M&A Announcement

Oct 24, 2017

Good day, and welcome to the Aker BP Conference Call. Today's call is being recorded. Morning. My name is Jonas Kamran. I'm the VP, Investor Relations at Aker BP. Thank you all for joining our conference call. Today's topic is Aker BP's acquisition of Hess Nordgas RS that was announced earlier this morning. I'm joined here today by Eivin Eriksson, Chairman of the Board of Aker BP Carl Jung Mihashvik, CEO of Aker BP and Alexander Kramer, CFO in Aker BP. We'll start the session with Carl Jung Mihashvik, 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 Hashe. Thank you, Jonas, and good morning, everyone, and 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 and P company. This transaction is an important step in that direction. Acquiring the portfolio of Hasnogja gives Zarka BP a deeper exposure to one of our core areas. Taking full ownership and control allows us to pursue upside more aggressively in an area we know very well. This acquisition, thanks to Doctor. 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 Hessdal GIs for a cash consideration of US2 billion dollars within the effective date, 01/01/2017. The transaction covers Hess Finters in the Valhall field and in Sattla field, HOD. Alkadipi is already the operator of these fields and will become the sole owner after this transaction. In addition to taking over the Valhalla hot assets, we're also taking over our tax loss carryforward with an undiscounted off tax value of approximately US1.5 billion dollars as split in Hasbroggi's annual accounts 2016. The transaction will be financed with available undrawn credit under our US4 billion dollars reserve based lending facility and a US500 million dollars in new equity. The equity issue is subject to an extraordinary general meeting for the three week notice period. We will send out the notice shortly, and the plan is to carry out the offering as a book building process during the month of November. ARCA ASA and BP TLC will pre commit to subscribe for their respective 4030% shares at market for a minimum of NOK 155 per share. In addition, ARKLBP 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 strengthened our earnings capacity further. And the board has therefore proposed to increase the annual dividend by a $100,000,000 to $350,000,000 per year from the 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 2017. And for accounting purposes, 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 upside in the field, sanction new projects and thus convert resources to reserves by investing more capital into the assets. We subsequently intend to calm down an interest in the field for new parties, 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 farm down, we intend to retain about 67% interest in the fee. The Hess share of the Valhall And Hod Field represents additional reserves of about 150,000,000 barrels of oil equivalent per year end 2016, which represents an increase for Aker BP of about 21%. Our production of around 24,000 barrels per day for the first nine months of 2017, which represents an increase of about 17% to our committed team. And 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 Ronal area, there are still a lot of untapped opportunities. This is illustrated by the additional contingent resource, which we estimate to be about 195,000,000 barrels for the Hess chair. 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. Farnell 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, and we intend to aggressively pursue these opportunities. Just over one fourth of the in place volumes in the Valhall area have been produced to date. And our ambition is to produce at least another 500,000,000 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 assets. Currently, there are lots of activities going on in the Valhall area. Following a two year drilling break at Valhall, we started up the IP drilling program in Q1 this year. Seven wells are planned, of which two have been completed and a third is underway. 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 Plant, which will be developed as an unmanned wellhead platform with 12 well stocks 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 expand water injection capability in the Roanland Flank Floor, 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 most municipal jackup rig. I'm extremely pleased with the results to date. And this campaign will prepare the team for the next phase. Now to summarize, this transaction fits very well with Afterbetu strategy. First, it strengthens our position as an operator and allow us to pursue organic upside without additional G and 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 team G and A operations of the embargo. And it gives us full flexibility to implement our alliance model for new CapEx 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, but I'm saying that we are extremely pleased against this transaction. And with that, we open for questions. And I hope that the operator could Thank you. And we take our first question from Alvin Thomas with Exane BNP Paribas. Thank you. Good 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? And also what it means to your cash tax paying position before Johan Sverdrup comes online? Perhaps a little bit of color around that, where you see the synergies and how they work. Morning, Thanks. Alwyn. It's Alexander. I'll try to respond to that one. So 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. But you shouldn't expect that to have changed materially from what was booked as of the end of Q2. So that is the starting point, obviously. And then as Carlos alluded to, it will be a partially debt funding of this transaction in addition. Then on the tax side, obviously, the there's a significant tax loss carryforward that is inherited of this transaction is a acquisition of the shares in Hessnodriga. The nominal value of that is 1,500,000,000.0. Then in addition, you will have the undepreciated tax balances that are residing with the assets and the license in Valhall. When it comes to the cash payment of this, you may recall that we discussed in the Q2 presentation that RPB for 2017 now will be in a tax paying position, And this is expected to be maintained was expected to be maintained in 2018. Then 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 cost. So the tax loss now inherited from Norway will be offsetting these expected tax payments. And obviously, the exact timing of that will depend on various factors. Okay. 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, first quarter. Okay. Thank you. Thank you. We take our next question from Rafal Goutache with Bank of America Merrill Lynch. Yes. Good morning, everyone. Just two questions, please, for 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? And then secondly, just can you clarify back to the tax cash tax paying position at $50 oil, what does that mean in terms of cash tax between now and Johan Sverdrup? K. I can start with with the question around abandonment liability. We we have Mhmm. In our books booked a short term abandonment liability of some 120,000,000 for the current Aker BP share in Valhall and Rhod, which you can then induce to around EUR $216,000,000,000 for the now acquired share in Norway. Long term abandonment is around currently around EUR 1,100,000,000.0 for Hakka BP share, which you can then induce for Hess to around EUR 2,000,000,000. Now it's important to remember that these ARO book liabilities in our books, they are on a pretax basis. So if you take into account the post tax effect, the $0.78 tax rate, you get down to around SEK $4.85. Now the your second question was around the the the again, around the the cash effect of of the tax. And again, it depends on a variety of factors, including to the oil price you assumed. But in a $50 environment, we'd likely extinguish those into probably the second year of Johan Sverdrup. Thank you. This is Ed Peersky speaking. We should also you should also take into account the fact that the field center is the field center was opened in 2013, as Paul has discussed. And we expect the field to produce at least another thirty years. So history tells that reserves tend to increase and production tends to be extended for giant fields like Valhall. So that's the task in hand for Aker BP going forward expect and produce even more from Valhall in the years to come. Thank you. And we take our next question from Kyoto Nielsen with SB1 Markets. Good morning guys and congratulations on the deal. A few questions on CapEx on the acquired fields. Could you give some details on the OpEx level on Valhalla compared to your existing portfolio of fields? And also, what kind of tax profile do you expect going forward for for those fields? Good morning, Taylor. I don't have those numbers exactly 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 a 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 in towards the end of the year, we don't differentiate materially on a per barrel basis for the Valhall and Hodz areas now for 2017. Okay. And then That that being said, there is obviously continuous work ongoing to reduce the OpEx per per barrel. And obviously, there are two factors going into that situation. The first one is the cost itself and the second is the productivity production. And we are working both those factors aggressively. This is, amongst other things, the key denominator. So the West Bank that I just talked about, which will be PDO this year, will contribute extremely positively to the OPEC trial. Your question is regarding CapEx. Essentially, this transaction will ensure that our plans going forward stays firm and as such, no deviation from our existing accounts, but it allows us to pursue those opportunities without delay. And one last question on dividend. Your new dividend guiding of $350,000,000 per year, should that be interpreted as the full year 2018 dividend? Or will that be subject to oil price development through 2019? For answering that question. $3.50 annual dividend will has not been made subject to any specific oil price assumption. So we have a significant headroom investor in our to service that dividend. And it's the first payment will be made for this quarter, q four twenty seventeen, and payable in the first quarter next. Is it completely unlikely that dividend will be above $350,000,000 next year if oil price increases? RKBP this increase is consistent with the dividend policy and guidance from Aker BP. And we have said that when we announced the $260,000,000 policy, we said that we will consider to increase the nominal annual dividend paid when and if Aker BP does new acquisitions. And 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 if when and or if we announce new transactions like the one we announced today. Okay. That's clear. Thank you. Thank you. And we take our next question from Nikky Kuzmanov with Jefferies. Good morning, and congratulations on the deal. Some of the questions I had in my mind have been addressed, but if I may ask them from a slightly different angle. How long the first one is on tax. How long do you think it will take you to work through that 1,500,000,000.0 of tax losses? How many years? And then in relation to that, I assume that there is free cash flow from the two peer readers based at Bauhau. And how does the increase in the dividend, the EUR 100,000,000 gross profit, to that? And then finally, bit of left field, but are there any lessons from Bauhaus, which is a huge midlife mature field, which could be applied to Jochen's Federal in terms of efficiency of operations, not necessarily in the early years, but maybe down the line? You. Morning, Nick. I can start with the tax one and let Paul supplement. 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. And how many years that will take will depend obviously on oil price and other factors. But obviously, once Johan Sverdrup is up and running with extremely low OpEx, that tax loss will be utilized very quickly. Okay. And then your second question related to the cash flow from all our allowance impact on dividend. 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 all out, 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 somebody serves me correctly, we have covered all our dividend payments in cash so far. So 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 expenses 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. And I'm sure that as partner in New Orleans, if we see an opportunity to do so there, we will. And we take our next question from Keith Barcaldar with ABN Yes, 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 Hagar Nygard with SEB. Morning, guys. Yet another question on the tax loss carryforward. Will this be used to reduce the cash tax payment over the operations? Or is it possible to dissolve Hess Norway and get the tax loss carryforward paid out as we have seen in other transactions you have done? And 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 by electorally between Aker BP and Hess without to the best of my knowledge, any competition whatsoever. So it's once again an evidence of the unique position of Aker BP as an operator on the Norwegian Continental ship. Morning, Harvoy. And yes, obviously, there have been cases where it's possible to have the tax loss extinguished upon liquidation. But in either case, we believe that given the tax position where we are today and how the acceptable results for Aker BP will evolve. It's just a matter of timing. Okay. Thank you. Thank you. And gentlemen, it seems we have no further questions at this time. And 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 two months ago to become the leading offshore E and P company. And we also believe that this transaction firmly brings the position to Aker BP as a service tax operator an M and A payer on the Norwegian Continental Shelf. So 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.