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

Hello, and welcome to the Nostrum Oil & Gas, Full Year Results for the year-ending 31 December 2023 call. My name is Laura and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions]. Today, we have Arfan Khan, Chief Executive Officer; and Petro Mychalkiw, Chief Financial Officer, as our presenters. I will now hand you over to your host, Petro Mychalkiw to begin today's conference. Thank you.

Thank you very much, and good afternoon, everybody. As usual, throughout this presentation, we will refer to the page numbers on the bottom right-hand side, of our full year results presentation, which is available on our website in the Reports and Presentations section. Firstly, I will hand over to Arfan Khan, our Chief Executive Officer.

Thanks, Petro, and a warm welcome to everyone. Let's see, as Petro said, you can see follow me on Pages 3 and 4. 2023 was a busy and critical year for the company. I'll start with focusing a little bit update to you on the strategic and operational aspects. Then I'll touch on financial topic and cover some details there and wrap up with HSE. On the strategic and operational side, last year, we successfully completed the restructuring of our bonds, providing the financial stability needed to deliver on our new mixed asset energy strategy. We diversified our upstream business through the acquisition of the Stepnoy Leopard fields followed by a 2-well appraisal program in Q4. The well appraisal operations are nearly complete. And as we had released in the RNS, a significant data has been collected across a log interval of circa 50 meter net pay. The flow rate and pressure buildup test confirm high well productivity. And so we believe that the results are positive and support the commercial potential of the field. And based on this in March of 2024 this year, we made a final investment decision for the initial field development phase of the Stepnoy Leopard fields with a forecast total cap budget of $100 million gross. Certainly, our goal is to get a fast track start-up of production in late 2026, which will provide early cash generation and it will strengthen our self-financing capacity and help spur for the development of the remaining resource base. A tieback, as you know, of this scale and magnitude will also increase meaningfully the utilization of our 4.2 bcm processing facilities, especially when combined with the additional production, as you already know from Ural Oil and Gas that commenced in Q4 of 2023. Further, we commenced a 2-well drilling program at the Chinarevskoye field. As you know that's a mature currently producing field. The well #301, first well of the 2 program -- 2-well program, reached a depth of 4980 meters has been drilled on time line and budget and is waiting completion operations, which start up expected mid-2024. It had multiple infill targets across the Carboniferous and Devonian age reservoirs, hydrocarbons, oil, gas condensate were encountered across 3 key intervals. And the results are broadly in line with the company's expectations of initial well rates of between 400 to 700 barrels of oil equivalent per day. The drilling rig will -- is, in fact, in the process of moving over to the next well, which is the #41, and we expect to spud early May and start up probably in Q3 of 2024, if successful. These 2 wells, both of them are successful, allow us to convert our 2P reserves to a PDP who develop producing, while also complying with [indiscernible] PSC obligations. The annualized production decline of 24% was greatly improved also by the -- by maybe 5% to 6% due to the successful and safe startup of our new compressor, which doubled our overall field gas lift capacity. And these are aging. We have aging wells and this new compression, they basically injected new life into our old wells, and we've seen some really good performance so far. Furthermore than we successfully commissioned and delivered safe start of -- restart of our $750 million state-of-the-art GTU-3 gas plant and demonstrating our commitment to innovation and operational excellence, and GTU-3, in fact, is providing improved efficiency in the extraction of LPG by 15% to 20%. The plant GTU-3 was also -- we has improved turndown capacity as well threshold, by installing a recirculation system, we can, in fact, produce the plant at a much lower rate. Last year also represented a notable advancement in Nostrum's midstream strategy, with tie-back of Ural Oil and Gas versus Chinarevskoye field. And processing the first ever third-party feedstock in our gas treatment facility. According to UOG, initial flow rates from their well were on the order of 0.3 million cubic meters per day of raw gas and UOG plans to connect additional 4 wells due to second half '24, with a potential combined throughput of reaching 1.5 million cubic meters per day of raw gas. That sort of a thumbnail of the strategic and the operational highlights financially year-on-year 24% decline in average daily production volumes, the weaker Brent price compared to 2022 and our relatively fixed operating cost meant that our reserves reduced -- our revenue is reduced by 40% and our EBITDA reduced by 64% year-on-year in U.S. dollar terms. The revenue reduction would have been substantially larger had we not intervened an intervention with gas expansion program and our improved offtake arrangements, which would improve our netbacks greatly. We continue to remain focused on maximizing facility uptime, while controlling costs where possible and improving efficiency across all facets of our business and that did indeed result in $23 million of positive operating cash flows before the one-off items. And this remains obviously a paramount importance for us to make sure that our operations remained viable and able to cover its operating costs, not only that to generate any positive cash flow that we can use for our growth projects. With the extraordinary items of $25 million paid on completion of the bond restructuring and a $19.3 million payment for 80% stake in Positiv Invest LLP, together with $26 million prior year tax audit payment led to decrease in our estimated unrestricted cash balances to $161.7 million from $233.6 million over the course of the year. Excluding these one-off items, it is noteworthy that our closing unrestricted cash position would have been $230 million compared with $233 million at the start of the year. So overall, I think we delivered on our promises in relation to performance and improving the top line as much as we can. On HSE and ESG side, whilst we have upheld an exemplary safety record over the past 4 years, with no fatalities reported during operations. I do regret to report a tragic incident in '23, resulting in a contractor fatality during routine maintenance while working on a high 10-meter high station platform, unfortunately fell through a missing guardrail. This loss is deeply felt and serves as a stark reminder of the criticality of fostering continuously safety as a core value. Following this instance, we conducted thorough investigations and have taken further measures to strengthen our occupational safety rules and oversight, specifically in relation to strict adherence to our permit to work system. The entire senior leadership team remains engaged at the grassroot level, placing a high priority on winning hearts and minds and helping to promote a mindset of continuous improvement in the journey to achieving our collective goal of zero incidents. Regarding ESG in 2023, we further strengthened our ESG task force, enhanced our independent sustainalytics ESG risk rating to 30.1%, positioning Nostrum in the top 20 companies in sustainalytics oil and gas exploration and production sector. With that, I will now hand over to Petro to run through our financial performance in more detail.

Thank you, Arfan. I'll be referring to Pages 6 and 7 in the presentation deck. Also on Page 9, 10 and 11, there are extracts from the full financial statements with some explanatory note. As already mentioned by Arfan, the sales declines in our Chinarevskoye field, softening Brent prices year-on-year and the largely fixed operating cost base, payroll and materials cost inflation, we saw a 64% reduction of EBITDA from $116 million in 2022 to $42 million in 2023. And indeed, that reduction would have been starker as Arfan has already mentioned, but were not implemented the gas lift expansion program and addressed and improved our offtake arrangements. Our selling and transportation costs in U.S. dollars per barrel of oil equivalent, reduced by 14%. The improvement reflects change in offtake destinations and offtake terms. Operating and G&A costs combined increased year-on-year by 16% in U.S. dollar terms and by $3.60 per barrel of oil equivalent. This is mainly driven by a number of factors. Firstly, increases in our payroll costs, mainly attributable to contractual indexation of our Kazakhstan payroll, which occurs every year at the start of each year. However, it's noteworthy that the company is leveraging its existing organizational structure, to advance all its growth opportunities, such as Ural Oil & Gas processing, Stepnoy Leopard appraisal and project development to avoid the need for new head count for as long as possible. Well repair and maintenance costs increased year-on-year, driven by ongoing and ad hoc requirements for works on wells, in order to maintain production of the current natural decline rates without any additional losses. These costs will, of course, vary year-on-year depending upon operational needs. In addition, raw material costs and professional service costs increased year-on-year, again, mainly driven by inflationary pressures. Although significantly reduced compared to 2022, our operating cash flows, excluding nonrecurring items, where indeed, as Arfan has explained, positive at approximately $23 million. That was sufficient to fund for current year corporate income tax obligations, 2023 CapEx and our bond coupon payments. Our unrestricted cash balance at the end of '23 was $161.7 million but excluding the one-off items would have been $230 million compared to $233 million at the start of the year. So I think overall, in cash terms, excluding the one-offs, a very encouraging performance despite adverse headwinds in crude prices, declining production. Our restricted cash balance at the end of the year was $25.2 million. That's comprised of $16.5 million in the debt service reserve account and $8.7 million held in our asset liquidation from the accounts under the terms of the -- our PSA. As you can see from Page 7 of the presentation, the impact of our one-off items in 2023 results were significant in terms of earnings and cash flows. Those items fall into 3 main categories: debt restructuring costs, tax audit payments and the acquisition cost of our 80% stake in Positiv Invest LLP, to license order of the Stepnoy Leopard fields. Of course, the debt restructuring costs incurred resulted in a significantly improved balance sheet. The positive invest acquisition costs and subsequent appraisal program costs allowed us to reach a final investment decision in March 2024 for the initial development phase of the Stepnoy Leopard fields. Regarding the tax audit assessment, tax legislation is often updated in Kazakhstan. And can often be subject to some uncertainty and differing interpretations, that we continue to limit any unplanned tax exposure through a solid risk management strategy involving appropriate external advice. From a balance sheet perspective, the capitalization of our Positiv Invest acquisition costs. The capitalization of the Stepnoy Leopard appraisal costs and the reduction in our cash balances drove the overall $71 million reduction in total assets. There were no asset impairments or impairment reversals during 2023. The $945 million reduction in total liabilities is mainly attributable to the $925 million reduction in our bond liabilities, following the bond restructuring completed in February 2023. As a result of that restructuring, our annual cash coupon payments have reduced from approximately $86 million per annum to $16 million per annum. This concludes our presentation today. And I will ask the operator to open the call to Q&A.

[Operator Instructions] We'll now take our first question from Charlie Sharp with Canaccord.

A couple of questions, if I may. Firstly, often, you mentioned the increased utilization of your processing facilities at Chinarevskoye with UOG and Stepnoy Leopard development. Can you give an idea -- I know it's early days, but can you give an idea of where that utilization might sit in 3 years' time, let's say, when Stepnoy Leopard has come on stream and has sort of bedded in? That's one general question. And the other one is on Chinarevskoye itself. With the drilling results you've had so far and hopefully more to come from the second well, do you think that maybe there is scope for further such campaigns in future years, maybe a couple of wells a year to redrill and bring back on stream?