Earnings Call: Q4 2017

Feb 2, 2018

Okay. Top panel now. Great. Then we'll start again. Okay. Thank you, Jonas, and good morning to you all, and welcome to this Q4 presentation for Aker BP here at Voden Repoten. The Q4 was in many ways yet another successful and eventful quarter for Aker BP. We delivered steady production in line with our plans and ended up with a full year production volume of 139,000 barrels of oil equivalent per day, in line with our latest guidance. We've had good progress on our many drilling and maintenance and modification activities. However, we have also had a fatal accident on the Maersk interceptor rig, something that we are following up extremely closely and expect the report to come out shortly. The strong operational performance translated into yet another quarter with strong financial results and solid cash flow. Alexander will revert to the numbers shortly, But I would like to add that this performance and our growth profile, we are planning to grow the dividend ahead, starting already in the current quarter. In 2017, we paid a dividend of $250,000,000 In 2018, we increased this to $450,000,000 and the intention is to increase this by another $100,000,000 per year until 2021. 4th quarter was also a busy period when it came to business development. We developed 3 field development plants and submitted those to the authorities for approval. And we concluded the transactions with Hass and Pandion, which resulted in an increase in ownership on Vallhalfeel from 36% to 90% at an extremely attractive net cost per barrel. When we hosted our annual Capital Market Day in just 2.5 weeks ago, we gave a pretty detailed presentation of our status and plans on all assets. This time, we will therefore keep it rather short. Let me start with a few comments to our production numbers. As previously announced, we achieved a production level of 136,000 barrels per day in Q4. This was marginally up from Q3 and in line with our guidance for the full year. The increased ownership share in Valhall provided some 20,000 barrels on top of these numbers. I would like to highlight 3 things in the Q4 production numbers. The first one is that Iwavalsen reached plateau. This was achieved 1 year earlier than the original plan, which was enabled by high drilling efficiency, high plant uptime and availability of processing capacity at the Edvard Grieg platform. 2nd, the Valhall production increased from Q3. This was partly because of maintenance in Q3, but also driven by new wells that are being drilled from the Waalhau IP platform. And thirdly, the Skow production was weaker in Q4. At the start of the quarter, 3 wells were shut in due to Christmas tree issues. During the quarter, one of these wells was successfully repaired and restarted, and I'm pleased to see that SKOV production is now more or less back on track. We are planning to repair at least one of the other Christmas trees this spring. We also carried out pressure buildup test in one of the Afuil test producers, which contributed to lower production in Q4. This producer has now been put back on production. Before I leave the floor to Alexander, I would also like to say a few words about the 3 PDOs we submitted just before Christmas. The 3 PDOs are as discussed in the Capital Market Day, Afol, Wallalfrank West and Skogul. These three fields are all going to be developed as satellites to our existing operated production hubs. The overall scale of these developments is significant with gross reserves in the range of 350,000,000 barrels of oil equivalent and with CapEx more than NOK 15,000,000,000 or around $2,000,000,000 There are, however, 2 key messages I would like you to remember from this slide. One, these are highly attractive projects illustrated by the very low oil price breakevens. Aker BP's net share in these projects amount to around 125,000,000 barrels of reserves with an average breakeven oil price of around $25 a barrel. 2, our consistent focus on improvement is generating tangible results. Compared to the estimates we had at Concept Select, we've been able to increase the volumes and reduce the CapEx. This has been achieved in close cooperation with our main suppliers through the Alliance model. The Alliance model have helped us improve efficiency, optimize technical solutions and compress time schedules. I would also like to emphasize that these improvements are purely driven by productivity gains. No change has been made to the scope. I will now hand the word over to Alexander, who will run you through the financial statements. Thank you, Karlan. Good morning, everyone. I will, as usual, take you through the income statement, the balance sheet and the cash flow for the quarter. The acquisition of Hess Norge and the subsequent farm down to Pandion Energy were completed just before Christmas. For accounting purposes, you will therefore not see any material effects into the income statement, but you will see the purchase price allocation in the balance sheet at the end of this year. For more and a lot of details on this business combinations, you should turn through Note 3 in the Q4 financial statements. So we recorded a total operating income of 7.26 $1,000,000 this quarter. We had petroleum revenues of 737,000,000 based off the production on 135,600 barrels of oil equivalents per day. Out of this €737,000,000 6 €25,000,000 came from the sale of liquids, and that came at a realized oil price of $65 per barrel. And we had $107,000,000 in revenues from gas, and that came at a realized gas price of $0.26 per standard cubic meter. We then had production costs of 147,000,000 This was compared to €134,000,000 in the previous quarter. If we look across our 5 hubs, OpEx levels remain stable with the exception of Skarv, where we incurred additional costs due to the workover activities that Karl just mentioned. Due to this, the OpEx per barrel went from $12 up to 18 dollars for the quarter. Other operating expenses, corporate overhead, G and A amounted to $14,000,000 in the quarter, which brings the total for the year more in line with the expected level. We expensed exploration costs this quarter of 56 $1,000,000 The main items here were dry haul costs, predominantly on Hufsa and Hurry for a total of €19,000,000 seismic costs of around €10,000,000 and other exploration expenses, including field evaluation costs and area fees of 27,000,000 We then had EBITDA of €509,000,000 for the quarter, up around 30% from the previous quarter. After deducting the depreciation of €183,000,000 in the quarter or $14.70 per barrel and the $21,000,000 impairment charge related to Gyna Krog, we get a EBIT of €305,000,000 Net financial items were a negative €57,000,000 in the quarter, and this was much impacted by the weakening of the NOK against U. S. Dollar during the quarter. Net interest expense were $15,000,000 down from $27,000,000 in the previous quarter. This was mainly driven by lower debt outstanding and decreased amortization effects since we canceled the RCF during the Q3. We have financial income of €18,000,000 This came as an effect of realized gains on derivatives and some net currency gains. Financial expenses were 63 €1,000,000 This includes a change in fair value of derivatives of €28,000,000 and accretion expenses of €32,000,000 dollars Profit before tax was then $248,000,000 The tax expense for the period was €214,000,000 and this gives a fairly high tax rate of about 86%. This mainly comes as a result of the NOK weakening against the dollar from around 8.0 to 8.2 during the quarter. Included in this amount is a tax payable of around 125,000,000 and changes in deferred taxes of approximately €90,000,000 Thus, the net profit for the quarter was €34,000,000 or €0.10 per share. Our balance sheet is up around €2,900,000,000 in the quarter, ending at €12,000,000,000 at the end of the year. The significant increase comes as a result of the change in our Valhall and Hod ownership. Goodwill increased by 43,000,000 other intangible assets increased by 378,000,000 and PP and E increased by €1,000,000,000 Then we adjusted PP and E for the investments in our assets during the quarter, the change in abandonment liabilities and depreciation, which resulted in a net change of around €800,000,000 You can have a look at Note 6 in the quarterly financial statements for lots of more detailed information about the fixed assets and the changes there. In addition, we then had a short term tax receivable of $1,500,000,000 recognized. If you look at the other side of the balance sheet, the accounting for the Hess and Pandion transactions, they resulted in an increase to abandonment liabilities with about €850,000,000 long term and €150,000,000 short term. This also caused deferred taxes to be increased by $67,000,000 and interest bearing debt increased with the new €1,500,000,000 bank bridge loan. Other changes in this balance sheet apart from this change in the Valhall Hod share, we had receivables and other assets at €775,000,000 at the end of the quarter. This was an increase of around €100,000,000 This increase was mainly related to higher crude sales and underlift, and this was partially offset by a reduction in working capital. Cash and cash equivalents were €233,000,000 at the end of the quarter, and book equity was €3,000,000,000 at the end of the quarter. This was obviously up from the Q3 as we have accounted for the equity issuance reduced with the dividends. Finally, we had tax payables of €351,000,000 Of this, €140,000,000 is expected to be paid during the first half of twenty eighteen. Cash flow from operations was €543,000,000 in the quarter. Cash flows from investing activities were a total of €2,200,000,000 And this includes payments for the Hess Norge acquisition and proceeds from the sale of 10% stake to Pandion Energy for a net amount of €1,900,000,000 In addition, we had investments in fixed assets of €248,000,000 where Johan Sajdrup accounted for $79,000,000 the Alvheim area, including Skogul, accounted for $39,000,000 Vanal Hoth of $25,000,000 and Ula Tambe finally at 48 €1,000,000 We also recorded decommissioning payments of €31,000,000 mainly related to the Maersk Invincible running P and A activities on Valhall. Thus, we had free cash flow of SEK235 1,000,000 in the quarter. Cash flow from financing activities. This includes net proceeds of the equity issue of €489,000,000 and net proceeds from the issuance of bank debt of €1,500,000,000 both related to the Hess transaction. In addition, we repaid €130,000,000 on our RBL for cash management purposes, and we paid out €62,500,000 in dividends. At the end of 2017, we had a cash balance of 2.33 1,000,000 and we had a book value of net interest bearing debt of SEK3.2 billion. The main reason for this increase, of course, being the new €1,500,000,000 bank bridge loan we issued. Now bear in mind that this loan will be repaid upon disbursement of the tax loss sitting in HSNORIGA, which is expected in the second half of 'eighteen. At the end of the quarter, we then had net debt over EBITDAX move from 1.0 to 1.4, and we had available liquidity of €2,900,000,000 Finally, let's just quickly revisit our 2017 guidance and compare this to actuals. Again, note that we are not including any of the effects of the Hess transaction here. Total CapEx spend in 2017 was €808,000,000 and this was slightly below our guidance of €900,000,000 to €950,000,000 The main explanation for this is a lower spend on Johan Sverdrup. Cash spend on exploration was €262,000,000 also slightly below our guidance of €280,000,000 to €300,000,000 again explained by fewer drilling days than planned. Total production for 2017 ended at 138,800 barrels of oil equivalent per day. This was towards the high end of our guidance. Production costs averaged $10.3 per barrel, in line with our guidance of around $10 per barrel for the full year. As for decommissioning costs, our cash spend was $86,000,000 in 2017, in line with guidance. We presented our 2018 guidance for production and CapEx and exploration spend and decommissioning costs at our Capital Markets Day on January 15th. Today, we are not making any changes to this guidance. This concludes my financial section. I think Carlo will provide some outlook on our activities, the operational side. Carlo? Thank you, Alexander. At our Capital Market Day some 2 weeks ago, we gave a rather thorough presentation of the status and plans on all our assets. I will not go through this in detail as it's obviously not been changed in the last 2 weeks. But I'd like to assure you that we are doing our utmost to create value across our portfolio. And as you can see on this slide, we have a lot of activity on our plate also in 2018. This includes, of course, the new PDO projects, but also continued drilling of development work drilling and development work at several of our fields. We will have 4 to 5 drilling operations running in parallel throughout 2018. We will also continue maintaining and upgrading our assets in order to maximize lifetime and minimize the risk of unplanned downtime. We are also stepping up exploration activity this year. A couple of the wells are mentioned on this slide. Frosk or Frog in Alham area and Kuitong in Tumbler in the Skow area. These are good examples of near field exploration, which if successful would generate significant value and positive synergies with our existing hubs. In total, we plan approximately 12 exploration wells for 2018. In addition to the 2 wells just mentioned, we will participate in 4 more wells in the North Sea and 6 in the Barents Sea. In the Barents Sea, we are primarily looking for stand alone potential. The potential hydrocarbon volumes in the prospects we plan to participate in and drill are significant. The risk is obviously also high, as has been demonstrated by the rather disappointing exploration results in the area last year. However, Valancy still remains an underexplored region that holds a massive resource potential And the significant improvement in drilling efficiency that we have achieved recently combined with lower grades and a balanced tax system means that these wells represent low cost options that we think deserve to be drilled. In the North Sea, we are currently drilling the previous mentioned Frosk or Frog well near Alfheim. This will be followed by Rijosen, which is a prospect located near our the Hornet prospect, which is a potential standalone target in the Sleipner area and Cassidy, which is located in the Oda license and a possible tieback candidate for Ulla. We are of course very excited by this program, which we hope will generate discoveries that could add to our long term growth stories. We may actually add one more well to this program following the recently announced ARPA license awards. We are extremely pleased with the outcome of the ARPA 2017 licensing awards. ARPA Aker BP was awarded 23 new licenses, out of which 14 was operatorships. And this gives us a success rate of close to 100%. The awards gives us access to attractive exploration opportunities both around our existing production hubs and in new prospective areas. Of the new licenses, both of which have significant volume potential, come with drilling commitments. 1 of these, production license 916, is located near Johan Sager and contains a very interesting prospect that we hope to drill already in 2018. So this is definitely one to watch. This concludes my outlook section. But before we open up for questions, let me just remind you of our main priorities, which are the same as last quarter. We will continue to work hard to deliver safe and efficient operations. Needless to say, our HSE program has top priority with continuous focus on optimizing production both in terms of cost and uptime. The same goes for production project execution. We have many important development projects going on in parallel, and we need to deliver these according to plans in order to secure long term profitability. Our continued improvement program with the ambition to make radical changes to the way we conduct our business in order to achieve step changes in efficiency and cost is also ongoing. Amongst other things, this include new ways of working with our suppliers through the alliance structures previously mentioned and it includes taking advantage of digital technologies across our entire activity space in order to improve efficiency and increase value creation. We will also continue to mature new investment opportunities across our portfolio. And even though the oil prices have recovered somewhat, we stick with our criteria of $35 per barrel as a breakeven, which we think strikes a good balance between what is possible and what is necessary to create attractive shareholder returns. And finally, on the growth side, we continue to pursue pursue both organic and inorganic growth opportunities, always with a view to apply our existing capabilities to maximize resource utilization and value creation to our shareholders. In sum, we think we can bring we think this can bring us closer to our vision, which is still to be the leading independent offshore E and P company. And with that, we conclude today's presentation and open up for questions from the audience and from the web. Thank you so much. From SEB. 2017 CapEx came in slightly lower than you have guided, and you said that was due to lower spend on Johan Sverdrup. That due to cost savings? Or is it phasing of CapEx? It's a little bit of both. But predominantly, it's those it's due to higher efficiency, higher productivity and therefore lower CapEx. And the 2018 CapEx, does that include the original estimate from Stadrill as it sits today? Or have you taken into account any further potential cost savings in that CapEx guidance? The CapEx guidance for 2018 includes only one side of the operator's current forecast for CapEx in 'eighteen. All right. Last question. You sold 10% stake in Vallal Hut to Pangin. And can you say something how the progress and the process is on the remaining 20%, how long you've come in the negotiations or potential negotiations on that remaining part? For the time being, there is no ongoing process on the remaining sale in Waalal. We are happy with our position. We believe that this is an extremely interesting asset with high upsides, and we will continue to mature our projects on the Valhall Hod area in order to increase the reserves. And then our long term goal is, of course, to get to around 67% ownership, but there's no rush. Yes. Is there a deadline for that? Absolutely not. Okay. So we'll take questions from the web. Starting with Anjaer at Handelsbachen Capital Markets. Related to Skarve, I assume that 2 shut in wells will impact Q1 in most of the quarter. How much do they normally produce? And what is done to prevent the same well failures elsewhere? Yes. Okay. Out of these wells, only 1 will actually have a minor production impact. And the result is that the way the Skalfield is set up, we can distribute production between the wells in order to keep the production volumes basically the same for a short period of time. But we will recomplete at least 1 of these wells in order to balance out again the drainage of the field long term. So we don't believe that to be a significant production impact as such. When it comes to cost, I think we have to remember that we completed the previous well in the middle of the winter season, which is probably where you should expect most rig downtime. And the next one will probably be towards the spring with at least statistically a lot better weather. So we expect lower costs on the next recompletion. We are currently carrying out an investigation of the cause of these failures. And as far as we can see, there are different failure modes. We have, of course, expected every other whales should fail in the same manner going forward. Okay. We have a question from Niki Kusmanov at Jefferies. Is there any reason why average production should not go up from Q4 2017 with further 2 step increases of allocated capacity at Edvard Grieg? So this is related to Ivarosun, I suppose. As far as I know, we are now at our maximum allocated commercial capacity across the Advert Grieg field, which basically means that we are on the plateau. We have more well capacity, but we are at the plateau in terms of our current production capabilities across the Edvard Grieg field. Then a question from Karl Friedrichszat Pedersen at ABG. Could you elaborate on the impairment of Gyna Krog? What is the driver behind this? Yes. I think on the GINA Krog, it's a smaller impairment, but it's basically just due to the long term assumption that we have on oil price when we test this on a value in use basis. So I think there's a bit of detail you can find back in the note disclosures, not 5 or 6, I think it is. The next question is from Alvin Thomas at Exane BNP Paribas. What will be the maintenance impact and its timing throughout 2018? And how much of this is factored into your production guidance? And second question, in your view, could there be upside from the further cost reductions at Arfjul, Valhall, West Flank and Skogul? And lastly, assuming there are more acquisition opportunities available in Norway, what is the average leverage ratio you would be comfortable at? Production of unplanned maintenance activities are included in prediction of unplanned maintenance activities are included in the production forecast. So there won't be any additional activities that will impact the production forecast as such. And then further upside of cost reduction on Afl, we still believe that it's possible to drive down costs by increasing productivity across the entire value chain and that also goes for these projects. Of course, they are now maturing into an execution phase and that means that a lot of the acquisitions in terms of bulk valves and packages have already been done. So the remaining cost reduction will come from a more efficient installation and construction phase. And then I think the last one was leverage ratio. Do you want to say something about that? I mean, the short answer is that we don't really have a specific target or a specific leverage ratio we need to be within. I think we've, in the past, we've done transactions where we've had a higher leverage ratio than what we have today. But I think that going forward, you should expect us to remain a robust balance sheet, but also a balance out of being opportunistic again if there are good M and A opportunities that we believe are value creative for the shareholders. But I think it's important to understand that we will continue to put value creation for our shareholders as the key ingredient when we do or key assessment when we do M and A assessments. And the criteria still remain the same. It's value creation. We're looking for oil. We're looking for operatorships. We're looking for assets with a high organic growth potential and probably possible tie ins areas. So those are basically unchanged, and we will remain disciplined in this area going forward. Okay. We'll take a couple of questions from Theodor Sven Nielsen at Sberbanken Markets. When do you expect operator Statoil to update on Sverdrup Phase II production and CapEx? And secondly, what is the predrill resource estimate for the potential exploration well in PL-nine 16? Yes. The operator does update the CapEx twice a year during the so called CCE, cost estimation updates. So we expect the next one probably towards the could come in one of the announcements, the upcoming now with Sator or towards the summer. We don't necessarily expect that there will be significant changes to the project in that in this time period as we are now well into execution. But there could be some reduction in contingency as we see the project progressing pretty much according to plan. And then I think the last one was? We have estimates. We haven't really released that number. So we'll come back with more detailed information on this prospect as soon as the license are finalized license work is finalized. A couple of questions from David Mersai at Deutsche. IvarOSNA has reached plateau ahead of the final contractual allocation increase in Q3 'eighteen. Does your current guidance allow for increases above this plateau? And secondly, given your close relationship with your suppliers, have they indicated higher activity on the NCS following the recent recovery in commodity prices? When it comes to Eeva Aalsen, we have included the contractual capacity that we have access to in our guidance. So we don't necessarily see an upside to this if things don't change from what we where we are today. Yes, we have a very close relationship to our suppliers. And I think they, as many others, expect more activity on the Norwegian continental shelf, both as a result of the current improvement work that's been going on in the industry and the reduction in cost as a consequence of lower volumes of work being executed in the last 2, 3 years, but also due to the increase in oil price. How much that will be is difficult to say at this point in time, but it's also important to say we're still way below the activity levels that we saw in 2013 2014. And neither Aker BP nor our suppliers expect a return to that activity level. Okay. And then we'll take a question from Johan Charantone at SocGen. Since reporting preliminary year end 2P and 2C figures on 15th January, what are the changes and estimates that you've been made aware of in addition to Lundin's revision of Filicudi resource estimates? And secondly, as part of the $170,000,000 deal with Pandion, have you transferred historic tax balance and uplift balances associated with that sale of Valhalla to your new partner? So first question, no, no changes. If I recall correctly, we did not have any resources from Filicudi on that. The $785,000,000 total was only on Gutta. So no change there. Secondly, yes, it's normal standard sale, 10% share in Vallalhaut, and the associated tax balances with that 10% goes with it. Sorry, one more. Victoria McCulloch at RBC. Just following on maybe from David's question with the oil price now near $70 a barrel and for a slightly longer period and slightly more optimism, How do you think this impacts both your costs of existing operations and M and A in the wider sort of portfolio as an acquirer? And then separately, looking at hedging, I know that you've used a U. S. Dollar and it knocks to U. S. Dollar in your guidance. What hedging do you have in place for FX going to this year? Okay. I can talk about your first points initially and then you can talk about hedging. When we think about this, we see a slight cost recovery in terms of unit costs. We see this particularly probably in the drilling market coming up now initially, but there's still lots of capacity left untapped. So how this will actually impact the market is highly dependent on what kind of capacity gets contracted and how the prices end up. But they will also be impacted by the fact that we've over the last couple of years seen a significant improvement in productivity. So even if you're kind of going back to the number of wells drilled on the exploration side as an example to what we saw in back in 2,008 and 'nine, we see that the productivity levels are higher, meaning that less drilling days will be necessary to drill out the same number of targets that will keep a downward pressure on prices. So in total, how this will pan out is a bit difficult to say from where I stand today. We are focusing almost solely on flow efficiency and because we think our ability to impact on unit prices is rather limited as a small E and P player in a pretty big market. But we think our execution model, particularly as it pertains to the Alliance model, gives us higher productivity and therefore higher flow efficiency and therefore lower cost per amount of work carried out in the end versus other normal execution strategies. When it comes to the M and A market, 2017 has been an incredibly active market on the Norwegian continental shelf with a lot of transaction closed both in terms of straight sales, mergers and acquisitions, some of them with more inventive formats and schemes. It's not completely ruled out that this won't continue out in 2018 as prices increase and therefore also as the price ask merge. However, you could also find that the activity decrease as sellers get more optimistic on their outlooks from their existing assets. So again, it's a little bit hard to judge, but it's definitely going to be interesting. On hedging, on FX hedging, we have in the past been hedging, I think, around 40% or so that we've tried to mention the NOK exposure. We very much think of this company as a U. S. Dollar denominated company. So it's the NOK OpEx and it's a NOK CapEx predominantly on Johan Sverdrup that we're trying to hedge. I think recently and as we speak, we are more actively hedging the point estimates on taxes. So when we're expecting to get a tax refund, we are hedging that exposure just by using forward contract. So it's a €1,500,000,000 tax refund. And we are, as we speak, trying to hedge a significant part of that, which is a NOK exposure. Okay. I think that concludes the Q and A round and therefore also the Q4 presentation. So thank you both those in the room and those on the web. Thank you so