Panoro Energy ASA (PEN) Earnings Call Transcript & Summary

Good morning, and welcome to Panoro Energy's First Half 2021 update. This is John Hamilton, Chief Executive Officer. I'm joined today by Richard Morton, our Technical Director; Nigel McKim, our Projects Director; and Qazi Qadeer, our CFO. We're going to walk you through some slides now that tell you a little bit about the business and the transformed business we have had over the course of this first half. And we will then all take some questions towards the end. In terms of webinar housekeeping, for those of you who have joined before, you will know, for those of you who are new, you need to raise your hand if you would like to ask a question or you can type in a question into the question panel. We will try and endeavor to answer most, if not all of the questions that are raised. And you can do so, you can type those questions in at any time. If you want to speak, you need to raise your hand and we will unmute you, but please do that at the end, but you can type in a question at any time. Next slide, please. Standard disclaimer, which we can move to the next slide, please. So before I get into the financials, as a reminder, today's conference call contains certain statements that are or may be deemed to be forward-looking statements, which involve all statements other than statements of historical fact. Forward-looking statements involve making certain assumptions based on the company's experience and perception of historical trends, current conditions, expected future developments and other factors that we believe are appropriate under the circumstances. Although we believe that the expectations reflected in these forward-looking statements are reasonable, actual events or results may differ materially from those projected or implied in such forward-looking statements due to known or unknown risks, uncertainties and other factors. So here are our highlights. We have 3 buckets here, the operational side. We've produced, on average, on a pro forma basis, 7,700 barrels of oil per day. When we say pro forma, we mean as if including the result of the acquisitions from the 1st of January, those transactions, 1 closed in March and the other closed in June. So we're trying to show when we show pro forma numbers, what the business would have looked like had we had those from the 1st of January, it's illustrative. On the reserve side, we have about 36 million barrels of reserves as a company now, and we have almost be equivalent in 2C resources as well. And that basically shows you that there is beyond the 2P reserve, there's lots of value sitting in contingent resource as well. On the financial side, we're seeing the mix here. We have a pro forma revenue of $105 million last year in the first half it was $26 million. So again, that's partially oil price, but it's mostly the result of the acquisitions that we've made. Net cash from operations, that's not a pro forma number. That's the real deal. That's cash flow from operations of over $60 million with a loss last year of $6.4 million. Average realized price in the first half was around $67 a barrel. Cash at the bank, $93 million as compared to $15 million as at the end of the year last year. Gross debt, $104 million, leaving a net debt position of $11 million. And on the right, we remind people of the strategic accomplishments we've had. We completed the Tullow acquisition, oversubscribed equity placement. We did the farm-in in South Africa during the first half, and we're actively drilling with growing production. And all of this is underpinned by a very robust capital structure, as we will detail shortly. Next slide, please. So here's a slide trying to show where we are and where we're going and where we've been. As you can see in the top left, we are showing what the transformation of the reserves and contingent resources is we -- pre-acquisition, we were about 16.6 million barrels of 2P plus contingent resource. We're now about 70 million barrels. So the company has really changed as a result of these acquisitions. In the lower left, you can see the impact of production that the acquisitions has helped transform the company into about 7,700 in the first half of the year on a pro forma basis. Where we're going is on the right. We are hoping to get to sort of peak rates during the course of this year of about 9,500 and that's when the new wells are coming on stream. We have 5 new wells, production wells coming online during the fourth quarter principally. So we hope to be able to move that up to that 9,500. And on the far right, again, reiterating, we expect to be in excess of 12,000 barrels a day during 2023 when Hibiscus/Ruche development comes online. So again, we have a very, very nice growth trajectory on our production. The production is purely based on 2P reserves. So the contingent resources sitting there on the bench is, so to speak, ready to be activated in due course. Next slide, please. Right. So our financials are all over the place a little bit as a result of the transactions. So there are some confusing elements in here. What we've tried to do is also show this on a pro forma basis. Again, this is an alternative measure that we, as a company, like to show because it shows what the company looked like as if we had owned these assets from the 1st of January, we had the economic interest as of the 1st of January, but not from an accounting perspective. And IFRS is very strict in terms of the way that we look at these things. So you can see the difference between the IFRS reporting and on a pro forma basis. On the revenue side, on the lifting side, we had 9 liftings during the year. If you go on a pro forma basis, we also had an additional lifting in Equatorial Guinea. The EBITDA is a very strong on pro forma basis, $66 million, IFRS is $28 million. There are some things going on with the reversal of the overlift position, and we can get into that if people want to with Qazi in the Q&A, but there are some elements there moving around. On the EBIT side, IFRS reporting is $66 million and $100 million on a pro forma basis. This is partially as a result of some negative goodwill. Again, IFRS requires us to recognize the fair value of the Dussafu acquisition, and that has actually come through the P&L. Also it's a negative goodwill. In other words, we bought it extremely cheaply. IFRS has been very strict in terms of recognition of that. And again, the cash on the balance sheet, we've already talked about. Next slide, please. Again, because of many moving parts, we thought we'd try and reconcile the cash position from the start of the year. Again, I think the most important thing for me looking at this is net cash from operations of $61 million. It's showing -- leaving aside all the accounting and the IFRS, it's showing what the real net cash from operations is, that's real cash and that's coming into the business, and that will continue to come into the business as we go through this year and the next and for the years to come. But this is really just to try and reconcile how we get to the $93 million of cash at this at the end of the period. There have been a lot of moving parts here. And again, this slide is meant to kind of deconstruct all that, so people can see that we've had the big inflows of cash from borrowings and the equity placement. We've got the outgoing from the payment of the acquisition and the CapEx in the interim period as well. Next slide, please. We have a very strong balance sheet, we believe. We have loan facilities as everybody is aware. And here's the breakdown on the top left of those loan facilities. Important to note, we have an undrawn $20 million advanced payment facilities meant to deal with any changes in working capital with -- because we're lifting our own oil, sometimes those are only done on a sporadic basis. So there could be times when we have some cash flow that's undrawn and I don't have any plans to draw it, but it's a very, very nice safety blanket. And on the bottom right, you can see the debt maturity profile. So these are not loan facilities that are repayable next year. These are stretched out well over time and all the way into 2025, 2026. So we're in a very comfortable position there. We have a hedging program. We have tried to hedge in and around our liftings. So you can see that in November, we're expecting probably a big lifting in Equatorial Guinea. We started trying get a little hedging in around that, trying to take advantage of $70 oil, which we've successfully done. And we will continue to find on a short-term basis prime target hedging in and around liftings. We have received smaller 600 barrels a day hedged in 2022 with costless collars. That's obviously a very small part of our production. But nonetheless, we have that in place as well. Next slide, please. CapEx and liftings. Again, this is just to provide full guidance and transparency. We have $45 million of CapEx this year. It's a little bit higher than previously guided, it was $43 million before. The difference is principally a Hibiscus North, which we'll touch on in a moment, the exploration well, which we just filed, which was contingent at the time of the last results. What we can also see is that the CapEx is very second half weighted. So we didn't spend as much money as quickly in the first half as envisioned. So the bulk of this will come in the second quarter. And we also have some guidance on our second half liftings, which look more or less like our listings in the first half is one Gabon is lifting less and our Equatorial Guinea lifting, we'll probably hopefully have in November that we're estimating at the moment to be a 650,000 barrel lifting. So again, trying to provide as much transparency as we can based on everything that we know in terms of when we expect liftings to happen. And again, as a reminder, liftings are our revenue recognition point. So we can -- on a daily -- we don't recognize revenue on a production basis, we recognize it on a lifting basis. So these lifting moments are our revenue moments and it's important for everybody to understand, you will get some lumpiness in our quarterly results, hopefully, in the half years and the full years everything smoothed out. But for instance, in the third quarter, this quarter that we're in as we speak, we don't have any liftings. So you are going to get some lumpiness. We just want to make sure we provide as much transparency as we can on that. Next slide, please. Right. Equatorial Guinea, our most important production asset at the moment is very steady, produced almost exactly the same as in the first quarter. But what's happening there is really exciting. We are drilling 3 infill production wells there. The first of which is a success and kind of good quality oil-saturated reservoir sands. The rig is now drilling the second of those wells. And all 3 of these wells are expected to be online and in production in the fourth quarter. At the same time, there are various upgrade projects, infrastructure integrity projects going along as the operator is extremely busy working on debottlenecking things on this facility, they've been busy for a number of years, and they really have been a great success. And it's one of the reasons we really like this project is we are at the inflection point now where production should grow from this 30,000 barrels a day on an upward trajectory through with the addition of these new wells, but also through improvements on the facilities. We have not yet decided in terms of new drilling production drilling for next year, but Panoro is very excited about what we see on the contingent resource side there, and there's a huge amount of contingent resource and we would expect all things being equal that the operator and the joint venture will want to drill some more wells next year, but we are not able to provide guidance on that as yet. Next slide, please. Gabon. The big news, of course, overnight was that we drilled Hibiscus North. We have made an oil discovery in the Gamba. There are 2 reservoir layers targeted as well. One is the Gamba, is the upper one upper reservoir. And then the Dentale is a lower target. We have made oil discovery, which is great oil saturated sands. We don't have enough information out. We have to put a press release out due to our obligations towards stock exchange. But it is too early to say what size it is at the moment. But obviously, we're extremely pleased to have again found oil on this track record of finding oil and the Dussafu license has been exceptional with the exception of one blip earlier this year on the Hibiscus extension well. This is again, confirming we're in a prolific area here where oil drilling dollars go straight into the cost pool. So even in the case of the dry well earlier this year, that money goes straight into the cost pool. So we're drilling not free necessarily, but we can recover all of our capital expenditure through oil production. So on the Panoro's side, and I know BW feels the same, we're extremely thrilled to make this oil discovery. And we will, from here, keep drilling down to the Dentale, and we will sign track this well as well and try and delineate, we'll run wireline logs to get a better estimate on potential volumes here. So it's a little too early to say volumes would be -- the range we gave was 10 to 40, we're still sticking by those numbers. And we will update the market, but nonetheless, extremely exciting. On the production side, we have the successful completion of the DTM-7 production well, which encountered a very long, good section of high-quality oil-bearing sands. The installation vessel is on its way. We hope to be producing early in the fourth quarter bringing these 2 well onstream, which we're going to boost production in Gabon. Next slide, please. Tunisia, very, very steady. We have produced about the same as the first quarter, around 4,600 barrels a day for the quarter on a gross basis about 1,350 barrels net to Panoro. We're having some success though. We're producing well over 5,000 barrels a day as we speak. We did have a small shutdown of one of the fields in August, which maybe seen slightly in the averages for the third quarter. But the message here very much is that we are on an upward trajectory, in terms of production Tunisia has gone exceptionally well. We are continuing to do lots small things that all add up to production growth. So hopefully, we'll be able to show a very strong second half in Tunisia. Next slide, please. South Africa. We are planning to spud this well by the end of 2021, rig negotiations are underway. This is a very interesting prospect well. It's drilling up-dip from the discovery from 1988, they in the part side that found good quality oil. We're coming up-dip of that to see if we can find rather significantly more amounts of oil that have been discovered there. We have a few different reservoirs that we're targeting in this well. So as we get closer to spudding that well, we'll be talking more and more about it. But there is confirmed information in some of our previous press releases about this prospect, that it indeed could be quite big. Next slide, please. So our standard newsflow ahead, we have the new production wells in Gabon coming online. So we'll have in fourth quarter, be able to announce them coming online and rigs, hopefully those will come in nicely. The Hibiscus well, we have made a preliminary announcement last night, but there are more announcements to come as we gather more information. So that's quite exciting. Infill wells in EG, one down, 2 to go. First well was excellent. I'm expecting the second and third to be good as well, and we'll bring those online. So there'll be some newsflow around those events. In Tunisia, we're continuing to work on our workovers, as I stated before. We have the PetroNor dividend, which we haven't touched on here, but we hope to be completing the transaction, the sale of our Nigerian business to PetroNor, which will result in a payment to Panoro of $10 million worth of PetroNor shares, which we intend to dividend to our shareholders as soon as practically possible after completion. The file is moving along well. It's subject to ministerial consent in Nigeria, which can take some time. But hopefully, that will be an event as we get to the end of the third quarter, beginning of fourth quarter -- end of third quarter really. And then in the exploration well in South Africa that I touched on. So there's plenty to go here this year, and we'll recharge next year and hopefully replace, do similar next year in terms of exploration wells and production wells. Next slide, please. So in summary, the key messages we have well, we have 5 new production wells coming onstream towards the end of this year that will hopefully get us to that 9,500 barrels a day, which is what we're targeting, and we're targeting -- we continue to target the -- in excess of 12,000 barrels a day during the course of 2023, which is when the Hibiscus/Ruche development comes online. We still have near-term triggers. So excitement in the shares, we have the exploration well in Gabon. And again, this preliminary -- last slide on that, but there is more news to come there with the South Africa well, and we have the PetroNor dividend. Cash flow wise, we are generating very good strong cash flow. We're fully financed. So there should be no concerns around our balance sheet so much to the extent that we very much stand by our position to pay dividends within the next 2 years. So you can see it all in front of you that we are going to be a dividend-paying company, and that is still very much the intention and the Board has reiterated that. We will give more detail on the dividend policy and how we're going to do it in the quarters to come. So with that, I'm finished. And if we can just go to the next slide to remind people how to ask questions, you can either type them in or you can raise your hand. So we'll turn it over to questions. I think, Qazi, I think you want to supervise?

Yes, John, thank you very much. We have a question that has come through the web, which is that in the financial statement, there is a line called other nonoperating items, what is included in this line? That is basically in relation to the [ 10% ] working interest we required. And as John mentioned earlier in the call, there was a recognition of negative [ fair value ] it was about USD 49.5 million, which means that the fair value of the assets that we acquired on completion date was in excess of the price we have paid for those assets. And henceforth, there is a gain which is recognized for the IFRS on day 1 of the transaction, and that basically is predominantly reflected in that line. There is detail in the note 5 to the accounts. And then for that, Dussafu acquisition might come as well, which [ has these things ]. I have question from Stephane Foucaud. I'm going to open the line for Stephane.

Yes. I had a question and quite a few actually first starting on Hibiscus North, I know on the way you at the early stage, but some questions, was the Dentale reservoir or resources included in the guidance of 10 million to 40 million, I think figure that you gave? So I was wondering whether we might have some more material news coming as you keep drilling. And then does the comments you're seeing and the business you have in the Gamba, are there any implication on the other prospects around Hibiscus North? So that's my question Hibiscus North and then I have got an accounting question. The first thing is that our CapEx you did for full year 2021 is that pro forma or is that IFRS because I think the [ 6 ] we spent so far was IFRS.

Right. Well, on the second question, I think Qazi correct me if I'm wrong, but that's real cash for Panoro. So anything that happens while we own the assets economically before we completed them before IFRS could recognize them, those -- any movements in CapEx were dealt with through the closing adjustments. So the actual cash that we handed over to Tullow at the time is adjusted for any capital expenditure or any income in that intervening period. So it's real Panoro cash, if I can put it that way. In respect of the Hibiscus North, so Richard, the questions were was the 10 to 40 range, including the possibility of some finds in the lower Dentale reservoir? And does the oil discovery in the Gamba tells anything else about the exploration on the wider block, if I understood the question correctly, Stephane?

Yes, correct.

Okay. John, I'll take that. Thank you. Thanks for the questions, Stephane. So the answer is, yes, on the first one. The high case included Dentale, the 40 case. And then in terms of the prospectivity around Hibiscus North, obviously, it's very early days. We haven't fully looked the well, but there are implications here. Gamba is present here, which is good for the prospects nearby. And also the trapping mechanism here is slightly different to other prospects we've drilled in the past. So it gives us further information on that aspect of the traps. And this was a slightly more risky trap than the Tortue and Ruche, for instance.

Great. And back on the CapEx question. So therefore that it means that for H2, the cash CapEx will probably more be like [ 39 million to 45 million ] that was reported in H1. Is that correct, John?

Yes. I mean it's always a thing with trying to look at things on an annual basis. It all depends on when cash calls get made. So it could be that some of it leaks into January. It could be that things are accelerated and January cash call creeps into December. But directionally, yes, this is entirely correct. And based on what we can see right now, we think this is the right number.

Thank you, Stephane. We don't see any raised hands at the moment, but there are a few questions from the [ start ] window which I will repeat here. There's one question from [ Mr. Kanarjan ], on the discovery in Hibiscus North if commercial, how do you foresee the development solution and what's the most likely timing for these barrels to enter the market?

Okay. Richard, do you want to take that one?

Yes, I will. Thanks. So this is -- as its name suggests, this is reasonably close to Hibiscus this separate structure. So it's a -- it would be if it were commercial, a tieback to the Hibiscus/Ruche project, which is underway. We have spare capacity in the design of that platform and pipeline back to the FPSO. And the Hibiscus North would tie into that. In terms of the timing, we think it would be quite quick project to tie back. It would just involve possibly a subsea tree and a flow line back to the platform, and that could be done in the space of less than a year.

So Stephane (sic) [ Mr. Kanarjan ], just as a reminder, the Hibiscus/Ruche development Phase 1, which is ongoing now where we hope to have first production in the fourth quarter of next year 2022. That involves 6 new wells principally in the Hibiscus area, the main, the bigger Hibiscus structure there and the Ruche area. And then there's a second phase, which is planned to maintain a nice plateau of production. And so this discovery here could very well tie into that second phase of development, probably not the first. The first we're really going to concentrate it on the sort of the main Hibiscus area. So we'd probably come into that second phase. So when would the barrels into the market, so to speak, that's going to be 2024 probably. But the point here is that it's just basically just extending out the reserve position in the block. It's extending out, therefore, the production profile in the block. So it's not so much about rushing those barrels to the market as it were, but just they can be kind of backfilled as we produce the reserves that we've already found. So hopefully, that answers that question.

Thank you, John. We have another question from an investor, which is asking you about, if we could say something about what we have learned from the geology of the new discovery, and any read across to other prospects and the rest of the [indiscernible].

Yes. I think, Richard, kind of answered a similar question, which is this well had a little bit more risk on it than some of our other ones in terms of the trapping mechanism. So it's very encouraging that it has worked well. I think it's a little early to make big conclusions about the read across. But again, since Panoro been involved in this block, we have made a straight string of successful wells. I can't remember the number now off the top of my head, but it's something like 16 straight successful wells in a row. We had the one blip earlier this year on the Hibiscus extension well. So I think it's just adding to our understanding of what's very clearly a prolific block with plenty more running room on it over the years. And again, the intention really, and we're aligned with BW on this one is that every time we have a drilling rig out there drilling production wells and bringing the cash flow in, we will allocate well slots to drill additional exploration wells. So you will likely see us drilling every time that rig comes out. So next year, it's coming back, be drilling 1 or 2 or maybe more exploration wells as part of those campaigns. So hopefully, we'll have some more news already next year.