Earnings Call: Q3 2020

Nov 18, 2020

Ladies and gentlemen, thank you for standing by. I am Emma, your Chorus Call operator. Welcome and thank you for joining the BW Energy Q3 twenty twenty Presentation. Please go ahead. Welcome to this BW Energy update for third quarter twenty twenty. This update will be hosted by our CFO, Knut Seter our COO, Lynn Espe and myself, Karl Arnet. I then go on to the second slide. Please note our disclaimer. Then on to the third slide, our highlights. Our EBITDA for the quarter stood at €22,200,000 with one lifting completed. Our cash position remains strong at USD 145,000,000. We are closely monitoring the COVID restrictions. We are hoping to restart our investment projects, and we will do so as soon as the COVID restrictions are of such a nature that we can efficiently undertake our projects. And I'll come back to that in more detail. We are planning for a restart of the Tortue Phase two drilling and tie in operations, and we're also progressing on Hibiscus route. And of course, we acquired jack ups to undertake that development and significantly reduce costs. So then on to Slide four. We are tracking very well with respect to our ESG metrics. We are continuing to focus on resource efficient developments based on reusing assets and our objective is just such an example. This will, of course, reduce significantly the greenhouse gas emissions associated with our development. We are continuing to support local communities where we operate, namely Gabon, Brazil, and Namibia, in local initiatives. Our lost time incident rate was zero for the third quarter, and, we were equally doing equally well on our environmental incidents. We had zero also in the third quarter. Then on to Slide five, the prediction of future energy demand and oil price in particular has always carried a lot of uncertainty. And we saw just from the start of 2020 till today, we've seen a significant shift in the forward curve of oil. It's basically gone extremely flat. Our response to this challenge is really how it's really the company's DNA and how we have been set up. We aim to be robust at these levels of oil price and have excellent returns on the current Brent forward curve. We are focusing on further reducing, the breakeven by, utilizing opportunities like, our asset jackup, for asset purchase. And we believe that fundamentally cost efficient oil and gas is to remain a substantial part of the energy mix in the foreseeable future. Then on to some more detailed commentaries on our assets, and I will then go on to first Slide six, Dusepu and directly on to Slide seven. We had stable operational performance in the quarter. In Q3, we produced 1,420,000 barrels, which is approximately 15,005 barrels per day gross. Our OpEx came down per barrel from 21 in 2019 to nineteen point six. But we do expect to see some erosion of that for the full year. We hoped to get to seventeen to eighteen per barrel, but we are probably going to track closer to $19 And of course, it's the impact of the extended COVID-nineteen restrictions and associated costs. And we've also seen some, impact of complying of Gabon complying with OPEC quotas. Then on Slide eight, restart of the TORQ development. And we are closely, as I said initially, we are closely monitoring the COVID nineteen restrictions and their effect on execution. We do today have significant restrictions in moving people, in particular, across boundaries with a lot of quarantine measures being implemented, understandably by various nations, and this makes efficient, greater execution extremely difficult. We have put LOI in place for the continued use of the Born Normand drilling rig, and we are planning for a tentative restart in March 2021. We do still expect the project, cross project investment for the TOR-two Phase two to be around $238,000,000 significantly reduced from the original budget of $275,000,000 Based on achieving a tentative drilling start in March, we expect to have first production from DTM 6H and 7H that needs to be drilled as well in the third quarter twenty twenty one. Then on to Slide nine. Our successful exploration activities in 2019 proved up Hibiscus prospect. We have since also had, other results from the seismic reprocessing indicating that, there could be a significant extension of the hibiscus deposit and this was formerly called Mupala and believed to be a separate structure. We have or we are planning, progressing on our plans to develop the Ruche Hibiscus complex. But, of course, this, later development indicates that, this may be more a Hibiscus development than a Ruche development. And we are planning to have an exploration further exploration well in the Hibiscus extension as part of the upcoming drilling campaign. We have focused on further improvements in the development costs, and I'll get back to that in the next slide, Slide 10. We have acquired two backup drilling rigs. We have used the significant compression in the asset values in the drilling markets to acquire two sister drilling rigs of similar design, Frieda Goldman. Our intention is to use the former bore atlas and convert it to Hibiscus Alpha and use it as the offshore installation on Hibiscus Development or Hibiscus Rouge development. The as you can see from this caption on the right, this is how the unit is today. The main change we're doing is actually removing the, drilling the the Derrick and the Derrick skidding facility, and we put on a bulkhead or a well platform that can carry the the biters over the wells to allow the dry tree units. And then we will drill over that template with another jackup rig. So it's a fairly simple conversion, and we are able to reuse a lot of the existing facilities on these drilling units. And that is why we are we expect to be able to reduce the overall CapEx of the project very significantly as well as getting a much more capable installation where we have already building quarters and substantial utility systems for life support as well as other as well as other facilities. Grainage among are among them. The other thing is the self installation. The the modem is movable unit, and that gives us advantages both in terms of installation activities and also in the effect we have on the seabed where we avoid the very invasive need for piling that we would have with a conventional steel jacket. So the pro this concept gives a number of benefits to our development. And today, these concepts are extremely attractively priced. Then on to Slide 11, produce production forecast. 2020 estimated production, we expect to come in at about 5,200,000 barrels gross versus the previous forecast of 5.4 to 5.8 equal to an average of about 14,250 barrels per day. The main causes of this is, as I mentioned previously, COVID nineteen impact and and the costs from the COVID and also a shutdown we had due to COVID infection. And then, of course, we have the non OPEC reductions that we comply with. You see from the lower left hand side caption our quarterly production figures, and you see our listed schedule in the right chart, lower right chart. Then on to Slide 12. Due to fuel economics, it's attractive at current oil price. We expect around $19 per barrel. We expect that to decline to approximately $11 per barrel when we reach FPSO nameplate capacity. Then on to Slide 13, we have a large portfolio of prospects as we have previously related to you all. The program we aim to implement is to drill two exploration wells per year, for the coming five years. And, we believe with a very modest chance of success of 40%, which is, the assumption that this pro for this program, we should be able to add up to 100,000,000 barrels of reserves. The two first exploration wells for next year, 2021, is included in the drilling rig LOI. That's all for Dusepu. And then I'll move on to Slide 14, Moramba, and then on to Slide 15 with some details. We have our field development plan now approved by AMP and our project team is now progressing towards also achieving environmental approval and we're planning a site and sort of a for the fourth quarter of this year. The other activities ongoing is enhancing the project and field economics, optimizing CapEx and OpEx. We are trying to reduce the time from start of execution to first oil. It's, of course, extremely important in our model to have the shortest cycle time possible. We are also assessing the life extension program for Volvo. The FPSO Volvo has become available and has engaged on a nearby field producing very similar oil qualities. We see this as a very compatible FPSO candidate, almost one to one. So, that is, of course, a big advantage for the Maromba development. So I would say, we are on track for FID, for the first phase. We now work on a sub $40 per barrel, to give us 15% IRR, and we are tracking well to get to that. We're also doing some work in pursuing tax reductions by getting margin of deal status. And we believe that is in the interest of Brazil to, let's say, help their oil and gas industry, by giving marginal field status to deals such as Maramba that contains significant resource that has so far not been developed in, let's say, due to, well, partly ownership, but also partly due to, the way of development, where our phased approach, will be successful, and we're very confident about that. So that ends the commentary on the assets, and then we'll go on to the financials. And I'll leave the word to Knud to pick up on Slide 16. Thank you, Karl. A few words to the financials, and we move on to Slide 17 with the income statement. The way we recognize revenues is on volumes sold, and we had one lifting completed to the company in the quarter, realizing an oil price of $46 per barrel, which was somewhat better than what we had in the second quarter. The production cost on a gross basis was, as Karl mentioned, 19.6 per barrel, which also included some additional costs, about $2,000,000 of extra costs related to the COVID situation and mainly the fact that we are having two crews in country in Gabon that is rotating out to the FPSO. So So it's not possible to, let's say, move people freely around the world. So we have that under control, in country. So EBITDA was about $400,000 better than the second quarter. The depreciations are more or less in line and as expected, giving us an operating profit for the quarter of $4,400,000 which was $500,000 better than the second quarter. On the net financial items, the net expense was $2,800,000 mainly representing the lease liability interest expense, as you can see, the $3,100,000 giving us a profit before tax for the quarter of 1,600,000.0 And then finally, after tax, we recorded a loss of $6,800,000 Moving on to the balance sheet on Slide 18, not a lot of movements. The reduction in the right of use assets are mainly due to depreciations. We also had a reduction in trade receivable due to the receipt of funds from oil sales, giving us also quite a good operating cash flow for the quarter. So the balance sheet is still very strong and solid, strong cash position at $145,000,000 The balance sheet has also a high portion of equity as you can see with about 50% equity ratio. Then moving on to the next slide, the cash flow overview on Slide 19. Here you can see the operating cash flow, which was $26,000,000 in the quarter. We had very low investments, just about $1,000,000 and then the payment of lease liabilities, which gave us the increased cash position up to $145,000,000 from $128,000,000 Moving on to the overview of CapEx. Here you can clearly see our measures that we took back in Q1 when COVID happened and the oil price collapsed and we were very much in control of our own destiny on CapEx spending, suspending all projects, showing that we're really in control and we were able to reduce CapEx down to very low levels in the second quarter and the third quarter. Now for the fourth quarter, we expect that to increase again with the purchase of these two jackups. In addition to some other CapEx, we expect the fourth quarter CapEx to be around 20,000,000 to $25,000,000 And then for 2021, we will again increase our investment activities with the full restart of the Hibiscus Roost development and the finalization of TOR2 Phase two. Moving on to the summary and then to the Slide 22, which sums it up. On Dussafu the exploration, as Karl mentioned, we have reprocessed the seismic giving us a much better view. And of course, in addition to our, let's say, ongoing production, addition to drilling activities we have done in the past, we learn a lot more about the field and we are very comfortable with our portfolio. And as also was previously mentioned, we expect to drill a lot of wells going forward in the next years. Tortue Phase two, we have a plan to get on stream in Q3 with the two last wells, the DTM 6H and 7H, which will then give us 8,000 to 9,000 barrels of oil gross at peak. And then with also the current plants, we expect to see the first oil from the Hibiscus Rouge development in Q1 twenty twenty three. We also hope then to see that we have reached the capacity of the FPSO, which is 40,000 to 45,000 barrels per day nameplate capacity. We're also in a program where we are working on tanker expansions. And we also there hope to have finalized that work in Q1, which will increase the storage capacity and could also enable us to do 950,000 barrels liftings instead of the current six fifty. And then we're also looking at the debottlenecking study that we also have mentioned in the past that could give us an additional 30,000 barrels of oil per day capacity. On to Maramba, we had approval from A and P in August and are targeting FID in about a year's time with first oil from 2024 in the first half. And also, as mentioned here, the economics have have improved and we're further working on on reductions. And, yeah, also mentioned that that the the Pole West is always now the the new candidate for the Marumba development. So I think that sums it up. So then we can move over to the Q and A session, and I hereby give the word back to the operator. You. The first question comes from the line of Anders Holter with Kepler Cheuvreux. Please go ahead. Thank you, guys. Thanks for taking my questions. I have two, if I may. First, it's related to investments for the rest of the year. I just want to confirm that or if you could confirm that the rest of the or the bulk part of the remaining investments for this year will be related to the Bussafir license. And also if, as a follow-up or not, if the transaction that you mentioned is due to that cost, will that be accounted as CapEx for the project? Or how should we how should we look at that? And then the second question is bit more long term. I see that you're now pushing out more on the final investment decision even further. We just have to sort of do the same given a bad thing for oil prices are. So I guess what I'm keen to get your thoughts on is how do you view Moramba versus dividends in terms of, big long term payout to shareholders? Would you prefer to, prioritize getting Moramba off the ground, or would you prefer starting to pay dividends slightly earlier stage than the original plans? Thank you, Anders. Let me start with the first question. The way I understood it was related to the CapEx coming now in the fourth quarter, which I said was mainly related to the jackups. So that's about $15,000,000 and and we also have some some remaining CapEx from from for two phase two. And we also have the Hibiscus Rouge project ongoing. So in total, that's about 20,000,000, and and we we are also capitalizing on the Maramba project, which is currently running at a 7,000,000 to $8,000,000 CapEx per annum. So, 2,000,000 ish per per quarter, that's what is related to Maramba. And as previously mentioned, all our activities on Kudu are expensed as operating expenses after the impairment in Q1. And then it was the question to Maramba versus dividend. I don't think we've pushed out Maramba, at least not on first oil. It should be, more or less the the same. And what we have indicated is that we should be ready to take FID, in the first quarter of twenty two. So I believe that's still our plan to get to the big CapEx investments going before we start to pay dividends. That's also in line with what we communicated clearly in in our IPO presentation. But then we have a substantial CapEx program, and we'll continue with that program until we are ready to, at least we have to say, see some very good operating cash flows from this investment before we're in a position to pay dividends. And just to reiterate what we said in the IPO material on dividends, and that was that we intend to pay out up to 50% of net profits as as dividends when we are when we when we see an end to to the to the main CapEx programs. Did that answer your questions? It did indeed, except from the the 14 and a half million that you recorded for the two check replace. Does that build up the account as regular CapEx for the Yes. That's regular regular CapEx, and and will will come in Okay. In q four. That goes into your cost oil pool. We have acquired the rigs now in VW Energy, and and we'll see how we will transfer them over to to the JV when when the time is there. Okay. Thank you. The next question is from the line of Nick Linney with Sefton. I had a few, if that's okay. Firstly, can you just confirm, was there any DMO oil sold in Q3 or not? Yes. We had the what was that? The 95,000 barrels. And the way we that comes in at at the top line and and also as an expense. So net, it is about $3.5 per barrel for, let's say, that flows net through the income statement. Okay. Next question. Can you say, of of the OpEx, like, is there any material part that doesn't qualify under the PSC as as high normal costs? Like, there any significant g and a part that's that's outside of of what runs through the PSC? Yes. We we, we have an organization that is not charging to to do so for you as well. As as mentioned. The the main CapEx related to Moramba is is capitalized on the Moramba project. We have the Yeah. So you do have that expensed part, whatever's expensed that is not What's expensed on on QDU is about the running cost there is about half a million per per quarter. And then we we have, yeah, maybe another half a million in in general overheads that might fluctuate with as a business development activity, M and A activity. But I can't give you an exact number for that now in Q3. Okay. No, rough numbers. Rough number is fine. So just getting a bit more clear on the CapEx. Can you say for Dusafu Phase two, how much CapEx is left for that between q four and and next year in, like, in total? How much CapEx left for this for first two? For tour two phase two Yes. Sorry. We we have the the the last well, to be drilled, the the seven h, the the drilling and completion, of that well, and then there's also the surf related work that is, you know, to connect those two well to the FPSO with the orders of equipment, should be around $40,000,000, from the top of my head. Okay. And of CapEx, so far, how much CapEx have you spent in total of on Hibiscus Rouge? Like, how much that counts towards the the budget that you've given us? I mean, what you have in in in the balance sheet is is what what we have capitalized in total. That is not only only for use of food. I mean, we have the rights of use assets that that is, you know, the least liability for for the FPSO, and then we have something called E and P tangible assets, and other intangible ex assets. So I think you can read numbers out of out of the the balance sheet. However, Marumba is about 50 of that, and the rest is is all all to. I'm just trying to understand because you give a I'm I'm not seeing the number right now. Maybe maybe we could take take a a little bit more details offline, Nick, if that's that's okay. Yeah. Okay. Okay. Maybe I can follow-up and and clarify. And just one last one. Regarding the wells and production performance, how would you say the wells are performing relative to expectations? I'll jump in on this one. This is is Lynn here. The no. I think we're we're pleased with the performance in the wells to date. The main producing formation of Gamba, the wells are producing very well. I think our reserve projections are are in line and water production pressure are all within the range of expectations. So far, so good. Okay. And the Dentale well? Yeah. Sorry. In the Dentale D 6, we just got one well producing from that, and that's that's producing per expectations as well. So we've got three wells in the Gamba and one well in the right now. Okay. Thanks a lot for taking my questions. Thank you. We have some some questions that have come in on on the web as well, and maybe I can can start with a few of those if there are no more on on the line. So we have one question that goes to QDU, whether we have decided to sell QDU and totally concentrate elsewhere. As I mentioned, we have a QDU on a low activity level where we're working on the, let's say, an optimized concept and are currently having a burn rate of about $2,000,000 So QDU is alive and, hopefully, we can come, come back with some good news on on QDU in in the year ahead. We have another question from the web, and that goes to the, lot of jackup questions here. What is the running layout cost, per unit for the jackups? That is about, currently, it's about $60,000 per rig. And another question, what is the expected operating life, of the converter checkup, when installed on the field? That is should be a twenty year plus life, and and we're designing them for for the the total life of all the fields of 20 plus. Then there is another question. What is the total net exposure to BWNMT if you do not proceed with conversion and installation on the second rig? That should be the second rig was purchased for 4,500,000.0, and I believe the current scrap cost is is around 3. And, of course, we have the layup cost. So I think that covers it. But then there's another question that I might pass on on to, to Carl. Why did you buy two rigs instead of one? And what do where where do you see the the the potential targets for for that unit? I guess that means location. Well, no. Yeah. Well, first of all, I think we well, we don't we we managed to get a package deal, and I think we've made the right call to buy two. It's correct that we have immediate use of one, and the other one is something we keep for the future. I think we pretty much aged the both of both the markets, and we have already received offers that would allow us to flip it and make money. So I feel very comfortable. But the main purpose, of course, is to continue development of Duciflu. It's a great value for us to be able to use the cookie cutter and run a second project based on the same concept and at 60 vessels, we can, of course, do that. So we think with the number of drilling prospects we have, with the adaptability of this concept, this is a great opportunity for us. Good. And there is another question. You say you might drill 10 wells over the next five years. Can you give some more granularity on the targets? And as a follow-up, could you possibly do exploration or appraisal wells before the drilling of the seven h production well? I don't know if you want to take that, Lynn. Yeah. I'll I'll I'll take this. First on the operation, the sequencing of wells, we're still working with our operational team. What's the the best way to sequence an exploration well, then a development well, the DTM 7H or how to do that. We've got flexibility in my operation wise, if that makes some sense. As for the number of prospects, we've I think we've previously shown a listing of the inventory of prospects and leads that we have. And as everybody knows, we've had a very successful drilling exploration drilling campaign to date. I think we're five for five on explorationappraisal targets. And with the high portfolio prospects and leads out there, I think we've got a lot of stuff to do, a lot of wells potential prospects to drill. And so we've given it up in a rough program that would make sense, 10 wells and approximately two wells per year. As for particular targets, I think we're still working through that in the sequencing. Right now, we're focusing with the Bruce hibiscus area. And I don't think I wanna give away too much, but we've got we've got a lot to drill. Good. Then there is a new question from the web. The production forecast on Slide 11 seems to show a lower forecast, production forecast versus previous presentations. Does that reflect the new timing of the new Rouge wells coming online or something else like OPEC quarters slash COVID? Can you take that one as well, Lin? Yeah. I can take that one as well. What what I think what it reflects is is a deferment of production. It's a deferment of the Tortue six and seven h wells. I think that's so that's pushed back out into into next year and and then the knock on effect from that as well. Good. Then there is another question, and I guess we continue with you, Lynn. What what are the specific COVID nineteen restrictions you need to see it to resume activity? Well, we're we're monitoring the COVID restrictions closely. And I think we're all trying to figure out what the new normal is going to be. I think we all realize it's not going to be like a year or so ago or maybe a year and a half ago today. But things are there's going be a new normal. And so right now we're operating. There is a quarantine protocol that we have when people come into Devon and effectively people have to go into quarantine. They have to get a couple of tests, effectively quarantines people close to two weeks, ten to fourteen days. So there's also we look for monitoring the flights. They've started to resume flights back down to Devon. There's more frequency those flights. That's come into place. Our vendors, our contractors, they've got to reestablish operations, be able to move their people freely from Europe or around the world into Gabon in and out of the country as well as movement of equipment as well. We're watching it closely. We've been able to continue to produce and now we're wondering, monitoring to make sure we'll be able to drill execute a drilling operation. I do know that one other operator in countries restarted their drilling program. So that's encouraging signs. We're also working with the government, the health authorities to increase the number of COVID testing sites in country and we're starting to see some movement on that. So there's been some positive movement on that. That answer your question? Yeah. I think so. So that concludes the the questions that we had on on the web. So over to you, operator, to check if there are any further questions on the line. Yes. There are no further questions on the line at the moment. I hand back to you for closing comments. Well, I think, we should just thank everybody for, very good questions and, look forward to speak to you all again in the not too distant future. Thank you very much. Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.