Vår Energi ASA (VAR) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the Var Energi Q3 Presentation of 2026. Today's call is being recorded. [Operator Instructions] I'd like to introduce the Head of IR, Ida Marie. Ida, please go ahead. Thank you.

Good morning, everyone, and a warm welcome to Var Energi's third quarter 2026 Results Presentation. I'm Gavitt here today with Nick and Carlo, who will take you through our results. And afterwards, we will open up to questions. With that, I'll hand it over to Nick.

Well, thank you, Ida, and good morning to you all, and great to have you all join us today for our third quarter 2026 results presentation. I'm pleased to report strong financial results in the third quarter, which is supported by high realized oil and gas prices. As a result of the strong performance, we're increasing shareholder returns and we're doing this whilst continuing to build long-term value. So now let's just look at the highlights for the third quarter. Production in the quarter of 369,000 barrels of oil equivalent per day was impacted by planned turnarounds and some unplanned outages, which are now resolved. We saw solid performance at our operated assets. and we expect higher production in the fourth quarter now that our main turnarounds are completed and with new projects and wells coming on stream. We continue to strengthen our financial position with significant CFFO post tax in the quarter of $1.5 billion. We completed a successful issuance of USD 2.5 billion bonds and a record high available liquidity of $7.5 billion. And we have increased resilience, we materially reduced net debt over the year to $3.1 billion, and our leverage ratio is down to 0.3x net debt to EBITDAX. And we're well positioned to capture further upside from the continued higher commodity prices. And we continue to unlock long-term value. The combination with Blue Nord is on track to complete around year-end. We completed both the D&O swap and the Pandion acquisition in the quarter, strengthening our positions in the Yowa and Asgard areas and consolidating our position in the Ringhorne North discovery. Our King development in the Balder area started up on schedule and is producing as expected. And we're pleased to announce a high-impact exploration collaboration, which was established between Var Energi, Equinor and Aker BP with the aim of targeting the next major NCS discovery. And lastly, we're increasing our dividend with an extraordinary component. As a result of the continued prices and our strong financial results, we confirm an increased dividend distribution for the third quarter of $400 million. compared to guidance of $350 million, with the additional $50 million representing the extraordinary component, and we're guiding the same also for the fourth quarter. Both the third and fourth quarter dividends will be attributable to shareholders combined company following the Blue Nord transaction pending closing. This means for the full year, we will have paid $1.45 billion compared to $1.2 billion for 2025. And delivering attractive and sustainable dividends over the cycle is a key priority for management, and we remain committed to a long-term dividend policy of 25% to 30% of cash flow from operations after tax over the cycles. And we have a track record of delivering this, having paid stable or growing dividends now for the last 19 quarters. A recap on the combination of Var Energi ASA and Blue Nord, which we announced in the summer. This is a complementary transaction for both sets of shareholders, and we've seen both companies outperform the market since the combination was announced. And the merger creates a stronger, more diversified company with increased scale. And you can see it adds growth with the strategic assets on the highly compatible Danish continental shelf. It adds value with a raised long-term production target of around 450,000 barrels per day. It increases returns with limited near-term additional investments. And we're leveraging Var Energi's strong balance sheet to create significant financial synergies. The transaction is accretive on a per share basis to reserves, production, cash flow and dividend capacity. As I mentioned already, we're on track to complete around year-end with the transaction subject to customary conditions precedent, including partner and authority approvals. And the combination of Var Energi and Blue Nord builds the largest independent producer of oil and gas in Europe. It increases our exposure to the European gas markets and strengthens the company position as a reliable and secure supplier of energy to Europe. And on the NCS Var Energi has a diversified asset base in all areas of the basin. And our portfolio is opportunity-rich, providing the basis for growth and long-term value creation, and we're moving at pace to realize this value. And so now looking at some of the details, starting with 2026 production. Production for the first 9 months averaged 383,000 barrels per day. Second and third quarter's production reflects the impacts of planned turnarounds with all major turnarounds now completed. Additionally, production in the third quarter was impacted by operational issues at the Johan Castberg FPSO due to outage of the power generation system. An extended turnaround at Yotin FPSO due to failure of the gas compressor requiring a replacement to be installed and production irregularities at the Asgard area due to curtailments at the cost of onshore gas processing plant. And the issues at Johan Castberg and the Hilton FPSO were all resolved by early August. And none of these main pressure impacts are reserve-related and have been managed effectively. We have 3 new project start-ups this year. El Fis North in the Ecose came on stream in the second quarter and is producing as planned. Our King development and extended reach well from the Ring on platform came on stream as planned in August and is also producing as expected. And also in the Balder area, our Balder Phase 6 project is on track to start up in the fourth quarter. So far this year, we've started up 34 new production wells which is in line with plan, although some key wells started up a little later than scheduled. And we remain on track to start up a total of over 50 new production wells during the year with many of the remaining wells in the final stages of completion. And so we expect higher production in the fourth quarter and a strong exit rate for the year. Now that our main turnarounds are completed and with projects and wells coming on stream. As we announced in our trading update, we now expect full year production of around 390,000 barrels per day compared to the original guidance of 390,000 to 410,000 barrels per day. Looking now at operational performance. You can see we're continuing our trend of improving our deliveries. We've seen strong safety performance during the year across a range of metrics. We've now had 0 material incidents for over 2 years. This takes hard work every day. We continue our trend of reducing carbon emissions intensity, and we're ranked in the top 15% of the industry globally. And we continue to be recognized for our ESG leadership, having recently received our first ranking MSCI at AA leader level. For production efficiency on our operated assets, we continued the strong trend with 91% for the first 9 months, noting that the year-to-date figure is disproportionately impacted by the planned turnarounds. Production costs, we achieved $10.9 per barrel in the first 9 months compared to our guidance of around $10 for the full year. The increase was primarily driven by strengthening Norwegian krone and we are updating our full year guidance to around $11 per barrel, and we have good control on underlying costs on an absolute level. Long term, including Blue Nord, we expect operating cost to be in the range of $10 to $11 per barrel. And technology is moving fast, and we are moving with it to continue to transform our delivery by combining new ways of working, technology and AI we are delivering significant value is what we call our best initiative. Our production factory approach is a great example of this, where we're combining -- where we are significantly reducing project cycle times and increasing value creation, and we have momentum across the whole value chain, which will continue to transform how we deliver on our strategy. And our material resource base underpins our value creation. Following the Blue Nord combination, 2P reserves will stand at 1.5 billion barrels, which supports current production levels. But we are much more than that with 2C contingent resources of around 900 million barrels, where development plans are being progressed. And we also have an exciting NCS exploration portfolio of around 700 million barrels of net risk prospective resources. And so putting this together, the combined portfolio has over 3 billion barrels of resource potential. and crucially, with over 50% of this yet to be developed. And there's more to come. We have a track record of continuously growing reserves and resources with around 280% replacement ratio over the last 3 years. And for 2026, we see that we will have an organic 2P reserve replacement of over 100% for this year. And developing this material resource base is how we will deliver on our increased long-term production targets of around 450,000 barrels per day for the combined company. And you can see the levers that will drive this, maximizing recovery from our high-quality producing assets, delivering on our portfolio of projects in execution. progressing our significant portfolio of early phase projects towards sanction and then unlocking more value with our focused NCS exploration program that is adding new projects all the time. and continuing to add to our portfolio of value-accretive M&A, such as the Blue Nord combination and the 6 transactions we've announced so far this year to high-grade our NCS portfolio. And we're delivering all of this at pace. Looking now at how we deliver on our long-term production target. We have 15 high-value projects in execution. All of these are subsea tiebacks or facility enhancement projects. And you can see developing around 370 million barrels net with strong economics, where the average breakeven is around $30 per barrel and rates of return of around 35%. So far this year, 2 projects have started up, King and Elvis North with performance in line with expectations. All ongoing projects are progressing on track as communicated. And realizing the value from our portfolio is enabled by our project factory approach, which combines standardized solutions, parallel working, precommitments and strategic partnerships. And our Bolder Phase 6 projects, as you can see here, is a great example of this approach in action. BalderPhase 6 was sanctioned in June in 2025 is now in the final stages of completion for startup before the end of the year, so around 18 months from sanction to first oil, with the project generating significant value with a breakeven of around $30 a barrel and payback in less than 1 year. And we've repeated this short-cycle approach with the recent sanctions in June of the Balder next New wells project and our subsea projects, where for both projects, we will see first production in 2027. I think you already know, we have a large portfolio of around 30 early phase projects that are moving towards sanction. Also, these are subsea tiebacks to existing infrastructure or facility enhancement projects and you can see low cost, short time to market, high returns with average breakevens of around $35 per barrel and rates of return above 25%. And I'm pleased to say we've built significant momentum with the sanctioning of 10 projects in 2025 and a further 4 projects so far this year and working towards a further 4 potential project sanctions by the end of the year. And when we look forward to 2027, we expect to sanction around a further 8 projects, providing more than 100% organic reserve replacement also in 2027. These projects demonstrate our ability to mature and execute a portfolio of high-quality developments. And we have the people, the equipment, the contracts in place to deliver the planned project program. and delivering on this portfolio developed, as you can see, around 500 million barrels of contingent resources and will deliver on our long-term production target. And now turning to our exploration program. where you can see we have a strong track record of unlocking value. And we continued its success in the first 9 months of the year with 4 commercial infrastructure-led discoveries out of 8 wells drilled. And we have 6 exploration wells remaining in the year, with 3 wells in the Balder area and 3 wells to be completed in the OA area. In August, as I mentioned earlier, we're pleased to announce the establishment of a high-impact exploration collaboration between Var Energi, Equinor and Aker BP, targeting the next major NCS discoveries. We've agreed to combine expertise, data, technology and exploration capacity. And over the next 5 years, the company's plan to mature and test the portfolio of approximately 20 to 25 exploration opportunities. with our ambition to drill around 5 high-impact exploration wells and Eli, and this program will start from 2028. Looking ahead, we have a significant exploration position in all areas of NCS and we will have an exciting exploration program in 2027 with some important high-impact wells. That rounds off my operational update, and I'll now hand over to Carlo to review the financials. Thank you.

Thank you, Nick, and good morning, everyone. Let's start by summarizing the key financial highlights of the third quarter. We achieved an average realized price of $103 per BOE and generated a significant cash flow from operations after tax of $1.5 billion. Our financial position continues to strengthen. Available liquidity reached a record high level at $7.5 billion, with net debt further reduced and our leverage ratio improved to 0.3. During the quarter, we successfully issued $2.5 billion of senior notes at an attractive price, further strengthening our liquidity position and extending the maturity profile of our debt portfolio. Such issuance materially contributes to the early achievement of the financial synergies announced in relation to the Buena transaction. Free cash flow was approximately $0.8 billion in the quarter. We continue to deliver attractive returns to our shareholders, underpinned by continued high prices, strong financial performance and our strengthened balance sheet. We're acting on our decision for an extraordinary distribution and we're increasing the dividend to $400 million for the quarter and guide the same level for the fourth quarter for the combined set of shareholders. each quarter consisting of $350 million base dividend and $50 million in extraordinary dividend. This $100 million extraordinary dividend distribution comes on top to the Q2 dividend increase, where we added for existing shareholders, $50 million to our previous run rate. This brings total shareholder distribution for 2026 to $1.45 billion, up from $1.2 billion in 2025. Our long-term dividend policy of 25% to 30% of CFF after tax over the cycle remains intact. We generated revenues of approximately $3.6 billion in the quarter, 70% higher from the same quarter last year, driven by higher volumes sold and higher prices. achieving a weighted average realized price of $103 per boe. Our realized crude oil price was $103 per BOE per barrel, representing a premium of approximately $6 per barrel to date brand. Towards the end of the quarter, premium differentials for medium and light sweet oil qualities from the NCS have materially increased. And since these grades represents approximately 50% of our crude oil portfolio. We're well positioned to benefit from such increase. As Cargos anomaly sold, weeks ahead of delivery, gross premiums will be reflected in our fourth quarter results. Should the market situation continue as in minor October differentials are expected to be in the range of $10 per barrel for the fourth quarter. Var Energi has always had a proactive forward approach to ship. This approach is protecting us from the material shipping resins are affecting the market while maintaining better availability to support our lifting plan. We have secured shipping capacity beyond 2030 at an average shipping cost of $2 to $3 per barrel. The right price for gas was $108 per BOE in the quarter, approximately $18 below the average spot market reference price. This was due to a combination of volume sold forward on a fixed price basis and volumes sold with a month indexation in a rising market, whereas the impact will be the opposite in understandment for the Gasored, that started first of October, we have sold around 18% of our gas volumes at year ahead contracts at around $76 per BOE and in until the end of the third quarter 2027 including additional express tranches, approximately 30% of our gas production for the fourth quarter 2026 and the first quarter 2027 is sold at an average price of around $82 per BOE. A brief update on our financial hedging position. We continue to retain significant exposure to place upside through a disciplined hedging strategy. For the fourth quarter, 15% of our post-tax oil production is protected through collar options with an average floor of $35 per barrel and an average cap of approximately $140 per barrel. For gas, 15% of the fourth quarter posttax production is protected at an average floor of approximately $83 per barrel with a cap of approximately $220 per barrel. We're also the advantage of the current supportive market environment to secure attractive hedging levels for the first 3 quarters of 2027. the use of calendar option structures, the company has protected approximately 12% and 11% of its posttax oil and gas production, respectively. Our 2027 hedge as project an average floor of $71 per barrel and 83 per BOE for oil and gas, respectively. For hedge volumes, the gas price capped at $106 per barrel, while the oil is maintaining a share price of participation above $100 per barrel. Var Energi generated material cash from the third quarter. FFo operations after tax was approximately $1.5 billion though from the previous quarter, mainly reflecting higher trade receivables resulting from the strong prices realized for our September sales that are already collected as we speak, and higher and higher cash tax payments. CAPEX for the quarter, including exploration, was $725 million. The strong operating cash flow covered the OpEx with a solid margin, and CFFO CapEx coverage was 2.1% in the quarter. Our full 2026 development CapEx guidance remains unchanged at $2.5 billion to $2.7 billion. Our liquidity position strengthened further during the quarter. We ended the quarter with a significant cash balance of approximately $4.75 billion and a record high available liquidity of $7.5 billion. Looking at the development of our cash position in the quarter. We generated $3.1 billion of cash flow before tax and working capital movements. Working capital had a negative impact of approximately $440 million due to higher trade receivable at the end of the quarter, which have already been collected. Taxes paid amounted to $1.1 billion, with a cash outflow of $828 million in investment into our high-value project portfolio, including approximately $100 million related to the Pandaracquisition. In the fourth quarter, we expect to close the previously announced divestments in Venango, resulting in a cash consideration to be received of up to $350 million. During the quarter, we raised $2.5 billion from the issuance of U.S. dollar senior notes and repaid $500 million of bonds during 2027. The average weighted coupon for this issuance is approximately 5.8%. it's materially contributing and derisking the early achievement of the financial synergies announced in relation to the Muller transaction. Also in September, we steps planned $350 million in dividends related to our second quarter results. The company has the third quarter with a very strong financial position. We continue to reduce our leverage ratio. Net interest bearing debt over EBITDAX is now down to 0.3 at the end of the quarter. significantly reduced from 0.8 in the same quarter last year and remaining well below our over-the-cycle target of below 1.3. We remain committed to maintaining investment-grade regulating and continue to hold the reading from Moody's standard pooling Fitch, all with a stable outlook. In the third quarter, we paid approximately $1.2 billion in cash taxes related to 2026 results. While for the fourth quarter, we expect the cash tax payments of approximately $1.7 billion. For the first half of next year, we give sensitivities based on 2026 estimated profits at different price scenarios. We remain committed to delivering long-term attractive returns for shareholders, and our track record now demonstrates 19 quarters of stable growing dividends. underpinned by continued high commodity prices, strong financial performance and on the back of the growth transaction, we're acting upon our decision with extraordinary dividends and by increasing shareholder distribution for the quarter to $400 million and at the same level for the fourth quarter. It's comprising $50 million of extraordinary component and is subject to audited financial results with sufficient equity and General Meeting Apuval dividend. The $100 million external distribution comes on top of the Q2 dividend increase, where we added for the existing shareholders, $50 million to our previous run rate, bringing the total 2026 dividend at $1.45 billion. compared to $1.2 billion in 2025. We continue to maintain a disciplined approach, and we will continue guiding dividend level on a quarterly basis in line with our long-term dividend policy of 25% to 30% of CFFO infer tax over the cycle. Var Energi continues to build the resilience and flexibility, supporting long-term value creation and attractive shareholder results. With that, I hand it back to Nick for final remarks.

Well, thank you, Carlo. I just 1 final slide to summarize. We strengthened our investment proposition, building the largest independent producer of oil and gas in Europe when the combination with Blue Nord closes. You can see we have increased reserves and resources of 2.4 billion barrels, which supports increased long-term production of around 450,000 barrels per day. And we're opportunity-rich. and are investing in a large NCS portfolio of high-value, short-cycle projects that will increase returns. And we have stronger cash flow generation of between $8 billion to $13 billion free cash flow over the period 2026 to 2032. We continue to improve the business for increased resilience and flexibility. with a free cash flow breakeven of around $40 per barrel, supporting investments through the cycle. And we've increased our dividend payout again for this year, and you can see that we have the capacity to fund long-term attractive shareholder returns. On completion of the Blue Nord transaction, our share free float will increase from 37% to around 43%, increasing the liquidity of our stock and potentially increasing the weight in the various stock exchange indexes. And finally, the global conflicts amplified the strategic importance of Norway and Denmark as secure and responsible suppliers of energy to Europe. All of these factors have combined to deliver significant shareholder value with a total shareholder return since the IPO 4.5 years ago of around 270%. These are our third quarter 2026 results and other reasons to be invested in Var Energi. I will finish there, and thank you for your time, and we'd now like to open up for your questions. Thank you.

[Operator Instructions] First question today is coming from Tianhong Bi of Citi.

First one, Nick, there's obviously been plenty of speculation around a potential transaction in Norway. And I appreciate there may be limits on what you can say. But if we take a step back, how do you think about Var's long-term strategy around Ekofisk, You've consistently increased your ownership in and around the hub over time. That strategy ultimately include an ambition to pursue operatorship of Ekofisk and the second question, perhaps for Carlo. On cash taxes, you're guiding to around 1.7 billion in 4Q. But looking back Var seem to have made additional tax payments in late 2022, which helps to reduce cash tax obligations in subsequent quarters. How should we think about that flexibility today? And is there any scope for further prepayments that could influence the cash tax profile into 2027?

Good. Well, thanks for the leading question. And I mean, what I will say is that we don't comment on acquisition activity. So I can't say any more than that on that. So Carlo?

Okay. When it comes to as cash, yes, you are right, in 2022, this was managed at the end of the year. It's not a straightforward process because the processing country is quite regulated or when we can revise our taxed and this has been already done when possible, exactly to reflect an increase in trends. So we'll see whether there is a possibility with the tax authority. But it will be out of the process. So I'm not guiding or anticipating anything with in that regard.

And if I just may add to that, we've already increased the second half this year from NOK 25 billion to NOK 27 billion, we've taken up the payment somewhat.

We took already the window. Clearly, the price is continuing on the higher end. So can't keep the base all the time but...

Next question is coming from Victoria McCulloch of RBC.

Thanks for the color on new production and wells being added in 4Q that helps us bridge to revise guidance. But can you help us a bit with the color as to how much your existing production is expected to increase in 4Q due to the lack of interruptions. And maybe connected to this, when do you expect Ormen Lange to subsea compression issues to be resolved? And I guess somewhat connected to my second question. how much of OpEx is FX related in? And how much was it -- or I guess is the difference from the $10 guidance versus the unplanned interruptions which I expect to have an impact on OpEx as well. .

So Victoria, just to cover off Ormen Lange. I think it's expected to start around the end of the year is our understanding. So -- but if you look to fourth quarter all the turnarounds are behind us. And actually, we have new projects coming online, Balder Phase 6, for example, will come online very, very shortly. And we have a lot of production wells coming online this year. Some of them have been a bit later than expected, but we're actually on track in terms of total numbers so far. And we -- so we've got 34 online, and we expect around 50 by the end -- or actually over 50 by the end of the year. Many of those are in the final stages of being completed. So we've got visibility on that. So we're going to see high production in the fourth quarter. We've set out that we're going to be around 390,000 barrels a day for the year and that -- which is at the bottom end of our original guidance and can do the sums as well as I can, which says we have to be 410,000 barrels per day in Q4, I think we're in good shape to be able to do that. and we will see good extent from the year actually because a lot of things coming online towards the end of the year. That's sort of how I would characterize our production in the fourth quarter. And then Carlo, maybe pick up the...

Your question about the OpEx. We have a year-to-date and of course around $11 per boe and approximatley 50 cents is purely to Forex.

Next question will come from Teodor Sveen-Nilsen calling from SB1 Markets.

First question, that is on the exploration collaboration with Nomura note BP, which by lookalike a very positive initiative. But do you expect -- or how do you expect that collaboration to impact your total exploration spending over the next few years? And second question that is on third quarter cash flow. Looks like you made some significant working capital investments in this quarter. Is that purely related to higher oil and gas prices? And should we expect that effect to reverse over the next couple of quarters? .

Yes. Good. I think the ambition is that between us that we drill up to 5 wells, high-impact wells a year. Each of us had an exploration strategy, which was around 20% of our exploration spend is directed towards high pace opportunities. The reality is we haven't been fulfilling that because for various reasons, we didn't necessarily get partner support to do things. And it's precisely why we put this collaboration together, which is the 3 of us wish to go and do these things. And so we're going to work together to build the license position to be able to happen. The first wells will come in 2028 and I don't see a material uptick in our exploration plan. I mean, our exploration budget goes in sickles a little bit depending on the quality of the opportunities and how they come forward. But I would expect us to sort of work within the sort of range that we have. And the more success we have, the more we can spend and the less success we have, the less we do, and we so we adjust that we go. I think Carlo, do you want to do...

Yes, sure. On the working capital, yes, I confirm your understanding the increase of working capital is absolutely mainly driven just by the increase of price versus June when you remember the rest was actually a bit going down and then it picked up again. And I mean if you look at our financials for the quarter tailoring capital, you can pick this up very, very quickly. That so is a pure temporary effect. And as I was mentioning, those receivables are obviously already been collected as we speak because there is risk and that perspective. So that's the reason.

Next question coming from Alejandra Magana of JPMorgan.

On the 3Q production interruptions, you provided some additional prepared remarks but can you help us understand what should give us confidence that these were isolated events rather than pointing to any recurring reliability issues. And then my second question is on Blue Nord. With closing around year end. Has anything from the integration planning changed your confidence in either the synergy target or the timing of realization?

Good. We mentioned 3 main events that impacted Q3 production. First of all, at Johan Castberg, we've had some challenges with the power generation system. I think we're in just over a year from start-up, it's the time that you start to see sort of issues with the facility that become evident. And I think that's what we've seen. So that issue is managed and behind us. And I don't -- we don't see a risk from it looking forward. The second issue was around the olden FPSO. We had an extended shutdown. The reason we extended it is that when we started up, we had a failure of the gas compressor and we had a spare, which we do have, and it just required us to place it. So actually, we've had a good track record with compression there. So it was a bit disappointing, but I think that issue is also behind us. And at Asgard, the majority of the issues here have been around some curtailment from the onshore gas processing plant, which again has a good trend of uptime but we had a problem with the valve and some other problems at the terminal. And I think, again, those issues are behind us. And none of these are reservoir related. They're all sort of one-off facilities issues. And I think we should be comfortable at. So these things will get managed properly going forward.

Your second question, perhaps you repeat that.

Transaction.