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

Good morning. Thank you for joining us today. Before we begin, I'd like to acknowledge the very sad news that we've heard about the passing of his majesty King Harald. I know on behalf of all in PetroNor that I wish sincere condolences to the Royal family and the people of Norway. From the conversations I've had in Oslo this week, I know that his loss will be keenly felt across the country. With that, I think we'll begin our presentation about the second quarter results for PetroNor. We sent out a report earlier this morning, and I'm here to summarize some of the high points of that and mainly to answer your questions. So please send those in, and we'll respond to them after a few slides. In many ways, it's been a great quarter for PetroNor. We saw improved production, back over 5,000 barrels of oil per day on average for the quarter, which is welcome. This came from the benefits of the infill drilling program that we completed in 2025, but also more stable infrastructure uptime and a higher production efficiency as a result of that. So we were pleased with the production performance. And we were also able to lift and sell nearly 1 million barrels of entitlement oil in April in this quarter. And that -- the timing of that was somewhat fortuitous in that we realized a significantly higher oil price than expected. And that resulted in a $112 million post-tax cash injection in terms of U.S. dollars that was realized in May. And this supported our balance sheet and encouraged the Board to recommend a repayment of capital to shareholders of $50 million that was made effective in June. So looking at the overall financial delivery, and I always look to see what our cash balance is. And at the end of the quarter, we're at $85.2 million. which is up from the beginning of the year, at what we were nearly $60 million at the beginning of the year. So we've continued to add cash. There's no debt in the company. Revenue for the half year, which includes the taxes that we have paid to the government in the Congo in terms of royalties and profit share is about $163 million and gross assets of nearly $250 million, which are buoyed up somewhat by the cash that's in the top line there. EBITDA for the half year of just under $90 million. You can see from the chart on the right-hand side of the slide that we -- like other small companies have quite a lumpy lifting kind of pattern, which makes it difficult to manage cash flow sometimes. But you can see from the -- we've had 1 lifting this year in April. And you can see the bottom chart that, that lifting, which is the large blue column in the middle of the slide here of nearly 1 million barrels, almost half of that was what we call an overlift, which means that there are barrels that we haven't actually produced yet. We are now having to pay that back, and we're paying back that -- back at a rate of about 100,000 barrels per month. So we will be back in balance by probably October this year and then start to build towards our next lifting. This is the cash waterfall for the half year. Starting in the beginning of the year with $60 million of cash. The oil sales of $112 million and then the treatment of tax and royalties is another $50 million. And then an accounting adjustment for that overlift that I just described of $41 million, that will disappear as we produce the barrels that I just mentioned. OpEx, $11 million and CapEx of $5.5 million. So this is the reinvestment into our main asset in the Congo. Admin of $4.1 million is what it takes to run the company. That's people costs, legal fees, professional services like our audits and other consulting that we use to run the company as well as our office and IT and things like that. That's come down quite a lot over the last couple of years. And we're trying to run the company as lean as we can. The big $50 million brick there is the return of capital to our shareholders, the repayment of paid-in capital of $50 million and then $10 million is part of moving the money through the company is through dividends is the leakage of dividends to our subsidiary shareholders, which leaves us with the $85 million that's in the bank as of the end of the quarter. Just a couple of slides on the portfolio, and our main asset is in the Congo. It's the Perenco-operated field complex called PNGF Sud, large field in terms of over 2 billion barrels original oil in place and about 500 million barrels recovered to date. So a long tail of production to exploit here. And it's -- so it's long-lived production, which responds well to infill drilling, as has been demonstrated in the last few years of reinvestment. And so this is something that we are working on in terms of starting drilling again in 2027. We've had a bit of a break this year. Reserves of just under 16 million barrels. If we carry on producing at the current rates, then that's another 9 years of production with 2C resources of 9.6 million barrels would mean that we could extend that to nearly 14, 15 years of production at current rates. And very high margin in terms of efficient addition of progression of reserves from 2C to 2P at about $11 a barrel and OpEx of $12 a barrel. So it's -- at current prices, it's -- this is a profitable asset. You can see the production slide in terms of this year's production in the bottom right of the slide, you can see that although we've enjoyed a fantastic quarter in Q2, we have seen a tailing off during Q3 with a falloff in the production efficiency. This is a number of key wells have needed repairs and are in the workover queue. Perenco have added a workover crew to the asset. And so they're addressing that situation. And so we expect that to improve. But Q3 will be a softer quarter in terms of production than Q2 has been. We will ultimately address that in '27 with additional infill drilling program that will bring us back up. We anticipate to over 30,000 barrels a day. Moving to Aje Nigeria, which is this redevelopment project that we've been working on for a couple of years now. We came into the project with a fractured partnership and a project that needed improvement in terms of the economics. So I think we've demonstrated consolidated partnership position by acquiring interest from misaligned partners. And we've defined a project with attractive economics, which is getting better as we improve the subsurface definition. We've worked hard on that this year with a new static and dynamic resi model. which is enhancing the economics even more. That said, despite our enthusiasm for this redevelopment, PetroNor is not the right company to approach the financial markets for project finance at this stage because of our legal challenges in Norway. So we've appointed an adviser, Talanger Capital, to identify commercial options and look at a farm down or a divestment of some of or all of our interests here. So -- we have a number of potential acquirers that are viewing data under nondisclosure agreements. And so we're progressing that with our adviser. It goes without saying I have to mention the Økokrim indictment of one of our indirect subsidiaries, Hemla Africa Holding. This in relation to historic allegations of corruption. The company categorically contests this indictment, and we are looking forward to the opportunity to have this thoroughly examined in court, and that hearing will start in November this year. And so I'm working with our legal team between now and then so we get prepared for that. This is still the beginning of quite a long road because the initial outcome, which will be expected in probably March next year will be subject to appeals. And so if process runs to its ultimate conclusion of a Supreme Court hearing then it could be as late as fourth quarter 2028 that we get a final outcome of this. In the meantime, we've been very focused on shareholder value. The operational delivery and a very focused strategy has generated cash to support distributions of paid-in capital to shareholders. We paid out NOK 4.2 per share in 2025 in 2 payments. And then this year, the NOK 3.25 was paid out in -- per share was paid out in June. In aggregate, with the performance of the share price, the total shareholder return over the past 2 years is about 100%, which I think has been an attractive return for our shareholders. Our current market capitalization is about NOK 1.6 billion, and 50% of that is represented by the cash we're holding in the bank. So I think a very strong balance sheet in terms of our valuation. To wrap this up now, a summary of the key points and production capacity has been demonstrated over the second quarter with production over 5,000 barrels a day for the whole quarter, which we're pleased about. We're preparing additional infill drilling investments in 2027. We are pleased with the lifting of million barrels and the timing of it giving us a big cash injection of $112 million in May. And we're currently able to rebuild that inventory entitlement oil for sale at about 100,000 barrels per month. So we will anticipate being back in balance by the fourth quarter. And we are making progress with our adviser process to look for candidates to farm down or divest our Nigerian assets to. So that's really all I wanted to say today. And so thank you very much, but I welcome any questions that you have.

Thank you, Jens. We will now go through our online questions. First one is, why are you holding on to so much cash?

This is Yes, this is a good question. $85 million, if we're spending modestly, it looks like we're holding on to cash and our policy is to distribute excess cash. I think the real reason is about the issue I mentioned before about timing of liftings. We have to be prepared for quite a long wait before our next lifting and oil sale. We're currently paying back our overlift that we made. And so given that we would be back in balance in October, we would need to wait a few months of continued production to build up an inventory to sell later on in 2027. Right now, we anticipate that will be probably around May next year. And so we need to retain cash to run the company in the meantime and to continue to fulfill our obligations under our licenses. And in particular, this means the CapEx and OpEx billing that we have for PNGF Sud. If we go into a drilling program next year, our CapEx will be increased. And so we need to be ready to manage that. And so that's the reason that we're holding on to the current stock that we have of $85 million. And the Board is focused on finding opportunities to repay capital where we can. But I would anticipate to be as part of the normal cycle and approved at our next AGM in May next year.

Following up on the timing of lifting. When do you expect the next lifting to take place?

Well, that's kind of related to my answer to the first question. And we don't know when we get to the front of the queue in the Djeno terminal. We anticipate it will be in May, but we will be working with the terminal operator and our oil trader, ADNOC, the national oil company of Abu Dhabi, to get the timing for the next lifting. So I would -- I expect it to be in May, but it could be a little earlier, it could be a little bit later than that.

Why are you continuing to invest in Aje if you're selling out?

We are investing modestly in Aje in terms of really enhancing the project definition. We think that's value-added work and will be of use to any incoming partner. It's aligned with what we've agreed with the Aje partnership. We can't simply stop work and down tools and leave the asset stranded. And so it's a balancing act of doing work that will be useful, that will not have a shelf life in that it will be out of date -- with an incoming party. So I anticipate that if we can get a transaction agreed in the fourth quarter, we would have a discussion with an incoming party while we're awaiting regulatory approval for what would be useful for us to continue to do. But in the meantime, we will continue to add value to the to the project with the work we're doing.

Moving on to CapEx. How do you expect CapEx to develop going into the next year?