Earnings Call: Q4 2019

Feb 11, 2020

Good morning and welcome to this presentation of the 4th quarter 2019 results for Aker BP. My name is Kjetil Bakken and I'm Head of Investor Relations in the company. The presentations today will be given by our Chief Executive Officer, Carl Johnnie Hajsvik and our Chief Financial Officer, David Tonne. After their prepared remarks, we will open up for questions and answers. Please note that Aker BP will host its annual Capital Markets update later today. And any questions in the Q and A session, we will primarily focus on Q4 related topics. And for questions related to topics covered in the Capital Markets update, we encourage the participants to send such questions by e mail to irarkerbp.com. And with that, I hand over to our Chief Executive Officer, Karl Johnny Hajjveig. Thank you, Kjetil, and welcome to this presentation of Aker BP's financial results for the Q4 in 2019, this time via call, but I'm looking forward to seeing all of you later today at the Capital Markets Update. My name is, as you know, Carla Haswig. I'm the CEO of Aker BP, and I'm also joined by David Tenne, our CFO, who actually today marks his 1st year anniversary as CFO of Aker BP. So congratulations, David. Thank you. The most important event in the Q4 was obviously the start up of Johan Sverdrup in October. This truly amazing asset has delivered excellent productivity so far. And facing the great work undertaken by the operator Equinor to develop this giant field in collaboration with a number of partners. We are also very pleased to report that the Valhall Sandqvist started production in Q4 on schedule and within budget. The project had been delivered with a contribution from 4 of our strategic alliances with high quality and an impeccable safety record. In fact, this project is more than 1 year accelerated according as compared to the original case. The operational performance was strong in Q4 with record high production and production regularity, which I will revert to shortly. On the vessel development side, I am pleased to report that there now seem to be a really constructive dialogue between the 2 operators in the Nuaka area. Significant work has been carried out to mature a joint technical concept, developing the entire area and all its resources, combining the 2 previous concepts that have been proposed for the area. And I would like to commend Equinor who have contributed to such Their participation in these discussions have made the solution significantly more robust. We have also entered into a deal with PGNIC to strengthen our position in the Skov area, and we are increasing our interest in the recent SREC discovery, take over as operator for the license, which has significant remaining upside in exploration. And at the same time, Peignig becomes our partner in the Alunort discovery, thus enabling us to move forward with exploration activity also in that license. Both these discoveries are located near Skov and the transaction would enable an efficient development of these discoveries as tiebacks to this FBSO. At the same time, we also sell our 3.3% operated non operated interest in Ginnakrog to PGNIC. And we receive a cash element of USD51 1,000,000 firm and another $11,000,000 in future contingent contingent on a development of the Alvenor field. Now moving on to production overview. Our production reached 191,000 barrels of oil equivalents in Q4, which is a new record for Aker BP. This was driven, of course, by the start of Bojanspeldrup, which contributed nearly 30 2,000 barrels of oil equivalents. But we also saw encouraging development in production from the rest of our portfolio, in particular from Alvheim and Valhall. At Alfheim, production was restored from Wilje following successful repairs of the Midwater Arch and at Valhall, we see contribution from new wells being brought downstream. The strong production number were also impacted by generally very strong production efficiency across our portfolio, averaging an amazing 95.8% in Q4. For the full year, production ended at 156,000 barrels of oil equivalent, in line with our previous guidance. 2019 was also a very good exploration year for Aker BP. The net discovered volumes are estimated to be around 170,000,000 barrels of oil equivalent or approximately 3 times our 2019 production for comparison. The discoveries were concentrated around Alfheim and Skov assets, in addition, of course, to the Lia Toni discovery in the Nuaka area. At our Capital Markets update later today, our Head of Exploration, Grievi Glorstad, will talk more about our exploration results and our plans going forward. And now I will hand over to David, who will walk you through the Q4 financial statements. Thank you, Carla, and good morning, everyone. It's a pleasure to summarize our financials for 2019. And with this also take you through the key figures for the last quarter ever where our income surpassed $1,000,000,000 This was driven by an increase in production of 31% as the Johan Sverdrup field started production. We produced 191,000 barrels per day, and with an underlift, the sold volumes ended at 184.5 barrels in total. Total production for the year ended, as Karl already mentioned, at 155,900 barrels per day, in line with the guidance set out at the start of the year. Liquid prices increased throughout the quarter, while the price of gas again was stable. The realized average hydrocarbon price was $57.4 per barrel, which is 5.6% higher than in Q3. Average hydrocarbon price for the full year 2019 was 57.7%, down from 65.5% in 2018. In total, petroleum revenues ended at $980,000,000 which is approximately 36% up from the 3rd quarter. Moving on to the income statement. Adjusting petroleum revenues for other income, which includes insurance and settlement related to prior year's activity, we get a total income of $1,300,000,000 in the quarter and $3,347,000,000 for the full year. Production cost of sold volumes were $154,000,000 and the production cost related to the produced barrels amounted to 160,000,000 dollars equaling a cost per produced barrel of $9.1 The significant decrease in production cost per barrel in Q4 was mainly driven by the start of production on Johan Sverdrup as well as partial insurance recovery on the Alvheim Midwater Arch repair. For the full year 2019, production cost ended at 12.4 compared with to the market guidance of roughly 12.5. The cost level was positively impacted by strong performance, particularly in the latter part of the year as well as a weak Norwegian kroner. Exploration expenses amounted to $85,000,000 $47,000,000 was related to dry well costs. In addition, we spent roughly $38,000,000 on seismic, GNG and field evaluation. The exploration activity was somewhat lower than originally planned as spud on the Nidhogg well slipped into 2020 while waiting for the Skogul well to be completed. Total spend on exploration ended at $79,000,000 in the 4th quarter and in total at $501,000,000 for the full year. This was $49,000,000 lower than the updated guidance of $550,000,000 given in our Q2 presentation. Summarizing the items discussed so far gives us an EBITDA of $745,000,000 for the quarter, up 55% from Q3. EBITDA for the full year 2019 ended at 2.286 1,000,000,000 dollars Depreciation was $255,000,000 or $14.5 per barrel in the quarter. For the full year 2019, depreciation per barrel was $14.3 Other operating expenses was $19,000,000 in the quarter. The main reason for the increase from previous quarters was related to certain one off items linked to previous year's cost allocations. Deducting depreciation and other operating expenses, we get an operating profit of $491,000,000 for the quarter and $1,327,000,000 for the full year. Net financial expenses was $67,000,000 dollars and the main reason for the increase from Q3 is a reduction in capitalization of interest as a result of Johan Sverdrup coming on stream and reducing the capitalization base. Profit before tax was $424,000,000 in the quarter and $1,084,000,000 for the full year. And taxes amounted to $312,000,000 in the quarter, and of these, dollars 347,000,000 was the current tax arising in the quarter and dollars 45,000,000 was reduction in deferred tax. The effective P and L tax rate in the quarter ended at 70 4%. The actual tax payments in the quarter amounted to $199,000,000 which is $13,000,000 below the forecast provided at Q3. Net results in the 4th quarter ended at $112,000,000 $141,000,000 for the full year. Moving on to the balance sheet. Property, plant and equipment increased by $410,000,000 in the 4th quarter. We had additions of 632, where investments at Valhall, Alvheim and Johan Sverdrup made up roughly 69%. Depreciation of PP and ME amounted to $223,000,000 On the other side of the balance sheet, equity was reduced by $76,000,000 which is the sum of net income and dividends. Bonds and bank debt increased by $347,000,000 Tax payables increased by SEK 166,000,000 giving a balance of SEK361,000,000 which can be divided into 155,000,000 related to the income year 2019, net receivables of EUR15,000,000 related to prior years and $221,000,000 related to accrual for uncertain tax positions. Other provisions for liabilities, including P and A, increased by $103,000,000 which can be divided into $149,000,000 related to increase in long term abandonment provision. The annual update of the decommissioning liability resulted in a decrease in the cost estimate, but this has been offset by a decreased discount rate, resulting in a higher NPV. The increase in ARO provision has been offset by $45,000,000 decrease related to long term derivatives, where the main part has been reclassified to short term. In sum, total equity and liabilities amounted to $12,200,000,000 at the end of the quarter. Moving on to the Q4 cash flows. We started the 4th quarter with a cash of $5,000,000 During the quarter, we withdrew debt of 3.35 1,000,000 dollars cash flows from operations amounted to $724,000,000 and tax payables was 199 Cash flows to investments was $541,000,000 of which the main contributors were $490,000,000 in investments in fixed assets, including $15,000,000 in capitalized interests, dollars 42,000,000 in exploration and $9,000,000 in Dcom and P and A. Lease payments amounted to $30,000,000 of which $25,000,000 was related to CapEx activities. Dividends amounted to $187,500,000 Then at the end of the quarter, our cash balance was $107,000,000 The book value of net interest bearing debt, excluding lease debt, was roughly $3,200,000,000 dollars and we had $2,600,000,000 of committed undrawn capacity on our $4,000,000,000 bank facility. And our leverage ratio net debt over EBITDAX was 1.2. Worth noting is also that we after the quarter in January 2020 issued a new bond in 2 tranches of total $1,500,000,000 which was used to further reduce drawings on our RCF. Currently, we therefore have in total $4,000,000,000 of committed and undrawn capacity on the bank facility. As we have now closed the full year for 2019, we have a more precise estimate of the remaining 2019 tax installments to be paid in the first half of twenty twenty. As previously mentioned, tax payments for Q4 was $199,000,000 resulting in a total tax payments for 2019 of $619,000,000 We have now fixed the first three installments for the first half of twenty twenty based on our 2019 actuals. Each installment would be approximately 50,000,000 dollars where of 1 installment will be paid in Q1 and 2 installments in Q2. This represents a reduction of approximately 50% compared to the first three installments we paid in the second half of twenty nineteen and in line with my guidance on our Q3 presentation. To sum up 2019, I will revisit our guidance for 2019 and the associated delivery. In the 1st 9 months, we produced 144,000 barrels of oil equivalents on average. In the Q4, we produced 191.1 barrels. Consequently, production ended at 155.9 for the full year and within the original guiding of 155,000 to 160,000 barrels per day. In my second quarter presentation, I adjusted the CapEx guidance slightly as we shifted scope from P and A to production drilling. Q4 CapEx came in as expected, and we ended the year with a total of $1,670,000,000 With the discoveries at Froskelon and Liatorn and the addition of the Nipa and Nidhogg wells to the program, we updated the expected exploration spend to $550,000,000 in my Q2 presentation in July. Q3 was another successful quarter with high activity and discoveries at Erne and Sreck. And in Q4, we finished the Carc well, but the Nidhogg well slipped into 2020. Total spend was therefore a bit lower than planned, and we ended at $501,000,000 for the full year, which is in line with the original guiding of $500,000,000 dollars There has been limited activity in Q4 related decommissioning and P and A, and total spend ended at 109,000,000 in line with the reduced guiding of roughly $100,000,000 Production cost per produced barrel. We guided production cost per barrel at roughly $12,500,000 for 2019. First half was, as expected, higher than the yearly average due to the maintenance work at Varuhalle and Nula, including the turnarounds in June. In the Q3, we saw costs trending down with less maintenance work and improved productivity. In the Q4, the positive trend continued. We also received insurance recovery for the mid water arch incident at Alvheim and low cost production from Johan Sverdrup ramped up. Total cost of produced barrels ended at $706,000,000 for the full year or $12.4 per barrel, in line with the original guiding. Lastly, we planned and paid a total of $750,000,000 in dividends for the full year. As already mentioned, we will hold a capital markets update later today. We will come back with much more details on 2020 and the longer term outlook. But to close off my presentation, I will summarize the main guiding parameters for 2020. We expect to increase production with roughly 36%, and the guiding for the full year is 205,000 to 220,000 barrels per day. Worth noting here is that we do expect some intra year fluctuations. Production in the first and third quarter is expected to be within the guiding range. In the second quarter, we expect production to be roughly 20000 to 30000 barrels lower than the midpoint in the guiding range due to summer maintenance work. In the Q4, we expect to be above the guiding range as we are gradually increasing production from new wells at Valhall and Arfuhl Phase 1 will come on stream. We are reducing capital spend with roughly 4% in 2020 compared to 2019 and expect spend of $1,500,000,000 in CapEx, dollars 500,000,000 in Expex and dollars 200,000,000 in AbEx. Capital spend will be somewhat front end loaded with roughly 60% spent in the 1st 6 months of the year. We expect production costs to go down with almost 20% versus 2019, down to an average of $10 per barrel. Also here, there will be fluctuations throughout the year, mainly driven by fluctuations in production, but also amplified by the fact that extra maintenance is typically conducted in the periods when the production is the lowest. And dividends are increasing by 13%, up to a proposed $850,000,000 for the full year. I will now hand the word over to Karl for some closing remarks. Thank you, David. As already mentioned, we will come back with more details on the priorities ahead, both on the short and long term at our Capital Markets update. So I'll only do a few remarks here. In terms of execution, we are continuing the start up of new wells on Valhall in particular and have had significant progress with the single trip multi frac the last few months. We also have a significant project portfolio ahead of us, even if the activity in 2020 is expected to be somewhat lower than in 2019. Imminent is the startup of the Skogel project on Alfheim and also the decision to progress on HUD. In terms of improvement, we're keeping momentum on the improvement agenda. And as you will see later today, we are progressing the value will be the implementation of our one team operating model, which are now under development. We are also, in terms of growth, mobilizing for the Nuaka area development, which we will also come back to later today, And we are spending significant amounts and resources maturing the recent discoveries, particularly in 2019. All in all, I'm sure that 2020 will be as exciting as 2019. And with that, we'll close the Q4 presentation and open up for questions. Thank you. Our first question today comes from Theodor Nilsen from SB1 Markets. Please go ahead. Good morning and thanks for taking my questions. Two questions for me. First, the deal in the Skov area, will that or how will that impact the 2P reserves? And second question that from 2020 OpEx guidance, that's down year over year. And is the key reason for that Pfizer volumes? Or are there any other reasons for the expected decline in OpEx per barrel? Thank you. Yes. So thank you, Theodor, and good morning. I hope we'll see you later today. When it comes to the deal in the Skave area, this is predominantly a allowing us to progress with exploration activities in that area. And allowing us to progress with exploration activities in that area. And we plan to drill a well in the Alvenor license a bit later this year. We have also taken over operatorship of the Sreck discovery and increased our ownership in that area by approximately 5%. Importantly, this means that we now see a maturation of a sequence of tiebacks to Skov, which can all be operated under the Alliance model with high efficiency. So first, of course, it's Afl, then it's Groesel, then we may be looking at Sveck or Alvenor, and then there are other developments also in the area. It's also probably worth noting when talking about Skav that we are currently drilling an exploration well called Nidhogg and expect results on that in a couple of weeks. In terms of the OpEx guidance, David? Yes. So of course, getting low cost barrels from Johan Sverdrup into the portfolio is an important part of the reduction. But we're also conducting less maintenance work at Ballhall and Nula. Remember back to the start of 2019 where we had flotels at both locations also conducting extra surface maintenance work. In addition, we're also increasing production at Varuhall, which is then driving down the average cost per barrel. So there are several elements into the mix, both volumes, but also driving down costs. And then specific, you asked about 2P Resources and Reserves or 2P Reserves and Resources. I think if you do the math, you'll discover that the amount of reserves we carry on Gilead Crogg is roughly 5,000,000 barrels. And then in terms of Alvenor, the reduction is in the range of 4,000,000 barrels and then we're adding about 2,000,000 barrels in Czech. Thank you. We now move on to our next question from Alwyn Thomas from Exane BNP Paribas. Please go ahead. Hi, good morning gentlemen. A couple of quick ones for me. I just wanted to get your thoughts on the Valhall drilling. Obviously, it looks like things are being quite good in the Q4 on the multi frac technology. I just wondered if you could sort of review the performance of the year, what works and what didn't and perhaps what the learnings are for the rest of the portfolio, whether it's other technological sort of improvements you can make on the portfolio that you'll put into action this year and next? Yes. Thank you, Alwyn. And yes, you're right. And just to remind everybody, we are currently drilling on Valhall on 2 locations. So the first one is the Masque Invincible continuing their drilling campaign on the Valhall West Flank. We just completed well number 6 and it's actually quite interesting to look at the results. We have drilled 1 producer and completed approximately every 30 days, which is significantly better performance than we assumed in the PDO. Also the wells are significantly longer and we've added about 19% to the reserve base as a result of that well extension in the horizontals. Also on the Valhall field center, we are still drilling. Now we are drilling sidetracks from existing producers. So that means that each of these drilling targets are ahead of that activity is the P and A activity. So that means that these wells take a bit longer than the previous wells, which were drilled on already P and A templates. Now in terms of single trip multi frac, I think the last few wells that we have done has showed amazing and encouraging results. The last well we did, we typically run 4 fracs a day compared to 1 frac every second day with a conventional technology. The effect that has is twofold. First of all, we're able to utilize smaller window windows, which means that we can be more efficient in total, particularly in the winter season. But it also, of course, gives us an ability to clear out the number of wells in terms of drilled and uncompleted or not put in production. We actually assume that by the end of 2020, we will have stimulated all the backlog on the Valhall field. So indeed, you are right. It's been a very encouraging development in the last few months. Okay. Thanks very much. Thank you. We're now moving on to Sasikanth Chilukuru from Morgan Stanley for our next question. Please go ahead. Hi, good morning. I had a question on your production guidance. Essentially, I just wanted to understand the conditions behind this range of 205,000 to 220,000 barrels per day. Just wanted to see what your upside case included. Also just wanted to check whether there was any major turnaround activity in 2020 like in the case of 2019. Whether just trying to see the phasing of the production increase in itself? Thanks. Yes. So we've guided a range of 205,000 to 220,000 barrels per day, and we don't want to talk too much about an upside or a downside case scenario. I think that's a bit early to say. When it comes to turnaround activity in 2020 compared to 2019, there will be less. But we are do expect some shutdowns at particularly Alvheim related to maintenance at the pipelines, but no major shutdowns are expected. But as mentioned, there will be lower production in the second quarter due to the maintenance work. Thank you. Thank you. We now move on to Johan Charrington from Societe Generale. Please go ahead. Yes, good morning, gentlemen. So I'm looking forward to the CMD later this morning. And I will just have questions which are very sort of focused on numbers. And I'm not sure you say it's how much more of insurance recovery related to repair at Alvheim you expect to show in product cost in 2020? In addition, on separate topic, are you able to guide on DD and A level for 2020 for your portfolio overall? And then maybe on CapEx, I'm just looking at understanding how much was spent in Valal and Scarf in 2019? Thank you. Yes. On insurance first, So we booked roughly $17,000,000 in the 4th quarter of insurance recovery. And when it comes to further insurance recovery in 2020, I don't want to speculate on that. We have some costs related to other midwater arches that we've done preventive maintenance work on, which we it's too early to say if there will be insurance recovery related to. I didn't catch your second question, but your third question was related to CapEx on Skarve and Varuhal during the year, if I understood correctly? This is correct. And for the second question, it was just about guidance on the level of depreciation for the year 2020, it's in P and L. Thank you. Okay. Yes. All right. So in terms of guidance on depreciation, I think the thing to do is to look at the average for 2019 and don't expect too big changes for 2020. Per barrel, of course, per barrel. When it comes to We now have a question from Al Stanton from RBC Capital Markets. CapEx guidance for 2020 of €1,500,000,000 is a bit ahead of what I was expecting. And looking at what some of the rating agencies said in the also, when you did the bond issue in January, what sort of CapEx guidance is expressed to bond investors at that time? Yes. So when it comes to our CapEx guidance of 1,500,000,000, so I think that's very much in line with what we showed in our Capital Markets Day update in 2019. So very much in line with that. I think it's important when you think about how the rating agencies view this. I don't want to speculate on their analysis, of course, but of course, they typically also refer to what we call the sanctioned portfolio, so the CapEx that's already been sanctioned. But from our side, the SEK1.5 billion is spot on what we showed last year and what we plan to spend. Fair enough. Thank you. At this time, there appear to be no further questions. Then I think we round off this Q4 and say thank you for your participation and welcome to the Capital Markets Day, which will open at 10 a. M. Here in Oslo. So thank you guys and have a good day.