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

Good morning. My name is Jens Pace. I'm the CEO of PetroNor. It's a great pleasure to be back here in a delightfully sunny Oslo to give an update on the company. We put out a report this morning for the 1Q results of this year. And so, I have a few slides to take some highlights from that report. But the main point of me being here is to answer your questions. So please start sending them in, and we'll get back to them after a short presentation. So obviously, start with the disclaimer slide. Now I have been using this slide for years, and it's never changed, but there are some changes in this one. So, the eagle-eyed amongst you might want to have a look at that. The outline of the presentation, I'll give a brief update on production mainly and then go into the financial performance and make some comments about shareholder value. There're a few slides describing the portfolio, which is a somewhat standardized pack, but it gives us an opportunity to get into a little bit more detail on each of the assets. And then an update on the Økokrim investigation a bit before a summary of the highlights of the first quarter and some comments about going forward. But then we'll get to questions and answers, so please send those in. So, starting with production, we've seen some natural reservoir decline over the quarter. Our production was 4,321 barrels of oil per day. So that's a few hundred barrels shy of where it has been in the previous quarter. And the reason for that is apart from some normal anticipated decline in reservoir, we've had a couple of high-rate wells that needed to be taken out for maintenance of their electrical pumps. These are now back online, and so we will see production coming up. I think in the past year, we've had some difficulties with infrastructure stability. Thankfully, that problem is behind us now, and we're actually seeing reasonably good production efficiencies. It was 90% on average over the quarter. And as I stand here in May, it's well above that for the last month or so. We're addressing the reservoir capacity issue with an infill program. We have 5 wells scheduled to be drilled. The program is a few weeks late. The Axima rig is still in Port-Gentil of Gabon, but it's shortly destined to arrive in Congo and start operations. And certainly, they're getting ready in the field for that, and we will start drilling 5 wells. The production impact of that will start, we anticipate in August, and we will work up to an exit rate at the end of the year of over 5,000 barrels a day, we hope, given the success of that program. And that will bring the full year average up to something closer to where it has been of 4,800 barrels a day on a working interest basis. So that's based on operator estimates of the impact of the infill program. So, looking forward to seeing that and recovery of the production. What does that mean in terms of some of the financial metrics? Well, we are sitting on a pretty good cash position. At the end of the quarter, we had $107.5 million in the bank and no debt. When we look at revenue for the quarter, it's a little misleading in that the accounting standards that we use count the money that we give in oil to the government is counted as revenue. So that was $13.9 million. We don't actually see that, but it goes through our books on our balance sheet. So, the time that we get revenue is obviously when we lift and sell our oil. And the chart at the bottom here tells the story of the track record of liftings and sales versus the inventory that we build up at the Gentil terminal as a result of our production. And you can see that if we look back on the last year, in the first half of the chart there, we lifted about 1.8 million barrels of oil, and that's the large blue columns. And the last lifting was just in December. That was nearly 880,000 barrels in one lifting at the end of the year. What that did was it produced what we call an overlift situation. We overlifted about 470,000 barrels. And so, the production through the first half of this year is, to some extent, paying that back. We anticipate that we will reach a balance point around the middle of the year in June and then start building inventory again. And as you build inventory, you start advancing up the queue at the Gentil terminal to have another lifting. So, we anticipate that in the fourth quarter, we will be close to the front of the queue, and we anticipate a fourth quarter lifting. It will probably be of the similar scale that we saw last year with a full cargo of around 800,000 to 900,000 barrels at the end of the year. And certainly, we'll have the opportunity to do that. and that's what we're hoping to be able to arrange. An alternative might be if we get into a pooling agreement with another lifter in the Gentil terminal, and we may be able to advance that. But if it's just us lifting by ourselves, it will be a late-year program. Somewhat confusing picture on the cash side because of the difficulties in the IFRS accounting system of dealing with not only the overlift, but also the fact that we have the sale of crude in December and the payment for that lifting in January, which kind of distorts the way that the numbers hit our balance sheet and gives us a large working capital movement, which you see is the large blue brick in the middle of this column here. So, the first area is starting from a cash position of $80 million at the 1st of January. We have the assignment of tax oil and royalties, which I mentioned earlier, which is counted as a revenue. OpEx costs, which it looks a bit larger than it normally is. The actual OpEx side from the field point of view is about $4.5 million, which is $11 a barrel, which is kind of a world-class operating cost number. The other elements of that are the kind of cost of sales, including the royalty that we've paid to the government, which makes it up to $9.9 million. Admin costs, which is the bit that effectively I control, is people costs and legal costs, and professional services. The people and travel bill is around $1 million, and the bulk of the rest of it is in legal costs. And that's something that we think will be addressed going forward with the changes in the investigation that I'll come to later on. So, the big working capital movement to account for the year-end and overlift situation. The CapEx investment so far, particularly in the Congo, quite modest, $2.8 million. We expect that will go up in the second quarter as we start the drilling program in the Congo. And then the big flying brick at the end, there is the repayment of capital that was achieved in January. That was $25.2 million, which leaves us the cash position that I mentioned before of $107.5 million and a strong position. So, I hesitate to stand in front of a chart of our share price, and maybe I won't do it if it's ever really bad news, but this is good news here. So, you have to give me some allowance. We've been focused on a strategy here of looking at the existing portfolio, investing in the existing portfolio, but not looking at growth beyond that, which is a change in the strategy that was announced about 1.5 years ago. And with that, we've made a commitment to give excess cash back to shareholders. And so, we were able to achieve the NOK 2 per share distribution in January this year, somewhat delayed you may recall, by conversations with the investigating authorities, but we were able to make that in January. And we're looking at a recommendation for the AGM, which will be tomorrow for an additional NOK 2.2 per share, about $30 million, and that will be proposed to the AGM, and if approved, will be paid before the end of the month. And that gives us a total shareholder return over the last 12 months of about 78%, assuming that second payment is approved by the AGM. And so that's not too shabby, and I hope that we can continue with those sorts of contributions to shareholder value. Let's go through the portfolio briefly. So, you can see we're focused in West and Central Africa. Our production comes from Congo Brazzaville, the PNGF Sud license. Gross field production is around 26,000, 27,000 barrels of oil per day, and with our working interest of 16.83%, that gives us the current production levels of about 4,300 to 4,500 barrels a day at the moment, which we obviously hope will be increased by the infill program later this year. And as I mentioned, this is high-margin production with lifting costs of around $11 a barrel. And depending on the production performance of the drilling program could be below $10 by the end of the year. The second area is a redevelopment project we have offshore, Lagos in Nigeria, the Aje field. Our current efforts there remain fixed on consolidating our license position with the acquisition of New Age's interest, which when completed will give us a working interest of about 52% in that redevelopment. We're interested in that redevelopment. It's a gas condensate and oil development, and it's well-positioned just offshore Lagos for a big gas market, and it's right on the West African gas pipeline. So, we see that as a valuable asset. And finally, in the Gambia, we have a pure exploration play in deep water. It is targeting analogous prospects to the ones that have been successful in the north in Senegal in the Sangomar field. So, it's a proven basin, and we've been working on the technical description of prospects there while undertaking an exercise in trying to attract partners to join us for the next license phase. I think the main issue to bring out of the metrics there is 2P reserves of 17 million barrels and 2C reserves or resources rather of twice that. So, some legs at the current production level to continue with high levels of production. And that's all from the Congo at the moment. The field complex in PNGF Sud of about 2.3 billion barrels of oil originally in place, with only about 500 million barrels recovered to date, which is a low recovery factor for reservoirs of this nature. And we see as much to come again as has already been produced. Our reserve position that I mentioned earlier on represents a 93% production replacement this year, which we've just completed our audit on that. And that supports more than a decade at current producing levels without doing too much more. And if we continue to invest as we have been doing, then there's an opportunity to double that lifespan in terms of production. The production efficiency, which is shown in the graph here, as you can see, over the performance in 2024, which is the blue columns, dropped down to just over 85% of production efficiency. We're seeing that increase now as the investment in new infrastructure, particularly power generation, has stabilized the operating environment, and we're seeing operating efficiency is getting above 90%, and we hope we'll stay at that level where they have been historically. And the infill program, we will start shortly on the Tchibouela East field, and that is focused on some high-rate opportunities that we think will add significantly to our production levels. Just a little bit more on Aje. So, as I said, we've been focused on getting the ministerial approval for the New Age acquisition. We anticipate that, that will be any week now. We've fulfilled all of the meetings and workshops with the regulatory authorities that were required to. And from our perspective, they've gone very well. And so, we're expecting that approval to come shortly. While we've been waiting for that, we've also been focused on the subsurface description of the asset, in particular, on the depth image of the deeper oil reservoir that underlies the gas condensate reservoir. This is significant because it obviously affects the way we look at the project economics. And I'm pleased to say that this has given us increased confidence in an oil upside. The previous versions of this slide had oil at around -- black oil at around 5 million barrels in terms of reserve potential. We've seen that as at least doubled, if not more, and so, we're excited about the potential that is being uncovered with this new work. The other things that we're doing are around the regulatory environmental and social impact assessment. And to facilitate this, we've purchased land at the landing point of where we anticipate the pipeline from the development will come onshore. And we're in the process of doing mandatory sampling and monitoring of the environment there so that we can make informed decisions about how that development is implemented. I think that's it for Aje for the time being. Just a few words on the exploration potential in West Africa here in the Gambia. As I said, we've been working on a seismic conversion of the 3D seismic that we have across the license, and this has provided some good support for the prospectivity that we see in these reservoirs that are analogous to the Sangomar field to the north in Senegal. Sangomar has been performing very well. It's still on plateau, and so, these are proven reservoirs now. And I'm excited by what we're seeing in the seismic conversion. It does seem to show that we have support for these being oil bearing in our license area. So, we're continuing to work to finalize that and working with our partners in GNPC, the national oil company, to look for partners to help us go through into the next phase of the license, which carries a well commitment. In Guinea-Bissau, you'll recall this is a license we farmed down 100% in the course of 2023. It was drilled in 2024, and the well was not commercially successful. There haven't been any formal announcements about that, but I think it's generally well-known across the industry. The operator has been conducting studies to decide what to do next. And we haven't -- although I've been in touch with them, there's been no reports as to whether they are going to move forward to another second well in 2026 or not, but we wait on news for that. There is the potential for PetroNor to get contingent payments in the future in a success case. I'd have to say that to start that with a disappointing well at the beginning puts that at some risk, but nevertheless, it's not discounted if they still have plans to move forward and drill. And we'll wait and see and obviously inform the market if we have any more information about that. So, a brief update on the investigation. We announced earlier in the quarter that the Department of Justice in the U.S. had closed their investigations. And although the company was never a target of those investigations, we were nonetheless a subject and participating fully in that process. So, it is something we're pleased about that work front on the legal side is at an end now. The investigation by Økokrim in Norway, which started some years ago, it remains ongoing, and we are continuing to cooperate with them on that. There's not much we can say about the forward time line. It's outside the company's control. We do expect based on signals from Økokrim that we will learn more before the end of the year, but we're waiting on that, their decisions. And we'll obviously, update the market as soon as we have anything meaningful we can say about it. So that brings me to a pretty simple summary here. It's stable production with an infill program to bring us back up to levels we've seen in the past, and I anticipate a strong exit from this year on the basis of that being successful. Oil inventory is building as we would expect, and that has the potential to support a large lifting in the fourth quarter. And with a company strategy that's focused on maximizing the value of the existing portfolio and returning excess cash to shareholders, we have a second return of capital of NOK 2.2 per share, which is about $30 million being proposed to the AGM tomorrow. So, if you want to support me on that, you'll come out and vote for it. Thank you very much.

What are the news on PNGF Bis?

Yes. Thank you. In the end of 2023, we announced that the Council of Ministers in the Congo had approved the award of the PNGF Bis license to Perenco group in which we would have, I believe, 25% of. We acquired 3D over that license in addition to the rest of the PNGF complex. So even though we haven't formalized the production sharing agreement yet, we thought it was wise to extend the survey over the whole area. That data arrived earlier this year, and we've been in the process of interpreting it and working with the operator to understand what it's saying about the license. We've actually found some things that are of interest, which we're in discussion with them. We anticipate that once we are able to inform the process of finalizing the PSC with our technical understanding of the license that we will move forward on it. We have, as I've demonstrated, quite a lot of opportunities to reinvest in the Congo as it is in the existing portfolio of assets in PNGF Sud. So, we're not in a hurry to add to that list of opportunities, but it's -- we have the option to do that, and we will take it when we're ready and have reached agreement with the government on the PSC.

What can you say about expected CapEx for 2025 and 2026?

So we had some big years for CapEx when we've been installing new platforms and as we did on the Tchendo field, which was kind of largely a big spend through 2023 and into 2024. But the kind of CapEx we've seen since then is really just focused on the drilling programs. And so, our relatively modest CapEx we've seen in the last quarter of $2.8 million will be -- we'll see that increased in the next quarter with the drilling program. I think on a gross basis, there's been a shift of about $10 million. And so, our net of that will mean that we are seeing costs of around $4 million to $5 million in the next couple of quarters. But I think in general, we're not seeing any big spend because we don't have any large infrastructure decisions to make. It will be focused on just increasing the well capacity of the field. And these have been very economic investments that we've seen payout of these within months as a result of some of the rates that we've been able to add. So, it's a very sensible program to be engaged in.

What is the best guess when it comes to the time line of seeing revenue from the Aje field?

Well, Aje is -- things do take time, and I think we've learned this. Waiting for government approvals is something that we've learned to be patient with. And so, there's an element of things moving forward at the rate that the government wants. And it's a bit of a dilemma because we would like to see the New Age transaction completed quickly. At the same time, there's an impatience on other parts of the regulatory authorities to see action in licenses and to see activity. And so, I think we're trying to manage that dilemma and see that project move forward. If we could get to a point where we see a final investment decision in the course of next year, then first production would be 2 years after that on the basis of the plan that we've developed. So, it's not soon, but it's in that sort of foreseeable future.

Positive to see another dividend. What will determine when the next dividend will be announced?

Well, we've had the unusual situation this year of having essentially 2 returns of capital employed, one in January, and now we're contemplating the January payment from 2024. And that was a result of conversations we were having with the investigating authorities. So, it's -- what we would like to see is getting this back into a normal annual cycle that's focused on our AGM, which is always around May, and will be based on prior year performance and excess cash that we can identify, that exceeds the needs of the company in terms of its investment plan. So, I anticipate that we will -- the Board will monitor this situation. If we get a lifting in the end of the year, then we'll be in a similarly strong cash position for the next AGM in May 2026. And so, I think we'll be looking at an annual cycle for this judgment to be made going forward.

For the year 2025, do you estimate the dividend in the same range as 2023 and 2024 payout of around NOK 2 per share?

I don't really want to be drawn too much on this because it depends on a lot of factors. Oil price being one of them. We've seen some softening in the oil price in the course of this year, which I mean, as an aside here, that makes you feel better about having overlifted last year at higher oil prices because we get the benefit of that. But -- so we will have to see how the cash situation and the company's needs work out when this judgment is made. But if oil price recovers and we see a good lifting at the end of the quarter -- the fourth quarter, then I could anticipate that we would see similar levels of return of capital. But it will come down. The Board will have to make that judgment when we have the finalized accounts for the year.

There are no further questions. So, I will now hand over to you, Jens, for your final remarks.

Well, thank you for the questions. And my final comments are really a return to the points I made on close here. We've got solid performance with stable production and a plan that's being implemented to bring that back up to levels we've seen in the past. So, an asset that has demonstrated it's responsive to infill drilling program, and so, we're excited about that for the next year. Oil inventory building with a view to a big lifting at the end of the year, and we look forward to that opportunity. Company strategy, which is very much focused on near-term shareholder returns. So, it's focused on maximizing the value of the existing portfolio and returning excess cash to shareholders. And so, an opportunity to vote on that in the AGM tomorrow with a return of NOK 2.2 per share for investors. So, looking forward to see the outcome of that vote. Thank you very much.