Trinity Exploration & Production Limited (TRIN) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Trinity Exploration & Production plc Investor presentation. [Operator Instructions] Before we begin, I'd like to submit the following poll. And I'd now like to hand you over to Nick Clayton, Chairman. Good afternoon to you, sir.

Well, good afternoon, everybody, and welcome to the 2021 results presentation and outline of our forward plans. For those of you who -- we've spoken before, my name is Nick Clayton, I'm the Non-Executive Chairman of Trinity, and I'm joined here today by Jeremy Bridglalsingh, the CEO of the company. By way of introduction, we've just outlined here the agenda for today's presentation. We -- as a start, we will outline the investor -- investment Synopsis, why you should be involved in the company over the next 2 to 3 years. During that, we will talk about our onshore drilling program for the rest of this year, especially the deeper leads, which we've identified as a result of the 3D seismic interpretation that's been ongoing over the last couple of years. We'll look at what that means for our medium-term production, outline quite a lot of our opportunities and diverse opportunity set and at the end, we'll talk a little bit about our 2021 results. But the key message and the key takeaway that I'd like to leave you with today, and we'll return to this during the presentation, is that we've taken a long hard look at our portfolio over the course of the last year. We've sifted and focused our opportunities as a result of the 3D. And we can see a very clear pathway now to growing this company partially as a result of near-term drilling, but I think it's fair to say that we've built an opportunity set which will enable us to undertake a multiyear drilling program, which will give us line of sight on potentially a doubling of our onshore production, adding materially to our reserves. And as a result, being in a position to make returns to shareholders over the next 2 to 3 years. As we go through the presentation, we'll touch on a number of areas where we've seen a number of questions, and those are SPT, the status on Galeota, the returns to shareholders and the timing of those and also the nature of our drilling program over the next year or so. At this point, I'd just like to outline what it is that drives or should drive your interest in Trinity over the next 2 to 3 years. We are a strong cash-generating business. We have -- as a result, that will enable us to drive a significant level of activity, and that will drive growth for shareholders. And ultimately, we, as a result of the restructuring undertaken in 2021, will in a position to make distributions to shareholders in the form of dividends or buybacks over the next 2 to 3 years. I mentioned at the outset, we've rigorously prioritized our investment opportunities. We have a drilling program that's 6 wells for this year that's fully funded, will give us the line of sight on very strong medium-term production, as I've outlined. And as a result of both a combination of our own organic activity and external initiatives being bid rounds and lease arrangements with Heritage, plus bolt-on acquisitions, we think that we're in a position to significantly grow this business over the next 2 to 3 years. I'm going to hand over to Jeremy, who's going to talk through the drilling program in a little bit more detail and more importantly, to look on the deeper prospects, which I think could move the needle quite materially for Trinity. Jeremy?

Thanks, Nick. It's good to be here. Thanks for taking the time to listen in so you can get an update on what we think is a very exciting inflection point for the business. We jump straight in that and describe the drilling program that we intend to carry out, which will commence as early as in the next few weeks or so. The drilling program of this year will contemplate 6 wells -- or this drilling program, rather, which will start this year, will contemplate 6 wells: 4 low-angle wells, similar to the wells that we drilled in 2018 and 2019; 1 horizontal well in the WD-5/6 area, which will be going into an [ adjacent internal ] existing producing area which has been shown very strong production; and a deeper appraisal well that will look at going into untested sands, which could have a number of various outcomes, but it looks very exciting for us. Some of the key statistics around the drilling program are we are going after recoverable barrels in the amount of 450 to 1.1 million barrels. The CapEx, the range looks at $14 million to $17 million, and the reason that we've given our range is because we have seen significant inflationary pressures when it comes to the cost of drilling a well. From the cost of steel to mud to cement, these have had significant double-digit increases in recent weeks, if not months. Just to be clear on the deeper well, the depth that we're looking at here is between 6,500 to 9,500 feet. So not extremely deeper in terms of kilometers and below the horizons where we currently drill into, which are between 4,500 to 6,000 feet in the Palo Seco area. The deeper well is an appraisal well and, therefore, will be subject to approvals from both Ministry and Heritage. I'll describe the deeper well in a little bit more detail on the next slide. What we are trying to do by taking on a range of wells is to really try to expose shareholders to a varying rate or range of returns for types of wells. And on the top right-hand corner, you can see the economic returns by well type as an illustration. The low angle well IRRs of 30-odd percent with cash returns in terms of cash invested and cash from the project be 1.4x. The horizontal well sees this increase significantly from 31% to 120% and cash on cash returns of 2x. The deeper well, the IRR is actually not there because it pays back within 1 year, but again, increase in cash returns. So what we are trying to do is to build an opportunity set where we expose shareholders to an increased ratio of barrels recovered versus CapEx invested. The change in the drilling and the returns paradigm employing horizontal high angle wells has been very much quality assured by the seismic -- 3D seismic that we purchased in 2020. There's been a lot of discussion around purchase in the seismic and what the fruit of that has been. And today, we can come out and describe exactly some of what that fruit will be. The current hopper, as Nick mentioned, is 40-plus infill wells, and it's a combination of at least 5 high angle horizontal wells, which will increase as time goes by, and at least 35 plus wells in terms of low angle wells. You will see the number of wells increase as well as the types of wells change in terms of the makeup of high angle and horizontal starting to play more and more a part in the opportunity hopper as we move forward. I think it's important to understand that the deep well and what the potential is there can have a significant impact in terms of what our future drilling program will be. The intent of the company is to drill at least 6 wells for the forthcoming years, providing that the macro environment supports us. So in essence, what we're trying to get the message on this slide is that this drilling campaign is going to test our technical assurance, our own drilling different types of wells. To remind you, we did drill a high angle well in 2019. The well came in, in terms of production as planned so the reservoir was there, the production was there. We did not manage to produce well for as long as we wanted to at the higher rates because of completion issues. But that's something that we have learned from and we'll intend to take forward into our next set of high angles and horizontal wells. What is the 3D seismic doing? And we put a cartoon up on the left-hand side that, hopefully, is not too technical. It's actually a line of seismic that runs across the Palo Seco blocks. If you look at the inset, they are down below and you see the WD-2, WD-5/6 and PS4. This is a line of seismic that runs across that. And the seismic is deliberately feeded into the background because we don't want it to make it look too technical. You can then see that there are a number of colorful lines that go across -- that go from left to right. And those describing horizons that we normally go into and then some deeper horizons where you see some light blue, then purple, darker green banked up against one of prospective oil zones. And these oil zones are essentially banked up against that red line that comes from in or around 7:00 and goes up to about 1:00. And that is a fault that we have only managed to image properly through having the seismic. The black lines going down that look like spider legs are actually wellbores. So you can see that the darker ones are the wellbores that are actually closest to the line, and the gray lines are those that are full or behind the seismic line that we're looking at. Notably most, if not with the exception of 2 wells, are very much centered or very much focused on exploiting the shallower reservoirs. Those are between 4,500 to 6,500 feet. So those areas are well exploited, but there's room for optimization. And by having the seismic, we have been able to understand the tracking mechanisms better. We've been able to correlate the way we make our current geology based on well correlation logs have been put together. We've actually seen areas where we've had to correct the way our geological understanding has been in order to keep true to the seismic and that has helped us understand where pools of recoverable reserves are still available and how we can optimize our drilling, either through low angle, high angle or horizontal wells. But you can see that most of these wells only penetrate at in or around 6,500 feet. There are only 2 or 3 of these wells that go deeper. And if you look at what we've mapped here very crudely, you can see that those deeper wells did not optimize or target the sands that are potentially prospective. By having this seismic, having this well control, we're now able to put together an image of the subsurface that allows us to see anomalies that we have not seen before. The intent is to test these anomalies. And what we have described here is 3 different stacked turbidite sandstone reservoirs with multiple pay opportunities. So there's an opportunity here to drill a deeper well into each of these 3 zones that you see banked up against the red line around across the middle of the [indiscernible]. And this is a typical example of what one of the deeper targets will look like. It is just around 9,500 feet in terms of the deeper sand there. And our intent is to drill through existing producing zones, where there will be stacked pay, or go down into these deeper areas and test these sands to understand the reservoir's deliverability, to understand the hydrocarbon and see if we can actually produce from this. The technical team has given us a 55% chance of finding between 1 million to 5 million barrels of oil and gas with an upside of over 11.5 million barrels. This is very significant for us if you -- when I get to this slide on describing the onshore reserves, you can see that the -- we try to put an illustrative impact on the potential of the onshore results. And you can see that one lead that can turn into a prospect could be very meaningful for Trinity. And what the team has identified is actually 9 leads similar to this that we will be going after in the near future. One of these we intend to drill in this campaign, and it may be drilled either in late 2022 or in early 2023, depending on the supply chain restrictions that we have in front of us. This is what has us, as a management team and a Board, very excited about this drilling program. We've put together a projected production profile. And it's based on 4 layers. There's a base, which is the dark, deeper screen and it's a base that you've been accustomed to seeing Trinity manage very assiduously over the last few years. The base has very low decline, very low risk. It's repeatable and it's what underpins the operating cash flow, the profitability that you've grown accustomed to. Add the low-cost base and the low breakeven, and you can see where the opportunity in terms of increasing oil price and increase in production comes from. I appreciate that the increase in oil price is a topic that we must touch on in terms of hedging and will do so later on. The next skin or the next layer is a likely -- a slightly less bold in terms of the green, and that represents the onshoring drilling, 6 wells per year for the forthcoming next few years at the very least. You can see that this offers us the opportunity to grow, but it's not very significant growth. There's gentle growth there, but it is low risk as well, too. So we believe that, that offers us the opportunity to sort of hold steady, have some general growth, take on some different types of risks in terms of high angle horizontal wells where the returns are premium and get a better CapEx to -- CapEx invested to barrels recover ratio. But what is really exciting is looking at the appraisal drilling. And in the first instance, if your well is successful, you can see what that looks like in a success case, where it sort of takes production from 1x or maybe 1.3x, 1.4x [ basis ] in production. But in an upside case, if the well is successful, the single lead that we mentioned before, you can see the ability for this to transform production. And should be noted that we've got 8 other leads that the team is maturing into prospects. Not all of these will mature into prospects, but having multiple leads allows us to build a hopper and therefore, put the best -- put our capital towards for the best opportunity. And it's also important to note that this illustrative projection excludes Trintes, the redevelopment of the low risk 2P reserves in the existing production then; the Echo development; Brighton infill drilling; and appraisal and prospective drilling in the Point Ligoure-Guapo Bay-Brighton Marine assets. Trinity today announced that we have around 67 million barrels of reserves and resources, and we try to break that down into the 3 different asset classes onshore East Coast and West Coast. I'll start off with the onshore on the left-hand side, and you can see the first bullet that we point to is base production. And in fact, if you look at the base production for East Coast and West Coast, what we've done is put a ratio of 1P reserves to production. And you can see that, that is 9, 15 and 17 years, respectively, which means that the dark green band that we looked at before the base has a significant [ amount of running ] in front of it. So therefore, the underlying cash-generating business has significant running room by which we can continue to build cash reserves onto the balance sheet. The onshore, though, in terms of 2P, 7.3 million barrels; and 2C, 3.8, is significantly dwarfed by the East Coast if you look across very quickly. But what we put on there is [ to lay on ] what the potential for appraisal and prospective resources can do. You can see if we are successful with the appraisal and exploration drilling that we propose on the onshore, the onshore can soon begin to rival the East Coast in terms of converting prospective resources into 1P production. For example, if the appraisal well that we intend to drill is successful, we can bring production on to that almost straight away. It is close to existing producing facilities and it can form part of the existing production train that we already have. So you'll see quick production from this, and it can also develop both 2P reserves and 2C reserves. In terms of the East Coast, a large figure in place there. You can see the contingent for Echo shallow and contingent to Echo dominate the reserves of the East Coast. And it's been very -- we've mentioned it publicly. We commenced a farm loan process in December. We had a number of different companies exhibit interest. We were very encouraged by that. We carried out a number of management presentations. But [ we will view with that ], the SPT reform would happen in line with the process, and that did not come to pass through a number of different reasons through what has happened geopolitically, the oil price that we've seen and then with changes happening with the U.S. changing -- removing certain sanctions from Venezuela. We think the government would be hard pressed at this point in time just like other governments with high oil prices to provide tax breaks to oil companies. But we also think that whilst this is the current state of play, we believe that once things settle back down, that the SPT reform, the fiscal reform, which is required to attract foreign direct investment into new onshore bid rounds or shallow water bid rounds, has to be changed before these various activities take off. So without the SPT reform, the decision of the Board, in best interest of shareholders and getting the best value for Project Echo has been to pause that process until we see or get line of sight on SPT reform and understand what that looks like by way of the impact on valuation. However, given that we've got significant 2P and 2C reserves in the existing Trintes area, the team has turned its eye towards looking at a renewed field development plan to getting back to drilling on the Trintes asset in as early as 2024, 2025. It should be noted that some of the wells on the Trintes field are almost as large as the appraisal well that we described before, where you have [indiscernible] between 200 to 700 barrels and wells recovering up to 0.5 million barrels. So quite significant in terms of value, production-wise as well as cash flow. On the West Coast, I'll just touch on it very quickly. We've got good 1P to production reserves there in terms of 17 years net ratio. ABM 151, we're going to reactivate that well. This is a well that is very low geological risk in this. So it's really operational risk. We intend to bring that on later on in quarter 3 into quarter 4 this year. And then as we mature the technical understanding through purchase in 3D seismic over the Point Ligoure-Guapo Bay [ bound ] asset, which is the [ PTB ] asset, we'll be looking at assuring the ALM 22 appraisal as well a potentially drilling deeper in that area for another prospective area. What I would suggest right now is stay tuned to the West Coast, and you'll see that development in the next sort of 6 to 9 months. Otherwise than that, the Ministry, they have 2 bid rounds that are due to get on the way, the onshore and the shallow water, both of which Trinity will be interested in. There is a deepwater round, which isn't clear right now, but Trinity is not participating in that. Heritage, as a continuous business development hopper, their next round of business development is to provide some [ full subleases ] looking at enhanced oil recovery. We have entered into that, and we look at that as information becomes more available to us. And finally, looking at bolt-on acquisitions. I mean, if you look at the 3D seismic in the previous slide, where it covers the 3 assets, WD-2, WD-5/6, which were already in our possession, but the seismic also allowed us to see a significant portion of PS4. It allowed us to drive the technical understanding for why we would want that asset and focus really not on the flowing bar, but the running room that assets adjacent to both WD-5/6 and WD-2 would offer us in the -- as we drive forward the train to increase production through the drill bit onshore.

We touched upon this in previous presentations, but I think it's probably one of the most important steps that we as a company took last year in forming the technical committee. It's helped us to cut to the chase very quickly in terms of sifting our opportunity set. And more importantly, following the passing of Bruce Dingwall, I think it's provided the Board with an extra layer of comfort and quality assurance. And I think, hopefully, that's going to lead us to improve results from drilling and mitigation of risk from that activity. So I make no apologies for reemphasizing the importance of this development for the company. We've got 3 world-class experts who've joined 2 members of the Board to form this committee. These individuals have experience across a broad range of hydrocarbon basins around the world and is a very, very important tool for the company. Jeremy?

Thanks, Nick. In terms of the 2021 results, most of this is already out in the public space based on the quarterly updates that we provided, but today we've given the final results. And within that, you can see production has held very strongly year-on-year. Without any drilling, we managed to hold production at only a 5% decline year-on-year, bear in mind, that in natural fuel decline levels of between 7% to 10%. So the operations team, the facilities team, the health and safety teams did a wonderful job last year holding production of -- for the benefits of cash flow generation, which you can see right below cash flow from operating activities increased year-on-year. Yes, there were better oil prices, but the business model is very strong with a low breakeven of $29.2 and that's -- we've held the breakeven below $30 for the last 6 years. I think it's going to be very difficult for us to continue to do so into 2022 based on the inflationary pressures that we see. But once we can increase production, you will see the breakevens go into sub $30, again on a moving forward basis. [ The work ] activities completed 7 recompletions. We were a bit less than we usually do. You normally see Trinity doing between 12 to 15 recompletions per year. But it gives a little bit of -- tells a tale in terms of COVID because notwithstanding the natural fuel declines, the team was also impacted by having to spend a lot of time and effort looking at the business continuity practices to ensure that the team remain as infection-free as is possible so that we could continue, but also we saw in other areas where the regulatory bodies needed to get involved, where reduced staffing, changes in practices just made things a little bit slower. And we continue to see that in this year. But I have to say, I mean, Trinidad is coming along. We're not quite where London is at the moment. Our vaccination plan was 6 months behind, give or take. But we are coming along, and things are getting better. And I can say that we are clear in terms of the approvals to move forward with the initial part of ordering program. And as I mentioned, for the deeper appraisal well, we will seek the approvals appropriately. 50% of all production onshore is now automated, and we are seeing already good signs from that in terms of the value that. that will bring in terms of reducing the amount of interventions required, being able to intervene much quicker, being able to optimize the production and generally being able to reduce logistics costs around where we need to monitor. So what we are trying to achieve as a reminder, is what we saw in the East Coast when we did the automation and logistics cleanup on the East Coast, where we saw a benefit in -- an uplift in production by 20% without any new drilling and a reduction in operating costs by 40%. So we're not quite there yet with the onshore, but certainly having 50% of the production automated has given us significant insights. Other main achievements during the course of the year, all of which has been announced and been in the public space for some time are on the Galeota license, where we have much improved commercial terms and a much stronger license; the onshore lease operating agreements, which will renew for 10 years on better terms than they were before; completion of the PS4 acquisition in December of last year; and of course, I mentioned the onshore seismic in significant detail, but it shouldn't be -- I would say that the job with the 3D seismic is not complete. We do have some products right now, but we continue to look at the 3D seismic to help influence and build -- grow the opportunity set, both in terms of existing wells, deeper wells and also enhance our recovery in due course. We have energy transition initiatives underway. We have commenced our solar irradiance study in Galeota, and initial readings of that are showing that the [ missile scale ] or the satellite data that we have used before has been inaccurate to the tune of even up to 50% in some instances. That is very meaningful for being able to plan what a power plant may or may not be able to do in due course. And we've also looked at energy efficiency in the WD-5/6 field, where we've ascertained what the power requirements are and we've built a solar system that has now taken that field office off-line and provides green energy. Robust production I mentioned and touched on before, and Nick has touched on in terms of our strength in Board, particularly with the technical committee. The foundation that we have is dependable, it's stable and is cash flow generative. I'll hand over to Nick now to conclude.

Thanks, Jeremy. Just to sum up where we are as a company. Financially strong, we have a strong cash-generative business that is capable of funding an acceleration in investments, and you're going to see that in 2022, but also going through over the next 2 to 3 years in terms of a consistent drilling program. And that's supported by a strong balance sheet. Jeremy has already alluded to the base production, which gives us that strong cash flow foundation and substantial reserves and resources to exploit. It's important not to forget that we have close to $200 million of tax losses, which will mean the growth of the company will be done on a tax-efficient basis. And there is a prospect of fiscal reform to unlock further investment. But just on that point, SPT reform, and Jeremy and I have courted the ministers in Trinidad assiduously over the last 6 to 9 months. We were given very clear assurances that fiscal reform was on its way. And then Russia did what it's doing in Ukraine. And I think there's no government anywhere around the world that's prepared to bring about fiscal reform and hand money back to the oil and gas industry while oil prices and gas prices are where they are. So I think we just have to be patient. I think the government knows what they need to do. But it's just going to take a bit longer than certainly we'd hoped. And the overarching message here is that we have very clear line of sight now, having sifted all of our opportunities, to grow this business to generate free cash flow in a way that should enable us to deliver cash returns to shareholders on a 2- to 3-year view. So that's all in terms of the formal presentation. By way of closing remarks, I'd like to thank all those who have listened in today, given up their time to listen to the story. I hope that we've conveyed the genuine excitement that we feel as a company and as a Board and a management team about the prospects for the company over the next few years. We are going to be busy. And I think 2021 has been a difficult year to navigate. But in many ways, we've worked out exactly where we wanted to go and are about to embark on that path. So I think that's all I wanted to say. And I know that there's a Q&A. There are questions and answers to be fielded. So I'm not sure who's handling that.

Nick, Jeremy, I'll handle that. [Operator Instructions] We received a number of presubmitted questions focusing on a few things. While some of these have been addressed in the presentation, the company will talk to some of these in more detail. And the first one reads as follows. Is there an option to postpone Galeota development until Trinity has sufficient production to organically fund the development?

I think the simple answer to that question is no. I do not -- I think the Board is of the view that it's highly unlikely that we as a company will fund the development of Galeota as 100%. So we need to execute the farm down to mitigate the risk for the company and to assist us in development of that -- of those options. So in simple terms, we, I don't think, as a company, are going to develop 100% Galeota based on cash flow, organic cash flow generated by the company.

The next question here relates to production levels and reads as follows. What's the expected production level completion of imminent drilling campaign? Is there a view on the realistic, attainable onshore production with current assets in the long term?

Jeremy, you can put some light on that.

Thanks. I mean what I will do, I'll just turn the slides back to the production projection that we had. And you can see what we have with the onshore drilling, but the appraisal drilling being potentially very transformational for us based on the existing assets that we have. Whilst I would have to say that there is risk around the appraisal, having multiple appraisal or leads, which can mature under prospect, gives us perhaps a greater chance of achieving [ this sound ] production profile. And also, it excludes, very importantly, the drilling in Trintes and Brighton that can also materially increase the production projection for Trinity.

Next question here ask, in the increasingly likely absence of meaningful fiscal reform, how does the company propose to increase shareholder value and provide return?

I can take that, Nick. I think, hopefully, we described during this presentation, the multiple pathways that we have and the one that we are going to execute on now, which is the drilling program. We believe that the -- by looking at various techniques, we can also try to increase the rate of return, notwithstanding what the current fiscal environment is. We think that there will be upside if fiscal reform does happen, but it doesn't prevent us from trying to grow the business through the drill bit and develop both the onshore and then eventually the low-risk 2P reserves on Trintes.

You've got a question that asks or reads as follows, you still expect reform, but the devil will be in the details. You can be let down again by a weak and feeble reform. Hard question perhaps, but what do you think on this?