Orrön Energy AB (publ) (ORRON) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the Lundin Energy audiocast. It's a bit of an ad hoc one outside of our quarterly, but we thought it was an appropriate time to update you all on this morning's announcement and various other corporate activities that are ongoing. I'll hand over to Nick Walker, who will take you through, and Teitur will also be presenting, and then there will be some Q&A at the end of the session. Nick?

Good. Thanks, Ed, and well, good afternoon, everyone, and thank you for joining us today. We've issued 2 press releases in the last week, and I thought it'd be a useful opportunity to run through some of the details. So first of all, we issued a release around the Edvard Grieg reserves a week ago, an increase there; and then this morning, we announced a deal that we've done with Idemitsu, building our position in the Barents Sea. And I think these show important progress on our growth strategy, and I'll run through a few slides to provide some more background and then we'll be delighted to answer your questions later on. So first of all, around -- our main strategy is organic growth, focused on Norway, but I think it's more than that, it's complemented by a focus on industry-leading efficient operations. And by that, we mean low cost and then a focus on low carbon aiming to be carbon-neutral by 2030. And I think those 2 points are important as it makes us resilient, it makes us relevant and it makes us investable into the future. And it's those factors that we look at when we view all opportunities through that lens. And I'm super excited about the growth opportunities ahead of us. We see multiple opportunities, and I think they come in 3 areas; it's around maximizing recovery and step-outs from our world-class assets; it's about continuing to explore in the mature basins in Norway; and it's about a frontier exploration, higher reward opportunities but carrying higher risk, and we have a balance of opportunities through all of those areas. And we've always said that we'd augment our growth with opportunistic acquisitions if we can find the right quality at the right price that we can create shareholder value. And the news releases that we've issued over the last week, I think, provide growth in all of those areas. First of all, we have the Grieg reserves increase adds 33 million barrels of 2P reserves to us and extends the plateau further. The deal we announced this morning with Idemitsu to build our position in the Barents Sea adds 70 million barrels of contingent resources and importantly, a position in the Wisting project and adds to our Alta position. And when you put those 2 deals together, they add over 100 million barrels of resources this year, which is significantly more than our production. So we're growing the business. And on top of that, we're about to commence a high-impact exploration program, 4 wells, you will see results on between now and the end of the year, targeting over 350 million barrels of net unrisked resources, and we'll talk a bit about that program as we go through. So first of all, looking at Edvard Grieg. The Edvard Grieg area is a prolific area and continues to get better and better. And our aim is to develop and explore the area to keep the facilities full in the long term. And what you see with the Edvard Grieg reserve increase, we're now extending plateau out to late 2023, and that's 5 years beyond the original PDO for the approval of the field. Of course, that's also supported by the infill well program that we're going to complete next year at Edvard Grieg, where we have 3 firm wells. And also the development of the Solveig phase 1 project and the Rolvsnes extended well test, which are both on track and also support that plateau extension. And now these are hugely valuable barrels, they carry no OpEx and very low CapEx. And in the case of the Edvard Grieg reserve increase, no additional cost at all. So very accretive to value for the company. And we see lots of upside opportunities to continue to keep extending the profile out in the future, and I'll talk a bit about those in a moment. So first of all, on to the Edvard Grieg reserves. We announced that the 2P ultimate recovery is being increased to 350 million barrels gross. And that's driven by continued outperformance of the Edvard Grieg field, where we see water production significantly lower than anticipated. And that is supported by the 4D seismic survey that we recently completed in the summer, and you can see the output from that on the chart here on the right. It shows excellent imaging of the movement of water in the reservoir, which is actually quite amazing given the fact that when the field was discovered, you could barely see it on seismic. And today, we can now see the movement of water, gas and pressure changes in the reservoir, allowing us to help understand the field and also manage the field in the long term. And what it shows on the chart is that water injection flood front to be further away from the producers than we had anticipated. When we put this together, it increases the oil in place in the field. The figure also shows location of the 3 firm infill wells that we're going to be drilling in 2021. We see further resource upside, I think, particularly in the southwest of the field, where one of the wells will target that area and also to the east where we have a dual-branch well, one of the branch is targeting some upside opportunities. So it's going to be exciting next year to see the results from those wells as we progress them. And of course, we put this together to update the reservoir model, incorporating all the results, and that's led to this reserve increase and an extension in the plateau. And so as I said, we're increasing 2P reserves by 50 million barrels gross or 33 million barrels net to Lundin. And that takes the 2P gross ultimate recovery to 350 million barrels. And you can see on the chart here, that's almost 90% increase above the original PDO. But there's further upside, the 3P plus 2C upside takes us to around about 420 million barrels. And I think it comes back to the old statement we've been using that the big fields get bigger. And I think we'll see more to come from Edvard Grieg in the years to come. And I think the program next year will help uncover some of that, too. So it's a great performance, and it just continues to get better. But that's not it really because the greater Edvard Grieg area, as I like to call it, is very prolific, and we see and continue to see significant upside opportunities here. When you put together what is producing and the fields under development, we have 2P reserves, so including Edvard Grieg, Solveig and Rolvsnes, now increased to 410 million barrels gross. And we extend the plateau, as I mentioned, to late 2023. But you can see here, there is an opportunity to double that again to around about 800 million barrels gross, and we see that coming in a number of areas with upsides in the existing fields and also prospective resources. So further upside in Edvard Grieg, potential future phases of development to Solveig, so phase 2 and segment D, if we see good success at the Rolvsnes extended well test as a full field development of Rolvsnes, and we see quite a lot of prospectivity in this area, which you see some of shown here, and we will be drilling the Merckx well just to the flanks of Solveig at the end of the year and hopefully, we'll see results on that around the end of the year or early next year. But that's a material prospect. And if it's successful, there's follow-on opportunity along the same trend. So the area continues to be really exciting. I'm optimistic we're going to be drilling here for many years. We're already working on a program for next year, and I think we'll be finding more resources here. I think the temporary tax incentives are also important, and they significantly improve economics on some of the smaller opportunities. So we're looking to accelerate some of the opportunities here, things like Rolvsnes full field, phase 2 of Solveig. And that's something you'll hear more about in the future as we work those opportunities up. But our aim here is to phase the activity so that we can keep the facility full in the long term. And I think we've had a great trajectory so far to move the plateau forward by 5 years from the original PDO is huge, and I think we can continue to keep doing that with the opportunities that we see here. So that covers the Edvard Grieg area, and then I want to now move on to the acquisition that we announced in the Barents this morning. It's a strategic acquisition, and it adds predevelopment resources from a deal we've just done with Idemitsu. It builds on already substantial acreage position in the Barents, and we expect it to contribute to sustaining the company's production in the longer term. We always said we'd look to supplement our organic growth strategy with value-adding acquisitions, and I think this fits our strategy. It's a high-quality, early-life or undeveloped assets. We're looking for things that complement our low-cost, low-carbon emissions portfolio and with attractive acquisition metrics where we can create shareholder value, and I think this deal fits all of those criteria. And you can see from the chart here, what this gives us, it gives us a 10% interest in the major Wisting oil discovery. It's a high-quality field with 500 million barrels of resources with upside potential. It's heading towards a development targeting PDO at the end of 2022. And if it achieves that, we'll get the benefits of the tax incentives that have been recently announced. And it will become one of the -- the next development hubs in the Barents and create an opportunity for nearby opportunities to be tied in, and we have already an acreage position in the area with some good prospectivity. So it builds on our position that we have there. I think it's also important that it fits with our low-carbon strategy. It will be latest technology and, indeed, a power from shore solution is being actively assessed associated with this. So I think it's a great asset. We clearly like more than 10%, but that's what we could get for now, and we'll be looking to see in the future if we can augment that. The deal also adds an additional 15% in Alta taking our interest to 55%. And it's an interesting discovery. It's likely to be a tieback into existing facilities. And we're exploring whether we can accelerate the development of that to utilize the tax incentives, but it's early days on that thinking. And the deal also gives us a 7.5% interest in the large Polmak prospect, taking our interest there to 47.5%, and I'll deal with that prospect on the next slide. This deal adds, as I say, 70 million barrels of contingent resources, a very attractive $1.8 per barrel. So very attractive metrics and I think creates a significant value. So I think a strategic, high-quality deal that complements our organic growth strategy and the type of thing we'd be looking to do more of if we can see the right deal flow come forward. So now turning to the Barents Sea exploration program. We're about to commence on a high-impact program here. We've always said it's early days in the Barents. It's a huge area. Not many wells have been drilled, but yet 3 billion barrels of commercial resources have been discovered and so we're excited and remain excited by the potential of the area. At our Capital Markets Day, we outlined a program of wells to be drilled here, but we did -- due to the oil price crash, we delayed the program. So we're actually about to get started on this now. The West Bollsta rig, which we have on hire is actually on toe up to the Barents at the moment, and we'll shortly spud the Polmak well. And then we'll go on to drill 2 further wells, Bask, and Equinor will drill the Spissa well. And you'll see results from those 3 wells between now and the end of the year. You can see there are material prospects and 2 of them have material upside associated with them. And this program of 3 wells is targeting over 800 million barrels of gross unrisked resources and, as I say, significant upside beyond that if we have success. So we continue to see opportunities in the Barents, and we were excited to do the deal that we've just done to build our position there, and we continue to look to actively build position in the region. So I think it's going to be an exciting time on the exploration front in the next few months as we see the results of these wells, but also exciting to see the project Wisting move forward. And hopefully, we can move Alta forward in due course. So with that, Teitur is going to chat for a few moments on some of the tax aspects, and then we'll wrap up for questions afterwards.

Yes. Thank you, Nick, and good afternoon, everybody. So just briefly to run you through the deal structure, which is actually very straightforward. It's a cash consideration of $125 million. There are no tax balances coming across with any of these assets. So this is payment for the resources as such. And we do expect this deal to complete towards year-end, that's our target, and it will be at that point in time that we pay the cash for this consideration. As Nick already mentioned, I mean, we feel this asset will fit within the temporary tax changes that the Norwegian government has great foresight to introduce earlier this year. And if this asset qualify for that, so basically we need to submit a PDO before end '22, and the government needs to approve that PDO before end '23. If those 2 items are in place, then the tax treatment on the CapEx we incur will be as per these 2 slides. So what you can see, if you look at the right-hand slide first, if you take an example of incurring 100 units in CapEx, you can see that over 6 years, you will get 91 or 91.4 units back through tax credits. But what was key with the changes the government introduced now is that previously, you've got that back over 6 years, whereas what you can see on this slide to the left is that you actually get the majority of that back actually in the year that you incur that investment. So out of 100 units you invest in year 1, you will already in year 1 get 73 units back through tax credit. So that obviously both improves the economics of the project because your tax optimization is more efficient, and clearly it has also a much less impact on the liquidity and the very healthy free cash flow profile that we've laid out to the market and which underpins the dividend and the deleveraging of the balance sheet as we move forward. And that sort of tax treatment is not only true for this project, but also some of the other continued reserves we have in the portfolio. I mean it depends on how CapEx-intensive each of these projects are. But in some cases, your breakeven prices are being reduced by $10 a barrel or so. And the IRRs are in some -- for some of these projects is increasing by 10 or more percentage points on some of these projects. So we are very pleased, obviously, with these tax changes that the government has introduced. And this is one case in point where we are opportunistically making use of these changes. So I think with that, I'll just hand back to Nick for concluding remarks.

Yes. So to wrap up or summarize, I think we demonstrate multiple growth paths and seeing delivery in all of them, maximizing recovery around Edvard Grieg and growing reserves. We're about to embark on a high-impact exploration program, and we've announced the strategic acquisition to build a position in Wisting and build our position in the Barents. So we're delivering growth; 2020 resource replacement with these -- with the deal, and the reserve increase so far will be greater than 180% this year. So that's building the business over time. And we can do this whilst maintaining a resilient and sustainable business and, of course, giving us the capacity to both fund growth and dividends, which we feel is extremely important. I must say I'm really excited by the growth opportunities ahead of us, and I think we continue to keep doing it and creating value. And it's going to be clearly very exciting for the next few months as we drill out some of these exploration wells, there are material opportunities and we'll see a flow of results through the rest of the year. So with that, I conclude my remarks, and we'll be happy to answer any of the questions that you might have.

Thanks, Nick. Operator, what we might do because I think we've got some sound issues this end, if you could call us back on the number, then we can take the Q&A, and you can operate it from there. So if you could just call us back. Thanks.

[Operator Instructions] Your first question comes from the line of James Hosie from Barclays.

A couple for me. I guess, firstly, could you just comment on the impact of any of the current union strike action could be having in your production assets? And then on the Barents Sea acquisition, does purchasing resources in the region under $2 a barrel some 6 years since they were discovered not undermine the economic case for further exploration in that region?

So James, good questions. On the strike issue, this issue only affects us in relation to Johan Sverdrup. And currently, today, the field is producing as normal. So today, no issue for us. I understand others have issues, but it's nothing that affects Lundin today. And then on your second question around the value of exploration, I think for us, we look at all opportunities to grow the business. We think the best way to create shareholder value is through the exploration drill bit, and we've done so over a long period of time, growing the business we have today, mostly through that, and that's -- we've done at around $0.80 per barrel post-tax over the period. And of course, we look to augment that with acquisitions, if we can find them at the right price, with the right type of assets that fits with our business. And we felt this one did, and we got it at an attractive price. When we've looked previously to grow through acquisition, we've had to overpay. And so we've been unwilling to do that. So I think if we can find more of these types of assets, we have definitely the capacity to do more to augment our growth strategy, but that's not how we plan to grow. It's something we can't predict, but certainly, we can manage our exploration program to the scale that we're able to that we wish to fund with the quality of opportunity that we see ahead of us. So that is how we look at this.

And your next question comes from the line of Yoann Charenton from Societe Generale.

Hopefully, you can hear me. I have just 2 questions, please, if I may. So you hinted at the importance of power from shore for this morning's deal and more broadly, for the development of your Barents Sea resources to prove consistent with your focus on low carbon. So at this stage, are you able to elaborate on energy supply solutions for Wisting and Alta separately?

No. I think it's way too early to talk about that. I mean clearly, power from shore is one opportunity and technology moves on all the time. But if we have to do this in a more traditional way, the technology has also moved on there. And like Edvard Grieg, where we've been able to continue to run this below 5 kilograms per BOE, which -- of emissions, which is 1/4 of world average, even if we have to go in that direction with these types of assets, then it will be very competitive. And we'll continue to work towards reducing emissions over time to meet our target of carbon-neutral by 2030, and I think we can do that with other forms of offsetting. So I think there's lots of opportunities out there. Just like Edvard Grieg -- actually, Edvard Grieg was built with turbines but designed around the ability to bring power from shore later on in life. And that's what we're doing. I think that is also an opportunity here. I think if we start to look at tieback opportunities for Alta, Johan Castberg is one, and I believe that's also been designed with the idea of electrification potentially in the future. And Goliat today up there is already operating with power from shore. So I think it is -- there's definitely an opportunity for us in the future, but not necessarily a requirement.

Okay. Nick, that's very clear. And if I may, a second question on my end. I appreciate that this morning as well looking beyond Wisting, you are raising your stake in Alta. But at the same time, you still have to demonstrate the commerciality of the Loppa High. So what are the factors basically to sort of monitor in the next 2 years for you to be able to basically take an investment decision on time to benefit from the tax relief?

Yes. I think we've -- what we've said previously is Alta got on its own as a stand-alone development is not economic to develop. So we need to tie it back into something else. The natural choice is to tie back into Johan Castberg. The reality there is that there won't be any space in Johan Castberg till 2030. So we have to wait some time. So if that's the route, then clearly, we're not going to be able to move that project forward in a time frame to take advantage of the tax incentives. But we are looking at other alternatives. There's a potential tieback opportunity to Goliat, but that's quite a long way away, and we had bend stretching the technology to do that, so we're assessing whether that's achievable. And the second option we're looking at is reused FPSO. And there are a number of potential candidates that might become available for us that we might redeploy there and do that economically also. So I think it's a bit early for us to comment too much on this. Our studies are sort of early stage, but we're definitely looking hard to see whether we could move it forward at a quicker pace than going by Johan Castberg.

And your next question comes from the line of Al Stanton, RBC.

I have 2 questions. The first one is just a follow-on from your description of Alta. I was just wondering whether taking a chunk in Alta was a precondition of getting a stake in Wisting. You didn't make Alta sound that exciting.

No. I mean Al, the core reason for doing this acquisition was to build a position in Wisting, but it also bought a piece of Alta, which is good, and we were happy to have more of it. So that was part of the deal that we negotiated, and we were keen to take more of it.

Okay. And then my main question is for Teitur. With respect to -- I hear what you're saying about Johan Sverdrup production not being threatened currently by the strike, but output is currently ranging across the portfolio because of the constraints in Norway. You've just spent $125 million on an acquisition. I was just wondering how much of this presentation and today's release is about comforting people ahead of the refinancing in terms of maybe reiterating the reserves for the bankers or maybe making bond investors a bit more comfortable with cash flows. Where are we with the refinancing?

No. I mean this deal, as you see, Al, is value accretive. So that should make all stakeholders happy in the long run. I mean the refinancing is progressing as it should. And with the tax changes we have seen in Norway, this will not really have that material impact on how we are able to deleverage the debt levels going forward. I mean we haven't come out with any CapEx numbers on this asset or neither any of the other 8 assets that we are actually looking at. But with the IRRs we are seeing on all of these, they are very appealing to push ahead with. And clearly, the debt refinancing that we are framing now needs to accommodate all of these plans, and that's the intent for us to make sure that it works and hangs together. And similarly, on the BBB- credit rating we have, we don't see this to have any impact on that. We will have a very solid credit rating going forward as well. So all of that has been factored into the thinking here, and we are on a very solid footing, whether it's deleveraging or dividend growth going forward even with this acquisition.

And I would say, Al, we have to release information as it becomes available. So it's natural that we have to release these things when they get concluded.

And your next question comes from the line of Anders Holte from Kepler.

Just a quick question for me on Wisting. I see that you are clearly excited about it as you have reminded us that that's the main reason for doing the deal in the first place. But listening to Equinor, they seem a bit more muted in terms of what they can achieve. So just interested if you could elaborate a little bit more on, is the resource potential sufficient for full-scale development? And sort of what's breakeven are you then looking at, if that's the case? And if that's not the case, what kind of resource additions would you be looking at to get Wisting off the ground probably before the deadlines in terms of the recent announced tax changes in Norway?

Yes. So Anders, I mean clearly good questions and a bit further than we can really go at this stage. We're not on the license, and we just announced a deal. But really, we wouldn't have done this deal if we didn't believe that this is going to move forward to sanction in the time frame. So we're pretty confident that that's going to happen and that will have an attractive development to invest into. So we're excited by the opportunity. And I actually would have liked to have had more in it, if we could have got more, but that wasn't the case that we could achieve that.

And your next question comes from the line of James Thompson, JPMorgan.

A couple for me, if that's all right. I just wanted to understand a little bit on Edvard Grieg, firstly. Obviously, a good result to get another 50 million barrels of reserves there. Can you talk a little bit about the interplay between actually the Greater Edvard Grieg area, just the performance of the field? Certainly, we talked a lot already in terms of the tax regime in Norway. But does it make sense to kind of continue pushing forward there if you've got so much upside really on the field itself? Clearly, there's very little cost associated with that. And then secondly, just on Edvard Grieg, I mean, nice chart that you put out there or nice figure you put out there on figure 4. I was wondering, Nick, if you could perhaps just key us into the key point -- the key things we're looking at in that picture, really. I mean I get the feeling that, that orange -- the sort of orangey red blobs you were expecting to be quite a bit bigger than the sort of 2018 polygons in 2020. So just maybe a bit more description on that would be very helpful.

Sure, James. Great questions. The way we've sort of see Edvard Grieg now is it's not just Edvard Grieg field on its own, but it's Solveig and Rolvsnes extended well test. And what our aim is to do is to bring resources in to keep the plateau going long term. So if Edvard Grieg on its own wouldn't have a plateau out till 2023, it's a combination of the 2 -- the 3 opportunities that allow us to push the plateau out to the end of 2023, and they complement each other. And so our aim going forward is to bring new opportunities in to keep the plateau going beyond 2023 as much as we can. And as I think I tried to explain, there are a lot of opportunities to keep doing that, but we have to keep bringing them forward and having them in the pipeline to be able to bring on when we need to. And we've had a lot of flexibility. I mean to be honest, if we look at it today, we've moved ahead with the Solveig and Rolvsnes developments a bit early than we needed because the field has grown in scale. But it's hard to predict that going in, and we wanted to be able to be sure we can keep the facilities full in the long term. And we also have some upside here. When Ivar Aasen starts to decline, we can start to produce more through the facilities, and that's something we're preparing ourselves for as well to be able to get more capacity through the facility -- our share of the facility. So I think it's good to have some contingency there to be able to do more. In terms of the chart on the 4D seismic, it's really quite simple. What we are doing is essentially injecting water into the field along the western edge, and you can see the 3 key water injectors highlighted. And what you can see in -- this is a difference chart that shows the change in the seismic response over time from the original, before the field was produced to now, and the big orange blobs show where we've seen water replace oil in the reservoir. And so you can see the flood front moving from the 2 northern injectors towards the producers. The southern injector, there's less movement because that injector came on later, and we had some challenges getting water in there, but that's now fixed, and you can start to see some movement there, too. But what you can see is also where the flood from was in 2018 in the blue line. So that shows that we've had relatively little movement in some parts of that between 2018 and now and this point -- and there's other reasons we see less water production in the field. We also look back at the reservoir data that's available to us and identify that the key difference here is that we have more oil in place in the field than we had predicted. And so it's a great result, and it's actually a very useful tool to help us manage and understand the reservoir performance. Hopefully, that's clear for you.

Yes, that's helpful. That's very helpful. And just a second question for me, if I may, just on the exploration side of things. I mean there's not that many companies drilling exploration wells in this price environment. So I think from our standpoint, probably quite a nice change from that perspective. But could you just run us through quickly the kind of key risks of each of those exploration wells you're drilling, just seems a bit your -- where the uncertainty lies?

Yes. Well, so we've got 3 wells in the Barents. They're all different types of prospects. Actually, we have Polmak, which is a sandstone reservoir stratigraphic trap. I mean it's a relatively high risk being a stratigraphic trap, but it's on the eastern side of the Loppa High. There's a lot of oil going through there. So it's an interesting Lundin prospect. And as I say, a lot of potential upside if we have success at that. And then the next one we go to is Bask, which is on the other side of the Loppa High. Again, a stratigraphic trap, a sandstone reservoir target, around 250 million barrel potential, relatively high risk again, but high reward and would also be a potential tieback candidate for Alta development, given its location. So that's a great prospect for us. And then we go down further south to Spissa, which is operated by Equinor. This is a 200 million barrel scale prospect. These are full tilted -- full block sandstone reservoir targets. Actually, there's a number of follow-on prospects here also if we have success. So I think that's a really interesting prospect. So we have, I think, 3 very different prospects to drill between now and the end of the year, completely different geologies, different locations but equally, they're very -- high reward if we have success. So we're excited to see the results there. Hopefully, that gives you the perspective you're after.

Yes. That's helpful.

We will now take our next question. And the question comes from the line of Robin Haworth from Stifel.

Kind of following up on James' one there. You mentioned that some of these -- I think you're drilling a strat trap. So I was just wondering if that coming out of the top size work that you did earlier on? Or have you -- so is it kind of a quick play, say, prospect by prospect risk that you're seeing is kind of going away with better imaging? Or is it -- have you learned something kind of fundamental about the petroleum system that's driving you in a different direction on the exploration side? And then just on Edvard Grieg as well on the reserves upgrade. So I assume that given that you're seeing more oil in place and driven by 4D seismic, is it a question that you basically in your reservoir model, you're putting more good rock into corners of the field that you haven't yet drilled? And so does that certainly have any impact on what we might see the behavior of Sverdrup in due course, just bearing in mind the geological analogies between Edvard Grieg and Johan Sverdrup?

Yes. So perhaps I'll capture the exploration one first. I mean Polmak, the top side doesn't go that far north. So that prospect has been -- it's something we've identified actually for quite some time. And we did talk about at our Capital Markets Day, it's a great prospect. But it is identified on seismic, and we see a nice package of opportunity there pinch-out against the High. But I guess it relies on a stratigraphic trap, so carries associated risk with that. But if we have success there, there's a number of other follow-on opportunities along the same trend. So -- and it's in a good place. So there's been a lot of oil through the Loppa High. So we're excited by that. I think the Bask prospect does capture some element of the top size across there. And again, we've continued to mature our seismic quality over there. And -- but it's a prospect that we've also carried for some time and, again, we think is material, and we like it a lot. But of course, it still carries risk in being a strat trap as well. So hopefully, that gives you a perspective on that. In terms of -- at Edvard Grieg, the oil in place comes from a number of things. Some of it's the improvement in the properties in the reservoir model, so reduced water saturation, improved porosities, slight changes in the oil-water contact, they all drive this, and a redistribution, the way we look at the sands in the reservoir as well. So I think there's a number of components I think that you can put your finger on any one of them. And I don't think you can really read through to Johan Sverdrup. We see a lot of upside on Johan Sverdrup. There's a wide resource range. I think we are fully expecting to see resource reserve growth there. But I don't think performance at Edvard Grieg you can read through to how particularly Johan Sverdrup will go. But what I will say is I think Johan Sverdrup is going to grow over time as we start to see more production history. But it's going to take a bit of time because it's such a big field, you need quite a lot of production in history to start to understand it. Does that help?

Yes. Super.

[Operator Instructions] Your next question comes from the line of Karl Fredrik from ABG.

A question following this transaction and, I guess, underpinning your strategy going forward. Could you talk a bit about capital allocation if you see the magnitude of capital required for the full development of Wisting? And further, if you see any other similar types of transactions that could fit well with your strategy? Also, if you could elaborate a bit on if you see further need for more renewables investments in order to cover any footprint related to Wisting?

Teitur, why don't you get the first one, and I'll cover the second.

Yes. I can do that. But I mean, really, it's too early for us to comment on what sort of CapEx requirements will come with Wisting. We've obviously based our acquisition price on various scenarios, both in terms of CapEx and resource analysis. But we can't really come out and comment upon that. But suffice it to say, when we looked and projected forward on whether it's the credit profile or whether it's the growth and dividend that we can sustain pre or post this acquisition, that picture hasn't really changed. And the main reason is because of the Norwegian tax regime. I mean we will -- we are already now in a cash taxing position, and our cash tax bill is dropping off as we move forward. So to incur these predevelopment or development projects to incur more CapEx is very, very efficient from a tax optimization perspective. As I said, for every $100 we incur in CapEx, $91 is coming back to, say, the taxes. So the liquidity impact is actually quite minimal.

And then on the renewable investments, we've done 2 renewable investments so far that cover around 60% of our current view on our electricity usage, and we will do some further to meet the requirements that we see ahead of us. But it's way too early for us to think about further investments for developments that haven't been sanctioned. So -- but to suffice it to say, we -- our intention is to be in a place where we balance our net electricity usage with generating our own renewable energy. So if we end up in that direction, that sort of will be in our mind -- mindset to do that. But it's, as I say, way too early to think about that.

Okay. May I just shoot in one other question as well? Looking at the M&A market, how do you find it currently? We've seen several transactions in discoveries lately. Do you find it to be a more active market there? Or is it quite active on the producing asset side as well?

I would say it's a bit early in the cycle to see a level of activity, but we do anticipate that it might become more active with low oil prices and people starting to think about strategies and changing strategies and you hear of some of the majors divesting of assets, so -- but it's a little bit early days. I think people want to see that this current environment is here to stay for a bit of time and before they're willing to sell at price -- reduce the oil price outlook. So I think perhaps early days. But the good thing is that we're in a place as a company to take advantage if we see some quality opportunities come forward, just like we've done today. And if we see further quality opportunities that -- where we feel we can do at a price where we can create value, then we're in a position to take advantage.

And your next question comes from the line of David Round, BMO Capital Markets.

Just a quick clarification on one of the earlier answers actually. Teitur, correct me if I'm wrong, but I think you said earlier, you'd like to deleverage or grow the dividend. Am I reading too much into that, i.e., that it's one or the other? And at what oil price could you do both?

Well, if I did say that, I was misspoken. It's -- certainly the case, certainly, is that we want to grow and deleverage and grow the dividend at the same time. And with the cash flow projections we have, that is very, very doable, even at lower oil prices. At half year, we had already generated close to $400 million of free cash flow. It was a pretty depressed oil price environment, that was pre-dividend, but even post-dividend $200 million or so, which is already more -- sort of more than covering this acquisition cost. So I think we will continue to be opportunistic. We have over $1 billion of liquidity headroom within our credit lines. And as Nick said, if we find similar deals at this sort of metric, then we will be very keen to get more of this or similar type assets. So the scenario will for sure be that we will grow dividend as we go into next year. And we will also be able to deleverage the balance sheet.

[Operator Instructions] Your next question comes from the line of Michael Alsford from Citi.

So just a follow-up really actually on the last question on the gearing level. What would you say is your, I guess, optimum absolute level of gearing or maybe net debt-to-EBITDA through cycle? Are we expecting you to delever quite materially as the availability under the RBL amortizes? Or are you going to sort of stay at this sort of level going forward? That's my first question. And then just secondly, could you just touch base on where we were on maybe testing the upside at Sverdrup in terms of capacity, production capacity?

Yes. No, I mean we haven't publicly guided on any specific gearing ratio, Michael. But where we were at the mid-year was, on a pro rata basis, we were roughly 2x net debt-to-EBITDA. And depending on how fourth quarter does, but we will probably be around about that level. And then if you look at into next year, we have already given guidance on CapEx for next year at Capital Markets Day. There may be a few changes to that given the rephasing we've done through this year. But next year, will, again, be a material CapEx year as such. But then -- when you then look at 2022 onward, when all the tiebacks to Edvard Grieg have more or less been completed, and we're at the back end of phase 2 of JS, then the CapEx starts to roll off quite aggressively, actually. So from 2022 onward, that's really when we start to delever quite significantly. And it's in that light as an asset like this would fit quite well into that profile, in that if you submitted a PDO at the end of 2022, we'll probably start to incur some level of CapEx even on this project from 2023 and going out in time. So in terms of production growth and also in terms of CapEx profile going forward, this asset fits to build quite well.

And on the Sverdrup, so testing the production capacity upside on phase 1, I think there was plans to do that before the end of the year?

Yes. Mike, we announced in our Q2 results that, that would be the case, and that's definitely the case. And I think you should watch this space between now and the end of the year. It's a bit early to comment on it. But once it's done, we'll clearly communicate it. But as we mentioned earlier, we're quite hopeful that we'll see capacity grow. Just to remind everyone, design capacity was 440,000 barrels of oil per day, and when we got on to plateau in April this year, ahead of schedule, we're now at 470,000 barrels of oil per day, and we have well capacity now that exceeds that. So there's a program to test the facilities over the next few months. It's not just oil capacity, but we also have to balance with water injections. So both of those things need to be tested to be confident that we can produce at a higher level. But we're quite confident that we'll see some further growth, but we'll have to see in the coming months where that's going to be.

There are no further questions at this time. I will hand back to you, sir.

Thanks very much, Sharon. I've just got one question, gents, from the web, which is from Alwyn at Exane who wanted to ask about tax synergies that might come with the deal and any operational synergies that might come with the deal.

Well, on tax, obviously, in Norway, new tax consolidate on a corporate level as opposed on asset levels. So that is, as I said, one of the main value drivers here is really the tax optimization that we can have in that. Incurring this CapEx on Wisting will immediately be offsetable against a very healthy tax base that we're going to generate in Norway. And as I said, for $100 spend, in the end, you will get $91 back through tax synergies. So it's very efficient from a tax optimization perspective.

On the operational front, there's no direct operational synergies for us, but I think the more activity and the more development that happens in the Barents Sea, you get naturally more operating synergies associated with that. So with Castberg moving ahead and once Wisting goes ahead, there will be clearly some synergies associated with all of that, but not direct to us, Alwyn.

Super. Thanks very much indeed, gents. And thanks, everyone, for listening in. Obviously, if you've got any follow-up questions or want more detail, please don't hesitate to drop us a line. And thanks very much for listening. Have a good day.

Thank you.

Thank you.

That does conclude our conference for today. Thank you for participating. You may all disconnect.