PetroNor E&P ASA (PNOR) Earnings Call Transcript & Summary

Good morning, and welcome to the presentation of PetroNor half year results. My name is Eyas Alhomouz. I'm the Chairman of the Board. And with me today is our Interim CEO, Jens Pace. During this first half year of 2023, we have reached levels we haven't seen before, laying the foundation for the best year ever and future growth. We successfully increased our production capacity as a result of our infill drilling program. We had 3 liftings of our oil inventory in the first half of the year, with more than 800,000 barrels being lifted, generating solid revenue supported by higher prices. Shortly after the first half, we also completed the farmout of our Guinea-Bissau asset to Apus Energy. It's a good year. Jens Pace will give you more details about the operation and the financial results.

Thank you, Eyas, and good morning, everyone. It's good to be here in Oslo to present a summary of the report that we put out earlier on this morning. I will have a few slides to help me do that, and then I'll be happy to take any questions from anyone who's listening. Please do send them in, and we'll address them after the presentation. So the normal disclaimer, which I'll let you read at your leisure. So first slide here is really an operational update, and Eyas has hit the highlights. So average net working interest oil production was 5,119 barrels of oil per day, which is a continued increase from where we were producing last year. And on a gross level, the production from PNGF in the Congo is exceeding levels seen over a decade ago. So that's due to the investment in infill drilling program, which started in 2021 and 2022, which added 6 new wells to production, and we are seeing the benefit of that now. We've actually drilled 4 new wells already this year that haven't been put on production yet. We're just finishing a fifth, and then they will all be put online in the next months, so starting in the next month. So we should see a benefit in the second half of the year from that additional investment. It's all about commercializing this production, though, and we've had 3 liftings of net entitlement oil. And Eyas said, that is over 800,000 barrels has been sold at an average price of $76 a barrel. And we already have a fourth lifting scheduled in October. So this will be a record year in terms of production and liftings for PetroNor. And then the 100% farmout of Guinea-Bissau acreage has been agreed, and this is a deal worth up to $85 million, with a firm consideration of $25 million that is expected to be paid in the second half of this year following government approval, and we understand that, that is progressing to plan. So just look at the numbers. I'll just pick out a few of these. Cash in the balance sheet is $26.5 million, which was a little bit up on where we ended the last year. And I'll show you a cash waterfall in a minute to show you the use of the cash during the year -- during the half year. Revenue of about $94 million, and that includes the taxes that we pay to our host government. And then that gives us an EBITDA of just shy of $58 million and a strong cash flow from operations of nearly $42 million. And I think you can see on the chart there to the right that the story is really about the production and lifting. You can see from 2022 and 2021, in both of those years, we lifted about 800,000 barrels of oil over the course of the whole year. We've done that already in the first half of '23, and we have a fourth lifting planned in the fourth quarter to get us over 1 million barrels of oil sold this year. So that's all going to be impacting the bottom line. So use of cash, and we started the year at about $25 million of cash. Net cash from operations, once you factor out the taxes and that sort of thing, is about $24 million. We have invested $14 million back into the infill drilling program and also the refurbishment of a former jack-up, which will become a wellhead platform that will be installed later on this year. Small amount of investment in exploration, which is really our license fees and a technical work program we're conducting in the Congo -- in Gabon, rather -- sorry, in the Gambia, getting my countries mixed up here. We move cash through the company through dividends from the operating company in Congo, so there's some leakage to our minority shareholders there of $3.2 million. And then loan repayments, we have a small working capital facility of about $11 million at the end of last year, which we've repaid $3.3 million of already, and that will be paid out over the next year or so. And that leaves us with the $26.5 million that we have on our balance sheet now. And I think looking forward, we have to reflect the proceeds of one of the liftings that we've done this year that isn't in our current balance sheet because it happened at the end of June. So there's $20 million that is in receivables that actually got paid during July. So it will be reflected in the next report. And then in addition to that, we have the lifting in October that is planned of about 400,000 barrels. And given the oil price, we should see about $30 million coming from that as well as the Guinea-Bissau completion. So continued investment in the infill program but some good outlook on cash during the second half of the year. To kind of run through the portfolio a little bit to tell you the highlights of what's happening in each area in a little bit more detail, and here's a quick summary. And you can see our production bases in Congo-Brazzaville, the gross field production from PNGF Sud of 30,000 barrels a day, and our net interest in that is 16.83%. Our operator there is Perenco. The redevelopment project in -- of the Aje field in Nigeria, we are looking to redevelop a gas -- an oil field into a gas field, and I'll tell you a bit more about that in a minute. And then a portfolio of exploration acreage on the Atlantic margin, which has multibillion barrel potential in net prospective resources, it's a proven basin, and we're seeing a significant amount of interest in -- based on recent discoveries along the Atlantic margin generally and a return to the exploration being in favor. So net 2P reserves of 20.3 million barrels of oil equivalent. And at current production rates, that's over 10 years of production. But we also have a sizable net 2C resources that gives us a pipeline of abilities to add to that in the existing portfolio. Looking at the Congo production. PNGF Sud is a complex of fields, with about 2 billion barrels of oil originally in place. And to date, less than 500 million barrels have been extracted. So it's a low recovery factor relative to other fields, similar size around the world. And we expect that there is as much to come again [ as being ] produced. There's a consistent track record of adding production through workovers of existing wells and then this infill drilling program. And these are high-margin barrels with OpEx of about $9 a barrel at current production rates. So that's pretty world class for a mature field. The 6 wells that were drilled on Litanzi and Tchibeli North East were completed in 2022 and really exceeded expectations in production. You can see this reflected in the chart on the bottom right. The increase that we saw in Tchibeli North East, in particular, was notable that we have 1 well there that's doing over 7,000 barrels of oil per day, which is a fantastic outcome. The 2023 program is going to be 5 wells in total once the fifth is completed. It's making good progress, and then all will be tied in to -- with first oil starting from the 4 producers during September. Then we'll take a drilling break while the converted jack-up rig is moved from the Netherlands down to take its new home on the Tchendo field, and a planned program of 6 infill wells using that platform will be drilled starting in January 2024. This is a shallower reservoir. Wells are quite cheap, about $6 million each, and the jack-up has got capacity for up to 14 wellheads. So we'll do an initial 6 infill wells and then see what the rest of the program makes sense to do. Looking at the production growth on a quarterly basis to date and then on an annual basis, you can see we've had a pretty good run of production increases from the infill program that I mentioned. The second quarter in '23 was slightly below the first quarter because of an unplanned shut-in based on another operator's infrastructure that we use. But we look to be catching that up very, very well in the second half of the year. And with the new wells being brought online, we have a range of expectations that should end up with record production for the year from -- for PetroNor. And with the additional tie-in of wells in 2024, we see a range there that has us banging on the door of 6,000 barrels of oil per day, so that's -- if all goes to plan. Let's spend a little bit of time on Aje here. We got a lot of questions about Aje, and it's -- that's good that there is interest there because we do think this is actually a fantastic project. It's 500 BCF of gas, very close to market with 27 million barrels of liquids in shallow water. So we see this as a very attractive development economically. Our progress in the project to date has been somewhat slow, I would have to admit, but we are making progress. We see to complete the arrangements, the deal we have with the operator, YFP, to form the jointly owned Aje Production AS that is now at a kind of a procedural stage. We expect that to close in the near future. And that will give us a 52% interest in that joint venture, which would equate to about a 20% interest in the overall development of Aje. That development looks like an upgraded FPSO that can handle gas, with drilling or sidetracking of 4 to 5 wells for both liquids and gas production and a 30-kilometer pipeline to the shore, where we would have an onshore LPG plant. So we'd get revenue from gas, condensate, oil and LPG. And we think that is very attractive in this marketplace here. We're confirming that in terms of our underlying economics with market inquiries on FPSOs. We have a pretty good handle on FPSOs that we could reuse in this area, but we're also going out to market to understand what conversion options are like for converted tankers, and that, we'll be reporting back in the next coming weeks. And similarly, we're going out to the gas purchases in the region that we have had discussions with and looking for tenders on gas price. And we expect to hear on that in the coming weeks as well. So we're trying to make sure that our economics are underpinned by both really firm understanding of costs and CapEx as well as the gas price that we could secure in the region. In addition to that, we have started a critical path item, which was reprocessing of the 3D seismic over the asset. This will allow us to better position development wells in the future. And so it's good to get that started because it's a job that will probably take quite a few months. And we're having positive discussions with sources of finance for project finance in this area. It's difficult to get finance for oil and gas in Africa. But because this is a gas project, we are getting interest and having a positive indication that this will be a very financeable project, given the recognition of gas as a transition fuel for Nigeria. Quick revisits to exploration. So the Guinea-Bissau transaction demonstrates the value of this part of our portfolio. And I think the 100% farmout gives us $25 million this year, but it also exposes us up to an additional $60 million through a success case here. So we have an exposure to the full cycle of getting through development planning to first production. And so we're very excited about that because we believe this is a very attractive prospect, and that's why we're interested in the acreage in the first place. Government approval is going well. We understand that the deal has been supported by the council of ministers in Guinea-Bissau and is with the President now. We expect a gazettal of the approval in the near future. So that will allow us then to move to completion of the deal and realization of the consideration. In the Gambia, we are accessing new data to progress a technical work program, and we're very excited about the early results from that. And in parallel, we've set up a data room, and we have companies currently visiting that data room under an NDA with a view to having -- initiating farm-in discussions. So we are hopeful that, that will result in the same sort of outcome as we saw in Guinea-Bissau. In Senegal, we get a lot of questions about Senegal. This is a long-running dispute we've had over licenses in the deepwater of Senegal. The dispute resolution mechanism is ICSID, the International Centre for the Settlement of Investment Disputes. This has taken a long time, and it's been several years of a legal process that is now finally seeing -- coming to an end. Although we had the final hearing in March last year, it's been taking quite a long time for the tribunal to come to a conclusion on their report. We've now been promised that during September. So we look forward to that outcome and drawing a line under that process. So I think this is the wrap-up. And what I hope you've seen is that the first half of 2023 really lays a solid foundation for what will be the best year ever for PetroNor, and that's through the elements of continued strong operational delivery from the Congo assets as well as the regular liftings to sell our oil inventory and generate cash flow. The infill program is proving to be a very attractive investment and helps us deliver the long-term resource reserve growth in a high-margin asset that, I think, will sustain production for decades to come. And the Aje redevelopment planning is advancing with our partners and the supply chain and potential customers for our gas. So we will hope to continue that effort during the second half of the year-end report on our progress. And then the monetization of Guinea-Bissau, it really demonstrates the value of the exploration portfolio, and we're looking to see if we can replicate that with some additional transaction in relation to the other parts of our portfolio in the Gambia. So all this gives us a strengthening balance sheet and a very positive operational outlook to the whole year. And that gives us the financial capacity to continue to execute the organic growth strategy, particularly in the Congo with the infill program fully funded by the cash flow. And we still are in the market for business development, M&A opportunities. We have a number of conversations that are ongoing. We recognize that we've said this before, and it's not worked out. We haven't found the right deal yet for us, and perhaps, we are choosy, but that's the way it's been. So we're building up a bit of a cash pile by the end of this year. That gives the Board other options to consider for introducing shareholder value. And we have been discussing the potential for a dividend or a share buyback program in 2024 after we've got our cash position, balance sheet fully audited from the proceeds of this year. And we will see a return to quarterly financial reporting during the second half. There's been some commentary that half yearly was not desirable. We did it for very good reasons because of the irregularity of our lifting program at the time. But now that that's been normalized and we've got a more regular lifting process that we will return to quarterly financial reporting during the second half. And if it hasn't been updated, we'll be putting out a new financial calendar very shortly. So that concludes what I have to say, and I'd be very happy to take any questions.

Thank you. We will start with a few questions from Teodor Sveen-Nilsen. First question is, what is your 2023 CapEx budget?

Total CapEx is of the order of $200 million on a gross basis for the Congo. And so our net in that at 16.83% is about $40 million.

Thank you. And on the dividend, when should we expect dividend payments to commence?

Well, there's a number of procedural steps that we have to go through for the Board to have the option to decide on declaring a dividend or a share buyback. This involves us declaring profits in the TopCo of PetroNor E&P ASA. It's a relatively new company. You may recall it was only really put together last year. So it hasn't declared a profit yet, and we need to do that on audited accounts. So that means we're looking at the completion of our audit in May of 2024 as being the first opportunity for the Board to consider the next steps.

Good. And on Aje, how should we think around price mechanism for the gas?

In our current economics, we have a pretty modest assumption on price of around $2.75 per MCF, which is the regional market. We are looking to confirm that and see if there's upside in that, which we believe there is based on the interest that we're getting from potential buyers in the region. And we'll have firmer numbers on that in the coming weeks as that is -- that study is realized. And I would say that we're looking for dollar-based contracts. And so that's an important element for revenue security here.

Thank you. Should we expect 0 Q3 revenues due to no liftings?

The revenue also -- that is reported will also include the tax that we pay, which [ was ] taken in kind as oil. So there will be a revenue reported, but the main lifting will happen in October. I believe it will be north of 400,000 barrels lifted, and we will receive that in the course of 2 weeks after we lifted. I'm not sure exactly when the date is in October. So it will be either at the end of October or in November that we see the main input from the Congo.

Positive to see you reintroduced quarterly reports. Should we expect Q3 '23 to be the first report?

Yes, indeed.

Then moving on to what's happened with your lifting agreement with ADNOC.

We announced a lifting agreement and a prepayment plan in -- with ADNOC last year. We were not able to operationalize that agreement because it required also ancillary agreements with the Djeno terminal operators. And that wasn't forthcoming at the time. So the agreement was effectively suspended. We've been able to lift our crude using arrangements with the Djeno terminal operators. But in the meantime, we've also been in negotiation with them and the government about getting rights for our Congo subsidiary to lift its own crude. That agreement was signed recently, I think, in the last month. And that means that we have flexibility now on how we lift our crude and sell our crude in the future. And that gives us an option to return to ADNOC or indeed to another trader. And so we haven't decided exactly what we're going to do yet, but we have that flexibility going forward, which I think will be a useful thing for us to have.

Thank you. We do get a couple of questions on the use of cash. And I guess you've already covered dividend, but our share buybacks off the table.

As with the potential for a dividend, I think we'll be looking at what we will do for supporting shareholder value. If we have a strong cash position as we expect, we will in the second quarter of 2024.

Thank you. How do you see investor relations to work and play out in a company like PetroNor? Do you agree that PetroNor can improve in this area in order to make increased interest in the company from new investors?

There's always more we can do in the area of investor relations, and I fully accept the responsibility for that in my role. And we presented at conferences, and we put out, I think, as complete as possible, reports on our production and any things that are going on in the company that are of significance. But I think there are other conversations we could have, and I have been discussing with our advisers is how we could step that up in the course of the second half of the year.

Thank you. Can you say something about the expected time line for PNGF Bis?

PNGF Bis is we have a right to enter into that license with our operator, Perenco. Discussions with the government are really being held at an operator level by Perenco. It's on their list of things to do. The success of the infill program and the number of opportunities we have to invest in PNGF Sud itself has perhaps made PNGF [ Sud/Bis ] less important in terms of priorities. Nonetheless, the Vandji discovery in the Tchibeli North East program last year is something that has caused additional interest because we see that as also having potential in PNGF Bis. And we're currently monitoring the production from the Vandji well, which is doing well. It's about 600 barrels a day at the moment, which doesn't sound like a lot, but that's kind of an expected decline from the initial levels of over 1,500 barrels a day. And we think that it's a reservoir that has potential in the area and certainly in PNGF Bis. So we will be discussing what the operator intends to do on that license in the coming months.

Thank you. And when will the company have a permanent CEO?

That's perhaps more of a question for my Chairman, who's standing next to me. This is a matter for the Board to consider. I've made it clear that I'm available to them while they need me. And whatever happens, I can assure you that there will be a very orderly process to ensure that there's continuity and the right candidate for the company going forward.

Thank you. So what is happening with the Vandji exploration targets?

I think I just addressed that, and we are monitoring the production from it. And Vandji is a different reservoir from the ones that are currently being exploited on PNGF -- in the PNGF area. It's more -- perhaps, more broken up, more fragmented. And so we need to understand that in terms of really understanding the economics of how it will be developed. 600 barrels a day is modest production but can still make sense in the right sort of setting and with the right total development costs. So we're looking at that carefully.

Thank you. There are no further questions, so I will leave the back -- leave the word back to you for your final remarks, Jens.

Well, thank you. It's a pleasure to report such positive results, and I look forward to an even better story as we approach the third quarter interim. Thank you very much.