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

Good day, and welcome to Nostrum Oil & Gas H1 2023 Financial Results Call. My name is Krystaline, I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, Mr. Ulugbek Makhmadiyarov 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 second quarter and half year ended 30th of June 2023. I'm Ulugbek Makhmadiyarov, the Head of Finance at Nostrum and I'm joined on the call today by Arfan Khan, our Chief Executive Officer; and Petro Mychalkiw, our Chief Financial Officer. We will be following the presentation of our 2023 2nd quarter and half year results that's available on our website in the Reports and Presentations section. As usual, throughout the presentation, we'll be referring to the page numbers that appear on the bottom right-hand side of each page and at the end, we'll open up the floor for any questions. Now let's turn to Page 3 of the presentation. And now I hand over to Arfan who will provide some opening remarks.

Thanks. Hello, everyone. Good afternoon. Thanks Ulugbek. Welcome to our 2023 half year financial results call. First of all, I would like to welcome and introduce Petro Mychalkiw, our Chief Financial Officer. Today is Petro's second day with Nostrum, so we couldn't ask him to present our financials today. So please go easy. I'll now hand over to Petro to introduce himself to our investment community.

Thank you, Arfan, and hello, everybody. Thank you for joining our half year results call today. As Arfan mentioned, I joined Nostrum as the new Chief Financial Officer yesterday, 21st of August. And I'm joining this call from Astana and Arfan is in Astana too. As you may have seen from the company's announcement, I'm a chartered accountant with over 17 years of experience leading finance teams within the natural resources industry, including both oil and gas businesses and mining and metals companies. I have extensive public company experience and first-hand experience of E&P operations working in Kazakhstan. It's good to be back in Astana, so I look forward to working with the Nostrum team to execute our mixed asset energy strategy launched this year to capitalize on the advantage position of our existing infrastructure and attract third-party volumes. Thanks again for joining the call, and I will now hand back over to Arfan.

Thank you, Petro. So let's get into it. A summary of the key strategic financial and operational highlights for H1 '23 are set out on Page 3. The main strategic topics, let's see, as you all know that following the completion of the financial restructuring in Q1 with a healthy balance sheet, cash reserves 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. And in Q2, we made considerable progress in this journey, which I will talk further in detail. On the financial highlights on Page 3, the average production and sales volumes were over 10,000 barrels of oil equivalent per day and 9,000 barrels of oil equivalent per day respectively. With these volumes, we were able to generate about $53 million in revenues in first half, whilst our EBITDA was around $15.5 million or $16 million at 29% margin during this period. At the end of this period, we had $192 million unrestricted cash balance, which is a solid base to invest into economically favorable strategic projects. On the HSE side, the safety of every person, as always, working for Nostrum has been at the top of our priorities, and we're pleased to report zero fatalities among employees and contractors, zero lost time injury. And one total recordable incidents during operations in first half of '23. On the emission side, we had 2,200 -- roughly 2,300 tonnes of air emissions in first half '23 against 6,300 tonnes permitted for '23 under the Kazakhstan Environmental Code. We are continuing to progress our disclosure policies around Scope 3 and continue our journey on the ESG with hopefully a year-end assessment plus analytics. Moving to operations summary on Page 4, following the end of the reporting period, we completed the acquisition of an 80% interest in Positive Invest which holds a social and use right for the Stepnoy Leopard fields. We estimate that the Stepnoy field holds between 50 million to 150 million barrels of recoverable volumes, which are considered contingent resources at this moment, with 20% or so of estimated to be in liquids. As we announced earlier, we launched an appraisal program with the intention of preparing a technical expert support, which could allow reclassification of certain of the hydrocarbon resources into reserves. We have also successfully launched the expansion of the gas lift system, which was funded, if you recall, last year, with the new compressor effectively doubling the compression capacity, which will -- is definitely going to help us slow the decline of production from the maturing field at Chinarevskoye. The initial production gain so far are exceeding our expectations. Further updates of that, we'll be able to provide as part of our Q3 '23 operational update. Also, as announced previously, the GTU3, with 2.5 bcm of gas process capacity. And that was the other project that we kicked off last year for commissioning a restart. And I'm happy to report that project is progressing as scheduled as per the plan. And from Q3 '23, we'll be switching all of our gas from the existing GTU1 and 2 into 3, to essentially test the efficiency of the plant as well as the effect on the LPG performance, especially with our turbo expander and are also operating within as part of the GTU3 process. We are continuing with our well and reservoir management strategy through the well workovers and rigless well intervention. And then in addition, as announced yesterday, the Board approved the limited-scale drilling program for the Chinarevskoye field to be executed over '23-'24 time frame. The program will leverage existing wellbores to reduce costs, new drill well costs will be much more significant. But using the existing wellbores will save us a significant amount of cost. And it does carry a level of uncertainties, risks as the plant subsurface targets contained multiple exploration appraisal and development objectives. The total cost program is estimated at around $26 million. And lastly, the Ural Oil & Gas tieback project is also in progress and actually making good progress on that, budgeted for around $5 million of capital expenses on our end of the scope. Of course, Ural O&G has its own large-scale scope that they are in the execution phase on with a tieback directly tied into our Southern Manifold at the Chinarevskoye facilities. It will allow for the first ever third-party feedstock to be receiving for processing in the group's facilities with an expected start in Q4 2023. That more or less summarize my operations. I will now hand over to Ulugbek to run through the financial performance.

Thank you, Arfan. Now if we move on to Page 5 of our presentation, which is the last one for today, we can see the trends in Nostrum's key financial indicators over the past several quarters. The financial performance of the company during second quarter and half year 2023 was relatively stable, say for a couple of one-off items such as payments resulting from the tax audit of past years as well as the payments and completion of the restructuring, which everybody is well aware of. These are highlighted on the slide. Production and sales volumes were as expected, as Arfan mentioned, during the period, contributing to a declining -- this contributed to a decline in all of the financial indicators. However, revenues were relatively even lower in Q1 due to the transition of -- to the new offtake agreement and deliver destinations. But relevant volumes were accumulated in stock and then were realized in second quarter. Hence, we see the revenues recovering. Overall, H1 revenues are lower in comparison to last year's first half due to lower sales volumes in line with the expected production decline from maturing fuel and also compounded with lower average commodity prices. For example, average Brent price was around $80 per barrel during half year '23 which compares to around $105 per barrel on average share during the last year's half year. However, we managed to partially offset this decrease due to pricing through active measures that company took against the widening Euro spread through switching to alternative export routes. As you may see further on the next chart on the slide, EBITDA and EBITDA margin have been declining over the past quarters with a one-off decrease again in the first quarter due to above-mentioned transition to new offtake agreements. However, half year combined EBITDA was $15.5 million with 29% margin. Now moving on to cash flows. As previously reported, in first quarter, we saw a net operating cash outflow of $21 million which was primarily due to the significant tax payments of around $20 million in relation to previous tax year. And overall net free cash outflow of $42 million, resulting from the payments of around $26 million on completion of the restructuring, including interest accrued from 1st January 2022, and the lockup fees. However, in second quarter, the company managed to maintain cash reserves and operate at a breakeven from a cash flow perspective. This -- we can follow from the cash balances chart on the lower right-hand side of the slide. It's not unexpected, but in the near term, the company will continue to see declining revenues primarily due to declining production from Chinarevskoye field, unless the commodity prices, of course, rebound substantially. Hence, the company may need to utilize some of its existing cash reserves for investing in prospective new projects and activities such as Stepnoy Leopard acquisition and appraisal development or a drilling program on Chinarevskoye field. While any benefits from such investments will not be seen until mid-2024 at the earliest. Respectively, the company will continue focusing on custom to-do optimization as a high priority to maintain its cash reserves as much as possible. It should also be noted that although OpEx and G&A expenses remain more or less on the same level, the company continues on its cost optimization journey, which is now reflected in curtailing any cost increases required to develop in new projects such as Stepnoy Leopard and Ural Oil & Gas through the allocation and leveraging use of all resources for such needs. 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 to the operator to open the floor for Q&A.

[Operator Instructions] We will take our first question from Charlie Sharp from Canaccord.

Just a little more questions perhaps on Stepnoy and Chinarevskoye operations, particularly, of course, the new drilling on both of those. And I wonder if you can give a little more information on the timing of the results from the wells. What in your mind, would constitute success? And how might that shape future activity? I know that there's a lot of sort of uncertainties around all of those wells but perhaps you could just flesh out how you would envisage the future developing in the event of success.

Yes. Thanks, Charlie. Maybe I can, Ulugbek, take this question a little bit. So on the Stepnoy, what we have is effectively an appraisal campaign to confirm certain parameters of the reservoir, which will then be used for us to mature and optimize the development scheme that we would move forward with on Stepnoy so that's a long-term project maturation effort. From Chinarevskoye drilling program, of course, we're drilling into existing reservoirs, where we have production and some of these reservoir's, the targets in the subsurface are a bit step out from where we have existing production wells. So it will extend potentially -- if successful, it will extend the producible area of the reservoir. So from that perspective, it has the potential to add additional PDP developed reserves. But again -- but these are -- because we're stepping out, there would be uncertainties and there will be risks, of course, associated with that. And then some of the targets also have an appraisal element to it, semi-exploration appraisal element so if it proves based on -- because we are drilling some more based on seismic. So if it proves those amplitudes to be hydrocarbon bearing and potentially it could potentially open up additional drilling opportunities. But these are still -- will be, again, not going through -- it will add potential for adding additional production, but we don't see any opportunity there that is dramatically going to reverse the production slide or somehow to slower the production slide back much above where we are today. So I do think that it has the opportunity to both -- the downside risk is there but also unlock some upside opportunities.

That's great. And I'm just -- one follow-up, if I may, on the Ural Oil & Gas. Could you let us know exactly where you are in terms of your investments in the Ural's investments in terms of pipeline and additional work on your facilities? How close are you to completion of both of those?