Earnings Call: Q2 2021

Aug 20, 2021

Hello, and welcome to the BW Energy q two twenty twenty one presentation. Throughout the call, all participants will be in a listen only mode, and afterwards, there will be a question and answer session. Today, I'm pleased to present your speakers. Please begin your meeting. A warm welcome to BW Energy's second quarter twenty twenty one presentation. This presentation will be hosted by our Chief Operating Officer, Lynn Espey our Chief Financial Officer, Knut Seterra and myself, Karl Arnitz. I will take you, through the comments on the operations, and Knut will take you through the financials as usual. And then we will all participate in the Q and A that we will have at the end. Please note our disclaimer. The highlights of our second quarter is of course, first and foremost, our production, which was good and stable in the quarter and gave us an EBITDA of NOK47 million with two liftings completed. This resulted in a further strengthening of our cash position to million And more on this will follow, of course, later in the presentation. We successfully completed the DTM 7H production well on time and below budget. We are, as we speak, currently drilling the Hibiscus North exploration well, and we will have some further commentary on that. Other notable things that will be covered in the presentation is the continued need to, manage the COVID pandemic and its impact on operations. And, of course, we will also address the much improved oil price of $70 per barrel. So gave us a very nice result from our 1,100,000 barrels lifted for BWE. The daily average production of 10,500 barrels per day gross will be covered as well as the further Tortue work with the tie in of the DTM 6H and 7H, and of course some further commentary on the Hibiscus Rouge project's progress. BW Energy recorded no LTIs in the second quarter nor any spills to the environment. So as such, we had a good result. COVID nineteen is still affecting the general execution of all work, and in particular the FPSO operations due to quarantine requirements and the strain that puts on our crew and work in general. The security risk at Usafu is considered low, but we have noted some piracy activity continuing in the North in the Gulf Of Guinea and we are doing precautionary measures to be able to, let's say, detect and safe put our people in safety before any pirates can reach us. With respect to our greenhouse gas emissions, the main trust of our savings is of course that we first of all use develop or existing discoveries, but not developed. And so we develop things that haven't been developed yet, but a lot of c o two has been used to find them, of course. And secondly, we repurpose equipment, thereby saving a lot of construction c o two that otherwise would be necessary to develop. Our production outlook remains more or less the same. We have a gross production estimate in our caption to the left and the net production estimate in our caption to the right. These includes the developments that we are currently working on and we have in our portfolio. Then on to Dussafu with some further detailed comments. Operations at Dussafu were stable in the quarter. We did have a production shutdown due to planned maintenance that was previously announced and executed. This gave us a gross production of about almost 1,000,000 barrels equal to 10,500 barrels per day. The combination of COVID costs and the slightly lower barrels gave us a higher OpEx per barrel than previously well, than we thought previously would be the case. The COVID costs are still significant in our operations. So our OpEx per barrel for the second quarter was at approximately $31 per barrel. While we still expect the full year OpEx per barrel to be at about $26 We have revised down our production forecast to the lower band of our or the lower end of our band and to 4.7 approximately EUR 4,700,000.0 gross. The main reason for this is the timing of the tie in work of DTM 6H and 7H. We did have hope earlier that we could progress or expedite the tie in work earlier, but we could not. And in fact, we have rather slipped a little bit more on the timeline compared to our projections. We have also had some effect of the that we have previously reported on, on the delays to the implementation of gas lift capacity increases that we have planned executed. They're still not executed and are significantly delayed and this is affecting our startup efficiency mainly. So we will have some deferred production. We do not expect any, let's say, to recovery or overall production from the Tortue. We are still extremely pleased with the performance of the reservoir, but we will have some deferred production due to this COVID situation that delayed our execution, not only of DTM 6H and 7H, but of the overall Tortue projects compared to our original plans. And of course, also this gas lift issue that I mentioned. The lifting plans have been revised slightly and the revised plan is now that we will have no lifts in the third quarter and two lifts in the fourth quarter to BW Energy. And this is shown in the caption on the bottom right hand side. The completion of the Tortue Phase two development is near, not yet completed. We completed the drilling of DTN7H in July on time and below budget. Again, we're very pleased with the drilling performance. We also are very pleased with the results of our drilling campaign because we encountered a large section of gross pay with a net pay of $3.72 meters. We expect the DTM 7H to be very similar in behavior to our DTM-4H, which is our current best well. So that is a very good outcome and we have good expectations. We're now preparing for the tie in. The subsea installation vessel is expected on-site in September as noted. We have everything planned and repaired and we have also done all the preparations on Adolo to minimize any production impact during the tie in operations. So we expect that to be smooth. Overall, we are quite happy that the Tortue Phase two project CapEx has performed well in the sense that we expect to spend less than we budgeted even though we've had, the interruption caused by the pandemic. So that is a good outcome and a good, let's say, scorecard for the, for all our project people involved in the Tortue Phase two project. On our Hibiscus Rouge development, the main work currently is of course the repurposing we're doing on the jackup. And the jackup is currently in the Dubai Dry Docks World Yard, where they are undertaking the removal of the drilling derrick, drill floor and all the associated equipment. This is this has gone extremely well. We see no major stumbling blocks going forward. We have been able to award all major subcontracts and they're all progressing according to plan. So we consider ourselves to be very well on track to achieve our target of first oil in Q4 twenty twenty two. This is ahead of the original schedule and is again showing that repurposing is a very good way to go to not only reduce investment and time, but of course also to reduce the environmental footprint of the development. The Hibiscus North exploration well we are currently drilling. The Hibiscus North prospect is a very similar prospect geologically to the Ruche field, that's how it shows up on seismic at least and that is what we are now setting out to prove. Our primary target is the Gamba Sands as usual and then we have a secondary target in the dental. We aim to drill down to target, carry out a number of tests. And if we are successful, then of course, we may also consider doing sidetracks. The estimated potential reserves that we are targeting is according to seismic in the region of 10,000,000 to 40,000,000 barrels of oil. We are continuing on our to high grade and define further targets in our exploration program for the Dussafu Block. As we have related previously, we are planning to drill two exploration wells per year for the coming four years. We are mulling over, carrying out a seismic reshoot for the area and we are currently evaluating whether this would give us, let's say, further, data that could be useful in defining our prospects. And, we are doing the cost benefit of this as we speak. But, of course, we are extremely pleased with the number of prospects we have and the number of targets that we have going forward. Then on to Moramba. Two positive developments on Moramba in this quarter. First of all, we have gotten very positive indications from the authorities related to the marginal field status. We have mentioned this before and the main, let's say, main improvement in this would be of course a reduced royalty rate. We have, as I said, positive indications and it seems like Maramba would fit the new definition of a marginal field in the Brazil regulatory. The second positive is that we have carried out a pre FEED to look at the feasibility of repurposing the Polvo FPSO in VW Offshore's fleet that have just come off contract on the nearby Polvo field. And, the conclusion is that this is suitable for the Maromba development, with, let's say, fairly reasonable small changes to its original design, it will be more a repair job than a full reconversion job, which is of course extremely important for the project economics. Otherwise, we are progressing on our environmental impact assessment with the environmental regulator, IBMA, and we are continuing to optimize our program with CapEx, OpEx and time to first oil. We are still on track to get to final investment decision in the course of first quarter twenty twenty two. And we are still seeing the possibility of a breakeven below $40 per oil while achieving 15% IRR, which is our target. And this is, of course, including the remaining acquisition costs that are deferred until first drilling and first production. Yes. Thank you, Karl. I will then take you through the Q2 financials and the highlights there. First, I will draw your attention to a change in the ownership of the Dussafu license that happened late in the second quarter, where Panoro Energy acquired the 10% interest working interest of Tullow. As part of that transaction, we settled the outstanding disputed amount that we had Tullow for their original back end right. So we successfully completed this settlement in respect of the outstanding disputed amounts and its collection in accordance with our previous expectations and recognized receivable. So now the ownership is 73.5% by BW Energy as previously, and Panoro Energy now owns 17.5%, and the rest is then owned by the Gabonese oil company, unchanged. In addition to that, in early Q3, we closed an agreement with Namcor, that is the National Petroleum Corporation of Namibia, where we increased our ownership from 56% to 95% and completed a farm in and carry agreement. So this for this increase in ownership, VW QDU paid $4,000,000 at completion of that transaction. But again, it was done in Q3, and it will then impact our Q3 financials as not part of the numbers that we're showing today. So the income statement. We had an EBITDA for the second quarter of $46,900,000 up from $33,200,000 in the first quarter of twenty twenty one, mainly due to increased oil sales and realized oil price. As Karl mentioned, we had two liftings in the second quarter, which took our revenue from $54,000,000 up to close to $90,000,000 So we're very pleased with that result. We have here also a few comments on, let's say, major deviations from the first to the second quarter. So you can also see on depreciations, they are going up with higher sales. The right of use assets, the depreciation on those are reflecting production. So that depreciation is a little bit lower, but still giving us a very good operating profit of $28,000,000 in the quarter. And as you might remember, we have an interest rate swap that fluctuates with mark to market values. In the second quarter, there was a negative value. It's still positive on the on, let's say, year to date, but it was negative in the quarter. So the profit before tax ended at $24,000,000 And after tax, that taxes were a little bit lower, a tad lower in the quarter. That follows more production. So we ended up with a net profit for the second quarter of $15,500,000 To the balance sheet, we there are no major movements. There is an increase in tangible and intangible assets mainly due to the to the the final production well that has been capitalized and also the Hibiscus extension well has been been capitalized and and less than depreciation. We also had a slight increase in receivables from JV partners that were was offset by the collection of the old receivable from Tullow that I mentioned initially. On the on the asset retirement obligation, there's a slight increase also again due to the addition of of the DTM seven h well, And and there is a large increase in in trade and other payables. That's where you also see the, let's say, increased activity on on on the project on the due to the ongoing drilling campaign and also to the overlift position. We have an overlift position of 300,000 barrels at the end of the quarter. So you can see that the trade and other payables increased by $41,800,000 still giving us a very, very solid balance sheet with total equity of $540,000,000 to the total assets of $8.90 The cash flow statement, we started off with a very good and solid cash position and also had a very good operating cash flow in the quarter. We have two liftings. One of those was paid in the quarter. The second one was then paid in July, so it's not included in these numbers. So operating cash flow was $62,800,000 And the net investment still at a fairly low level. We expect that to increase a lot now in Q3 and Q4, where we will, in the second half of twenty twenty one, have approximately $120,000,000 to $130,000,000 in CapEx. Net financing activities, that's lease obligations. We record the bareboat lease for the VWO dolo, which then gave us $216,500,000 in cash at the end of the quarter. So we, in general, see a very strong operating cash flow, mainly then reflecting the higher realized oil price and the two liftings and that the company is well capitalized for the upcoming investment activities with a robust balance sheet and no external debt. Then we go over to the outlook statement. So on the exploration side, we are looking forward to the results from Hibiscus North. Hopefully, we have some at least preliminary results in a week or two. Then on the TOR two Phase two, we will then tie in the two remaining wells in Q4 and increase production by approximately 8,000 barrels of oil per day in the peak gross production. And then later on in 2022, we will get to the first oil on the Hibiscus Rouge development with where the jackup then will be installed and get into production. And then we really see the uplift in oil production, where production is expected to go up to the nameplate capacity of the FPSO, which is about 40,000 barrels of oil per day. And on Maramba, we are working hard on the plans, as Karl mentioned, with the target FID in Q1 twenty twenty two and first oil expected in 2024. And with, let's say, Hibiscus Rouge on stream in 2022, 2023 and Maramba in 2024, the company will then generate significant cash flows and intends then to start to pay dividends when those two projects have been finalized. So we are generating already significant positive cash flows at current oil price levels and with no debt and a solid capital base following the also the capital raise that we did earlier this year. We are well funded for our accretive investment projects in Dussafu and Maramba and maybe other targets as well. And we expect them to generate significant value for our shareholders going forward. So by that, I our presentation is concluded, and we will then go over to the Q and A section of this webcast. We have a question from the line of Theodore Sven Nielsen from Sberbank One Markets. Please go ahead. Good afternoon, Karl and Kurzan. Thanks for taking my questions, and thank you for for the update. Have three questions, if I may. First of all, obviously, this is North. We're looking forward to see the results. I just wonder, is it possible with this one well to firm up the top end of the 10,000,000 to 40,000,000 barrels pre drill resource range? Do you need to build more wells to actually firm up the top line of the slide or discovery? And second question is just on Slide five, on the illustration production, it looks like we have increased the 2023 expectations for 2Q slightly compared to what you presented in the first quarter report. Can you just please confirm that? Looks like 2023 to Q now is higher. And then a final question on your note that there will be no listings in third quarter. I guess then we should also model close to zero revenue in third quarter, of course, also then much higher revenue in Q4, just to clarify. That's all from me. Okay. Maybe Lynn takes the first question. Sure. Thank you, Carl. Hello, everybody. This is Lynn Espey. The the question related to the Hibiscus North. And as I understood the question, would it just take the one well to fully appraise up to potentially 40,000,000 barrels reserves in the Hibiscus North accumulation? And good question. 40,000,000 is in in the kind of the upper range of what we're we're hoping to achieve. The right now, the wells planned is a single penetration, but we do have up to two appraisal sidetracks associated with that well. You know, it is conceivable if we're if we're in the fortunate position that it turns out to be on the upper limit. Maybe we might need a a additional standalone expiration well. But right now, where we have the structure and model, we don't think that's required, and we think the single penetration to appraisal sidetracks will be sufficient. We also have the, you know, option to drill another appraisal sidetrack as well if if need be. But, hopefully, that answers your question. Okay. Second part, I think Yeah. I can can take the second question. Very well spotted, Theodore. Not that we're trying to hide anything, but you see it on Slide nine, where we if you look at Dussafu production forecast, that's where the changes compared to the previous quarter. And as Karl mentioned, the production the lower production now is not lost, but it's deferred. So if you look at the 2021 and 2022, that's a tad lower than in the previous presentation, and it's higher in 2023 and 2024. And I guess that's what you also see accumulated on the Slide five that you mentioned. And to your final question on the liftings in Q3, which is just one lifting for the government that will take place now in September. So there will be no liftings for the partnership in Q3 and two in Q4. So for Q3, we will have, of course, a lot lower revenue. We only have the DMO sales that we it's been quite steady, around 100,000 barrels in the previous quarters, and I expect it to be the same in Q3. And then it's the state profit oil that we will record as revenues. Okay. Thank you. That's all clear. Thanks. Thank you. Then we if there is nothing more on the line, operator, we have a few on the web. We don't have any further audio questions? Okay. Then we'll go over to the web questions. There is one question there about the Hibiscus extension well and the capitalization of that well compared to pure expensing. So the cost has been capitalized in spite of that well-being water bearing. So we drilled the Hebim-one prospect test well to test the formations and also to find out the more the size of the hibiscus area. And in order to test the concept, we had to drill the second well. And even if it was water bearing, it gave us valuable interpretation of the, let's say, of the area and enables us to better define the structure and stratigraphy and extent of the hydrocarbon resource in that portion of the Dussafu field. So it's not out of the normal. It's not an aggressive approach to capitalize. This is how it is done in the E and P world, and you can also find other companies that have done the same. Then we have another question related to Hibiscus North and the status of the drilling. How we follow that and when we might have some news. Maybe you can take that one, Lin. Sorry, yes. Could you repeat the question there, Hibiscus North and the current drilling operations and when to expect something and if you can say something about the progress? Yeah. Sure. Yes. We're very close, so we expect to penetrate the the Gamba probably within the week or so. Wells carried on. We've had a little bit of drilling challenges with the well, and we're carrying through with that. But we're progressing through. And, yeah, and again, very near, perhaps in a week's time or so, we'll we'll know some information. And I'm sure, Knut, you'll, share it with, all the investors in due course. Yes. Of course. When we have preliminary results, we will inform the market, about the status. Okay. Then we have another question. Maybe you could elaborate a little bit, Karl, on we say in the presentation that we're also looking at other potential investments on the prospect M and A side, if it's something to say there about specific projects or areas of interest? Well, normally, we don't like to be very specific on our M and A activities and what targets we have. But it's I mean, suffice to say that there's a fairly high strategic activity in the market where portfolios are rejigged and we are constantly sifting through 2,030 prospects for brownfield investments and M and A. So there's a high activity. Our main targets is of course West Africa. We're West Africa focused. We are Brazil focused. But I would say there's also activities in other markets. So we're currently, we're also looking at plays in Southeast Asia that are interesting. So we have a high activity. We have hired people and we have beefed up our subsurface team quite significantly over the the last year. So, yeah, we're looking at a lot. But I don't want to go into specifics as to what what name and name names. There is a follow-up there, Karl, about how we look at the market at the moment and how these potential opportunities compare to in investments in organic growth. Well, that is, of course, the very tight measure that we put on everything we look at, and that is that it needs to be better. If it is to warrant a look, it needs to look better and have good potential that is better than what we have currently in our portfolio, which is quite tricky because we consider our portfolio to be world class with Dussafu and Moramba. So yes, that is a tricky thing to live up to for the prospects that we're looking at. And, well, we we still see a lot. We still look into a lot. But, of course, a deal is a deal. It always takes a little bit to to land these things there. This is what I've always called white elephant hunting. They are quite rare beasts. Good. And then there is a question to you, Lynn, maybe on the production in Q2 that was a little bit on the lower side and whether that is an issue with the decline in the well productivity and if we can say something about production in per day in Q3. Yeah. The actually, q two production was always forecast to be the lowest quarter of the year. It has also a scheduled shutdown maintenance in it as well. And our annual production forecast is is is skewed because we're having two additional wells come online in the in the second half or it's coming on in the fourth quarter. So we're always gonna have a lumpy production forecast. But, anyway, q two was always gonna be the lowest quarter, and and we should hopefully see it ramped up in in the second half. I think, originally, we were hoping to get those wheels online at the end of q three, but with delays securing a new installation vessel, we've had some operational difficulties there. Our original installation, offshore installation contractor decided to get out of business. So we've had to move to find a secure an alternate company contractor, which we have done and still working through some scheduling, but they're they're scheduled to come out as we've shipped them here in September with bringing those two wells online in q four. So, I mean, this COVID has made operational planning a bit challenging, but, you know, it's a bit choppy. But, you know, I think we're making progress. And so, anyway, hopefully, that provides a little bit of color on our our production profile this year. I think it's important to underline that this is deferred, not lost production. It's delays in getting the production. That's a deferment. And on the question of whether we believe this is, you know, on the reservoir performance, maybe you want to expand a little bit on that, Lynn, as well. Yeah. Sure. The we there is no anticipated loss of reserves. As you said, it's just deferred reserves, you know, this is all we've worked this through with our third party reserve auditors as well. It's just it's just pushing out the production. But in terms of the reservoir, I think we're still very excited, very pleased with our reservoir performance, the world class reservoir, the Gamba formation. And what we, you know, what we have experienced, we might you know, we need a little bit more gas lift to produce the wells, but that's within expectations, the top the range of expectations that we had. But like with everything, you know, just traveling around the world, moving people and equipment in this COVID environment is, you know, has its challenges. Eventually, it all happens, but things can be a little bit choppy. Okay. And then we have a question related to CapEx split in H1 between TOR2 Phase II exploration and Hibiscus Rouge development. I don't have all the details in front of me, but the main I mean, it was pretty low in the first place, which means that most of the CapEx is coming in the second half. So it was Tortue Phase two and the exploration well, as mentioned, that has been capitalized on Hibiscus Rouge. It's a lot of engineering in hours, but it will be a lot, of course, now with drilling in July. We drilled the seven H that will all be capitalized for the Hibiscus Roost development. And yes, we'll get back to that in the third and fourth quarter as well. We can maybe prepare some more details. And then we have a final question about whether we have any updates on QDU. I mentioned farm in to 95%, but maybe, Karl, you could give us an update on the project. Well, very quickly, we are now in the process of updating our business plan for Kugu. We are very pleased to have taken over 95% with a 5% carry for the government. This, let's say, sets our hands free to really move this forward. We're still very comfortable with the possibility of using this indigenous gas for Namibia and maybe also to provide electricity or gas, whatever is the best plan to neighbors and to substantial mining industry that we have in this area. So we are now sharpening our pens and starting our work on the business plan. And as soon as we have established a proper business plan, we will probably give some more updates to the market as to what direction we're taking this. Okay. That concludes the questions on the web. So maybe you should round it off, Karl. Okay. I well, I guess all that is left for me to say is thank you all for participating in this quarterly update. And we thank you all for listening in, and we thank everybody for their care and attention in preparing questions. Thank you. This concludes the conference call. Thank you all for attending. You may now disconnect your lines.