Panoro Energy ASA (TLW) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Tullow Oil plc conference call. [Operator Instructions] I do have to advise you that the call is being recorded today, Wednesday, the 10th of February 2021. And your speaker for today is Rahul Dhir. Please go ahead.

Thank you, Jodi. And good morning, everyone. It's a nice, sunny, [ sort of a bit cold a day ] here in London. So I'm hoping you guys are all staying warm. Thank you for dialing in to this call. And it's -- this is our second announcement [ that we have ] last 2 weeks, so Les and I thought it was important that we had a quick call and cover off things. And so first, what I'll do is -- I plan to cover off really the substance of the RNS. So that's the deal announcement from last night. It was slightly odd time we made the announcement, but that was to allow Panoro to complete their book build last night. And I just wanted to put that deal in context. Then I also wanted to take the opportunity to -- just to provide an operational update and a little bit more color to the trading statement that we issued a couple weeks ago. So that's kind of the agenda, but I'll cover that off quickly, and then we'll leave time for questions. But this should be a relatively quick call. So very pleased. We've agreed the deals with Panoro, which is about up to $180 million. So what does that include? That includes our entire interest in Equatorial Guinea. So that's a nonoperated position 14.25% in the Okume Complex and the Ceiba field. The way the deal is structured is the cash upfront of $89 million and then the contingent payment of up to $16 million, so the total consideration was $105 million. We are also selling to Panoro our entire interest in the nonop Dussafu assets in Gabon. So that's -- again it's nonoperated. It's a small stake. It's 10%. And the deal is structured similarly, so there's a cash upfront of $46 million. Plus there is a contingent payment of another -- up to $24 million, so the total $70 million. Now they're structured as 2 separate SPAs. So 2 separate transactions with 2 separate SPAs. And there's also another contingent payment, which is $5 million, which is paid once both have completed. So that's kind of the overall kind of deal structure. There are some additional details: There is no tax on the disposal. We have full upfront approval from the Equatorial Guinea government. Given the size of the deal and our market cap, Equatorial Guinea will be a class 1 transaction, so it will require shareholder approval. We plan to have a circular that will be distributed later this month. Also, in our press release last night you will have seen [ there is a timing of it, where this is ] dependent on an equity raise from Panoro. And I'm pleased to say this has been successful. So with many congratulations to Julien Balkany and John Hamilton for a pretty remarkable job on that. And timing-wise, we're expecting both the transactions to conclude in the first half of 2021. I wanted to spend a bit of time just to explain the rationale. So you'll remember, those of you [ who heard us at ] the Capital Markets Day in November, that we've been very clear. Both Les and I have been clear that any asset divestment needs to be value accretive to the business, and it needs to strengthen the balance sheet. And from our perspective, this transaction, it does -- these transactions, I should say, they do both. And from timing perspective, they're very supportive of the refinancing process that we're going through right now. And in that, they'll provide liquidity, additional liquidity, in the first half of 2021, but in addition to the [ major ] liquidity and the balance sheet impact, what's also important from our perspective is that we are able to redeploy the CapEx spend from these assets to our core of high-return assets. That's a very important thing. So you'll remember I talked at the Capital Markets Day we have a very, very deep inventory of high-return assets. I think you'll remember I talked about 60-plus investment opportunities we can have with IRR of 80-plus percent, right? So what this allows us to do is to redeploy CapEx, future CapEx, I mean, to these. So that's a tremendous value accretion in addition to the value we get from the business [ as we see it right now ]. And also, importantly, we remove future decom liabilities. And I think, when you look at it from both perspectives, it makes a lot of sense because we have high-turn assets where we can redeploy the CapEx [ driven ], and it becomes a win-win from our perspective as well as [ from Panoro's ]. In terms of the actual kind of operating impact. There is about a 6,000 barrels a day production impact and roughly sort of 2P reserves of 20 million barrels. And so that represents about a $9 per barrel valuation. The actual impact on the 2021 production is going to depend on the timing of the completion. Just also we have said it's value accretive and it's also strengthens our balance sheet. So let me give you kind of a few numbers to frame that. Firstly, there's very negligible impact on our RBL debt capacity. It's only about slightly over 2% of the borrowing base is impacted. This will reduce our CapEx guidance by about 10%, so roughly $26 million. Over a 10-year period, there is a higher impact on CapEx. So we'll see CapEx over a 10 year probably impacted by about -- reduced by about $300 million. And that's the point I was making, which is that money we can redeploy into our core, much higher-return-generating assets. And these are on average higher-OpEx assets. Our nonop portfolio, as you know, is [ about a $50-plus ] OpEx compared to Ghana, which is substantially less than that. So this will reduce our group operating [ costs ] and makes the business more resilient to lower oil prices. We have decommissioning liabilities associated with this of about $130 million, so there's [indiscernible]. Overall, the 2021 prefinancing cash flow -- now you'll remember that's a number we've focused on [ pretty similarly ]. So that's going to be bolstered by about $100 million at $50 [ oil ], all right? And if you take all the kind of self-help and asset sales and everything that we've done, this starts to kind of reflect the $575 million which is from Uganda, so the $500 million that we received and another $75 million that's contingent on the FID which is expected this year; the $180 million from this; along with the cash savings that we are now sort of banking of about $125 million, cost savings of $125 million. And it's over 2 years, so that's $250 million. So that starts to add up to about $1 billion of self-help and asset sales. So that's -- that puts the company, I think, in a pretty strong position. Also, looking at the analyst forecasts, I think overall the deal is very much in line with consensus [indiscernible]. So I think we're quite pleased. I think it's a win-win for both companies. I think it fits in with our strategic intents to focus on the high-margin core assets. And obviously we've been in Equatorial Guinea for a number of years, have had a very good relationship with the government. [ And we are still looking ] [indiscernible] and the incremental support from the government through this process as well. Gabon remains a core area for us. This is a nonop, relatively small equity stake for us, so it gives us the opportunity to refocus on other areas and look to build our business there. So that's with respect to the deal. Let me also -- I wanted to take the time, since we're all here together, to just update you on the kind of operational and financial performance. And this is really building on what we shared with you at the trading statements almost 2 weeks ago. So just a quick recap on 2020. I think we will agree that we delivered a good job. Despite all the challenges, we delivered production in line with expectations of almost 75,000 barrels per day. There's a tremendous effort by the team to really bring the cost structure down, and that's the $125 million per annum that's sort of running through now this year and will continue. We [ executed ] in Uganda, so that helped reduce our net debt. So we ended the year with a net debt of $2.4 billion. And overall, revenues were about $1.4 billion. So that is at a $51 realization, so that reflected a very successful impact of the hedging program. And of course, we held a Capital Markets Day last year, where we set out the new business plan. And it's important because that's really what we are focused on right now, which is delivering high-margins and high-return opportunities that we've kind of executed. And the plan, just to remind you all, is -- that we're on track to deliver very material cash flows over the next decade. And what it does is it enables us to reduce the debt and generate value for all our equity investors but also importantly for the host countries. So just talking about '21. We had a good start operationally. We just signed a contract with the Maersk Venturer drilling rig. This is for Ghana. And that is now mobilizing and will start drilling in Q2, and I'll talk a little bit more about that. Other things: Facility performance continues to be good. We're injecting over 200,000 barrels of oil per day in Jubilee. You may remember, at the Capital Markets Day, we talked about a 180,000 barrels a day overall injection through '21, so we're doing better than that. And that helps you to maintain reservoir pressure. That helps stem production decline. Also, by maintaining reservoir pressure, you're able to then reduce the gas-oil ratio, which also then helps with production, so the water injection is quite an important thing. We've also had consistent gas offtake from the GNPC. That's on behalf of the government of Ghana. So that's running at about 125 million SCFs per day, and that's pretty much in line with the expectation. I think, the production guidance we gave for '21, that reflected a couple of things. So that reflected the overall impact of the historic underinvestment in both Jubilee and TEN. That's something we had flagged at the Capital Markets Day. In addition, the guidance also reflected that we now have a confirmed shutdown at Jubilee. That's going to be in September-ish time frame. So that's a complete shutdown. So that will impact production in the kind of 5-ish percent range. We also [indiscernible] partners Perenco [indiscernible] the operator of Simba. We deferred the investment from '21 to '22. So that had a significant impact about 1,500-plus barrels of oil net to us. And we had faster decline on [ Ntomme line ] than we expected. Fortunately, that's stabilized now, so we're on a good footing for '21. With the start of drilling in Q2, we now see a pretty clear path to growing production and cash flows again. Just to give you some more color. So we've got 4 wells planned for this year just given the timing. So that's we are looking to drill and complete [ 4 wells ]. 3 of those will be in Jubilee, and 1 will be a gas injector in TEN. And just an important thing for this is I talk about the production decline in Ntomme. One of the factors was the absence of gas injection to support that production, so putting a gas injector there is certainly going to help both restoring production and stop declines. So now given the timing of the drilling: So what we expect is, of these results, you'll see only 2 [indiscernible] have a partial impact because you're going to start drilling in Q2. You're going to have first completion in Q3, so you'll only have a partial impact on production this year, but importantly they'll all contribute to production next year. And of course, we're now on a journey, having created the kind of headwind from a strong focus on costs. And we have high operating margins and the capital discipline. We're focusing capital on the high-return [ steps ]; and we're on a multi-well, multiyear drilling program. So we expect to drill 5 wells next year, and again the same thing is going to happen. So the wells that are drilled early in the year will contribute obviously more than less -- in the year will contribute less, but then they'll contribute in the following year. And broadly speaking, what we expect then is that -- and again this program is going to be an asset. I think we said this at Capital Markets Day. It's that it's going to be more heavily Jubilee weighted. So the implication of that is that you'll start to see in 2022 a restoration of production in Jubilee certainly above 2020 levels. And in TEN you're not going to have many new wells, but certainly in '22 what we expect to see is the ability to hold the production flat relative to '21. So these are just broad sort of indicators. Obviously, over time, we'll give you more specific guidance. And the -- and our kind of -- the central West Africa portfolio, we expect that to remain flat. Obviously, once deducting the impact of the sale of Equatorial Guinea and Dussafu in Gabon. So I think we're pretty excited about that. I think we have a strong operating base, and it will help to building the production very much in line with the business plan that we set out at the Capital Markets Day. I -- so I just wanted to say a few words, not a lot but just a few words on the refinancing. So in the trading statement, you'll remember, we provided a short update on the refinancing. And we have also announced that the redetermination which is the process we go through with the RBL banks, which we had be planned for January '21, would be deferred by a month; and had many questions. So that's why I thought it would be good to address that. Many people ask us. So the -- was this linked to any major issues? [ Are there anything sinister ] about this? And whether at all it is linked to production guidance [ or what it is ]. So that's -- just to be very clear: That's not the case. It's very simple. We just need a bit more time with the banks to run through the details of the new plan. And also clearly, the introduction of these 2 deals that we've announced today, that is a relevant impact with the injection of first half liquidity. So that was the reason for the kind of additional time. Also I think it's been reported in a lot of depth by press and all that sort of stuff, but I just thought it would be good to just be upfront and kind of share this with you guys so everybody is on same page. We've appointed advisers and lawyers, as this is as part of the kind of debt refinancing discussions; and as have the lending banks; and with the bondholders, the 2021 and the 2022 bondholders. So everybody's got -- and we're now in constructive discussions with this entire group. Now clearly these are multiparty discussions, so -- and they're complex and they're [ under conditions ], so they will take some time, but we expect that we'll conclude these by Q2 of this year, so not Q1. Just also I just want to share with you it's a somewhat complex process. It's somewhat opaque as well, so it will be difficult for us to be 100% transparent because also these are commercial negotiations. So we wouldn't be able to provide a kind of very detailed blow-by-blow commentary, and I hope you understand that, but we'll try and provide you updates as often as I can. So the next regulatory release we have is our full year results. Just bear with us because I don't want to make any promises on how much progress will have been made by then. I just want to give you an update as we can, but the key point I want you all to remember, and this is the message also that we're conveying to our creditors and the banks, is that we have significant cash reserves. This is a positive injection in liquidity. We've got a robust cash-generative business, which has got a very clear path to deliver a net debt in the range of $1 billion to $1.5 billion and gearing at the lower end of the 1x to 2x range. That's over the next 4 to 5 years. So the problem that we're trying to solve is the reprofiling of the debt to match the debt maturities with the timing of our cash flows. So that's the problem that we're trying to solve. And that's the process that we're doing right now, educating everybody on this and then kind of getting everybody on the same sort of page. So look. I mean that's what we intended to cover, so I'm going to stop now. We'll take some questions. Les and I are here to kind of help you with any questions that you may have. So Jodi, over to you, and you can [indiscernible].

[Operator Instructions] Our first question for today is from James Hosie from Barclays.

Just, I guess, a couple of questions from me on the transactions. I mean, was this a competitive sales process? Or were you talking to other than Panoro on these assets? And then just on the contingent payments within each deal, I mean, can you provide colored view on the likelihood that the production targets are going to be achieved? And were these assets where production growth is being assumed in the 10-year plan you outlined late last year?

Let me hand -- let me let Les describe kind of the deal stuff, but there was -- clearly there is CapEx associated with these assets, like I said, roughly about $300 million or so. So there is some growth obviously coming from that. The material [ growth ] change in the plan is really driven by the assets in Ghana. So we don't really see this as having any material impact on the growth of the company, and I will Les explain to you. We have this multi-well program. So that's -- and frankly, with the additional capital, we can look to accelerate drilling in Ghana, for instance. And that's a lot more value accretive, from our perspective, but I'll let Les answer the question on the deal process and structure.

James, as you will recall, I mean, we received over the last while quite a series of inbound interest on our assets. And we took advantage of that inbound interest to also run competitive processes on each of those, so yes, it has been tested competitively. And then on structure, yes, of course, we've adjusted the -- our position base so that they're deliverable. Now you can see there's quite a bit of detail, in the update on both of those, how it is structured from a production and oil price point of view, but we're certainly positioning [ a little that we see them being deliverable ]. And if you look at oil prices as just being an example, we're already sitting today above the oil price that's included in the [ kicker ]. So yes is the sort of short answer to both of those. So we're in good position. Thanks, Rahul.

Our next question is from Matt Cooper from Peel Hunt.

So congratulations on the disposals. 3 questions from me. So first one is, can I get what the total working capital adjustment to the headline price is for Equatorial Guinea and Dussafu in 2020? And second question is, do you think there's likely to be any tax payable in Gabon? And when do you expect Gabon government approval? And then finally, given the disposals and also the improving oil price, are you now considering contracting a second rig in Ghana this year?

So Matt, let me take your third question, and then Les can talk about the working capital and the tax. So I think clearly there is a tremendous amount of it has a [indiscernible]. You know that, right? So -- and these assets, like I said, there is about $300 million of additional sort of CapEx that we can now redeploy. So clearly we're going to think about how we accelerate Ghana. I think we're encouraged by the oil prices, but I think what we're excited about, frankly, is the underlying potential. So this -- certainly, we were already contemplating [indiscernible] [ I think that's certainly ] going to be very much part of that. We're going to go through a process with our partners and start to kind of see the timing of all of that, but it's certainly under consideration. But we -- it would be premature, Matt, to comment on timing of that, but as soon as we have definitive plans, we will certainly share that with you guys. But Les, over to you on the working capital and the tax.

Perfect. Thank you. Thanks, Matt. On the working capital, let me -- because, of course, we don't know precisely when these deals are going to complete. We're confident we're going to complete in the first half. If we assume for now -- given we've got EG government approval and it's not a long process within Gabon. So if we just, for the sake of argument, chose the end of March, if you kind of take account of the revenues and costs in the intervening period, cash would be in a region of [ 1 3 5 ] for the both transactions. And the only adjustment that we would expect on top of that, assuming an end March, would be our share of the transaction costs, which we've put in the release, which is [ $4.5 million ]; and then our transaction fees, which is all our advisers that we've used on the transaction, which in totality between the two is about $8 million. So [ 1 3 5 ], give or take, adjusted for $8 million. So that's the kind of 2020 on a cash impact. Then on the second, you will have seen in the release, which again Rahul mentioned it in the opening remarks, we've had very good collaboration and support from the EG government. So we actually do have -- in advance of signing, we've got all the necessary approvals, including confirmation that there was no tax due on the disposal. And we have the same conclusion and a function on Gabon, and it's a 30-day process that's required for the Gabon government approval. So as you can see, we're well positioned to move forward with completion in the first half of the year.

Our next question is from James Thompson from JPMorgan.

Just a couple of questions from me. In terms of the nonoperated production outlook, I mean, it looks like [ obviously this is a ] decent amount of growth. And could you perhaps point to the projects in the rest of the Ghana portfolio that would kind of replace that to keep production steady over the next 10 years in the plan? Or is it really that we'll shift to Ghana, an even greater shift to Ghana on a medium-term basis? That will be the first question. And the second one, in terms of the growth CapEx you talk about, is that really sort of next-couple-years or front-end loaded '22, 2023 given the implied "ramp-up on the assets in Gabon" phase? So simply whether it's a quite a big benefit from a CapEx perspective over the next couple of years [indiscernible].

Well, I think, on the nonop, James, the big drivers very much in the portfolio is Espoir because there is [ 4 ] coming in that. And in Gabon, we have Simba, which is as I said [ the development ] has been a decent sort of contributor for '21, but that is deferred to '22. We're also -- just around [ Côte d'Ivoire ] and particularly in Gabon we see additional sort of potential similar to what we saw with Simba, which is opportunities to tie back existing infrastructure. So that's something that's the team sort of continues to work on, but the 2 tangible projects are Simba and Espoir. I think, in terms of your -- the CapEx impact, yes. I mean I think we see broadly from at sort of $55 flat oil these assets being cash flow neutral for the first 5 years. So they -- that sort of means that it's front-end loaded. So that gives us the opportunity then to say, "Hey, can we redeploy the CapEx to -- particularly to Ghana?" I mean I think, as Matt had asked the question then, there is a consideration to sort of [ looking to bring in ] a third rig -- or sorry, second rig, Freudian slip, yes.

Excellent, great. And then just sort of [indiscernible] basis, well, also what's behind the different oil price assumptions in the contingent payments?

I'll let Les handle that.

As with all things, James, it's subject to negotiations and processes that are laid out before, so well, this is not by design [indiscernible].

[Operator Instructions] Our next question is from Mark Wilson from Jefferies.

I'd like to ask. The press release outlines and quite in detail once again the directors' comments regarding uncertainty, at full year results and also repeated it at interim results, regarding covenant breaches and the potential liquidity shortfall over an 18 months period. I just wonder if you can give us an update on where that uncertainty understanding is now given we're in February 2021.

So I think -- and thank you, Mark, for the question. I think what's very clear as we look at the [ business ], right, is that we have a very robust plan, which [ was out in a ] Capital Markets Day. And I just explained that we're very much on path to deliver that; and we can start to see the start of the investment program beginning the recovery in production and cash flows and so on and so forth, right? So that's been one. I think point number two is that we -- now through the various self-help measures, we've taken a lot of costs out of the system. And we also have, through this asset on the Uganda, created really kind of real cash liquidity. And the problem therefore what we're trying to solve is one about kind of matching the maturity profiles to cash flows. Now till such time as -- so that's all very clear, and I think you guys can put the math behind and can -- we can very much kind of see that. Till such time as those things are not resolved and from a directors' point of view, we have to continue to state because there are covenants on the RBL which have [ all the bookings, liquidity tests ] and things like that. So till such time that those liquidity issues are unresolved, I think we are obligated to continue to put these comments. And as I said, we're on path -- now through the discussions that we've started, and they're constructive, we're certainly on paths to resolving these by Q2. So I don't know, Les. Do you want to add further to Mark's question...

No, nothing to add. What we're doing right now is seeking to address that through the discussions we're having.

Okay. [indiscernible] and just [indiscernible]...