OKEA ASA (3SX.F) Q3 FY2025 Earnings Call Transcript & Summary

[Audio Gap] is now producing -- no sorry, drilling the wells on Bela. So the key operational figures for the quarter, you can see an increase here in safety. That is related to 1 single incident where we had a slip, trip and fall from a ladder, at a very low altitude. So we've got a broken leg, unfortunately, in this incident. So that as a result or the reason why the results are increasing on safety. So that is always something we are focusing on and try to learn from. Production, as you can see, is the same as the previous quarter, high production efficiency of 91% even though some of our assets were down in September for 3 weeks. And we see a slight increase in production expenses for the quarter. What the note on this page is basically what I've already said. You can see on the last column for production volumes. You can see that Brage has picked up production and actually compensates for the shortfall from then the other head planned turnaround during this quarter. But we have seen very high production efficiencies, both on Draugen and Brage also on the Statfjord area with above 90% and then lower production efficiency on Ivar Aasen and Gjøa/Nova as I just mentioned because of the planned downtime in September in particular. So on our assets then for the operational update. Draugen, again, very strong production performance with the production efficiency of 94% during that quarter. We have reduced the reserve estimate at Hasselmus, and Hasselmus as a tieback, pure gas into Draugen, and that is because we see a very strong aquifer underneath the Hasselmus' reservoir which then gives us more pressure than anticipated previously. That means that we could get water increase earlier than expected at the tail end of the lifetime of Hasselmus. So that's why we have cut the tail end a bit in this latest update. So that's the reason for the impairments on Hasselmus. On Garn West South, we are planning to drill that one now in the fourth quarter. We do have a plan for putting that well into production in 1st of April next year. So that will give a very important production boost to the Draugen asset for 2026 in particular. On Brage, again, very strong operational performance with a very high production efficiency of 97%. That is quite impressive because we also seen a very heavy drilling campaign on Brage in the same period at the same time as we are ramping up the Bestla activities, both subsea but also on the top side of Brage. We started the Sognefjord East well back in 1st of July as planned and the production from that well has been extremely good. So that increased the production of Brage by 42%. And that is also the well, which then has consated for the loss of production from -- and also Ivar Aasen during September when they had the planned downtime. We have done the drilling on Talisker East according to the plan, and we do expect that well to be started in the first quarter of 2026. Actually, we came to the total depth of 10,009 meters just 3, 4 days ago. So that will be an extremely long well to complete and run conditioning. But it's a very important contribution to Brage. On Statfjord, we have also seen high production efficiency, but we are also seeing lagging performance, and we also see that some of the expected cost reductions and also improvement areas that we have looked into is lagging behind. That is also one of the reasons why we are having an impairment on the Statfjord area. We have also taken down the recoverable reserves, which have previously been in the plan. So that is also having a net impact. So the picture for the impairment on Statfjord is both a reduction in reserves, but also increased costs compared to previous models that we've had. We are still working very closely with operator and the rest of the partnership to drive improvement, but it takes somewhat longer time than we had previously expected, but that is still the overall strategy for Statfjord. On Ivar Aasen, the lower production efficiency that we have seen there is due to the planned turnaround in September of 23 days. There's been a seismic campaign which has been sanctioned because obviously, we need to run more infill drilling on Ivar Aasen to drive more value extraction from that area in the future. And increased our Recovery VI campaign is sanctioned, and we do expect the first oil from that project to actually -- starting in 2026. And last but not least, the Gjoa/Nova area. We have also low production efficiency here because of the planned downtime in September where we did maintenance. And we also converted the production on here from high pressure to low pressure production, which will then increase production from the area. We are seeing very good effects since start-up of the low production regime that now has been introduced on here. And we are focusing on -- both in Norway and on here to drill more in the area, but also in Norway, in particular to increase the recoverable reserves from this area. So again, a very good asset for OKEA. So back to our development projects, predominantly of them, which is power from shore, on Draugen. Again, this is progressing well. We are ramping up the installation now on Draugen with quite a bit of equipment being installed. The onshore facilities has also been progressing well. And the onshore facilities will actually be put into operation in August next year because that we are electrifying the new asset, which has a cable or power going up to Draugen. So the onshore facilities will be completed and put into operations in August or September next year. And the offshore activities on Draugen is ramping up, as I just mentioned. The other main development project we have is the Bestla, which is the tieback to Barge. We are still aiming for completion early 10,000 barrels equivalent net to OKEA when it comes online. We are now in the middle of a drilling campaign, which is according to schedule, and we are drilling with the rig that you can see at the Deepsea Yantai, which then will go straight over to Draugen to drill the Garn West South well thereafter. So very happy to the sanctioned project is actually progressing according to the plan that we actually laid out 2 years ago and that we are due seeing more reserves coming into Brage already in '27. So last but not least, on my section is the exploration success. We have been very focused in OKEA on being mid- and late life operator and champion, and that is something I think we have demonstrated doing both in Brage, but also on Draugen. But exploration success and grow organically as a company is also very important, especially in the areas around our assets. Therefore, the -- acceleration success is extremely well received. We have found volumes in the area there in the range of 16 million to 33 million barrels of oil. This is actually oil that can be drilled out from the Brage platform. So we do expect first oil already in 2027 from this area, and we have below $20 breakeven on these resources. So this is an extremely important contributor to Brage for the future. Likely, it also means that we can extend the commercial lifetime of Brage, which also then will have a positive impact both on the Brage reservoirs, but also on Bestla that will be tied in and started in '27 as I just mentioned. So really looking forward to have actually a drilling break in 2027, no, sorry, '26 because we are then allowing the space on both to be used by the Bestla crew that will do the topside modifications on Brage. And then at the end of next year or early in '27, we are restarting the drilling campaigns on Brage and then obviously, the Talisker success and the discoveries there will be an important part of the future drilling plan for Bestla. So with that, I will hand over to Birte, who will take you through the financials before I come back with a summary and the after we go into the Q&A session. So with that, I hand over to you, Birte.

Thank you, Svein. We delivered solid production also in the third quarter as well as positive results on exploration around Brage that will likely extend the economic life of Barge and Bestla. There is still no way around. The impairment in the quarter drives the bottom line into the red. I will revert to more details on the impairments following a review of production and sales. Production ended at 31,700 barrels of oil equivalents per day, which is same level as previous quarter. Production from the new -- well at Brage offset the impact of maintenance on other assets. We sold 36,300 barrels per day, which includes a net overlift equivalent to 4,600 barrels a day. And this is only due to overlift from Draugen and Brage. The average realized liquids price increased by 3% and -- at $65.3. The average realized gas price decreased by 5% and ended at $65.7 and includes a realized gain on hedging equivalent to $4.6. And in total, this resulted in petroleum revenue of $218 million. The graph to the left illustrates our crude liftings over the last 5 quarters as well as the average observable market price. Note also the bar illustrating expected volumes in the coming quarter. And as is visible from the graph, we expect an underlift, and this is largely due to a significant lift from Draugen expected very early in the first quarter. The graph to the right outlines the difference between the average market price of Brent for the quarter of $69.1 compared to the average realized liquids price for OKEA. Positive quality and price adjustments brought the realized crude price to $70.6 or $1.50 above the market. 13% of total volumes old were NGLs, which is equivalent to 18% of the liquids volumes. As NGLs trade at a discount to crude, it brings the average liquids price to $65.3. On this graph, we illustrate the volumes of gas sold over the last 5 quarters as well as the observable market price in the same period. The amount of gas sold were in line with previous quarter as a reduction from Gjøa and Nova was offset by additional volumes from Brage. I promised you some more details on the impairments. And this time, we included a slide that outlines some of the facts and technicalities of impairments in general, and we also outline more on the specifics about impairments in the quarter. And in total, impairments amounted to $151 million, which corresponds to a post-tax impact of NOK 47 million. The impairments on Statfjord were a result of reduction in recoverable reserves and a recognition that expected future cost reductions are less likely. Jointly, this resulted in impairments on Statfjord of NOK 138 million, of which NOK 5 million relate to technical goodwill and NOK 133 million related oil and gas properties. This also means that there is no remaining technical goodwill on Statfjord on the balance sheet. As you may recall from our previous updates, technical goodwill impairments have no tax offset in the income statement and is not reversible. Asset impairments on the other hand, have a tax offset in the income statement and is reversible if micro or macro conditions should improve. I think it is fair to say that our efforts to improve operational performance on Statfjord have so far not yielded the warranted results. However, we are aligned with the operator on the overall asset strategy, and we'll continue to chase measures to improve the robustness and generation from Statfjord going forward. On Draugen, production data indicates that the reserve or pressure development is higher than anticipated, which increases the risk of earlier water ingress as outlined by Svein. This is not impacting production estimates in the near term, but we expect an earlier cutoff of the Hasselmus well. This results in technical goodwill impairments of $11 million. As there are no tax offset, post-tax impact is also $11 million. And over to the profit and loss statement. We delivered operating income of $124 million, consisting of the petroleum revenue of $218 million and other operating income of $5 million. Other operating income mainly relates to net tariff income at Gjøa and Statfjord. Production expenses amounted to $77 million or $24.5 per barrel, and the increase in cost was mainly due to maintenance on several assets during the quarter. As already outlined, impairments amounted to $151 million. Exploration expense and SG&A of $11 million comprised exploration expense of $7 million, of which half relate to seismic purchase. SG&A amounted to $3 million. Net financial expense amounted to $2 million. Expense interest of $10 million was partly offset by $8 million in finance income. Tax income was $62 million, which brings the net loss to $37 million. And moving on to the balance sheet. Goodwill amounted to $97 million and comprise $81 million in technical goodwill and $16 million in ordinary good. Cash and cash equivalents amounted to $377 million. And in addition to the cash balance, $42 million in excess liquidity has been placed in money market funds classified as financial investments. Following settlement of the $125 million OKEA04 bond in early July, interest and bond loans are now normalized and amount to $295 million. Income tax payable of $92 million represent tax accrued for the first 3 quarters of the year, partly offset by 2 installments paid during the quarter of a total of $11 million and $4 million in tax refund for 2024, which is expected to receive in the fourth quarter. Asset retirement obligations of $969 million is a pretax amount and is partly offset by asset retirement receivables of $465 million. Cash generated from operations was a solid $197 million. Taxes paid of $11 million includes the first 2 tax installments for 2025. Settlement of the OKEA04 bond resulted in a payment of $127 million in the quarter. $103 million were used for investments, mainly relating to Bestla, power from shore and production drilling at Statfjord. This brings our total liquidity to $480 million. And as mentioned, $42 million is placed in money market funds, bringing the cash balance to $377 million. And finally, an update on our guidance. With another strong quarter, with production at the high end of our expectations, we are increasing our guidance for 2025 as well as narrowing the range to 32,000, 33,000, and this is up from 30,000 to 32,000 barrels per day. We keep the production guidance for 2026 unchanged at 31,000 to 35,000 barrels per day and we keep the CapEx guidance for the next year and this year unchanged with $350 million to $380 million expected this year and $300 million to $360 million expected for the coming year. And in line with previous communication, we currently do not have an announced dividend plan. This is due to a relatively large investment program, particularly in '25 and '26. The Board intends to revert with a dividend plan when it considers to be in a position to distribute. And this will, amongst other things, depend on the macro environment. That's all for me for now, and I'll give the word back to you, Svein. Thank you.

Thank you, Birte. And as a summary then for the quarter. We have demonstrated that we do have a continued strong production performance on our assets, but our net result is impacted by the impairment that Birte -- we are net cash positive, and there is no debt which is maturing until 2028, and we are continuously drilling to develop new production wells, well demonstrated by what we have done in Brage in particular, but also what we are now going to start on Garn West South and Draugen. We've been very successful on the exploration, especially with the Talisker discovery in the Brage area. So this adds significant to the company and especially when it's in the area around our assets because that is low cost and it's also quick to recover. So maybe already in 2027, production -- pole discovery. And we are building and maturing our portfolio and looking for further investment opportunities. So in summary, very strong performance operationally, unfortunately, it's offset by the impairments, but what we are focusing on to be the mid- and late life operator is something that still continues. So with that, we will move into Q&A session, and I hope that as mento will continue with us in this one.

[Operator Instructions] The first question is from the line of John Olaisen from ABG.

A couple of questions. Let me start with the Draugen power from shore. Could you tell us what is the remaining CapEx on that project, please?

Thank you, John. Thank you for the question. We do not guide on CapEx by project, but I can say that we are still within our guided range and both of these -- on both of the 2 major projects that we have, Bestla and power from shore. So we don't expect any updates to our CapEx. And I can also say that we expect a bit more power from shore CapEx in the fourth quarter of this year. But other than that, I -- we do not guide on CapEx by project.

Right. And you haven't given guidance for CapEx for '25 and for '26. Is there a lot of CapEx related to Bestla and the power from shore into '27. Or is most of that included in the '25, '26 CapEx.

For Bestla, most is included in the '25 and '26 CapEx and for power from shore, there will still be some CapEx in '27 as start-up is expected in '28.

Could we take the guide in a bit into 3 years and rough estimate for the Draugen powershore CapEx.

Well, we have stated before that our CapEx of '25 and '26 is very roughly split 1/3 between Bestla power from shore and infill and production drilling at Statfjord and Brage if that is an indication.

An indication, that's it. And so what I'm getting to is, are you fully final -- what are wondering about -- are you fully financed or -- and I guess so -- by how much margin would you say, by the way, because you have a lot of activity in '26 and into '27, the power from shore, Bestla -- production drilling and exploration. Could you give us some comfort that you fully financed for all these projects, please?

Yes. I can say that when we raised the previous bonds, we stated that we were fully financed. And I would say that under most macro conditions, we are fully financed throughout this. And of course, when Bestla comes in operation, that will also add to our productionand revenue stream. .

And at what time would you start considering paying dividend? I guess it's related to what we just talked about. At what point in time will you be comfortable that potentially could be paying out dividend.

Yes. I think it's -- we have, again, stated that we will revert with a dividend plan once the Board considers that we are in a position to distribute again. But obviously, the especially the Bestla project is a key to have comfort into the startup of -- Bestla is a key driver in those kind of considerations which we have all the time in the board and in the moment in OKEA.

The next question is from the line of Teodor Nilsen from SB1 Markets.

A question from me. First on your impairments. Could you indicate how much you will reduce the reserves on Draugen and Statfjord in your next -- through the next reserve report as a dire consequence of the impairment. Second question that is on cash tax. Are you in a position to price some guidance on those cash tax over the next few quarters? And then a question on M&A and growth. You have a shareholder that previously has stated that they wanted to grow -- they want to look to grow in Norway. Are you going to looking at any growth opportunities in Norway? Or are you looking at anything outside Norway? And my fourth and final question that is back to the Draugen power from shore project. We have seen at several other projects that have been canceled recently due to lack of profitability. I just wonder if you could remind us of what kind of profitability or internal churn you're seeing from the -- value onto project.

I missed your second question about the tax you asked if we were in a position to what.

If you are in a position to guide on cash tax over the next few quarters.

And maybe I can answer that first because we have -- in our guidance section, we have provided some guidance that each of our installments at the moment is estimated to between $5 million and $6 million. And under the new tax regulation, we paid 10 installments per year. So we expect the 2 payments in the coming quarter, 3 payments in the coming quarter. We have 2 payments in the current. Do you want to take the next one, Svein?

Yes, I can do the M&A one, Teodor. We are still focusing on the Norwegian Continental Shelf. So we are still looking for opportunities, but it needs to be something where we can see we can add further value creation in a similar way that we have done on Draugen, but also, in particular, on Brage as we have demonstrated lately. So -- still our core focus. So we are not looking elsewhere that is supported by our Board. . And the power from shore, I know that some licenses have not started power from shore electrification projects. Obviously, we have started our project for some time, but the power from shore project for Draugen as well as a very important strategic pillar for extending the lifetime of Draugen to 2040 and beyond as it gives us very good transparency on the cost picture when it comes to power generation for the Draugen field. So obviously, that is not related to our project.

And you also had a question about impairments and volumes. And I think we need to refer to the update on the ASR report before we provide those kind of details, Teodor.

Okay. Could you indicate it's like down 5% or down 20%. I assume it's in that range from somewhere.

I think we need to revert in the ASR report. I think it's somewhere in between those numbers you referred to there. .

[Operator Instructions] And while we wait for any more questions from the telephone, let's check if there are any written questions.

Yes. We have a question here from Sten -- can you say something about the arbitration ongoing with Equinor about Statfjord. Is there any progress in that?

Yes. Well, there is no more to be added on that, what has been communicated previously is all we have on that matter. .

And we stated in the report that the arbitration has ended and that deliberation is ongoing. So I think that's the latest update we have disclosed, I want to disclose on that matter. .

He has a follow-up question about dividend payments, and I think we answered that already. So then I'll move over to the next question from Russell Soranki. Could you update on the year-end or development. Is it still part of the Ofelia Cerisa project? And is there something holding it back?

Yes, we are still looking at the whole area, including Ofelia is separate development because there could be opportunities and synergies to actually develop these together. The current time line for the Gjøa Nord is that the license is planning a Decision Gate 2 before the end of this year. So that is the actual time line for that. But looking into all the other prospects in the area is important to get a more robust development concept.

There is a follow-up question from Russell. Looking ahead, does OKEA want to add additional long-life assets to the portfolio. And when might there be opportunities to acquire these assets.

Yes. As I just mentioned to Teodor as well, we are continuously looking for growth opportunities inorganically. So we still want to add long-life assets, but the criteria for those assets needs to be that we identify further value creation. And when they come, it's hard to say, but we are continuously looking to grow and build valuative portfolio. .

We have a question from Sigon Holda. Assessed with the future refinancing of 05 and 06 maturing in '28 and '29 could move to a cash flow-based distribution limit rather than NPAT.

Thank you for the question, Sigbon. Yes, we always discuss how to find the appropriate balance between lender security versus cash flow flexibility. Cash flow limits has been discussed in previous rounds. And I will certainly not exclude this an option going forward. But for now, we have eased the definition under the OKEA06 bond to exclude the effect of technical goodwill impairments, which, as that will never result in any cash effect. But yes, so I wouldn't exclude it. .

A follow-up question. USD 151 million pretax impairments mainly start from Draugen? How confident are you that further write-downs are behind us?

Well, we have $80 million remaining on our balance sheet in technical goodwill and the technicalities of technical goodwill is that it will hit the P&L at some stage as an impairment. But bearing in mind that it has no cash effect. So these impairment tests, we do every quarter and the effects, amongst other things, depend on macros at the balance sheet date. So it can be a bit unpredictable, the timing of technical goodwill impairments.

Another one from Sigbon Hovda, our reserve revisions at Statfjord and Draugen expected to materially affect production in the next 12 to 18 months.

Well, for Draugen, the effect that Hasselmus is expected at the tail end, which is further into the future than 12 to 18 months. And for Statfjord, it will have some effect but it's still within the guidance that we have for '25 and '26.

Another from Sigbon Hovda. What incremental CapEx is assumed to convert Talisker into production? And will this fit inside your guidance?

Well, we are still maturing the plans for Talisker but I can say that the CapEx is expected quite limited and really very little beyond drilling cost at Talisker.

And the last one from Signod Hovda, how does OKEA potential industrial consolidation on the NCS following the INEOS Swale Energy acquisition.

Yes, I guess that also falls within the questions we have answered on MA. There's consolidation that happened between 2 parties that made sense. So I think that will still continue to happen on the Norwegian Continental Shelf. So -- but for our sake, we are still looking into opportunities, how we actually can grow inorganically predominantly. .

There's a question from Karl Kango. Has the Statfjord deal was described to have structure with downside protection and upside profit sharing. Can you help us understand the combined cash effects to OKEA since the acquisition? How much cash has OKEA paid to Equinor since the deal? And how much cash has OKEA received after tax from Statfjord since the deal closed?

Well, we don't guide on cash flows by asset, but we had a profit-sharing element, which was intended to protect against paying too much, but obviously, operational risk is still OKEA's following the acquisition date. I can just remind you that the purchase price was -- the agreed purchase price was $220 million plus the upside profit sharing, which was tied to gas and oil prices until the end of 2025.

Okay. We have a follow-up question from John Olaise. .

Yes, John, please go ahead. Your line will now be unmuted.

The unit production cost has been around $24 per BOE over the last couple of quarters. And you're right that it's negatively impacted by high maintenance both in Q2 and in Q4. Is it possible to give some indication what we should expect unit production costs to be going forward? .

Yes. Over the last couple of recent quarters, it's been above 20, but it has also been below 20. So over time, we expect it to be around 20 on average. And obviously, we have maintenance on 3 different assets quarter, which drives additional cost.

All right. And more medium term around 20, what we expect to -- are there any special effects in sort of the near term next couple of quarters that will impact production costs.

Nothing as major. So we had 2 assets we had more than 3 weeks of downtime and maintenance. So we don't expect any major maintenance in the quarter.

Okay. And then I wonder if you could comment a little bit on exploration for 2026. I understand that Arkenstone project has been pushed until Q4 '26. Is that correct, by the way? And maybe to talk a little bit about what other key exploration wells, which you expect next 6 to 9 months, please? .

Yes. Well, Arkenstone has been pushed out. It was -- well, we have tried to drill it once. But obviously, now it has been pushed out into 2026. So that is something that we are planning on, but the key there is for Equinor to actually get that prospect into one of their drilling weeks. When it -- and as we have said before, we are aiming to have 2 or 3 exploration wells per year -- up to 4 if we do find attractive opportunities. So that is still the target. So -- so that is at least the volume that we are looking for in the future, but Arkenstone is definitely a significant one.

And now there are any extras wells for the next 6 months you expect to participate in?

No, we are -- no, not for the next 6 months. I need to go back and look into the exact and for when we are spreading the next exploration well to be quite honest, but not for the next 6 months as far as I can recollect.

What -- is there an exploration well on the -- on the table '26 right now? Or are you still in the planning phase for that.

Well, we are planning, and these wells tend to move back and forward. I just mentioned Arkenstone was spudded and has now been moved into '26. So these targets are moving back and forward. The overall exploration portfolio that we have is around up to 4 wells. But currently, we have 2 or 3 each year in average, but they tend to move back and forward between the between the years. So -- so for next year, it is the Arkenstone in particular that we have. And then we have a few other projects that we are working on. But not in the next 6 months, it will come later on in '26 if we are sanctioning it.

Okay. Then I have a follow-up question from Karl. If OKEA's equity should turn negative, what effects that could have -- could that have according to the Norwegian accounting regulations?

You should refer to the book value of equity. And I think the accounting regulation refers to something like satisfactory according to the risk of our operations or something in those terms. But obviously, our liquidity projections and such as is key here, and it's quite solid. So no direct effect, it doesn't force us to raise equity or anything like that, if that was the concern. .

And the last question from Karl Kangor based on the start for Statfjord experience, can we expect more organic development from OKEA going forward versus large transformational M&A deals?

I'd say the answer there is yes. It's inorganic development if we are buying something, but we are still fixed on the strategy that we have set out that we're going to be the leading mid- and late life operator on the Norwegian continental shelf. I think we have demonstrated that we are capable of doing so. So those opportunities will still come in Norway. So I guess the short answer to that is yes. .

Any further questions from anybody? I think that's it. So I think we're going to end call now. Thank you very much. .

Thank you.

Thank you all. .