Earnings Call: Q1 2021

May 20, 2021

Welcome to the BW Energy Q1 2021 Presentation. Throughout the call, all participants will be in listen only mode, so there's no need to mute your own individual lines. And afterwards, there will be a question and answer session. I'll now hand the floor to our speakers. Welcome to BW Energy's Q1 2021. This presentation will be hosted by our Chief Operating Officer, Lynn Espie our CFO, Knut Etcetera and myself, Karl Arment. I will take you through the operating highlights and then Kymuth will, as usual, go through the financials and then we will have the Q and A session at the end. Onwards to our second slide, the disclaimer. Please note our disclaimer. Quickly on to 3rd slide. Highlights of the quarter. Our EBITDA was $33,000,000 with one lifting completed. We restarted our drilling campaign and we are progressing well with our Hibiscus Rouge development. We completed one listing of 650,000 barrels And we realized the price of $67 per barrel. Average daily production was 13 1,600 barrels per day, Ross. And unfortunately, I'm sure you that follow us have noticed, we are Hibiscus extension appraisal well did not contain hydrocarbons. Again, more will follow on that. We are progressing well with our preparations for the Hibiscus North exploration well. And we are more than 1 year into it, managing and closely monitoring the COVID-nineteen pandemic its impact on operations. And more will follow on that too. Then on to Slide 4. The Unfortunately, the company suffered its first lost time incident in March. This was associated with the reactivation work of Hibiscus alpha and It's of course very regrettable, but it's the first incident for the company so far. We have no incidents. I'm happy to report that no spills to the environment, so that is good. We keep our record on that score. We have implemented certain hardening measures with respect to safety and this is associated with recent piracy cases in the Gulf of Guinea. We do not have a heightened Security Risk Status Act of 2, but we have still selected or elected to implement certain measures to make sure that we stay safe offshore. The COVID-nineteen is still affecting our operations in a significant way. And it's a little bit different in the sense that With respect to our Hibiscus Alpha work, we actually see good capacity and a good response from the supply chain to realize the project. So we see that the capacity is there. With respect to the FPSO, we do see that, Yes, we are able to continue operations, but our ability to carry out modifications and additional work has been significantly affected. And of course, that's been going on for quite some time. And we do not see any imminent change to that situation. But I will cover more the effects of this later in the presentation. Slide 5. There's no significant changes to our production outlook And we are at sea in a time where we will realize significant expansion in our production capacity going forward. On to Slide 6, Dussafu And Slide 7, we had stable operations in the Q1 With a gross production of 1,220,000 barrels equal to 13,600 barrels per day. Our OpEx came in at around $23 per barrel and that's including the $1 in additional COVID costs. The The COVID-nineteen pandemic situation continues to restrict the execution of work on the FPSO. And this is mainly related to the work that is in addition to the operations, I. E, modification work We are managing well to keep the operation going. We have a system of quarantining the crew before departure. It is costing us additional money, but it is operating well. The problem is for all the extra workforce that is difficult to organize and difficult to get continuity work. We will B drilling soon the DTM 7H after we have plugged and abandoned the Hibiscus extension well. And we will then, after completing the GTM 7H, have the hookup and first production from GTM stage on 7H. The first oil from these wells is expected to this something that may be affected by the COVID situation. And I'll talk more about the consequences on the following slide. The full year OpEx is expected to be in the 21 to 24 per barrel bracket. On to Slide 8, the Dussevoo production forecast. We have revised our estimates for 2021 from 5.2000000 to 5.8000000 barrels gross the to 4.7 to 5.7. I'd like you to notice that this is not this. We're not talking about a lost production. We're talking about a deferred production or the potential of a deferred production. And this is mainly related to the COVID situation and the inability to get work executed outside of the day to day operations. And of course also any potential impact that we may have to in our hookup campaign for the DTM-6H and DTM-7H. So that is why we have an increase in the uncertainty of our estimates, 1st and foremost, but also a potential that we may have to defer some production. We're not talking about losing production, but deferring production to later. Otherwise, you see the gross production profile in the upper left hand caption and the expected quarterly gross production in the left hand caption and the listing schedule in the right hand caption. Then on to Slide 9, the Hibiscus extension and the preliminary results of the drilling and the data gathering campaign. The well location was chosen to test both the potential Mupale prospect and the hibiscus prospect. And these were 2 different seismic interpretations of the same area. They well very closely matched the predictions. And we had, let's say, all significant levels came in on prognosis. But unfortunately, the main reservoir sand, the Gamba sand, what was water bearing. And this is a confirmation that This was not a Hibiscus extension, but it was the separate Mupala reservoir order That we found, the Mopala prospect that we had was not very highly rated initially either. And it was the potential of the Hibiscus extension that gave us the, let's say, the interest in drilling this prospect, but that did not come through. This of course has no bearing whatsoever on the Hidiscus 2P and the discovery we made in November 2019. The We still have 46,100,000 barrels that was established by the first Hibiscus exploration well. So So there will be no consequences for the sanctioned hibiscus Rouge development project. The hibiscus Rouge is progressing extremely well. We are currently projecting that we will have first oil ahead of target. And we are now targeting Q4 2022 next year. We have awarded the majority of all contracts and we have received 10 minutes for all the outstanding scope. The The jackup conversion is proving to reduce the investments and time to first oil in line with our expectations. So we are on track $100,000,000 CapEx reduction. And of course, this gives us a very, very attractive project economics for this case of development, the Hibiscus Rouge, where we have a very low cash breakeven of $25 per barrel and a 15% IRR at sub-thirty dollars per barrel. On to Slide 11. The next exploration well we are planning as part of this drilling campaign is the Hibiscus North. Hibiscus North. It's a geological and analog to the niche field that was previously discovered. The Gamba reservoir is the primary target with Dental as a secondary. We Again, aim to test the interpretation of both the legacy seismic and reprocess seismic the well cost is estimated to $18,000,000 with each sidetrack being approximately $9,000,000 each bracket. The potential reserves of Ibertskuz North is 10,000,000 to 14,000,000 barrels. On to Slide 12, the exploration program. We are planning 2 exploration wells per year for the coming 4 years. We have now done significant work in the hibiscus area. With the hibiscus discovery, we have the Mopala failure and then the Hibiscus North that is coming. You see another Hibiscus prospect in this caption, Hibiscus South. The The Hibiscus Alpha is planned to be drilled in nature from the Hibiscus Alpha as this was as this will totally possible from the location. So that's the current plan for the Hibiscus alpha aspect. So the work is ongoing to high grade the next the 8 targets for 2022 and onwards. And we, as you can see from this caption, we have a large number of significant developments to explore. On to Slide 13, the Maramba. The main development of Maramba since last quarter has been the completion of the environmental baseline study, and we are progressing towards an environmental approval from IBAMA. Otherwise, the work is mainly related to our development and optimizing the CapEx and OpEx The prospect again remains, of course, extremely interesting this call with a very large upside in reserves. So that concludes my part, and I will hand over to Knut to cover the financials. Thank you, Karl, and good afternoon, everyone. I will give you some additional information to to the financial figures. First of all, I will also guide you to our website, the investor section on the website where you find all this material, including the earnings tables in XL that might be useful for some of you. Then I move on to the income statement, slide number 16. As you can see, we had a decrease in operating revenue. That is due the 1 lifting that we did in the quarter compared to 2 liftings in Q2 sorry, in Q4. Lifting was done in April, realizing an average price of 66.7 $6,000,000 That is the average dated Brent in March plus a premium. And the company then sold $800,000 in total, and also had an underlift position, giving these revenues of 54.1. On the operating expenses, the Operating expenses were $20,900,000 The production costs in DUSA, who excluding royalties was about $23 per barrel, including about $1,000,000 in extra costs related to COVID, as Karl mentioned. We have some additional costs mostly related to restricted traveling and quarantining listen and so forth. Just as a guidance as well for the Q2, we had scheduled maintenance shutdown in May, and we will also have some reduced production in the second quarter. That is, however, included in the guiding that was just given. Also in the Q2, we will extend the the Hibiscus extension well that was dry. So that is not affecting these numbers. The drilling was performed in the Q2 and we will then expense everything related the second quarter. So EBITDA End of that $33,200,000 And as you can also see, depreciation were somewhat down, that Depreciation are following the barrels sold, and we have fewer barrels sold in the quarter, giving us an operating profit of 17,400,000. We had the agreement that we entered into with BAMCOR in the last quarter, where we're going to increase our working interest to 95%. Everything related to Kudu is expensed, but we're working on the updated business case the business and are looking for a capitalization of Kudu later this year, but so far everything that we have related to Kudu is, is expensed. On the net financial items, the main, let's say exceptional item in the quarter was an increase in the value of our mark to market on an interest rate swap that we have in place. So all the financial items were $3,300,000 And finally, we had a profit of 17.7, taxes of about 10. Those are increasing with the realized oil price, Turn over to the balance sheet on slide 17. The Not much. I've or we have commented on some of the major items. The right of use assets are decreasing in value with depreciation. On the inventory side, there you can see the effect of the of the underlift position. So inventory And trade receivables has also increased a little bit with lifting that we performed in March and where we have received the funds in April. Then the main change in the balance sheet from the first the sorry, from the Q4 to the Q1 was the equity position that has increased mainly because of the equity or the capital raise that we performed in January. So, all in all, this gives us a very solid balance sheet, and we have good liquidity and capital to deploy On Slide 18, a few words to the CapEx investments in assets, as you can see there's still low activity on Maramba before we come to FID. And also on this Afu, we just restarted our activities drilling and we had about $13,000,000 of CapEx in the quarter. That will then increase with increased activities going forward also when we start the conversion of the hibiscus alpha. So we will have somewhat higher CapEx in the second quarter and then the main chunk will come into the 3rd and 4th quarter this year. So we expect additional 140,000,000 the dollars of CapEx this year from Q1. Over to the cash flow situation. We started off at the start of January with 120.6, then we did a capital raise in January, giving us net proceeds of 73.5. We also had a positive operating cash flow of $11,900,000 and then the payments of lease liabilities and the net investments, as I mentioned, giving us a final cash position at the end of the quarter of $184,400,000 So that concludes the financial part of this presentation. And then I move on to the summary to slide 21 with the key value catalysts. First of all, with exploration. So the next target as mentioned in this presentation for the U. S. Gulf Coast North, which is a total separate structure. So we have, again, high hopes for success on the results there. This is totally separate from the DISCUSS extension. And we believe that the data we have from the hold is a flu block now the should give us good targets. And we also have planned up to 8 additional exploration wells spectrum from 2022 to 2026. On the TOR-two Phase 2, the addition of the 6H and 7H wells will give us about 8,000 barrels of additional production later this year. And then we have the Hibiscus Rouge development with an improved target now where first oil is targeted for the Q4 in 2022. Where then total production from the Dussafu will get up to the FPSO same nameplate capacity of 40,000 barrels per day. And the Muramba, as just Carl went through the target FID there is for the Q1 in 2022 with first oil the Annual General Meeting just approved the policy, where the intention is to pay dividends once we are done with our main investment activities, Portis of Fuemurumba, where we can see significant operational cash flows coming out of those the dividend payout ratios data this up to 50% of net profit. So that concludes our presentation today. And then I leave it over for questions. Question. In the queue. And that's from the line of Peter Sjuns Nielsen of SB1 Markets. Please go ahead. Your line is open. Thank you and good afternoon guys. Two questions for me, if I may. First of all, on Slide 5, you show your long term production ambition. I just noticed that it looks like in 2025. The graph you show in the Q1 presentation indicates 4,000 to 5,000 the barrels per day high production compared to what you showed last time. I just wonder what's the difference? It looks like it's Marambod Phase 1 and then what's the changes there? Second question is on the Safuu. And I just wonder, after the slightly disappointing Hibiscus expansion, well, the Have your assessment or risk assessment regarding the north and south prospects changed anything? Thank you. I can maybe take that. This is Lynn Hespi. In regards to the Hibiscus North prospect, It is a complete independent structure than the Hibiscus extension. So, and it's more analogous listen to the Ridgeline, the trend of Rouge. So, it has the results of Hibiscus extension the system. Have not affected the risk profile of the viscous force. So we're still very excited about it. And it's due to be drilled perhaps in about 60 days once we finish completing the DTM-7H, which is our last core 2 development well. And the first question was about peak plateau the slide. We'll have to go back and look at it, but we haven't discounted any of our reserves of any of our projects, Maramba, Ruche, Hibiscus and all that. If there is a little fluctuation perhaps on peak, it might be a little bit of phasing and timing when they all line up. And the from time to time, depending on when we're going to first oil comes on and all that, peaks can be adjusted a little bit up and down, but listen. No change to reserves on any of our assets. And just to add to that, Theodore, We've lowered our guidance somewhat for DUSA II in 2021 2022 the and recover that in 2023 and 2024. So there is no loss in production. It's more a deferred production. And when it comes to Maramba, the reservoir team has been working on the model over the last year and the It looks like the 3 first wells from Phase 1 in Muramba the could give a somewhat better result than previously communicated. So I guess that's answering your question. The Yes, absolutely. Thank you. That's all for me. Thank you. Once again, if there are any further questions on the phones, And whilst we're waiting for any questions to come from the phones, I believe we have with some questions on the webcast. So I'll hand back to our speakers to address that. Yes. We have some questions on the web. You might have answered a little bit of this already, Lynn. The Yeah. The question is, can you please elaborate around the drilling of Hibiscus extension and the seismic used? The Are you more or less optimistic about the next well based on the disappointing results? The Yes. No, the it's drilling these prospects this there's uncertainty involved in all that. And we've had an excellent track record today, 5 for 5 for success and then we've had this disappointing results, but all in, we're 5 or 6, which is still an outstanding track record. The I think industry track record, if you're 1 out of 3 success, that's very good. And we're way above that now. The We're still very enthused about the prospects and we've got a lot of prospects still to drill. So the But in the oil and gas business, there will be setbacks. We will drill dry holes, but I don't think that diminishes our enthusiasm this call for Hibiscus North. And as I said earlier, Hibiscus North is a complete independent prospect structure. The success of failure, hibiscus does not affect it. And hibiscus North, the trend line is more akin to ruche. And as a follow-up to that, another question is what prospects Woodyard target after Hibiscus North. And what is the prospect size? The Well, good question. We've got a number of those candidates vying for that. This is Hibiscus North will be the end of this drilling the next year associated with the development of the Hibiscus development. And we are targeting that time, so next this year to focus in on drilling and exploration well or 2. And the We've got, there's other potential in that Greater Ruche area. There's the Wollwittingen area. There's the Prospect B area as well as others. We haven't narrowed it down. So at this time, we're not ready to guide on which queue. Good. Then we have several questions here related to CapEx. Same ID item combined. Some of them. The question is, what is the CapEx going forward for the company on the the 2 main projects, namely Hibiscus Rouge and Maramba. So first of all, form for Hibiscus Rouge. We, as I mentioned earlier in the presentation. The guiding was at SEK140 1,000,000 from Q1. A little bit of Moramba. And as we've said previously, Moramba is running at 10,000,000 to 12,000,000 CapEx per annum prior to FID, where FID is planned for early 2022. For the total Hibiscus Rouge, the remaining for 2022 and 2023 as well is about $450,000,000 gross. The that includes the remaining Phase of Tortue Phase 2 the and also then the Hibiscus Rouge Phase 1. So our share of that percent to 3.5 service is about $330,000,000 Muramba is still little bit early days. We are still in the phase where we're firming up the CapEx. The what we have as an indication is that we're going to spend about $700,000,000 over the three phases, the, which will then start in 2023 and end up in 2026. The So that's the CapEx. And a related question to that, what kind of additional capital do you need to fund this development? And the answer there is that we're very well funded for Hibiscus Rouge at the current oil price. We have very good operating cash flow. We need some additional the funding to get going with Maramba. And as we previously have communicated, the we are working on an RBL facility. We put that on pause after we the We put all the investments on hold a year ago, and now we have resumed those discussions. So the That's one way forward. We're also looking at the sale and leaseback opportunity that we the for the viscous alpha conversion project, so construction and operating financing. So I think that was it on the CapEx side. The Then we have some other questions, a lot of detailed questions here for the first of all, it's related to revenues. The net lifting, the 650,000 barrel figure, whether that is BWE this year SEK550,000,000 of that was our net lifting. Then we also have the DMO sales, as I mentioned in the presentation, the state profit oil, which gives the total of 800,000. So the answer. It's 550 of the listing to BWE. And then there is a question to Maramba. Are you still discussing revised fiscal terms for Maramba the with the Brazilian government or is it now settled? No, that is still ongoing discussions that we have the if we can get to a marginal field definition of the Marumba field. The And then we have a question, I guess that's a more philosophical question, maybe you can take that call. The How does the company view profitability with the Maramba development? When you look at the recent guiding from the International Energy Agency, where the There seems to be an opinion that oil is not going to be such a huge energy source after 2,050. Well, I think call. We are, of course, aware of the, let's say, currents the political currents and the political initiatives. But BW Energy is specifically geared up with a business model that possibility to quickly get from investment start to monetization the and cash back. And that is also the plan on Moromba. So from the time we start our investment cycle until we have our cash back will be a very, very short time. My expectation is that we will be there within the cycle of maximum 6 years. So the of course, the reserves of Naramba could probably or will probably be there for quite a lot longer. And we expect 2020 year field life with the current development or current reserves the And then there are additional reserves. So if the EIA Estimates are panning out, then obviously the additional reserves will may not be harvested. But we believe still that the initial reserves and what the current development plan. It's geared up to capture. It will be very successful. Good. And then we have a Kudu question, maybe you could continue on that one, Karl. It says, can you talk about what you think the key elements are to making Kudu viable and what progress are you making on these? The Yes. We, as we have said all along, Kudu is definitely a different play than oil developments. The Kudu is gas, Kudu is Sub Sahara Africa, and we believe Vudu can be a very interesting component in the electricity the play in the Sub Sahara region. 1st and foremost, of course, for Namibia itself, currently importing all power from South Africa. But as we know, the South African power system is or is in need of renewal and it needs to be taken away from coal. And we think there will be a drive for, of course renewables, but also there will need to be some gas in addition to that to ensure the stability of the grid. The So we believe, Hudu fits very well into that. And that's our game plan. So it's a very long play. The but we believe the fundamental market is there for the 2 gas. So that's our prime motivation. The process of taking over the field 95% and as soon as we have concluded that transaction, we will immediately start our efforts to define the development plan and the business case. The and there's a number of for those that follow South Africa and Namibia, there's a number of initiatives to build the power, build reliable power in the region to replace the existing power sources that is coal fired. The same here. Will the company in the near future evaluate buying back own shares? The as a principle, we look at buybacks and dividends more or less in the same way. And we the have stated clearly that we have a substantial CapEx program going forward. And our intention the So the intention is then to do, to wait until, just to be in Maramba the is operational, which we then expect in 2024. The so then we have significant operational cash flow to fund both the growth and dividends or buyback. So I think that concludes the questions that I can see here on the web. Then maybe over to you Carl for the final the I think we have covered a lot. So I believe there's nothing much more to say other than thank you for your participation and the interest in the company. And we, of course, look forward to encounters again in the near future. Thank you.