Valeura Energy Inc. (VLE) Earnings Call Transcript & Summary

Good morning, everyone. Ladies and gentlemen, thank you for joining us for this Valeura Energy webcast, where we'll provide some more color on the announcement we released earlier today. I'm Robin Martin, Vice President of Communications and Investor Relations. And here with me in our Calgary office is Heather Campbell, CFO. Also joining us from Singapore is Sean Guest, who you'll hear from in just a moment. This event is being streamed live and is being recorded today, April 18, 2023. A replay will be made available through our website later today, and all lines will be in a listen-only mode for the duration of the event. So the running order for today is that in just a moment, I'll hand over to Sean, who will provide some prepared remarks, and we'll reference slides that will be shown on screen if you're joining us through MS Teams, or they're available through our website if you're joining by dial-in. After that, we'll take any questions you might have. [Operator Instructions] Please bear with me while we change screens here. So to get started, I'd like to draw your attention to the advisories on Slide 2 of our presentation. I'll suggest that you review this at your convenience, noting, in particular, the cautionary language around forward-looking information. I'll also note that throughout the presentation, unless otherwise indicated, the numbers we're showing are U.S. dollars and are all presented on a net working interest basis. So with that, I'm going to move over to Sean, just bear with me while we do that. And Sean, if you can unmute, you're now live.

Okay. Thank you. Can you hear me clearly, Robin?

Sounds good on my end.

Okay. And have you got the slides up?

Slides will be up in just a moment. You can start chatting, and I'll get them going.

Okay. Well, thank you for that. And thanks for everyone for joining us today. It was about 3 to 4 weeks ago that we closed the acquisition of the Mubadala Gulf of Thailand assets. I appreciate your patience in waiting for us to get out this very key information today. I know that everyone expected that we would quickly release financial results at close, but the only result that we had at that date was the cash that we inherited of $243 million, and that was not a number that we could release on its own at that time. We needed to get into the new office, spend the time with the staff and confirm the financial position at close and the business plan for 2023. So we've now got there. And additionally, this time period has allowed us to complete our external reserves audit, so we're able to provide those numbers at the same time. So the objective of today's press release were to provide you with a summary of the key financial information at closing of the Gulf of Thailand acquisition, get the guidance out for 2023 for Valeura and to release our corporate reserves and resources, which now include the acquired Mubadala assets. I'm very pleased with these results and hope this helps give you line of sight into the capabilities of the business. What we now have is a strongly cash-generative portfolio fully levered to the price of oil and with some very meaningful opportunities to continue both replacing reserves and also growing production further. Thanks. Could I have the next slide, Robin? So just go back one Robin. Sorry, thanks. So by way of background, in early December last year, we announced the transformative acquisition, whereby we are acquiring the Thailand oil-producing portfolio of Mubadala Energy, And it comprised 3 operating license interests, which included the Nong Yao, Jasmine and Manora oilfields. The effective date for our acquisition was August 31, 2022, and at that time, the business we were acquiring had roughly 0 working capital balance, meaning all the cash and inventory in the business essentially offset the liabilities that existed at that time, and those liabilities were mainly a provision for taxes. So since September 1, 2022, until the closing date of March 22, '23, all economic benefits generated by the business have stayed within the companies we are acquiring. To put it another way, on the closing date, we added to Valeura a business that came fully stocked with everything that it generated in prior 7 months including all the staff that made it happen. So I'm pleased to say that over that period, both the team in Thailand and the assets themselves have performed exactly as we'd hoped. The average oil production was about 20,600 barrels per day, which generated $363 million in revenues. Importantly, this yielded just over $30 million per month in pretax cash flow, which was right in line with the estimate that we published when we announced the deal in December. So the net result was that at March 22, the business we acquired came with cash of $243 million. And after adjusting for other assets and liabilities such as inventory, oil inventory in tankers and tax liabilities, the business contributed to a Valeura net working capital position of approximately $105 million. So that's really the value that we see we acquired from that 7 months of operations. So the tax payable is a main liability in the working capital adjustment since the Mubadala acquisition assets are highly cash generative and did not come with any tax loss carryforwards on their own. There is a potential to apply tax losses we acquired in the former Kris Energy Gulf of Thailand assets against the income generated in some of the Mubadala fields. However, this requires an internal corporate reorganization before that's possible. We've started that project but assuming success is expected to take 6 to 9 months to complete. We'll share more details as the picture becomes more clear over the course of the year. So just to recap, we received $243 million in cash, which amounted to $105 million in net working capital. That makes it a perfect time to remind you that the headline consideration for the deal was just $10 million plus certain contingent payments. They will kick in only if the average Dubai oil price is above $100 a barrel in 2023 or 2024. So as a reminder, even with the oil prices we witnessed in 2022, the average price for the year remained less than $100. And finally, just to note, all of the numbers provided are management estimates and are just kind of a teaser for you. The first time you'll see the acquired business fully rolled up with the rest of the company will be in our Q1 results, which are planned to be released about May 11. Thanks. So guidance for the year. So Slide 4 is really looking at the key guidance numbers for 2023. And after spending quite a bit of time with the new team over the last month, I can tell you, we've truly got a top-notch team there and a very professional organization. We've been working quickly to understand the financials and also have a business plan for 2020 -- we also have a business plan for 2023, in which I have a great deal of confidence that it will continue to deliver the high production and the reserve replacements. We expect production for the full year to be between 20,000 barrels a day and 22,300 barrels a day. There's no gas production in the mix, so that's all oil, which, on average, generally sells at approximately Brent pricing. Though actual price will depend on the particular field. We have no hedges in place, so we're fully exposed to any upside for oil pricing. Operating costs are expected to be in the $220 million to $240 million range. So using the midpoint of production and operating cost, it works out to an average OpEx across the fields of approximately $30 a barrel on a unit basis. For planning purposes, we generally think about the total amount, though, and with a lot of fixed offshore installations in the portfolio, we estimate that about 70% of the total OpEx is fixed. Capital spending is forecast to be between $180 million and $200 million. The majority of this expenditure is drilling costs, and the uncertainty is driven by the sequence of the drilling activity. So we expect to have 2 jackup rigs on contract at times during this year. One of them is almost for a full year. And the other is the rig that we've announced previously that will be coming in July for the Wassana 5-well infill campaign. So also on this slide, we've identified some key projects. Obviously, the integration of the ex Mubadala, ex Kris Energy and Valeura organizations is a priority for us, so that we can start to really find synergies across the business. As for field operations, we intend to restart the production from the Wassana field just as soon as we get the all clear. And that's currently looking like May. We're currently planning 21 new wells across the different fields and are still reviewing other drilling opportunities we may add to that. Towards the end of the year, a big milestone will be the sale out of the new MOPU production facility to the Nong Yao C development and the start of development drilling there, which is expected to yield first oil from that new field in Q1 2024. So before I move on, I just want to ensure it's clear that the guidance numbers we're presenting here are for the full year. And that includes the first part of the year before we'd actually completed the Mubadala acquisition. So some of the spend has already taken place by the previous operator and, therefore, won't actually be reported in Valeura's spending or Valeura production per se. That will become more clear when we get into the financial reporting later and throughout the year. Thanks, Robin. Next slide. So reserve highlights. So in addition to providing some key numbers on the Mubadala acquisition and our guidance for the year, the other part of our announcement today is our year-end 2022 reserves numbers. We disclosed the numbers for the Wassana field already, along with our Q4 results a few weeks ago. And we've now had the same reserves evaluator, Netherland, Sewell, assess the rest of the Thailand's field. So the table at the bottom outlays out the facts, which I'll summarize by saying at the end of '22, the assets held proved plus probable reserves of 29.1 million barrels net to our working interest with an after-tax NPV of about $261 million. Again, I'll note that the tax assumptions in this economic evaluation assume that we can only apply the tax losses to the Wassana field, and hence, there's no taxes expected to be paid for that asset. The other 3 fields acquired from Mubadala are assumed to pay their full share of taxes with no benefits from any tax loss carryforwards. So as noted, we'll work on a corporate restructuring this year, which could accelerate some of those tax losses and hence yield an uplift in the value of the fields. The other point here is the NPV that's shown just refers to the 2P reserves. We don't include any value for contingent resources or prospective resources in that number. Next slide. So the key part of the story that we've been telling with this acquisition is really on reserve replacement. And if we look at Slide 6, I feel it's a really important insight into the future value of our business. We've shown this slide before, and it's now been updated to include the 2022 figures. And note that these -- the data on here are just for the ex Mubadala assets. Everything showing up to and including 2021 on this chart is based on publicly available data from the Thailand regulator, the Department of Mineral Fuels. 2022 reserves are based on the new data from our independent reserves evaluation. And the red bars show the actual production from the 3 producing fields since 2017. And you can see production has remained largely stable over this period. And as per our guidance figures for 2023, we expect it to stay right in that same band for this year. Now the proved reserves, the 1P, the proven, are shown in blue and have remained essentially unchanged. Much of the ups and downs you see in that reserves in that band are related to year-end oil prices, which, of course, affects the reported reserves. But what it demonstrates is that each year, the fields have produced about half of their proven reserves. And yet at the end of each year, the proved reserves have remained largely unchanged. This suggests that the average reserve replacement ratio on these fields is historically about 100%. And we saw that pretty close to that again last year. Okay. So this stable aggregate production profile yields a continual cash flow stream. Now a portion, but not all of the cash flow, will generate needs to be reinvested into the assets to continue replacing produced reserves and eventually to fund decommissioning work, but that leaves a significant portion available for other uses. As a management team, we are focused on growth and have shown over the past year that we can deliver. With the 2 deals we closed last year, we delivered a share price that's increased 600% in the past 12 months. We believe further significant growth is still achievable, and the cash flows from our current business can be redeployed to support this growth strategy. At some point in the future, if we do not see good accretive opportunities to grow the business, then potentially cash flow could transition to direct shareholder returns. But to be clear, Valeura does not currently have a policy of dividends, and we are not proposing one today. But if we continue to drive this type of performance from the assets, it's something I expect the Board to consider. Next slide, Robin. So Slide 7 touches on our sustainability priorities. This is a slide I've also shown before, and I'm more than happy to keep speaking to it. It reinforces how our principles have not changed. We are in business to generate value to our shareholders. But in doing so, we recognize the responsibility to all of our stakeholders and that we need to manage our business in a sustainable way, just as we did when we were a shallow gas producer in Turkey. We continue to invest in our people and support our local workforce and the communities where we operate. As for governance and leadership, over the past month of operations with the new team, it's immediately clear that we have shared values when it comes to governance and practices and ensuring we have high-quality leadership across the business. What I want to expand on more today is specifically related to our environmental actions. It has been a while since we were producing gas in Turkey, and Valeura has now become a significant offshore oil producer. It's time to get with the program. One of our first steps this year is to measure and define a baseline for everything that we do in these new assets. We'll use these data as a basis for an inaugural sustainability report. And I commit that this year, the company will be coming out with a clear strategy related to our emissions and our corporate mid- and long-term goals related to such. Thank you. So I'll just touch briefly on key aspects of each of the assets, and we'll start with Nong Yao, which is shown on Slide 8 here. So to recap, Nong Yao is a high-value oil field, where we have a 90% interest. It's in a growth phase at the moment, and we see the start of significant expansion this year with the development of the Nong Yao C accumulation. We have a MOPU in construction now, which is set to sail out to the field in Q4 and to be tied into the existing Nong Yao production infrastructure. That will enable the start of development drilling, where I expect we'll get about 4 wells drilled in 2023 as part of a 9-well initial drilling program. Ultimately, the Nong Yao C development should increase our net oil production from the license up to about 30,000 barrels a day average in 2024. And that production is expected to commence in Q1 of next year. We have further infill drilling on Nong Yao planned for 2023 as well, not just the development. Additionally, the team is also currently working up an appraisal well for the Nong Yao D accumulation, which will most likely be drilled in 2024. So next slide. Jasmine Slide 9 gives you a little detail on Jasmine, which is currently the largest source of production in our portfolio. The intent with Jasmine is to continue the long history of reserves renewal. When we announced the acquisition, we noted that Jasmine had produced 12x its original FID reserves, and this number keeps expanding. The rig has been working continuously on the Jasmine field since January with good success rates. They currently see production above 10,000 barrels a day for this field. Ultimately, our efforts here are aimed at arresting the natural declines by assessing new reservoirs whether through new infill drilling or also through workovers. Manora. So this slide is a reminder of what we're doing on Manora, and it's the most mature of our assets. But as we've noted previously, it's a perfect case study for what's possible in the Gulf of Thailand. When we started negotiating this acquisition more than 18 months ago, the base plan was to stop production at Manora in 2022. Ultimately, with new wells drilled in 2022, the economic life has been moved out to at least '25, and we see further potential for infill wells. The team are currently reviewing a potential 2- to 4-well drilling program, which we may even get drilled this year. Next slide. So Slide 11 provides a little more detail on the Wassana field. This was part of our Kris Energy acquisition and is essentially a production reactivation project. As we've announced, we've had some issues with trying to reconnect the storage vessel to the field, which has resulted in some damage to the offloading facilities. That's being assessed as of today. And within the coming week or so, we expect we'll have a clearer picture on what's required to get us to first production. Best estimate at the moment is that we'll have everything cleared to start production operations in May. So initial target once we're up and running is to produce at about 3,000 barrels a day net to Valeura, which is what the field was producing before it was shut in back in 2020. Thereafter, we'll see the potential for an increase, and we've chartered a drilling rig, which should arrive in Q3 for the 5-well drilling program, ultimately targeting an increase to about 4,500 barrels a day by year-end. Before we leave that, and while we're on the former Kris Energy assets, just to make a brief comment on the Rossukon field in G6. We have not included any spending or production in our guidance estimates for Rossukon nor have we included in our resource numbers. We still have not taken a final investment decision with our partner in the block, but I expect we will provide some clarity on that very shortly. Next slide. And really just a reminder here that our deep, tight gas play in Turkiye remains part of our portfolio, too. We still see the tight gas play as a potential source of significant upside in the longer term. Our intent with the asset is to maintain the leases and licenses in good standing while seeking a partner to participate in the next phase of the exploration appraisal. We've seen some positive interest, but we still until now do not have a commercial agreement in place. So not a lot of additional news to share on the play. Okay. So just bring it to the concluding slide. So we have completed a transformative acquisition of more Gulf of Thailand assets. And on day 1, we demonstrated a very positive return for shareholders. With 7 months of operations included in the acquired business, we can show that it is all working as we expected. For 2023, we are guiding at 20,000 to 22,300 barrels a day of production. All of that is oil at approximately Brent pricing. OpEx is around $30 a barrel, and CapEx is in the range of $180 million to $200 million with the spending focused on reserve replacement and our growth projects at Nong Yao and Wassana. Our third-party reserves valuation shows that the barrels in the ground are real and have the ability to generate significant value for us going forward. Importantly, the numbers are very much in line with what we presented back in December when we announced the deal and proved the continued delivery of reserve replacement year-on-year. So as we look at the business going forward and envision what Q1 2024 could look like, we expect to have Wassana open and up to 4,500 barrels a day net, and the Nong Yao C development online at more than 11,000 barrels a day. If we're able to maintain steady-state operations at both Jasmine and Manora, this could see production peaking for these assets in the 25,000 to 30,000 barrel a day range. So raising our sights further, we continue to be active in the M&A space and see more opportunities across the Southeast Asia region with similar characteristics to the deals we've concluded in Thailand. At the same time, we're hopeful we'll find the right partner to pursue for the next steps in the Turkey play. So with that, I'll move on to the Q&A session and hand back over to you, Robin. Thank you.

Thanks, Sean. We've had a bunch of Q&A come in. Just give me a minute to get a little bit organized here. Okay. So let's start with some operations questions in relation to Wassana. First question is when it comes to the infill drilling program on Wassana, how long do you expect it will take to complete the wells?

Yes. So the 5 horizontal wells that are being drilled there. we expect to be about 120 days in duration. Part of that is because you have a fixed number of well slots there, so you actually have to abandon a well to then drill a new well. So there is a bit of extra operation time required for each well that you drill.

Okay. So will each well be drilled in individually? Or will all the wells come on at once?

Yes, it's a good question. We take in our modeling for cash flow and that we take the conservative assumption that the production will come on at the end, but we will be looking for ways as you go through this as to whether you can have some simultaneous operations and start to bring some of those wells on. But again, not guaranteed, and that's why we take a conservative assumption of once the drilling concludes in Q4, then you'll get all that production coming on.

Okay. Sticking with operations for a moment. Do you expect the production additions from Nong Yao C to more than offset expected declines from the Manora and Jasmine fields in 2024? And I think you said Q1, yes, looking at upwards of 30,000 barrels. Anything further you wanted to add to that?

No, we do. We see that Nong Yao C can come on. And especially, the interesting thing is really the peak production and how much it will add in the peak. And that's going to be quite a high number we expect, but then it is about the average that you're then going to get over the fields. But we do see that Nong Yao C can really provide a good offset for the decline in the other fields. But again, we'll still continue the programs that we have in those fields to try and maintain the production on them as well with both more infill drilling and more workovers.

Okay. Okay. I'm going to let you rest your voice for a minute, Sean. I think there's a question for Heather. And you've mentioned a little bit of this, but on tax loss carryforwards, we're aware that Valeura has tax loss carryforwards from the Kris Energy acquisition. Could you please quantify these and give some color on what's involved in being able to use them and timing?

Sure. I think we've -- we can bring that together. We've kind of really explained some bits and bobs of that in our year-end results, and then Sean had briefly addressed it in his remarks. But there is -- there are about $275 million of noncapital loss carryforwards in -- related to Wassana assets that we inherited with the Kris Energy acquisition. As Sean mentioned, there is a corporate reorganization that needs to happen in order to use those. And I believe, as we mentioned previously, those -- Wassana is a Thailand III concession. Nong Yao and Manora are also Thailand III, and those tax loss carryforwards once a reorg is completed can be shared. The planning for that reorganization took place mostly pre-close, and we've started the initial project to realize that corporate reorganization. And as Sean mentioned, it will take about 6 to 9 months. And then the loss carryforwards, we'll be able to be realize starting when that project is complete.

Okay. Another more finance-oriented one. Is the $105 million increase in working capital from the Mubadala acquisition net of all capital expenditures that were done during the 7-month period between the effective date and closing?

Yes. That's the net working capital, including cash that we expect to acquire, and it includes all up-to-date accruals as per examination so far.

Okay. Okay. Back to maybe a couple of M&A-related questions that have come in. First of all, and this is something we addressed back in December, but I'll voice it again because I think it's helpful. Curious as to why Mubadala sold the assets at such a low valuation?

Yes. You have to recognize it at the time, especially, there's a significant pressure on a lot of the global major players, Shell, Exxon, BP, Mubadala as well to move from all their oil portfolios. And that's -- what has actually happened was Mubadala had made the decision at the highest level that they wanted to transition into gas and were getting rid of their oil portfolios. This portfolio was very significant for us is actually, I believe, only about 6% of Mubadala's production. So they were really looking to make a move out of oil, and we're motivated to really have the sale process go. The other comment we've kind of made, it was a very long negotiation that went on, and the initial price was not $10 million. It was always significantly more than that, and there was an earlier effective date. So the negotiations really led it to this point that we ended up getting the deal for this price.

Okay. And while we're on M&A, we've got a question here. Can you talk about M&A landscape going forward?

Yes. So we've had other deals that we are looking at in Thailand. A lot of these are on the smaller level. We talked about this before. Maybe you'd refer to it as more equity consolidation things, and we see some of those that we're working to bring to a close. But really, for the next ones, we are looking at other deals, which obviously now have to be of a much more significant size, things in the 25,000 to 50,000 barrel a day range. And we are seeing some of these around the region and starting to really get involved in those. We obviously hope we can move it faster than this deal, which took so long, but we do still see the space for growth out there.

Okay. On to capital spending. We've got a question here. Is this sort of range of -- or this sort of magnitude of capital spending what the market should expect to see in years coming forward? Or is this abnormally high, abnormally low?

We think for this asset base that this might be a little bit high because you're looking at -- encountered in here is a 1 rig pretty well for a full year, another rig for 1/3 of the year and then a development program as well with the new facility coming on. So you can see there is a number of -- a lot of it is drill ex, but a number of different projects that are ongoing at the same time. So I think that this could be seen as a high year, but if we have success from some of these and we start to see other opportunities, then we may be willing to keep the CapEx this high if it can deliver the production results.

Okay. And on the subject of CapEx related to that, what's driving the higher and the lower end of the range on CapEx? Is this to do with whether you add additional wells at Manora? Or is there something else that drives this wide range?

There is a small amount of uncertainty, but most of it is really driven by how are we going to use the one rig for the full year time which that would put you towards the upper end. But again, it would yield more wells in that case. So that's really what we're looking at. There's the majority of it driven by the drill sequence in that final drill planning that we have.

Okay. Okay. Let's switch gears just a little bit, and I'll bring up a couple of questions that came in, in relation to Turkey. First question, how many parties are we in discussions with? Is there still a potential that we see a farm-out this year?

Yes. The parties that have been in the data room have been moving around. We've seen different types and different characters of parties in there. At this point, we have not come to a conclusion with anyone. So to me, it's uncertain. We've gone through a period where we've had extremely high gas prices and high gas security concerns in Europe. And we haven't got a farm-out deal done at that time. So that states that it is kind of challenging. We are continuing at it. We have some other ideas, but we'll see. So no, I can't guarantee anything related to that.

Okay. And related to that question, what are the capital commitments in order to keep the Turkey licenses in good standing?

They're actually very small. Just as we did last time, considering it's 3 blocks, you can work out that you must drill a well, but the wells do not have to be a deep well. And we've worked with the operator of the shallow assets and have just shared some of the drilling costs. So to give you an idea, we fulfilled the drilling commitment in 2 of the blocks for $250,000 each, and that allowed the blocks to be acquired for an additional 2 years. that's obviously at the most optimal case. There will be studies work as well and some overhead costs, but it's in that sort of range. It's very low relative to the CapEx numbers we're now talking about here.

Okay. Another topic that's come off in a couple of questions is our decommissioning expectations. And I'm going to group together just a couple of questions here. Number one, can you explain how decommissioning and abandonment costs are handled in the reserves report?

Yes. We have decommissioning costs that are worked up. We have internal engineering work, sometimes external engineering work, depending on the assets and the company that we're dealing with. And so you've got those actual engineering reports that give you the cost, and then those are included in the economics of the reserve report that yield the NPVs and the values.

Okay. And related to that, has there been any change in the decommissioning CapEx expectations that we laid out back in December?

No. At this point, there haven't. There will be more decommissioning studies that will be ongoing this year. We know at Manora, we said we've already put down half of the decommissioning cost has been set aside. And we'll have to, I believe, this year, put down another quarter, so that one will be about 75% put aside. But we will be doing more work on decommissioning and really emphasizing, though, we'll also be really following the work of Chevron and PTTEP again to look at how they're doing the decommissioning and the savings that they're able to achieve in kind of the approach that they're taking by doing mass well abandonments, mass topside abandonments, mass jacket abandonments all and similar. So a lot of it, as we say, we'll be watching and learning from what goes on there.

Okay. Okay. I think we've captured most of the questions here. There's been a bunch that I grouped together. So if there is something that we haven't addressed that you'd like feedback on, feel free to reach out to us by e-mail at [email protected], and we'll address anything outstanding offline. In the meantime, maybe we'll just finish with one further question. Are there any specific wells to watch out for or key milestones to watch out for in 2023 that could be particularly material when it comes to reserves replacement?

Yes. It's a really good question. But I don't really think we would look at it and say that there is seriously one well or one event that's there. What's happening with, like when you look at '21 infill wells being drilled, you really have statistics working in your favor. And you're going to get some results that are better than expectation and others that might be lower. We -- even last week, we had a really good result where they were just doing a workover on one of the wells on Jasmine and perforated it, and that one new zone delivered 1,500 barrels a day, right? Now you don't know how long that's going to sustain for, but you do get these bit of surprises. So with that many wells with that many workovers, it's more about statistics working in your favor.

Okay. Very good. As I say, if there's anything further that we've missed, I've tried to group together bunch of questions here. I hope I haven't missed any. If so, do reach out to us on [email protected] or give us a call. All of our contact numbers are shown on the screen there and obviously available through the website.

Thank you very much.

And that ends our call, we'll make a recording available on the website later today. Thanks, everyone.