEx overall for Nostrum. If you can give us guidance for this year, where do you see CapEx and also the split of this CapEx. You have -- that's the first question. The second question is about Stepnoy Leopard and the related CapEx for Stepnoy Leopard, not necessarily just for this year but overall. And also, if you can comment on your production expectations this year and where you have seen production in the second quarter, but also in the first quarter this year. And finally, on the Karachaganak, have you started negotiations with the Karachaganak consortium? If yes, where you are in this negotiation? If no, when do you plan to approach them?

Sure. All good questions. Let's see. Let me start with Karachaganak because we just covered that topic. The -- this is all internal work, and so we will be -- this is anything we do regarding progressing further -- unlocking further gas -- domestic gas supply or commercial gas supply will likely require a heavy involvement of the state. And I think those discussions have not really yet begun, and we hope to engage in those discussions sometime this year. But I can't be overly -- I can't guarantee you. But that's -- that will be our plan is to begin those discussions this year sometime. Now coming to Stepnoy Leopard, the acquisition is still not closed. So I would probably hesitate in laying out any kind of a specific CapEx program at this stage, but be happy to do that after we close the deal and we are, in fact, moving forward with a clear plan. We do have a clear plan, but we'll be able to share more on our development concepts that we're looking at. There is a $20 million acquisition, of course. And the appraisal program that we will conduct on Stepnoy Leopard, which will help us with sort of making concept selection concerning field development, it will not be -- it will be less than $10 million to carry out the fluid sampling, dynamic testing, reservoir connectivity assessment, key sort of input parameters for carrying out different development scheme analysis. One of the things that we're certainly looking at is an early production scenario, which can -- which gives us the fastest, shortest time to start up and require a lot of major infrastructure installation. We can bring mobile skids to deploy on the field. And we're not far from our export terminal at Dallas, where it's about 10 kilometers from the field. So we could potentially look at an early production system scenario, a liquids-focused strategy as part of Phase 1 and then moving to a full infrastructure tieback to our existing as part of Phase 2. So those are all concepts that we -- all the concepts that we are looking at and, of course, will firm up with the additional sales of data that we'll acquire later on this year. Moving back up, you wanted to know about the guidance on production. We have provided 9,000 to 10,000 barrels of oil per day guidance. I believe our first quarter was a little bit above 10,000, and we'll see how we actually play out on our guidance once we have more confidence in terms of which end of the range we'll end up with on the year once we have our compressor addition for the operational because that's really critical at the moment. So we are averaging about 10,000, but how this will move forward, will depend a lot on getting that compressor online. So at the moment, I would still continue to guide between 9,000 and 10,000 without really giving you a whole lot of comfort whether it will be reaching the spectrum it will be. You asked about capital allocation, right? Something about the capital program for '23?

Yes.

Look, I mean, the thing is that some of the capital and stuff acquisition and making sure we continue to complete our UOG project construction work, we still have about $4 million, $5 million -- $4 million left to complete to spend this year. And the compressor, obviously, will require -- has an $8 million price tag. We'll continue to spend -- make sure we spend the rest of that this year. And then, of course, we are also commissioning our GTU3, which will also require $4 million to $5 million. So we have a small amount of capital that we are able to allocate without any issues. Major capital commitment will only occur once we have the midstream projects really any major agreements. If we conclude those, then we will start to firm and load those projects with capital from engineering, long equipment, et cetera. We may look at longer equipment orders on Stepnoy Leopard, if it's in a success case. We wanted to do a fast-track development, fast-track start-up. Then we may be looking at some sort of long lead items that we would commit to towards before the end of the year. But the quantum of those are really hard to give you a whole lot of sense of. I don't think they'll be large, but there will be some that will require early commitments on these additional new projects.

Fair enough. So it's about $15 million, $20 million of CapEx and then additional $10 million for the appraisal work on Stepnoy Leopard?

I think so. I think that's probably -- again, that's -- you can't hold me to that because this is still very much work in progress, yes?

No. Fair enough. And when do you plan to close Stepnoy Leopard?

Well, there are a number of CPs that we -- that need to be completed. And so we have a long stop date of June 30. And so everyone is working around the clock to get the CPs wrapped up.