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

Hello, and welcome to the Nostrum Oil & Gas Financial Results for the Second Quarter and 6 Months ended 30 June 2024. 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, the CEO, joined by Petro Mychalkiw, the CFO, as our presenters. I will now hand you over to your host, Petro Mychalkiw, to begin today's conference. Thank you.

Thank you, Laura. Thank you, everybody, and good afternoon. Welcome to this call to present the financial results of Nostrum Oil & Gas for the 6 months ended 30th June 2024. My name is Petro Mychalkiw, the company's Chief Financial Officer. I'm joined today by Arfan Khan, our Chief Executive Officer. We will follow the format of the H1 2024 results presentation, which is now available on our website in the Reports and Presentations section. As usual, throughout the presentation, we will refer to the page numbers that appear on the bottom right-hand side of each page in the presentation. At the end, we will open the floor for any questions. I'll now hand over to Arfan to begin our presentation today.

Good morning, afternoon, evening, wherever you guys are. Thank you, Petro, and a warm welcome to everyone attending this call. I will be referring to information contained on Pages 3 to 6 of the presentation. H1 results has been another busy and successful period for the company. Strategically speaking, following the positive results obtained from the Stepnoy Leopard 2-well appraisal program, which support the commercial potential of the field, the company made a final investment decision for the initial development phase with a forecast total capital budget of $100 million gross. Early cash generation will also strengthen this project self-financing capacity and helps further development of the remaining resource base. A tieback project of this scale and magnitude will increase meaningfully the utilization of our 4.2 bcm processing facilities, especially when combined with additional production that we now have from Ural Oil & Gas. Following the FID, in July, we published a competent person's report on the fulfill development of the Stepnoy Leopard fields with 138 million barrels oil equivalent gross proved and probable reserves and over a fivefold increase in Nostrum reserve base from 23 million barrels of oil equivalent to 133 million barrels of oil equivalent, representing material value creation of approximately $220 million of after-tax net notes from NPV10 at 34% real return. In addition, the remaining large discovered proved undeveloped contingent resource base of 67 million barrels of oil equivalent gross across the Stepnoy Leopard fields represents a significant potential -- potentially commercial opportunity. Future subsurface work is planned to identify deeper exploration and prospective resources. Operationally, regarding the 2-well drilling program at the Chinarevskoye field, Well # 301 has been producing since May 2024, and Well # 41 completion is expected in Q3. The significant year-on-year increase in production and sales volumes reflects successful launch of Nostrum's midstream strategy to become a major third-party gas processor, starting with processing of Ural Oil & Gas feedstock in our gas treatment facility. According to Ural Oil & Gas, throughput of 1.5 million cubic meters per day of raw gas is targeted by the end of 2024. Naturally declining production from the Chinarevskoye field has been slowed down by the excess of the gas lift capacity increase, and we continue to benefit from improved LPG extraction efficiency at GTU3 by approximately 20%. Our production facilities availability was approximately 97%, demonstrating the high quality of our infrastructure and our operational excellence. Financially, the significant production sales volume increases during the period the USD 3.9 million Ural Oil & Gas condensate tolling revenues received in H1 2024 and the improvement of Brent prices between H1 '23 and H1 '24 drove the 23.7% increase in revenues from $52.8 million to $65.3 million and a 44% increase in EBITDA from $15.5 million to $22.3 million. We continue to focus on maximizing facility uptime, controlling costs and improving efficiencies across all facets of our business. Excluding one-off items, our closing unrestricted cash position at the end of June would have been $158 million, only a slight decrease from 2023 year-end cash balance of about $162 million. Regarding ESG and HSE, we continue to focus on operational safety, of course, resulting in 0 fatalities, a 0 lost time injury rate and a very low total recordable incidents during first half of 2024. Regarding ESG, in first half '24, we remain on target to operate within the permitted air emissions volumes for 2024 under the Kazakhstan Environmental Code. We also achieved an improved independent ESG risk rating of 29.2, previously it was 30.1, moving us effectively this company to a medium risk category as per Sustainalytics. I will now hand over to Petro to run through our financial performance in more detail.

Thank you, Arfan. I will refer to the information presented mainly on Pages 7 and 8. Additionally, in the presentation deck, towards the end, we have overviews of the financial statements on Pages 10, 11 and 12 with explanatory notes. We're pleased to report strong revenue performance in H1 '24, mainly driven by increases in production and sales volumes and tolling fee income from our processing of Ural Oil & Gas feedstock whilst production from our mature Chinarevskoye field continues to decline. Average daily sales volumes in H1 '24 increased by 16%, compared to H1 '23. H1 EBITDA increased by 44% year-on-year, reflecting the increased sales volumes, improved Brent pricing and Ural Oil & Gas condensate tolling revenues. Selling and transportation costs, operating costs and G&A on a per barrel of oil equivalent basis all showed a positive downward trend, reflecting the impact of increased sales and production volumes, partially offset by inflationary cost pressures, including the contractual annual indexation of our Kazakhstan payroll. We continue to leverage our existing organizational structure to advance growth opportunities and limit the need for any new head count additions for as long as possible. As Arfan has already said, net operating cash flows before nonrecurring items remain positive for the period and closing unrestricted cash would have been just over $158 million before nonrecurring items, as shown on Slide 8, a slight decrease from our 2023 year-end unrestricted cash balance of $161.7 million. Of the closing unrestricted cash balance, approximately 96% or $137 million were invested in short-term bank deposits and AAA rated money market funds to maximize our returns on cash reserves. From a balance sheet perspective, the main change during H1 has been the recurring biannual capitalization of the 13% PIK interest on our senior unsecured bonds and unwinding of the fair value adjustment that was booked at the time of the refinancing at the beginning of '23. This concludes our presentation today. And I'll hand over to the operator who can open the floor for any questions.

[Operator Instructions] We will now take our first question from Dimitry of ICE.

Do you hear me?

Yes, we can hear you.

Okay. Okay. I have several questions both current and future operations of Nostrum. The first question relates to Chinarevskoye field, just to clarify, the current guidance is 7,000, 8,000 of barrels of oil equivalent per day. And this guidance already includes contribution from [indiscernible] 2 wells in May and -- commissioned in May and expected in September. What I want to confirm, do I understand correct that even despite a [indiscernible] production except to decline like 20%, 25% versus previous year.

Petro?

I actually -- Petro here, I just lost probably the last sentence there that you said, sorry, could you...

What I see from the data on the presentation, the slides -- the current guidance is 7,000, 8,000 of barrels oil equivalents per day for Chinarevskoye field. And even despite -- this guidance already includes data from this year [indiscernible] I mean, even despite [indiscernible] the production is set to decline by 20%, 25% versus the previous year. Or [indiscernible], which is ongoing, like these 2 wells, [indiscernible] should boost somewhat the production in Chinarevskoye field?

I can hand over to Arfan, but generally speaking, the guidance is still the guidance that we're retaining for average production for the year from Chinarevskoye, 7,000 to 8,000.

Yes. I mean that's correct. Dimitry, thanks for that. Let's see. The -- we did include the -- some production from 301 in our guidance, but we had not -- we had risked out any production contribution for 41 because it carries a fairly high dry hole risk of 60% or higher. So that's why it did not really carry a significant amount of contribution into production guidance. I would say that the overall -- this is an annual average figure, the guidance that we provide. And so directionally, I think all I can tell you right now is that we should be towards the higher end of our guidance going forward.

Okay. And let's continue with the Stepnoy Leopard. In the current presentation and in the previous presentations also, the estimated CapEx for initial field development phase for over the next 2 years, 2025, 2026, it's about like $100 million growth. Is it correct, yes?

Yes, that's correct. That's the current budget.