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

Hello, and welcome to the Nostrum Oil & Gas Full Year Results for the year ending 31st of December 2024 Conference Call, hosted by Arfan Khan, CEO; and Petro Mychalkiw, CFO. Please note, this conference is being recorded. [Operator Instructions] I will now hand you over to Petro Mychalkiw to begin today's conference. Thank you.

Thanks, [ Francois ] and good afternoon, everybody. Welcome to this call to present the financial and operating results of Nostrum Oil & Gas plc for the year ended 31st December 2024. My name is Petro Mychalkiw, the company's Chief Financial Officer. I'm joined today on the call by Arfan Khan, our Chief Executive Officer. We will follow the format as usual of our full year results presentation available on the website in the Reports and Presentations section. As usual, through this presentation, we will refer to page numbers that appear on the presentation slide deck. I'll now hand over to Arfan to begin our presentation.

Thank you, Petro, and a warm welcome to everyone joining this call. I hope everyone can hear us okay. Please refer to the information contained on Pages 3-6 of the presentation. Just a quick summary. 2024 has been yet another busy and successful year for the company. We delivered strong operational and financial results. We advanced our mixed asset strategy and solidified our position as a major third-party gas processor in Kazakhstan. On the strategic highlight side, Nordstrom achieved significant Stepnoy Leopard project milestones during '24 and early '25. April '24, we successfully -- after successfully completing our 2-well appraisal program, we took a final investment decision for the initial phase of the field. This was followed by an independent third-party competent persons report in July with an estimated 138 million barrels of gross 2P reserves, yielding an economic value of $220 million after-tax NPV and a 34% rate of return. In addition, to the 2P reserves, the field also contains 67 million barrels of contingent resources, which provide further upside, commercial upside for the opportunity. In April '25, we secured approval from the Ministry of Energy of the Republic of Kazakhstan for a phased full field development plan for the Stepnoy Leopard field extending until 2044. And this phasing allows the company to deploy optimum capital allocation whilst meeting its target production start-up date between late '26 and early '27. On the UAG side, our collaboration with Ural Oil & Gas has led to obviously a very successful tieback project, and we expect this to continue accreting significant value for both parties with further development of the Rozhkovskoye field. And in March '25, as was announced, we entered into a binding agreement with Ural Oil & Gas to extend the processing of the hydrocarbons on new terms until the end of the license expiry, which is May 2031. This agreement extension is value accretive, mutually beneficial for both parties. The new fixed processing fee structure across all products generate sustainable cash flows and support plant operations, substantially increasing the utilization of Nostrum's world-class processing facilities. This approach helps establish a robust growth-oriented business plan for the next decade. Operationally, we are focused on delivering operational excellence with 98% processing facilities uptime and continuous operation of GTU-3 since restart in September '23. In '24, Nostrum saw significant growth in both processed volumes and titled production. We saw a 48% year-over-year increase in titled production volumes, raising our average daily titled production to 14,935 barrels of oil equivalent per day. This growth was driven by additional gas and LPG from Ural Oil & Gas processing as well as additional production from the limited-scale drilling program and efficient well workover intervention activities. A 94% increase in process volumes combined with effective cost control led to a year-over-year 41% reduction in operating expenses per barrel of process volumes from about $10 in '23 to about $6 per barrel in '24. To mitigate the natural production decline of our Chinarevskoye field and meet our license commitments, we have focused on targeted drilling, well intervention and production optimization. In '24, we successfully drilled the #301 well on time and within budget, and it was put into production in May of '24 with inflow rates meeting our expectations. We also drilled well #41 for an appraisal sidetrack to the upper Devonian gas condensate horizon. We have already been producing from this horizon. So this was an offset to an existing producer. The targeting of the sidetrack was driven by amplitude -- seismic amplitude as we did not have any other well control. And unfortunately, the well missed the primary target by a few hundred meters. It did in camera secondary intervals that were hydrocarbon bearing but they proved to be marginal, so the well was put on a temporary suspension. The key data that we acquired, particularly in order to calibrate our seismic amplitude is yielding quite a significant level of understanding on the reservoir architecture, and this will help and improve our confidence in future well planning. Financial highlights. The main focus is to ensuring that we deliver strong performance and driven by increased third-party processing volumes, efficient management of our upstream and processing operations as well as effective cost control. We delivered a year-on-year 14.6% increase in revenues to roughly $137 million and a circa 16% increase in EBITDA to roughly $49 million. That's against a mature declining asset. We maintained strong liquidity position with $33 million net positive operating cash flows and unrestricted ending cash and cash equivalents balance of $150 million, which would have been $178 million, excluding one-off cash flow items. On the HSE and ESG side, safety continues to be our foremost priority. In '24, we reinforced our commitment to a strong safety culture and rigorous operating standards, achieving a record of zero fatalities and no lost time injuries incidences. We maintained a strong ESG performance, ranking the 11th percentile among oil and gas producers in Sustainalytics ESG risk ratings, reflecting our focus on responsible operations. Whilst our greenhouse gas emissions increased primarily due to processing of third-party feedstock from Ural Oil & Gas and increased operating footprint, we improved operational efficiency and reduced emission intensity by 28%. That wraps up my brief summary. Let me please hand it over to Petro to run through our financial performance in more detail.

Thank you, Arfan. Please refer to the information in our presentation deck on Slides 7 and 8, and 10 through to 12. We achieved significant improvements across the board in our financial KPIs during 2024 despite $1.60 lower average brent price in '24 compared to '23, we increased revenue by just under 15% to $137.1 million, driven by higher processed volumes and higher titled production. EBITDA increased by over 16% to $48.9 million, with our EBITDA margin increasing slightly to 35.7%. This was achieved through our higher revenues, effective cost controls despite inflationary pressures and our operational demand. Our operating expenses per barrel -- per barrel of processed volume reduced by 41% year-on-year from $9.80 per barrel to $5.80 per barrel. Similarly, our G&A expenses per barrel of processed volume reduced by 49% year-on-year, down to under $2 per barrel. These reductions mainly reflect our improved economies of scale. We also recorded on the balance sheet a $87 million impairment reversal in our noncurrent asset carrying value, and this is primarily driven by the accretive value of our growth catalysts, such as Ural Oil & Gas processing and the Stepnoy Leopard fields development opportunity. Pleased to comment on our strong cash performance in 2024. As Arfan has already mentioned, we generated $33.1 million of net operating cash flow before one-off items, which funded most of the Chinarevskoye drilling costs and Stepnoy Leopard fields' appraisal expenditures during 2024 as well as the semiannual bond coupon payments in June and December 2024. As a result, we only drew $11.3 million from our group's unrestricted cash reserves during the year. We ended the year with an unrestricted cash balance of just over $150 million. Our net debt position at the end of 2024 was $404.2 million, an increase compared to 2023, reflecting the capitalization of $51.8 million of senior unsecured note at PIK interest and a $47.8 million fair value amortization and a net $11 million reduction in cash and cash equivalents and DSRA. This concludes our presentation today, and I'll ask the operator now to open the floor for questions.

[Operator Instructions] The first question comes from the line of [ Dmitry Sentchoukov ] from ICU.

I have several questions. And the first question is about the CapEx. Could you please provide some guidance for the capital expenditure for this year and for the next year, 2026? And specifically for [indiscernible]?

Well, I can take a stab at it, Petro, and certainly anything that you want to add, please feel free to do that. Thank you, Dmitry. Good to hear from you. Outside of the -- we're not planning any major capital expenditure in '25, Dmitry, other than obviously meeting our obligations for [ Genesco ] license retention, which means that we would probably still be looking at a couple of low-cost sidetracks and I believe it will be in the $10 million, $15 million range that we'll be looking at for that statutory requirements for the sidetrack and drilling operations. Beyond that, I think the level of CapEx required to mature to actually go into a construction phase of the Stepnoy project is still being sort of defined and optimized. So I don't really have any hard figures to give you on that. So directionally, I mean, that's -- we obviously are trying our best to back-end load the sort of spending capital requirements to reach the start-up of the field, which we will still target for end of '26-'27 time frame. So our goal will be to try and minimize as much as possible the upfront capital outlays.

Okay. And the next question relates to UOG. And the presentation mentioned that agreement was extended last month, and under new terms. Could you please elaborate on what these new terms are?

Well, I mean, I'm happy to -- I think we provide some clarity that we moved into purely a tolling fee arrangement across the 3 primary products, the gas, the LPG and condensate. So there is a fixed tolling fee that they will be paying us. So that's the fee arrangement that we have entered into. And previously, if you recall, we took titled to gas and LPG, whereas in this update, we have decided to move to a fixed fee structure and not deal with any of the other risks -- risk and uncertainty with -- uncertainties with pricing and whatnot. So for us, it provides a reasonable level of security and sustainable predictability of our cash flows. So I think that's the -- that's about as much as I can give you. The commercial terms themselves are unfortunately -- we are not able to provide them to the public at this point.

Okay. And besides the UOG, is there any progress with other third parties like Karachaganak for example?

Well, I mean, look, the door on the Karachaganak is never closed. I think in the end, the KPO field, the shareholders of Karachaganak, the major companies and the Republic of Kazakhstan will need to reach a decision about the way forward. There is a gas plant to be built, and it's our understanding that the country is moving towards -- and the shareholders are moving towards building their own stand-alone plant, which we don't know when that's going to happen. There's been no firm decision yet taken on a project sanction. But I think directionally, that's where they're headed. But that doesn't mean that our opportunity is fully closed because in the end, the country is going to need every processing capacity that they can get their hands on given the rapidly rising demand for domestic gas. So we are keeping our options open and certainly door open as well to the Karachaganak option.

And one more question about shipments or feedstock from UOG. And I understand the volumes will be close to the volumes in the last quarter of the last year, like it's 1.5 million cubic meters per day, yes.

You mean for the foreseeable future or for the rest of the -- that.

What I intend to hear is some guidance for volumes for the UOG feedstock for this year and for the next year, for example.

I see. Look, as far as we are waiting for -- to hear from UOG what their volumes will be. I mean, obviously, I cannot put volumes out there for that UOG intends to supply unless that information is already out in the public domain. You appreciate that because we don't -- it's not our field, so we cannot be speaking on behalf of UOG and providing you with any forecast about the production from the Rozhkovskoye field. That is -- the UOG has to provide that information, release that information first before we can sort of reiterate or summarize. you see. But we can say is that the long term, I believe this information is already in the press, Petro, in terms of what the long-term peak target that the field is expected to reach. Do you remember if it is 1 bcma or something. Please go ahead.

[ KNG ] disclosed that they expect to produce a total of 0.53 billion cubic meters of oil gas during 2025. That is the only positive disclosure we made around fund volumes for 2025.

Okay. I have 2 questions -- 2 more questions. And the first question is about EBITDA margin. I'm asking because the margin averaged around 35% in 2023, 2024, but reached almost 30% in the final quarter of the year. And should we expect that 30% level to continue this year or some guidance, for example, for expected margin because we actually don't know volumes from UOG shipments, we don't know new terms, at least some margin expectations for the entire business.

Yes. I mean we haven't provided -- as you say, we haven't provided margin guidance for the year 2025. What I can say is that obviously, the margins achieved in Q4 reflect the throughput volume, the economies of scale driven by the throughput volumes from UOG. We have a very large -- we have a substantial fixed cost base in our operations, over 50% of staff costs, which is predominantly fixed. And we have the remaining 50%, we have a significant portion of that, that is also fixed. So the volume is very much -- and pricing obviously are the factors that really determine -- the primary factors obviously determine margin. Pricing, we -- I can't give you guidance on Brent right now, obviously. It's only fee structure for UOG, of course, stabilizes some of our income, but it is still subject to UOG volume. So I can't give you a very simple answer to predict margin through 2025. But hopefully, you understand that those are the driving factors behind the margin calculation.

Okay. But if I understand, the margin should be at least close to the levels seen in previous years, like around 35%, not lower.

Well, look, I mean, pricing is one of the key factors to margin, obviously. Now changing the tolling fee structure, of course, UOG pricing is in the fixed fee structure. So -- and obviously, we're not able to disclose that right now. So as it's difficult for you to have a view of margin going forward. But I'm afraid that's as much as we can disclose right now.

And the last question relates to Rozhkovskoye. We have guidance for this year, like on the midpoint 6,000 barrels of oil equivalent. And what is the actual breakdown between products because oil production and sales are presented on the consolidated basis. And what is actual production volume of biogas, for example, because GTU 1, 2 and 3 they need some volumes to [indiscernible] production like around 2,000 of barrels of oil equivalent and will be sufficient gas produced in Chinarevskoye to meet this different turnout.

Well, I mean, I can tell you, operationally, Dmitry, the -- we're not operating all 3 plants. We obviously put 1 and 2 on standby, and then we operated GTU3. So that's how we manage. We don't have any issues in terms of having gas available as fuel to run our operations. And certainly, with now predict -- more volumes coming through the system, we expect the plant to be fairly robust and stable for many years to come. In terms of the breakdown between the products, don't we put something in the RNS.