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

Thanks very much, Mark. Good afternoon or good morning, everyone. Welcome to the Lundin Energy Third Quarter 2021 Results Call. We will follow the normal course of business today. Nick Walker, the CEO, will take you through operations and an update on the quarter and Teitur Poulsen, CFO will take you through the financials, and then Nick will finish up with a quick summary. And then Q&A at the end again will follow the normal course. We will take calls from the line first, and then I will moderate any calls from the web. So please get your questions in early, if you want. So thanks very much. And Nick, I will hand over to you.

Well, thanks, Ed, and good afternoon or Good morning, if you are joining us from North America. And of course, welcome to our third quarter 2021 results discussion. I will start off with the key highlights. I am pleased to report another set of record production and financial results for the third quarter. This is underpinned by continued strong operating performance and further strengthening of oil and gas prices. And you can see here, Q3 production was 194,000 boes per day, and we expect full year production to come in towards the top of the guidance range. All of our key projects are on track. The Edvard Grieg tie back projects of Solveig and Rolvsnes achieved first oil in the first quarter on schedule and below budget. And the Johan Sverdrup Phase 2 project is firmly on schedule for first oil in the fourth quarter next year. And yesterday, we announced the strategic acquisition of a further 25% interest in the Wisting development. I think this is a great deal for us. It adds 130 million barrels of resources at a price of $2.50 per barrel, which I think is very value accretive. And further supports the long-term production outlook for our business. On top of that, a high-quality cash-generative business delivered record financial results in the quarter. You can see operating costs here of $2.90 per boe, which is better than guidance. And we delivered record free cash flow for the period of $1.6 billion, resulting in deleveraging of the business. And you can see net debt at the end of the period is $2.6 billion. And I am pleased to note that the Board of Directors anticipate to propose to the 2022 AGM, a 25% increased dividend for 2021 of $2.25 per share, which in total is $640 million. And I think this clearly demonstrates our commitment to grow shareholder returns. And we continue to be firmly positioned as an industry leader on carbon emissions. And during the quarter, we further accelerated our decarbonization plan to become carbon neutral by 2023 from our operational emissions. And already today, 60% of our production is independently certified as carbon neutrally produced, and I see this as a key value differentiator for Lundin Energy looking forward. So in summary, we delivered another set of excellent results in the third quarter, and all of our key business priorities are on track. And now what I want to do is step through some of the details supporting this performance. So first of all, looking at production. Our world-class assets keep on outperforming. As I have mentioned, our 3Q production was 194,000 boes per day, which was towards the top of the guidance range, as you can see on the chart, and that's now 25 quarters running that we have met or exceeded guidance. And this performance continues to be driven by excellent production efficiencies across all assets and additional facilities capacity at Edvard Grieg due to further declines at Eva Olson. And when we look forward, we expect the production for the full year to come in towards the upper end of the guidance range, which I think you will recall is between 180,000 boes to 195,000 boes per day. So we should come in towards the top of that range. This delivery is backed by continued top-tier operating performance, which you can see shown on this chart with excellent production efficiency metrics of 95% to 98% across all our assets. I have already talked about operating cost of $2.90 per barrel, which is better than guidance, and these are truly industry-leading levels. And also really good performance on carbon emissions, 2.9 kilograms of CO2 per boe and to put that into context, that's 1/6th of the world's average. And importantly, we again delivered safe operations in the quarter. So I think stellar operating metrics all around. Turning now to our decarbonization plan where we are firmly an industry leader. We are making great progress. And during the quarter, we further accelerated our plans to become carbon neutral from operational emissions by 2023. And to recap, the plan is supported by real action around 3 key pillars: firstly, reducing emissions with electrification of our assets with power from Shore, which you can see on the chart significantly reduces our carbon emissions; secondly, replacing and offsetting our power usage with our own investments in renewables. And then thirdly, what we can't reduce a commitment to nature-based carbon capture through quality reforestation projects to neutralize the balance. And this means that by 2023, every barrel that we produce will be independently certified as carbon neutrally produced. And we are continuing to work to build a market for carbon neutrally produced barrels. I think we are seeing lots of interest, and we have made quite a number of sales on that basis. And as I mentioned, I see this as a key value differentiator for the company looking forward. And the key aspect of our decarbonization plan is powering our business with renewables. We are on track with the power from shore projects that Johan Sverdrup and at Edvard Grieg. Our target is to meet all of our own power usage with our own generated renewable energy and our Leikanger Hydropower investment in Norway, as you can see from the chart covers around 40% of our net power usage this year. The MLK wind farm in Finland, which you can see in the photo, has just started generating power and will be fully operational by the end of the year. And our Swedish Karskruv wind farm will be online at the end of 2023. By which time, as you can see in the chart, we will have net generating capacity of around 600 gigawatts hours per annum, which covers all of our usage, including the required we now need for Wisting. And this means that by the end of 2023, our business will be fully powered by our own generated renewable energy. So now turning to our world-class assets that underpin our business performance. Firstly, Johan Sverdrup continues to perform at an extremely high level, with Phase 1 operating very stably at 535,000 barrels of oil per day gross with extremely high production efficiency. And you can see some stellar operating metrics. OpEx is well under $2 a barrel and exceptionally low carbon emissions, more than a 100x better than the world's average. And when Phase 2 comes online, this will lift field capacity levels to over 755,000 barrels of oil per day. And to put that into context, it's about 25% of Norway's total production. And we continue to see excellent reservoir performance. And based on the company's latest technical assessments, there is potential for increased resources and also to extend the plateau through infill drilling, and we are working to complete this work as part of our reservoir process. So I think you will hear more of that in the coming months. So now looking at Phase 2 of Johan Sverdrup. The project remains firmly on track for first oil in Q4 of next year and with costs unchanged from the PDO. And I think the key elements of the projects are coming together very nicely. We reported in the last quarter that the jacket for the Phase II platform and a large module on the existing rider platform were installed in the summer. The subsea facilities are being installed at the moment and will be complete by the end of the year, which will allow drilling operations on the subsea wells to commence early next year. And in the photo, you can see the fully assembled Phase 2 process top size, which is being completed in Norway and will be installed offshore in the second quarter next year. So in summary, Johan Sverdrup continues to deliver above expectations, and everything is on track for Phase 2. So now turning to the Greater Edvard Grieg area, where we are delivering on our multiple projects that will keep the facilities full in the long term. At Edvard Grieg, we have had excellent results from the infill well program, which I will cover in the next slide. And we continue to see the benefits of facilities capacity upside with Eva Olson clearly in the decline phase. And we're on track with our power from shore project for completion at the end of next year. The Solveig and Rolvsnes tie back projects, which flow through Edvard Grieg. I will talk about it in a moment. They are now online. And we recently completed a successful appraisal well and test of the Lille Prinsen discovery, and we are now moving forward with development studies to potentially submit a PDO by the end of 2022. And we are also working hard to bring forward a number of new opportunities, and I expect we will be exploring and appraising in this area for many years to come. So now focusing on the Edvard Grieg reservoir. The performance continues to exceed expectations, which I expect will lead to a reserve increase and further plateau extension, and we will update on that with our 2021 year-end reserves process. We have had great results from the 3 well infill well program in the field. As highlighted on the map, you can see the 3 wells that have been drilled, and this is now complete, with results from all 3 infills well in line were better than expected. And this is a great project with stellar economics and to remind the breakevens for this project are less than $20 a barrel. And we are already beginning to think about the further phase of infill drilling. So the Edvard Grieg reservoir continues to outperform and continues to offer upside. So now focusing on the tie back projects to Edvard Grieg. I am pleased to report that we have delivered first oil from Solveig Phase I on schedule and below budget. And this is a key project for us to sustain production through the Edvard Grieg facilities that will produce, as you can see, a plateau rate of 300 -- of 30,000 barrels of oil per day gross. The project's got great economics with a breakeven oil price of below $20 a barrel. And I think this shows the value of tie back projects into existing facilities. You can see from the chart that the first 2 horizontal production wells have been completed, and we saw excellent results that are better than expected, and I anticipate this will lead to a reserve increase at year-end. The third producer is currently drilling, and then we have got 2 water injectors to complete, which will be done in the first quarter next year. And that will complete the Phase I development. The early production results here are key to de-risking a possible Solveig Phase II project, which on success we aim to bring forward for PDO at the end of 2022. And there's quite a lot of upside here. You can see that the whole area has a potential up to 100 million barrels of oil equivalent gross. So it's quite a big prize for us if we can move forward with a Phase 2 development. So this has been a great project for us so far. I think it's going to be super exciting to see the production results. And hopefully, then we can move forward with a Phase 2 project in the area. We have also delivered Rolvsnes well test projects, again, on schedule and on budget. This is an exciting project and its aims at unlocking significant potential resources in weathered and fractured basement reservoirs on Utsira High, and early production performance from the extended well test is in line with expectations, which is, I think, very encouraging. The aim of EWT is to gain a better understanding of the long-term production performance of the reservoir. And on success, the potential to unlock a full field development here at Rolvsnes with -- you can see resources up to 80 million barrels gross. So in parallel, with understanding the reservoir, we are moving forward the development studies, and we are ready to submit a PDO at the end of next year if the reservoir performance supports that. And success would unlock significant additional basement potential in the area, potentially up to another 100 million barrels gross. So I think it's going to be super exciting to see how the EWT performance goes over the next year. And hopefully, then we can step into a full field developments here and start to think about the other opportunities that are available in the area. And this chart we have shown before. I think it pulls all of the elements of the greater Edvard Grieg area together and remind you of the long-term production outlook for the area. We have already stated in the past that the plateau has been extended to the end of 2023. That's 5 years on from where the original PDO was. And with Eva Olson on decline, it allows production through the Edvard Grieg facility to further expand, as you can see, which has already increased production from the contractual levels that we have at Eva Olson for 95,000 boes per day, and we have the potential to lift this up to 135,000 barrels a day as Eva Olson declined further. And the key thing here is that we have the well capacity to use, any of the capacity that's available to us. And I think there's lots more upside in the area with the potential to keep the facilities full in the longer term. And as I have discussed, we are working super hard to bring forward a number of those new projects in the area. And I think it's going to continue to be an exciting opportunity to grow resources here. Just one slide on the Alvheim area. This continues to be a good asset for us. So it's got a strong track record of continued growing reserves and creating value. And it continues to progress multiple opportunities in the area. With 3 infill wells planned this year, 2 have been completed, with results in line with expectations, and the third well is currently drilling. And with 3 new projects being progressed. PDOs have been submitted for the Kobra East and Gekko and Frosk projects, and these projects are now moving forward and concept studies are ongoing on the Trell & Trine development with the aim to submit to PDO next year. And all of these projects have been progressed under the Norwegian temporary tax regime and have great economics with the breakevens in the $25 to $30 per barrel range. And you can see from the chart what these do for us, together, they add 65 million barrels of gross reserves and delivered gross peak production of up to 45,000 boes per day. So I think it's super encouraging that we continue to find opportunities here to create value. And I think there's still more to come in the future. And turning now to Wisting. I was super pleased yesterday that we could announce that we have acquired a further interest in the Wisting oil developments. Last year, we acquired 10% in Wisting and Idemitsu and at the time we said we made it clear that we'd have liked more. And it's great this opportunity has come along for us. This deal with OMV gives us an additional 25% in the project, taking our working interest to 35%. I think this is a strategic deal. It creates the next production core area for the company and supports the long-term production outlook for our business. And you can see the deal adds a 130 million barrels of net fully appraised contingent resources at our acquisition price of approximately $2.50 per barrel, which I think is very value accretive. And the addition of these resources alone, you can see delivers a total resource replacement ratio for the company in 2021 of about 190%. Wisting is a high-quality 500 million barrel project with strong economics. At the moment, the finalization of the concept select for the project is ongoing, and the PDO is planned to be submitted by the end of next year. And as this development is being powered from shore, the deal is fully aligned with our decarbonization strategy. And on top of that, we see significant exploration upside close to Wisting, with the surrounding acreage estimated to hold another 500 million barrels of oil of un-risked prospective resources. So I think this stills a perfect example of how we look to supplement our organic growth strategy with opportunistic acquisitions and fitting our ambition to sustain our business in the long term. So I was super pleased that we could do this. So we are continuing to deliver on our growth strategy. The business is set to produce over 200,000 barrels a day by 2023. In fact, we are almost there. And that's supported by the projects that we have recently completed and those that are underway. And we aim to sustain at those levels with a pipeline of new projects. We have got 2 projects heading to sanction. 3 projects are being de-risked. And we aim to also deliver future value. For example, the strategic acquisition of Wisting is a good example of that, but we also aim to continue our material exploration program. As I have mentioned, we are set to, again, [ more ] than replace our resources, the Wisting deal alone has almost 2x this year's production, showing we continue to grow the business. And so I remain really excited by the growth opportunities and prospects ahead, and I am confident that we can continue to sustain our business in the longer term. So that wraps up the operations overview. And with that, I will now hand over to Teitur to review our financials.

Okay. Thanks very much, Nick, and good morning or good afternoon, everybody. So I think third quarter, again, can be categorized as a very solid financial performance quarter for us, obviously, driven by the outstanding operational performance, very strong cash generation overall. And we continue to delever and, therefore, to build the balance sheet strength. So some of the key financial highlights on this first slide here, and Nick has been through the production volume, but our financials are, as usual, driven off sales volumes. And you can see in this quarter, we were over lifted by around about 7,000 barrels of oil equivalent per day with both Edvard Grieg and Alvheim being over lifted whilst Johan Sverdrup was somewhat under lifted during the quarter. Hydrocarbon prices is very much theme of the today, these days and [ during ] third quarter are very strong realized prices, both on oil and gas, $72 for oil. And actually over $100 per boe in central gas price, $16.8 per Mcf. Costs continue to be very much in control. And in fact, as you are seeing, we are guiding down full year CapEx guidance for the year. But in the quarter, OpEx was just over $3 per barrel. And we had oil and gas investments of $322 million and renewable CapEx, which also includes carbon capture investments of $21 million. So this has now generated yet another record EBITDA -- EBITDAX number of close to $1.3 billion. And for the first time, also cash flows from operation in excess of $1 billion for one quarter and then generating $674 million of free cash flow before the dividends. And as Nick mentioned, just over $2.6 billion of net debt at the end of the third quarter, which now leaves our net debt to a 12 months trading EBITDA at 0.7x. Then looking on the next slide and some of the key financial metrics that we measure ourselves on. You can see on the top right, the volume results equated to 18.5 million barrels oil equivalent, which is up 38% on the same period last year and 13% on the previous quarter. And as I said, sales prices per boe, $72.8, which again is significantly up on both the prior -- same period last year, 78%, 79% up and 9% up on the previous quarter. So you can see our EBITDA generation up 21%, driven off a total revenue of close to $1.5 billion. So EBITDA of $1.28 billion. Cash flows from operation, over $1 billion. This includes now higher tax installments, $321 million installed in the quarter, which is up from the second quarter. But CFFO was also somewhat positively impacted by an [ online ] of working capital of $91 million. We had total investments during the quarter of $338 million. So that leaves free cash flow generation of $674 million, which is covered more than 5x the dividend we paid out in the quarter of $128 million. And the free cash flow is up 59% on the previous quarter. And the net -- sorry, the net adjusted results for the quarter is $234 million. Then on the next slide, following in on our realized prices for oil sales. In the bottom left, you can see that the data breadth average for the third quarter was $73.50. The timing impact in this quarter was a negative $0.50. We had a disproportionate amount of volume lifted during August and out of the 3 months during the quarter, August was the weaker pricing month. And then we had the physical discount of $1.40, which is an improvement on second quarter when we had fiscal discount of $2.10. So that left us with a realized oil price of $71.6 for all the cargos that we sold during the quarter. And on the chart to the right, you can see that the all-in blended cost was $72.80 when you include the gas and the NGLs, so actually a higher price than what we achieved for the oil on a stand-alone basis. Then going to the next slide and just a slide on gas. It's not something that normally shines through in our numbers to the gas revenues, but given where gas prices have been recently, this is now starting to make an impact on our financials. Just to remind people, all our gas sold the spot Edvard Grieg and online gas goes through some progress in the U.K. whilst the Johan Sverdrup goes via the [ cocostia ] terminal in Norway and then in on the Dutch market. And all gas sold on a day-ahead principle. And you can see the volume we sold in Q3, just over 12,000 barrels of oil equivalent per day. And you can also see how the gas price has strengthened during the quarter accretively full year, particularly in the quarter and finishing the quarter in excess of $120 per boe. So very strong gas price realization. And as I said, on average, for the quarter, $101 boe equivalent for our gas sales. Then also looking at the working capital trend. You can see in the previous 4 quarters we have continued to build our working capital position. That's really been reflected through an increasing oil price environment over those 4 quarters and also increasing production. And since that was also the trend in the third quarter, you would logically expect Q3 also to continue to build working capital. But in fact, what happened here is that we have around working capital close to $100 million in the quarter. And the reason for that can be explained by those 3 small bars in the top right, where you can see that in July, August were the 2 months where we lifted the majority of the volume, close to 75% of the volume was lifted over those 2 months. And given that we invoice on a 30-day payment term, it means that we got paid for both July and August. And that's really what led to an unwinding of working capital in the quarter. So 3 quarters of the volume was lifted over the first 2 months, and therefore, we have got full payment for those volumes. If we then go and look at the operating cost and EBITDA margin, operating costs continue to be extremely low as [ leaping ] the industry-leading in reality. The NOK has continued to strengthen somewhat. And given that all our costs, more or less, all of our operating costs are NOK denominated with a stronger NOK that leads to somewhat higher U.S. dollar costs. But nevertheless, still just over $3 a barrel during the quarter. And in absolute numbers, just below $60 million, and we reiterate the full year guidance of $3 for the full year. And you can also see here on the EBITDA margin continues to be extremely strong. The average for the 9 months are around about 94%. And also 94% in the third quarter. Then turning to taxes. If you start with the top 2 charts. First, this is the tax rate we reported on the phase of the income statement, a pretax profit of $936 million and a tax charge of $800 million. So that equates to an 85% tax rate on the face of the income statement. But that includes FX loss of $97 million and most of that FX loss is non-tax deductible, which therefore drives off the effective tax rate. But if we adjust for the FX and some other smaller items, then the underlying operational tax rate we have had is round about 77%, which is in line with the effective tax rate in Norway of 78%. In terms of cash tax payments, as I mentioned earlier, you can see in the bottom here, the third quarter in payments, $321 million. And what you also see here in the fourth quarter, we are going to pay based on a NOK exchange rate of NOK 8.5. we are paying $722 million. Of that, around about $640 million relates to the 2021 tax installments and another $80 million relates to our catch-up payment to fully settle our 2020 tax bill. And we are also providing here a look ahead on the first half next year in terms of tax installments, we anticipate to pay to fully settle the 2021 tax bill. So based on an oil price deck of $70 to $90 for the fourth quarter this year, we expect to pay in the first half of next year, somewhere between $1.46 billion to $1.72 billion of tax installments spread across those 2 first and second quarter, as you can see here, as I said, to fully settle the 2021 tax bills. And you can see also on our balance sheet at the end of third quarter, we have booked a tax liability of $1.4 billion relating to this year's tax charge and also to catch-up payment to make for 2020. Then looking at cash flow generation, organic CFFO, $921 million and then unwinding of working capital, as I mentioned earlier, of $91 million. So that takes us above $1 billion of CFFO generation just in the third quarter. The investments we have been through just below $340 million. So that's how we generate the free cash flow number of $674 million during the quarter. The dividends we are paying is $128 million per quarter. So for the full year 2020 dividend, we are going to pay $512 million all in. And that then leaves our cash bills for the quarter of $531 million, which therefore leaves the company with a cash balance at the end of the third quarter of $853 million. On liquidity position and debt position on the right here, you see how the net debt is derived. We have $2 billion of bonds outstanding, and we have $1.5 billion of term loans outstanding or gross debt of [ $3.5 billion ]. And as I said, just over $850 million of cash, which leaves us with a net debt acquisition of $2.6 billion. And that leaves the company with a very solid liquidity position of $2.4 billion when we add in the undrawn revolving credit facility of $1.5 billion. On the bottom left here, you can see the maturity profile of the debt instruments we have outstanding, and the average maturity here is 5.25 years, and we actually have no maturities falling until the end of 2023 when a terminal of $0.5 million matures. And also on the investment-grade credit ratings, we continue to have 3 ratings publicly available. And all of those 3 are still higher than investment grades. Then just a recap on our latest guidance. Nick has been through the production volume. And as I said, 3 year -- sorry, $3 a barrel OpEx is still our full year guidance on that front. As I mentioned, we are taking down our CapEx guidance to $770 million for the full year. That's driven by some CapEx savings on both Solveig and Edvard Grieg through better drilling performance than expected and also some rephasing of Rolvsnes CapEx. While G&A expenditure is increasing to $325 million. And a big chunk of that relates to the 25% additional acquisition of Wisting oilfield, which has an effective date of January 1st this year. So therefore, we have accounted for all costs incurred from that point onward. And renewables continues to be at $100 million for the full year, reflecting this latest Swedish wind farm we acquired earlier in the year. And my last slide then is just to be up on the dividends in the third quarter, we paid the second quarter dividend in early July, and we have already paid the third quarter dividend, which will then be reflected in our fourth quarter which we paid out in early October. And the big news, of course, is that the Board of Directors anticipate to propose to the AGM next year, an increase of 25% in dividends to $2.25, which will create an absolute number of $640 million of payout, which is still going to be significantly less than half of the free cash flow generation we have during this year. So that concludes my commentary, and I will hand back to Nick for concluding remarks.

Yes. Thanks, Teitur. And I have just got one final slide to summarize. I want to leave you with the message that we delivered another set of record results during the quarter. And all of our main business priorities are on track. And the key points I listed on this slide, first, are world-class assets, keep on outperforming, yielding record production and operating costs ahead of guidance. Second, we delivered record free cash flow and have a really strong financial outlook for the business, which supports the increased dividend proposal that we have talked about. Thirdly, all of our key projects are on track, providing growth to over 200,000 boes per day by 2023. And in fact, when you reflect back on our Capital Markets Day, we are set to go somewhat higher than that. And we have a pipeline of opportunities to sustain at that level. And fourthly, as we talked about, we have announced yesterday, the Wisting acquisition. I think this is a great deal, and I think it further supports the long-term production outlook for the company. And the fifth element is that we further accelerated our decarbonization plans to be carbon neutral by 2023 from operational emissions. And crucially, we are already 60% of the way there today. So those are our third quarter 2021 results. Thank you for your time. We'd now like to open up the call for your questions. So I think it's back to you, Ed, or the operator?

[Operator Instructions] Our first question comes from the line of Sasikanth Chilukuru of Morgan Stanley.

I had 2, please, both related to the Barents Sea. Now that you have quite the additional 25% stake here, and you have a 35% stake in Wisting and you established another core area in the Barents Sea. However, there have been issues of major cost escalations or dealers with projects associated with the developments in Barents Sea, Goliat and more recently, Johan Castberg. And Wisting is further away from the shore. I was just wondering, when you look at -- how do you actually -- or how did you actually account for the development risks associated for a project like Wisting, especially before increasing your stake in the project here or committing to what's likely to be a very big CapEx program. The second question was also sticking to the Barents Sea. But in terms of exploration, 2021 so far has turned out to be another disappointing year for exploration in this area. You highlight un-risk prospective resources around the Wisting area. Will you be restricting your exploration program towards that area in the Wisting or are you still optimistic about exploring in other parts of the Barents Sea?

They are both good questions. I can't really comment on Goliat and Johan Castberg. We are not involved in those projects. But what I will say is that we have been Equinor, the operator of Wisting during the development phase, and we enjoy a tremendous performance with Equinor on the Johan Sverdrup, and they have done an amazing job to deliver that project. Both Phase 1 and Phase 2 looks like it's going to come in on schedule and below budget. And so we think with the right structure, with the right focus on the project that we can -- there's no reason why our project in the bands can't be delivered efficiently and on schedule. And I am sure that's the motivation for Equinor. In fact, I know that is. So I think we also carry an element of contingency in all our numbers. And as a project comes closer to sanction, you reduce that level of contingency. So we have quite a wide range of cost estimates. But when you take those cost estimates at the end, we see that we have strong economics even on downside cases. So I think we are confident that we can move this forward. And I am sure that the project will be set up in a way to deliver on schedule and on budget. And so we feel confident about that. And then around exploration, it's true that there hasn't been a lot of recent success in the bands, but it's a big area. And there's some -- a number of big projects already there, Castberg, Wisting, Goliat, Solveig and I think there's more to come. And of course, building this material position in Wisting, I think we are motivated to explore around Wisting. And we have been building the acreage there, joining with the partners. So we are excited by those opportunities. There are some similar prospects with similar seismic attributes that you see over Wisting in those prospects. So those are the opportunities that we have. It's -- I think we have probably one other well to be drilled there next year, which is the only other commitment where we have. That's closer to Goliat. But we have a big exploration portfolio also in other parts of Norway, and we continue to drill in those areas as well. So hopefully, that answers your good questions.

Sure. If I can just have one follow-up or a clarification, essentially regarding the acquisition. There's this increase in the E&A expenditure of around $65 million related to this Wisting acquisition. I was just wondering, will that be a payment towards to OMV or how do we account for that or is it already considered in the cash consideration of $320 million?

Yes. No, that will be a catch-up payment that we have to make to OMV because they have effectively been funding the 25% spend on that license from January 1st. And given that our deal is affected from early January, we have to repay them whatever they have funded from January 1st to the completion of the deal.

Next question comes from the line of Teodor Nilsen of SB1 Markets.

Two questions, if I may. First, on the dividend versus cash flow, Teitur, you pointed out that cash flow this quarter is 5x the dividend. And then looking into 2022 on your indication of 2022 dividend, it still looks like you will pay pretty low share of your earnings and cash flow in dividends. So I just wonder, going forward, should we expect you to pay a pretty low share of earnings and free cash flow in dividends? And secondly, on deal you did with Idemitsu, which looks very exciting. I just wonder the difference in the price you paid for the first 10% or $1.8 compared to the $2.5 you paid now. How much of that is explained by CapEx invested from last year until the time of deal closing now and how much it expand by other factors?

Yes. I mean, on the dividend, I mean, we have been very clear, and we are just following our policy really, which is that we want to continue to grow dividend year-on-year in line with our financial performance. And that's what this latest proposed dividend increase is doing. Of course, this year's free cash flow number is looking somewhat better because of the tax installed -- phasing of the tax installment. So there is a catch-up payment of cash taxes next year, as we showed on our slide. But even so you are right that our free cash flow should exceed the dividends we are proposing now. So that means that we will continue to delever the balance sheet next year also even after dividend payments. But we need to look at this through the cycle, and we need to set the dividend level so that we can actually follow the policy of increasing it year-on-year. So we look out more than just 1 year, we look out a number of years and make sure that we can actually fulfill that increase over that time frame.

And I think on the second question, I mean, the deal we did with Idemitsu, we didn't just include 10% of Wisting. It also included a share of Alta. And so when we quoted the purchase price for that deal, it included the resources that we picked up from Alta. So if you actually split those out, we play very similar amounts for the Wisting share that we have received from OMV as to the deal that we did last year with Idemitsu.

Okay. Understood. And just a follow-on on can you remind me on the gas oil portion?

On gas oil, it's almost 100% oil. It's very, very small amount of gas. It's a shallow field with low pressure. So you don't get much gas. The gas is exported and -- but it's basically no value in the development.

Our next question comes from the line of Michael Alsford at Citigroup.

A couple of from me actually. And maybe following up a little bit on the last question around the sort of cash flow breakdown next year. Could you maybe try to isolate what the catch-up payment is for the 2021 tax payment in your guidance for 2022 tax. And just to pick up on your question or your comment around the fact that you think you will generate free cash flow next year. I am just wondering what that oil price is that you need to deliver that because, I guess, with the CapEx -- CapEx, obviously, rising probably with Wisting investment. You have got clearly the cash taxes increasing substantially. It would seem to me that you would need at least $65 to meet that sort of threshold. Maybe you could talk a bit about that, please? And then just secondly, on exploration. You spent sort of $100 million this year and really found limited amount of organic reserves. So it's another year of inorganic reserve replacement, which is still a way to replace reserves. But I was just wondering how do we think about investment going forward? So how much exploration spend should we expect from the business maybe going forward in 2022 and beyond?

Yes. Michael, maybe I can start on your tax question. I mean, what we are guiding on the slide on tax is a payment in Q1 of next year of round about $575 million. And then another 2 tax installments in Q2 next year of $1.1 billion or so -- $1.1 billion so that makes a total payment of $1.40 billion to $1.7 billion, depending on what realized price we get in the fourth quarter to the quarter we are currently in. So those tax installments fully relate to the 2021 tax charge that we are accruing for. And then it's only from August next year that we then start to pay tax installments relating to 2022. And we haven't given any further guidance on that in terms of what that tax charge will be. But it's obviously clear that when you look at the cash taxes we have to pay next year, they are going to be significantly higher than the taxes we have paid this year because the 2020 fiscal year was a much weaker year macro wise. So therefore, the tax bill from 2022 spilling into 2021 was significantly lower. But we will give further guidance on our cash flow breakdown for 2022 as we normally do, including what oil prices we need to achieve for breakeven, pre and post-dividend payments.

And then, Michael, for your question around exploration. I think the way to look at this is that we see exploration and resource growth coming in multiple areas. First of all, step-outs around our world-class fields and then near-field exploration opportunities in the mature areas in the basins. And then a component that we dedicate to the frontier basins where we see higher reward, but higher risk. And then we supplement that with opportunistic acquisitions. And I see all of those as levers to continue to sustain and grow the resource base for the business. I think it's fair to say we haven't had much success on the frontier exploration opportunities for a while. But the other area is, I think we have had a lot of success on near field step outs. And of course, some of the acquisitions, I think, have been very value accretive. And I think if you look over the last 5 years, we have had 150% resource replacement ratio averaged over that period of time. So for every barrel we have produced in the last 5 years, we have added 1.5 barrels, so growing the business. And then I think I am quite confident now looking at where we are in the business that we are going to have a resource replacement ratio this year towards 2x what we produce and Wisting alone does that. And so again, growing the business. So I think we have had a lot of success growing the business. I think we can keep doing it. But yes, it's true that our frontier areas haven't -- exploration haven't particularly delivered for us. But I guess, for me, it doesn't matter where it comes, as long as it comes, and that's what we have been doing. I think when you look at the expenditure levels, I think we have got quite a heavy load of appraisal spend this year in our exploration appraisal spend. So that's quite a big component. All of the, for example, the study money that we talked about on Wisting goes into that bucket. And we have drilled quite a number of appraisal wells. So relatively speaking, of the $325 million that we are guiding for this year, it's a relatively small amount is on sort of frontier exploration areas. I think we have tended to guide somewhere between $200 million and $300 million per year on exploration appraisal, and we haven't really set our plans for next year. But we will do that around the Capital Markets Day, and it's coming together at the moment, but you can expect it to be in that sort of range for next year. Hopefully, that answers your question.

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

I just would like to ask a few questions again on the Barents Sea. Is it fair to say that bringing forward the dividend upgrade announcements, which comes something like 3 months ahead of your CMD has a lot to do with the Wisting announced last night. Just trying to understand if there is basically a link between the timing of the dividend upgrade announcement and the Wisting deal. Then again, on the Barents Sea, you referred to that area in the vicinity of Wisting and you stated basically that there is un-risk prospective resource potential of 500 million barrel, how much of this can be targeted next year as part of your ENA program? And then maybe a final question, looking away from the Barents Sea and thinking about the Edvard Grieg, are you able to say how much of the reduction you had this year in your development and expenditure budget came from this better-than-expected trading performance at Edvard Grieg and Solveig?

Okay. Yes. No, good question. So in terms of the exploration area around Wisting, we see some good prospects there and -- but Wisting's on a development time scale, which will be 2028 first production and then we won't have capacity for some years after that. So I think what we are looking at is the exploration will come some years from now. The first step is to put the acreage together and develop the plans. And really, we need to explore in the time frame that can keep the facilities full in the long-term because these would be tie back type opportunities to Wisting. So hopefully, that gives you a sense. It may be 3 or 4 years from now that we start to drill some of these opportunities. So if it's good upside, then we will continue to study them and do seismic surveys and analysis to move those forward. In terms of the timing of the 2 announcements, there's absolutely no correlation between them. I think in terms of bringing forward our dividend announcement, it's -- the business is in such great shape. We keep getting asked so many questions around what's the dividend going being for next year, and we thought it would be good to provide some forward guidance rather than wait until our Capital Markets Day at the end of January. So there's absolutely no correlation between the 2. The business is able to fund both growth and deleverage the business as well as fund a growing dividend. So we don't see that there's any conflict there. And then your final question, I didn't follow exactly what it was around Edvard Grieg?

Yes, it was on the CapEx.

Savings. So we are reducing it from $850 million to $770 million. So it's round about an $80 million drop. And in rough numbers, roughly half of it relates to Johan Sverdrup and the other half relates to the -- most of the savings on Solveig and the Edvard Grieg campaign.

And our next question comes from the line of Karl Schjøtt-Pedersen of ABG Sundal Collier.

Two, if I may, both related to this Wisting. First, is this a free start that would have been developed without the temporary tax regime in Norway? And as a kind of part to that question, what is the 2020 time line is not met? Is it something that we should expect to be developed regardless? And the second question is, if it proves that electrification of Wisting is not feasible, is it still an asset that you would be cleaner? Or is it an asset that does not fit with your low carbon strategy?

Yes. I mean in terms of the timing, I mean, it's absolutely on the trajectory to get sanctioned at the end of next year. So I don't think there's any question about that, that happening. There's a lot of motivation to do that. The project's going to make concept select about sort of defining the exact concept, which is coming very shortly. And actually, the feed contract has been awarded to Aker Solutions already. So this is moving forward, in my view, and we are very confident that we will get to PDO at the end of next year. And in terms of -- could you remind me of your second question again?

That was regarding electrification. If it proves not to be feasible.

Yes, yes, sure. In terms of electrification, the technology as is 300 kilometers offshore, but the technology is well advanced for doing this, and it's perfectly feasible to do it. To give you a sense, there's been a recent connector built from the U.K. to Norway, which is further distant than that, and that's become operational. So I don't think there's any doubt that this is going to be electrified.

It's also feasible from an economic point of view?

Yes. Yes, it's all part of the project concept that's being defined at the moment and has been engineered for sanction at the end of next year.

Our next question comes from the line of James Thompson from JPMorgan.

I have 3 questions for me, actually. First of all, Nick, are we now into a time where effectively it's kind of continuous drilling on Edvard Grieg? I mean you had kind of first infill campaign, you are now talking about another one. I mean should we just expect it now to be a sort of consistent drilling program there? And then secondly, on Edvard Grieg, you kind of formally increased your allocation in the facility now? I think you talked about sort of 95 heading upwards. I mean, obviously, you have got full access to it at any time. But is there sort of a form of change in the amount you are able to utilize every day?

Good questions. We have just come to the end of the current infill drilling campaign of 3 wells. The rig will depart from the field very shortly. And then we are starting to plan another infill campaign, which we haven't defined when the timing is going to be. And so that could be a year or 2 away. We need to define what the program is going to be. We will probably do another 4D seismic survey next year, which will help define the opportunities. And of course, we like to continue to see field performance. But I think it's probably not going to be the final infill program when we do the next one. So I'm sure we'll be drilling here on and off for many years and not just in the field but around it because I think there's lots of opportunity. So you can see developments of the full field on Rolvsnes as a potential and further phase of Solveig and other exploration appraisal in the area. So I think we will be drilling overall in the whole area for many, many years.

Okay. And sort of -- but I guess not so much drilling on the field itself next year when you have Solveig and -- you are not going to be drilling much on Grieg next year?

No, we [ won't have ] a drilling on Edvard Grieg next year and in fact Solveig, we will be completing the Phase 1 development drilling. So by the end of the first quarter, we should be finished with the water injectors that we need to drill there and then the rig will depart that field. So what we are now doing is starting to plan for the future phases, full field on Rolvsnes, if we see success with the extended well test Phase 2 at Solveig. Both of those projects, hopefully, we can move forward at the end of next year. And I am hoping, during next year, we can also define another phase of infill drilling at Edvard Grieg. So as I say, I think we will be drilling here for many years. There's lots of upside.

Just on Wisting, I mean, obviously, you have got quite a big state there now. Are you able to give us any color at this stage in terms of the kind of CapEx that you are going to be exposed to ahead of first oil?

No, we are not. I think we can -- we tend to update on our capital guidance outlook at our Capital Markets Day, and I think we will do that again, and it's a bit early to be doing that, particularly given the project's in its definition stage. So that's something for the future.

I thought it's quite interesting in your pack that you talked about the amount of gas that you are going to be able to sell because of the electrification strategy in 2023, I mean, I think that's one part I'd be interested to know as well. Obviously, carbon prices have been going up and up and up in 2021, do you have a good estimate for how much you saved in dollar terms by your electrification strategy this year? And the second part on that kind of cost angle is, are you starting to see much cost inflation at all in Norway. I mean, clearly, your operating costs are sector leading. But prices are rising, and I am sure service contract is going to get paid. So are you seeing much pressure there?

Yes. So on the first question, I mean, I think it's well-known that carbon taxes in Norway at the moment are just over $100 a tonne, and it was announced a while ago that they would progressively increase to $240 a tonne by 2030. If we look like a field on electrification net to us, we are saving through electrification, about $1.4 billion on carbon taxes by electrification. So it's material. And so it's a big part of the value creation that we get from it. And of course, we don't -- as carbon taxes go up, we are not going to be paying any more. So it gets better and better. In terms of inflation, I think it's a good question. And I think obviously, we are going to see some inflation. I think we haven't seen it into the services yet. I think still things like drilling activity is not -- is relatively modest. So I think in terms of that area, we are probably okay for now. But I think, of course, where we need materials that are on a worldwide market like steel, for example, I am sure we are going to see growth there. And we haven't already seen it into our business, but it's -- as we start to define new projects, I am sure we are going to see cost growth there. But we have already, I think, built in latest cost growth into the outlooks that we have, but it's going to be sort of clear to us that we need to understand what this looks like going forward and are we looking at short-term inflation or is it a longer-term structural change.

Our next question comes from the line of Al Stanton at RBC.

Yes. I've just got one question, so I will be fairly quick. And it's for Teitur. I don't think you spoke out in the presentation, but I think it is in today's release that your forecast for fourth quarter cash flow from operations is $400 million to $500 million, which is a bit less than I am assuming. And you are also guiding to either no free cash flow or negative free cash flow of $200 million. So I am wondering, in addition to the big Tax bill, the $700 million tax bill and the $320 million acquisition, is there any other chunky numbers that we should just look out for in the fourth quarter?

No, not really, but the reason why there could be flat to even negative free cash flow during the fourth quarter is obviously movements in working capital, which is a bit more tricky to forecast and predict, which is why we left ourselves a little bit more of a margin on that particular range in addition to movements in capital and D&A programs.

I will ask a second question then, if I may, and that one's first for Nick. The disclosure in Norway is better than we have in the U.K. And so when the Lancaster field, the grant -- fractured granite basement was being produced. There wasn't that much clarity on water cut, but we will get the water cut figures for Rolvsnes. Is there any guidance or anything that we should worry about when we are looking at the production figures?

No. I mean, it's too early for us to update and it's not been producing for very long, but what I will say is that the early production data is in line with expectations. I think it's very positive. But of course, the water cut development in the field is key to understanding it and also the pressure performance of the field will be also key to understand. It's connected to a big enough volume. And so it's going to be exciting to see the results over the next year because that's going to be key to defining whether we can move forward with a full field development. I will say it's a different type of geology than Lancaster. So the difference here is that this is not just a fractured baseline, but it's also weathered. So you have porous secondary porosity in the basement. So the key here is to see that, that responds, and that's what the key is about the extended Rolvsnes. So too early to really give you any sense of how it's performing other than it's in line with expectations.

As there are no further questions on the phone at this time, I will hand back to Ed for any questions on the web.

Yes. Thanks very much, Mark. We have actually got 2 from the web. So I will just quickly run through them. One -- first one is from a Anish Kapadia, your production from 2025 to 2030 from your current reducing asset base could potentially halve over that period. Wisting should now offset some of this, but do you see further development projects required or are you happy for longer-term production to decline?

I mean it's a good question. And obviously, at some point, our fields would decline, but I think there's still lots of upside in Edvard Grieg area, in the Alvheim area and particularly in Johan Sverdrup, and I think all of those things are going to push the profile out. And of course, Wisting adds to that. And we would expect to see our exploration appraisal program also add to that. So I think we are pretty confident that we can continue to sustain the business longer term. And I think we have demonstrated that our assets continue to grow and create value. And I think there's lots of opportunity to continue to do that longer term.

And the last question is unnamed. A shy shareholder. Will the increased stake in Wisting impact your 2020 CapEx and E&A budget? Are there any ways you can guide on increased stake mode of this CapEx next year?

Yes, it will last the margin. But obviously, next year's sort of big CapEx number really still relates to Johan Sverdrup Phase 2 to complete that project. So -- and whatever expenditure will be on Wisting will be relatively modest in the big scheme of our total CapEx program next year.

But indeed, our capital drops relatively quickly next year, through Rolvsnes. So as -- Johan Sverdrup comes to an end, so -- and the Edvard Grieg project's complete. So actually, you should be looking at CapEx significantly down on this year, next year.

So thanks very much. Again, thanks very much for everyone on the audience listening in. That concludes the Q3 2021 call. If you have any other questions or want more detail, Please drop me at edward.westropp@lundin. Thanks very much.

Thank you.

Thank you.