Earnings Call: Q4 2019

Feb 25, 2020

Welcome to Norreco's Fourth Quarter Presentation. And I'm here today with Johan Sherlo, the CFO of the company and Arthur Sonnesen, the COO. And yeah, we'll just move straightforward. Ewen? Dennis Altle Sorensen. Thank you very much, and a very warm welcome and good morning to all of you here today. We are here to present a new quarter, even though we are well into the next one and a new year. And it's been another quarter of, I would say, excitement, different from the previous quarter, but yet strong results as we as we go along. So let's have a look at the the headlines and some of the key numbers. You can see them on here. Starting out with a production of 31,700 barrels oil equivalent per day on an average throughout the quarter, and which is in line with what we guided on, which was between 3133. So looking at the EBITDA, the adjusted EBITDA of 116, operating cash flow of 87 and a net profit of of 44. On the financing side, we were out and got a convertible bond secured. It was issued, $175,000,000 US dollars with quite a broad and international interest, and it was substantially oversubscribed. Also, it comes to the lending part and the RBL facility, we renegotiated some terms and got an improvement in the availability of the lending facility of US30 million dollars On the operations side, we see that there's been continuous maintenance and activities in terms of wells, stimulations, and so on and so forth, which, is keeping going Halston and Daum running, in the terms we expect, whilst Chira, on the other side, is completely shut in and has reached a so called safe state of operation. I'll get back to the operational details in a minute. So if we take the production first, break that down into the different hubs, you can see the comparison here between the previous quarter and the current quarter. So the big difference is, needless to say, it's Tiara. And this is according to the plan. Tiara is shut in. It means that the production ceased in, September. And, now the this current state of Teela is that it has been depressurized. It has been cleaned, purged, made hydrocarbon free, and it is in so called safe state, and it's moving forward with some activities we will see, a little bit later on. Halston is in line with what we expected, so is Dan, and so is GOLM. Many maintenance campaigns, going on. Some of them extending a bit more than anticipated, but yet we are able to deliver, on the said production. GOLM, I want to highlight GOLM, which has also undergone quite a bit of heavy maintenance during the quarter. And in December, it actually sort of came up with a record high operational efficiency of close to 97%. If we look forward, the same type of activities for the fields will plan to take place, similar level, you know, with continuous, maintenance programs, workovers, well interventions, and so on and so forth. Nothing different from, from last year into 2020, And we we foresee that the expected production for also q one twenty twenty is going to be, pretty much the same as the previous quarter, and we would like to to offer a a guiding on thirty one thousand to thirty three thousand barrels oil equivalent per day on an average. So that was production. A few more words on the activities. If we look at the overall operational efficiency for the assets, as you can see in the annual or quarterly report as well, you can see it's maybe on the low side, in the mid low 80s, but yet, we are able to deliver on the set production. On Halfdan, which is the biggest and most important producer, with stimulation of quite a lot of the key wells, bringing those back on production, maintaining the production level that we expect. In addition to that, there has been some temporary shutting in of the water production water injection system to maintain that, and that was also fully put back in production again. And, of course, there's there's quite a bit of bit of independency between Dan and Halfdan, and hence, if there's planned one maintenance, shut on the other one, it may have then an impact on on the other. On Dhan, producing 8.6, over the, of the quarter, Also, planned maintenance and several work of activities on the wells to keep them up either for production purposes or for water injection and securing the water capacity that we need for for maintaining the production of the wells. On Gome, which has the biggest maintenance campaign attached to it this year, also including some valves, pipeline piggings and so on and so forth, It took a little bit longer than planned, but still December was a very, very good month and we hope to also see that into the future with an operating efficiency of close to 97%. So quite a bit of activity and that is also expected to continue into 2020. Tiara. Tiara is an important project for NOECO. It's an important project for the Danish underground consortium. Also an important project for Denmark. And during the quarter, progress went according to plan. Now we are sort of above global and progress is around just above 50%. And fabrication is going on at different sites. This picture here is from Lagardos in Spain for the jackets, for the accommodation unit and also for the processing unit. So as you can see here, 2020 is going to be a year of removing the old big production platforms, the TI East and TI West, from the North Sea, and and also the associated jackets, whereby 2021 is going to be dominated by putting things in place again. Both jackets, in the early part of the year, and and then also, well, in in 2020, late part of the year, early into 2021. And 2021 is then going to put put the the wellhead and riser modules earlier in the year and later in the year, the the processing module, which is then being fabricated in Bataan in Indonesia. So this is moving forward. It's in line with the plan, and it's in line also with the budget. If we take a look at the reserves and the reserves maturation, which is really, I think, at the heart of, NOECO's value proposal and look at it with sort of the large optics, we have talked we're talking about, the in place reserves. And the in place reserves is a is a is a massive number. And, we also know that the, the recovery factor on the Danish continental shelf is somewhat lower, which gives us a compared to maybe the Norwegian benchmarks, which is also a fantastic opportunity to really to work on that. And in addition to the 2P reserves that we have communicated earlier, we have a number of continued resources of different maturity. And our purpose, together with the operator and the joint venture, is to move those, to continue to mature them and move them into the 2P domain and thereafter into producing barrels. In this category here, we have a number of projects. We are going to specify one today and show you some some details about it. It's linked to Halston. And Halston is not just sort of one of the the biggest and and highest producers, but it's also the one with the lowest recovery factor and the biggest potential, of our DUC portfolio. So in that sense, it's of particular importance to bring out projects and mature those, for the Halfdan asset. So what does that look like? Here are the Halfdan project. It's going to be a an unmanned tie in, an unplatform to parts of the system. It's oil project. Very, I would say, low cost development, high value. Net to Noreco, we're talking about close to 15,000,000 barrels with a significant upside. And in Orecca, we always, always pursue the upside. FID early next year and first oil is expected during 2023. So this is a project that is already passing the concept select and is about to start the FEED phase in these days. So it is really moving forward, and we're looking forward to that. Two other projects. Example for that sort of bucket of mature projects, one oil and one gas. And as you can see, have a similar character when it comes to low cost and high value projects. And if you look at sum these up, we're looking at projects of more than 40,000,000 barrels net No Echo coming on over the next two to three years. We're looking at production at 10,000 to 12,000 barrels a day net to No Echo coming on over the next two to three to four years. So if you put that together, it may look like something like that. And there are three things to, I think, to pay note of, in this presentation. One is that with what we have and what is sanctioned driven by Chile coming back in 2022, we are looking at a significant ramp up of our production level from the 30 ish level we are today to the 50 mark. Secondly, the mature project that we have in our portfolio that currently we and the joint venture and the operator is working on will then take us the next three to four years at the 50 mark, if not above. And if you think one or slides back out of the 130 plus continued resources. We have enough projects there to keep us at the 50 mark for the rest of the decade. So with that, I'll, I'll leave the word to you and, to talk about the, the financials. Perfect. Thank you, Atlov. So what I'd like to do now is just move on to talk about the oh, sorry. Talk about the the financial performance of the business during the during the quarter. So as we as Atla mentioned and as we've talked about before, this is the first quarter that truly reflects our ownership of the DUC assets, and it's also the first quarter that truly reflects the shut in of Tyra for the for the period. I think what we what we have, you know, witnessed as a company is the fact that on the basis of the strong underlying asset performance coupled with the risk mitigation structures that we have in place with, with Shell and that we've put on, in the market in terms of price hedging, we've had strong financial results. So just to to look at some of those highlights, we've generated material revenue. So production was 31,700 barrels a day, and we had a realized price of $77 for liquids. And that was significantly above where the Brent market price was during the period, and that's a result of the price hedging arrangements that we put in place with Shell in October 2018. And that allowed us to generate hydrocarbon revenue of roughly a $172,000,000. We also generated significant profitability. So when we look at, our measure of adjusted EBITDA, which incorporates the value of the volume floor that we have with Shell, we generated a $116,000,000 of of EBITDA on that basis. And then finally, on this page, we also delivered significant cash flow generation. So our cash flow from operations was $87,000,000. And as Atla mentioned during the period, we also issued a senior unsecured note, which isn't actually convertible, but it's a senior unsecured note into the market which generated significant institutional investor interest and has supported our financing position as we exit 2019 with $286,000,000 of cash on the balance sheet. Moving on to look at our production and sales and how that translated to to revenue. As we've talked about, our our production was 31,700 barrels a day. That reflects the fact that Tyre was shut in for the full quarter. We experienced a small underlift position during the period, roughly 2,200 barrels, which results in us, having sold effectively 29 and a half thousand barrels during the period. As I mentioned before, from a hedging perspective, our realized liquids price is significantly above, the the market. So the dated Brent, average during the quarter was 62 and a half dollars per barrel, and our realized price was 77. That's largely a function of the hedging that we put in place in October 2018, which was in a, I think it's fair to say, a different oil price environment that was that was more supportive. But it also reflects the fact that after Tyre was shut in, we have experienced some positive development of the DUC premium, which is the premium that our Brent receives. And and and also we have benefited from the rollover of hedges from previous periods that were at higher prices. Bringing all those components together, our revenue was a $172,000,000. What I wanted to do briefly also was just touch on our production expenses during the quarter because there's a a couple of elements there that it's worthwhile just, just focusing on particularly, as it refers to one off items. So our production expenses related to the direct lifting and transportation of our production was $72,000,000, which equates to roughly $24.7 per barrel during the period. And that is again, as I think the the messages from a lot of the financials, that that reflects the fact that during this period, Tyra was fully shut in. Once Tyra is back on stream, we expect the that that measure of field operating cost to decrease to roughly $12 $12 a barrel. And that's what we see from from our perspective as we go through the the Tyro redevelopment. That that's what we see as being our recurring level of OpEx. On top of that in q four, there are some adjustments that it's worthwhile just touching on. Based on the methodology that we set out in q for how we are measuring, internally our, our unit OpEx per field, we have excluded changes in inventory and costs or benefits associated with an under or overlift position. During q four, we also had some accruals and, adjustments based on timing. So we received, effectively billings that weren't, or charges were authorized that weren't billed during the period. And, also, we adjusted some of the costs between q three and q four. But I think the main I think the main point to touch on is probably just the exceptional costs, of $22,000,000 at the bottom here. So these are these are one off charges related to to the DUC. Roughly $11,000,000 of that, was, exceptional related to restructuring, and that's an exercise that's being carried out by Total to make sure that the organization is is fit for purpose as we go through the Tyra redevelopment and also once Tyra is back on stream. That's, related to q four only. We don't expect it to be recurring. And I think similarly, we expect to see a benefit from that, frankly, as we go through the, you know, the forward period in terms of where our level of OpEx is with an organization that is set at the right size and with the right people. In addition to that, we also had a a stock scrap expense, which recognized the fact that Total wrote down the value of, some inventory in line with net realizable value net realizable value. And I think that's something that is, you know, it's fundamentally an accounting change that is, to bring the value that we see in line with what is reported in our accounts. But I think the main main message to take away from this is that as we look at what we think our, our OpEx will be going forward, we're comfortable with the with with the level around the, around the top, so the field operating cost which is recurring. Moving on to the hedging. I think everybody here is probably aware, that we have in place some pretty material hedging arrangements with with Shell and also now in the market. What that's enabled us to do is generate a or or realize a higher, price than has been in the market. So we have a set of price hedging arrangements that were put in place in in October 2018. And you can see when we look at q one twenty twenty and then 2020 overall that we expect to continue to benefit from that relative to where the price is in the market today throughout the remainder of 2020. From 2021 onwards, we've put in place additional hedging in line with the requirements of our RBL facility, which has a hedging requirement as part of it, which is 50%, 40%, and 30% of one, two, and three year forward production, and we're fully in compliance, compliance with that. We also have the liquids protection agreement, which essentially sets a minimum level of oil production that will be compensated for commercially. That during the period, we recognized a contribution from that agreement of $33,000,000. Oh, sorry. Do want to No. I want to say something. Oh, sorry. Did you say something about So the the actually, sorry. Just to just to finish off the point on the on the volume agreement, We have in place a a volume protection agreement with Shell, which which is the minimum level of oil production that will be compensated for. We recognized $33,000,000 for that in q four. And based on our internal estimates of production, we expect to continue to benefit from that through 2020. One other point to note, in terms of where our forward, price hedging portfolio is relative to the price that we realize. The prices that we outline here are based on dated Brent. So effectively, it's the market the market price for Brent. The DUC oil production sells at a premium to a premium to to to Brent. During the quarter, it's been roughly, I mean, it's roughly $1.50 per barrel. And I think we have experienced some positive uplift in that premium as a result of Tyra coming off stream, and effectively an improvement in the quality of the of the of the blend. So I think what what that means is that from a forward price perspective, the price that we're expected to realize, in our accounts is likely to be higher than where we are from our price hedging portfolio. Moving on to our financial statements, and I think the the key thing here is really just to highlight some, some key areas of focus. For adjusted EBITDA, our reported EBITDA is is is $59,000,000, and there are some adjustments to that that we make to bring that more in line with with what we see as the underlying reality of the performance of the business in terms of what we have compensated for commercially. So the benefit for us from the Shell volume guarantee was $33,000,000 during the quarter, and that doesn't, flow through our p and l because it's it's measured as a reduction in the purchase price, so it shows up in our cash flow statement. But I think, again, it's it's fundamentally related to the underlying performance of the business, and it's something that we'll continue to to see throughout 2020. We've also excluded the the exceptional DUC operating costs, so that's the stock scrap and the the restructuring, and a small proportion of transaction costs related to our bond issue and our and our RBL. And that leads us to, an adjusted EBITDA number of a $116,000,000 for for q four. Our net result for the period was $44,000,000. And I think one thing just to highlight there is that during, during q four, we have adopted hedge accounting. So that will be the policy going forward that effectively allows us to recognize the benefit of realized hedges as they roll off as part of our revenue. But the change in value of our hedge book, as we look forward comes through, the other comprehensive income line. And I think one other point just to touch on here, cash flow from financing, that reflects the fact that we have, we issued a bond during the during the quarter, which we'll touch on in the next page, but a $175,000,000 of of external financing from institutional international investors. And then finally for me, an overview of our capital structure. So our RBL continues to be drawn to $746,000,000. As I mentioned, we issued the NOR 14 bond, during the quarter. That's a $175,000,000 instrument with a coupon of 9% and a tenor of, six and a half years. That was strongly oversubscribed, as part of the issue, which I think is good verification of the Norco story from a debt perspective. I think it also allowed us to, I think market is perhaps not the right word, but certainly meet additional investors and build on the story in terms of our public perception. And we have used the proceeds or will continue to use the proceeds to strengthen our financial position and also provide us with additional flexibility as we look to sanction projects like, for example, Haftan North that, we see as being value additive, as the opportunities as the opportunities arise. And then finally, from a net interest bearing debt perspective, we talked about this last quarter, but there is a distinction to be made between how we look at that on an accounting basis and how we look at that from a covenant perspective. We have a convertible bond, which has a forced or a mandatory conversion to equity. It also has a number of equity like features and has the option for us to pay interest on a pick basis. As a result of that, from a covenant perspective, we exclude the convert from our, from our net debt net debt calculation when we're measuring our leverage going forward. And as a result of that, our effectively our covenant net debt or the way that we looked at net debt internally was $661,000,000 at the end of the quarter on the basis of our $286,000,000 of cash. So I think, again, just to just to summarize, I think it's been a it's been a strong quarter of financial performance driven by both the agreements that we have in place, but also the underlying performance of the assets. And we exit the quarter in a strong financial position as we move into the the the Tyre redevelopment in 2020. Time for some Q and A. Of course. Taylor Rains from Spadmark Gold Markets. Your product guidance for Q1. Could you say something about your full year expect expectation for 2020? Will that also be in the 31 to 33 range? Think, Al, do you want to comment on that one for production? Sure. So our we are, at the moment, only guiding on only guiding on q one. I think it's fair to say that the during the period based on, the operations that we've seen, we've seen strong performance in in in in q one, so far. I think '31 to '33 is a is a good level for for q one. I think, as you would expect, there is a a small natural decline on the portfolio. So overall, we're not expecting any material changes, but I think we're only guiding specifically on Q1 at the moment. Okay. And then just on the TEEDA redevelopment, in light of the the pretty soft gas prices we're seeing in Europe, has that changed anything around how you think around the the Tyra redevelopment? No. I think we still mean, I think fundamentally, we still see the Tyra redevelopment as being both a key project for for us and for Denmark. I think it the economics are, you know, are still positive. Total has come out and said that the project remains on time and and on budget. I think also if we look at the the gas prices, given we're two years away from from first production, I think there's plenty of scope for the market to to move. But fundamentally, there's been no change in our no change in our view on on Tyra over the last day as a result of the current market environment. Thank you. Okay. So we have one question online. Yes. It's relating to future capital allocation. After the startup of TYRA in 2022, how do you intend to balance investments and projects with potential dividends? Should investors expect a combination? I think we will in today's environment, we will focus on substantial dividends as part of the free cash flow. And I think we haven't gone out with a fixed mix of that. But it's a bit early days, but I would be surprised if dividends would not be much higher than investments. Okay. Thank you, everybody.