Good day, welcome to the Aker BP conference call. Today's call is being recorded. If you would like to ask a question later during today's question and answer session, please press star one on your telephone keypad. At this time, I would like to turn the conference over to Aker BP.
Good morning. My name is Jonas Gamre. I'm the VP Investor Relations in Aker BP. Thank you all for joining our conference call. Today's topic is Aker BP's acquisition of Hess Norge AS that was announced earlier this morning. I'm joined here today by Øyvind Eriksen, Chairman of the Board of Aker BP, Karl Johnny Hersvik, CEO of Aker BP, Alexander Krane, CFO in Aker BP. We'll start the session with Karl Johnny Hersvik taking you through the background and rationale for the transaction. His introduction includes forward-looking statements, and the normal disclosures regarding such statements are available in the supporting slide deck that we published this morning. After Karl's introduction, we'll open up for questions. With this, I give the word to our CEO, Karl Hersvik.
Thank you, Jonas, good morning, everyone, welcome to this conference call. Aker BP has, for a long time now, been clear that our ambition is to be the leading offshore E&P company. This transaction is an important step in that direction. Acquiring the portfolio of Hess Norge gives Aker BP a deeper exposure to one of our core areas. Taking full ownership and control allows us to pursue upsides more aggressively in an area we know very well. This acquisition strengthens Aker BP's position on the Norwegian Continental Shelf as both production and reserves will increase significantly. Let me now take you through the details of the transaction. Aker BP has agreed to acquire Hess Norge AS for a cash consideration of $2 billion with an effective date, 1st of January 2017. The transaction covers Hess' interest in the Valhall field and its satellite field, Hod.
Aker BP is already the operator of these fields and will become the sole owner after this transaction. In addition to taking over the Valhall and Hod assets, we're also taking over a tax loss carry-forward with an undiscounted off-tax value of approximately $1.5 billion, as booked in Hess Norge's annual accounts 2016. The transaction will be financed with available undrawn credit under our $4 billion reserve-based lending facility and a $500 million in new equity. The equity issue is subject to an extraordinary general meeting with a three-week notice period. We will send out the notice shortly, the plan is to carry out the offering as a bookbuilding process during the month of November. Aker ASA and BP PLC will pre-commit to subscribe for their respective 40% and 30% shares at market or a minimum of NOK 155 per share.
In addition, Aker and BP have guaranteed for the remaining 30% at yesterday's closing price of NOK 155 per share. Since we introduced dividends about a year ago, the cash generation in Aker BP has been very strong. With this transaction, we strengthen our earning capacity further, and the board has therefore proposed to increase the annual dividend by $100 million to $350 million per year from the fourth quarter of 2017. As before, the dividend level is set to increase further after the start-up of Johan Sverdrup. We expect to complete the transaction before year-end of 2017, and for accounting purposes, the increased ownership will be reflected from the completion date. The deal is obviously subject to approval by the relevant authority as per normal.
Going forward, our plan is to continue to proactively pursue upsides in the field, sanction new projects, and thus convert resources to reserves by investing more capital into the asset. We subsequently intend to farm down an interest in the field to a new party which can work together with us to proactively target and unlock the upside potential in the area, either against cash or against other assets. After such a farm-down, we intend to retain about 67% interest in the field. The Hess share of the Valhall and Hod field represent additional reserves of about 150 million barrels of oil equivalent for year-end 2015, which represent an increase for Aker BP of about 21%. A production of around 24,000 barrels per day for the first nine months of 2017, which represent an increase of about 17% for Aker BP.
With the added reserves and resources from this transaction, our production could reach well above 300,000 barrels of oil equivalent in 2023 and 2024. Regarding the Valhall area, there are still a lot of untapped opportunities. This is illustrated by the additional contingent resource, which we estimate to be about 195 billion barrels for the Hess share. This represents an increase of about 33% to our existing contingent resource base. Our plan is to gradually convert these resources to reserves as we continue to develop and mature the field, and also to increase our resource base over time as we continue to work the asset. Valhall started producing in 1982 and has been continuously maintained and developed since. A state-of-the-art new field center was commissioned in 2013, including power from shore and technology capabilities for efficient operations.
With a new field center and huge resource potential in place, we see this as a unique opportunity to create more value for our shareholders going forward. We intend to aggressively pursue these opportunities. Just over one-fourth of the in-place volumes in the Valhall area has been produced to date. Our ambition is to produce at least another half a billion barrels of oil equivalent in the coming years. I fully expect that we can increase this number over time as we continue to work the asset. Currently, there are lots of activities going on in the Valhall area. Following a two-year drilling break at Valhall, we started up the IG drilling program in Q1 this year. Seven wells are planned, of which two have been completed, and a third is on the way.
The remaining four wells will be drilled next year, and we are working to increase the number of wells drilled going forward. The next development project at Valhall is the West Flank, which will be developed as an unmanned wellhead platform with 12 well slots tied back to the Valhall field center. We plan to submit the PDO before year-end and expect production to start in 2020. We also have concrete plans to extend water injection capability in the Valhall Flank North, which will allow us to produce more of the resources in the Northern Basin area. In parallel with all these activities, we have embarked on a campaign to plug all wells using the Maersk Invincible jackup rig. I'm extremely pleased with the results to date. This campaign will prepare the field for the next phase. To summarize, this transaction fits very well with Aker BP strategy.
First, it strengthens our position as an operator and allow us to pursue organic upsides without additional G&A costs. Second, it gives us increased leverage to the benefit of our continuous improvement work, exemplified by the positive developments in efficiency in our drilling and field P&A operations on the Balder. It gives us full flexibility to implement our alliance model for new topic projects in the Valhall area. Third, it adds scale to our existing growth opportunities and allow us to pursue these opportunities even more aggressively. I don't think I'm overstating it when I'm saying that we are extremely pleased with this transaction. With that, we open for questions, and I hope that the operator could assist.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. Thank you. We take our first question from Alvin Thomas with Exane BNP Paribas. Thank you.
Morning, all. Congratulations on the deal. Firstly, could you just tell me a little bit around how this changes your evolution of net debt, perhaps where you expect that to be around year-end and next year? Also what it means for your cash tax paying position before your Hanz comes online. Perhaps a little bit of color around that where you see the synergies and how they work. Thanks.
Morning, Alvin. It's Alexander. I'll try to respond to that one. On the first question regarding net debt, we have the third quarter presentation coming up Monday next week where we will disclose the net debt position. You shouldn't expect that to have changed materially from what was booked as of the end of Q2. That is the starting point obviously. As Karl alluded to, it will be a partially debt funding of this transaction in addition. On the tax side, obviously there's a significant tax loss carry forward that is inherited as this transaction is a acquisition of the shares in Hess Norge. The nominal value of that is $ 1.5 billion.
In addition, you will have the undepreciated tax balances that are residing with the asset and the license in Valhall. When it comes to the tax cash payment of this, you may recall that we discussed in the Q2 presentation that Aker BP for 2017 now will be in a tax-paying position. This is expected to be maintained, was expected to be maintained in 2018. Obviously once Johan Sverdrup is up and producing in 2019 and 2020, that picture is, of course, changed, and there will be a significant net tax bill. The tax loss now inherited from Hess Norge will be offsetting these expected tax payments, and obviously the exact timing of that will depend on various factors.
Okay. Thank you. Last follow-up. When do you expect the deal to close? I think I missed that this morning.
We expect the transaction to close by the end of this quarter.
Okay. Thank you.
Thank you. We take our next question from Raphael Gautier with Bank of America Merrill Lynch.
Yes, good morning, everyone. Just two questions please from me. Firstly, on the abandonment liabilities that come along with these assets, can you give us a little bit more color on what those are and also the timing of any payments to settle those? Secondly, just can you clarify back to the cash tax paying position at $50 oil, what does that mean in terms of cash tax between now and Johan Sverdrup? Thank you.
I can start with the question around abandonment liability. We have, in our books, booked a short-term abandonment liability of some $120 million for the current Aker BP share in Valhall and Hod, which you can then induce to around $216 for the now acquired share in Hess Norge. Long-term abandonment is currently around $1.1 billion for Aker BP share, which you can then induce for Hess to around $2 billion. It's important to remember that these ARO booked liabilities, in our books, they are on a pre-tax basis. If you take into account the post-tax effect, the 78% tax rate, you get down to around $485. Your second question was, again, around the cash effect of the tax. Again, it depends on a variety of factors, including to the oil price you assumed.
In a $50 environment, we'd likely extinguish those into probably the second year of Johan Sverdrup.
Great. Thank you.
This is Per Harald. You should also take into account the fact that the field center was opened in 2013, as Karl Johnny has said. We expect the field to produce at least another 30 years. History tells that reserves tend to increase, and production tends to be extended for giant fields like Valhall. That's the task in hand for Aker BP going forward, to extract and produce even more from Valhall in the years to come.
Thank you. We take our next question from Teodor Nielsen with SP1 Markets.
Good morning, guys, and congratulations on the deal. A few questions on CapEx, on OpEx, on the acquired fields. Could you give some details on the OpEx level on Valhall-Hod compared to your existing portfolio of fields, and also what kind of CapEx profile do you expect going forward for those fields?
Good morning. I don't have those numbers exact in front of me, but if you recall back in the Capital Markets Day, at the beginning of this year, we had a slide that showed all the assets on an OpEx per barrel basis. I seem to recall that we had Valhall area, which included both, just below $20 per barrel. I believe it was $19 that we guided on. I think now when we are here at closing towards the end of the year, we don't differentiate materially on a per barrel basis for the Valhall and Hod areas now for 2017.
Okay.
That being said, there is obviously continuous work ongoing to reduce the OpEx per barrel. Obviously there are two factors going into that equation. The first one is the cost itself, and the second is the production. We are working both those factors aggressively. This is, amongst other things, the key denominator. The Valhall Flank West that I just talked about, which will be PDO-ing this year, will contribute extremely positively to the OpEx barrel. Your questions regarding CapEx. Essentially, this transaction will ensure that our plans going forward stay firm, and as such represent no deviation from our existing plans. It allows us to pursue those opportunities without delay.
Okay, thank you. One last question on dividend. Your new dividend guiding of $ 350 million per year, should that be interpreted as the full year 2018 dividend, or will that be subject to oil price development through 2018?
Thanks. Answering that question. The NOK 350 million annual dividend has not been made subject to any specific oil price assumption. We have a significant headroom investor in Aker BP to service that dividend. The first payment will be made for this quarter, Q4 2017, and payable in the first quarter next.
Is it completely unlikely that dividend will be above $ 350 next year if oil price increases?
Aker BP, this increase is consistent with the dividend policy and guidance from Aker BP. When we announced the $250 million policy , we said that we will consider to increase the nominal annual dividend paid, when and if Aker BP does new acquisitions. In addition, we said that we expect yet another step change when Johan Sverdrup comes on stream in 2019. Aker BP will stick to that guidance and dividend policy, and continue to consider an adjustment of an increase of dividend paid when or if we announce new transactions like the one we announced today.
Okay. That's clear. Thank you.
Thank you. We take our next question from Nikolas Kuzmanov with Jefferies.
Good morning, gentlemen, congratulations on the deal. Some of the questions I had in my mind have been addressed, if I may ask them from a slightly different angle. First one is on tax. How long do you think it will take you to work through that NOK 1.5 billion of tax losses? How many years? In relation to that, I assume that there is free cash flow from the 2P reserves based at Valhall. How does the increase in the dividend, the $100 million post-deal compare to that? Finally, a bit of a left field, are there any lessons from Valhall, which is a huge mid-life mature field, which could be applied to Johan Sverdrup in terms of efficiency of operations? Not necessarily in the early years, maybe down the line. Thank you.
Morning, Niki. I can start with the tax one and let Karl supplement. I think the question was a bit similar to one of the earlier ones from Alvin. We do expect to start utilizing the tax loss here this year already. How many years that will take will depend obviously on oil price and other factors. Obviously once Johan Sverdrup is up and running with extremely low OpEx, that tax loss will be utilized very quickly.
Hi, Niki. Your second question related to the cash flow from Valhall and its impact on dividends. As we previously stated during the call, our recommendation to increase dividend is not just based on the fact that we are getting access to the cash flow from Valhall, even though that is a portion of it. We've had very good cash flow in Aker BP as we started our dividend program about a year ago. If memory serves me correctly, we have covered all our dividend payments in cash so far.
We feel that as a totality, it's more than prudent to increase the dividend yield at this point in time. Now, your last question regarding the applicability of experiences on Johan Sverdrup from the Valhall field, we are always open to sharing knowledge and competency and technology with other operators, if and when that may be applicable. I'm sure that as partner in Johan Sverdrup, if we see an opportunity to do so there, we will.
Great. Understood. Thank you very much, Alex and Karl. Thank you.
Thank you. We take our next question from Tiziana Burkhalter with ABN AMRO.
Good morning. Congratulations, gentlemen. I think most of my questions have been answered, and indeed were related to CFFO, free cash flow, and potential synergy effects. Thank you.
Thank you. We take the next question from Halvard Nygard with SEB.
Morning, guys. Yet another question on the tax loss carry forward. Will this be used to reduce the cash tax payment over the operations, or is it possible to dissolve Hess Norge and get the tax loss carry forward paid out, as we have seen in other transactions you have done? Also, is it possible to say something about the competition from the other bidders in this deal? Thank you.
This acquisition has been negotiated exclusively and bilaterally between Aker BP and Hess without, to the best of my knowledge, any competition whatsoever. It's once again an evidence of the unique position of Aker BP as an operator on the Norwegian continental shelf.
Morning, Halvard, yes, obviously, there have been cases where it's possible to have the tax loss extinguished upon liquidation. In either case, we believe that given the tax position where we are today and how the taxable result for Aker BP will evolve, it's just a matter of timing.
Okay. Thank you.
Thank you. Ladies and gentlemen, as a reminder, please press star one to ask a question. Gentlemen, it seems we have no further questions at this time. With this, I would like to hand the call back over to you for any additional or closing remarks.
Okay. Ladies and gentlemen, thank you so much for listening in. As our Chairman just said, we see this as an important step in the continued journey of Aker BP towards the goal to become the leading offshore E&P company. We also believe that this transaction firmly positions Aker BP as an attractive operator and M&A player on the Norwegian continental shelf. Thank you for listening in, and have an excellent day.
Thank you, ladies and gentlemen. This will conclude today's conference call. Thank you for your participation. You may now disconnect.