Earnings Call: Q2 2020

Aug 26, 2020

Hello, and welcome to the BW Energy Trading Update q two twenty twenty. Throughout the call, all participants will be in a listen only mode, and afterwards, there will be a question and answer session. Please begin your meeting. Good afternoon, and welcome to BW Energy presentation of the second quarter and first half twenty twenty. This presentation will be hosted by myself, Karl Arnett our CFO, Knut Setyra and COO, Lynne Espey. The present presenters will be myself and then followed with Knut who will take the through the financials, and and then we will all be present to answer any q and a that will be organized later in the call. So on to our disclaimer, page two of the presentation. Please note our disclaimer. Then on to page three, our highlights. The second quarter gave an EBITDA of 28 21,800,000, and we had continued to have a strong cash position at the end of the second quarter of $127,000,000 We completed one lifting in the second quarter to cut the company. We did, as you know, defer our investment projects due to the COVID-nineteen restrictions affecting our smooth operations of projects. We have focused on protecting our employees and partners from the COVID pandemic, and we have had certain effects on our operation as we have related to you before. Dusapu production increased in March 2020 with the addition of two wells, part of the TOR two phase two campaign. But we then held the second phase of TORQ two campaign deferring two wells due to the COVID restrictions. We did do some further reductions in our capital spending, from the first quarter, and our estimate for the for the current year is now 110,000,000 versus the previous estimate of 115. I'll go then on to slide four, safety. We did have COVID effects in in, of course, this quarter as well, and movements in and out of Gabon was restricted, but mainly we have been able to contain the situation. We did have one incident of COVID infection on Adolo affecting operation, and we shut down for four days and deep cleaned the vessel and was able to resume production thereafter. In 2020, we've had four LTIs. These were previously reported as well. There's no further LTIs in the second quarter. We have zero environmental incidents and have now produced 2,500,000 barrels. On to Slide five, we have an active program supporting local communities in Gabon and other places we operate. We have certain activities related to the COVID-nineteen, particularly in Namibia and Brazil with donations to local agencies. And in Gabon where we are producing, we have, of course, more comprehensive program, and you see that's related on the slide five. Then on to slide six. This is our path to, let's say, restart our activities. We are waiting, of course, to see what effects we have of COVID and when restrictions caused by COVID can be lifted, and we can resume normal operations in terms of project execution. Our current plans based, of course, on on the caveat that this depends on the restriction imposed by COVID is to restart the TOR two phase two program, complete the drilling of seven h well, and the time of then six h and seven h. The GTM six h was was it's already drilled in the in the previous part of our program prior to the COVID restrictions, and our aim is to have first oil from these two wells in the second quarter twenty twenty one. We are doing engineering work that we can undertake at this point to refine our Ruche phase one program. And, of course, the the objective is to reach first oil in the first quarter of twenty twenty three. But we will tell you more about that program later on in the presentation. Then we have Ruche phase two, which will take us up to 2024. At Moromba, we are working on the field development plan and move towards a final investment decision in the first quarter of twenty twenty two, to achieve oil in 2024. Other activities is, of course, the RBL, which we will also cover later, and, of course, other activities related to farm ins or acquisitions. I will then move on to Slide seven to cover Dussafu in more detail and then swiftly on to Slide eight. We have had continued strong operational performance in the second quarter and have produced 1,400,000 barrels or equal to about 16,000 barrels gross per day. The performance of the two wells of phase two that we were able to put in production, the DTM four h and DTM five h, has been strong, and they have been performing, in line with our expectations. The q two OpEx is in line with plan and reduced from about $21.8 per barrel to about $17 per barrel in the second quarter. We expect the full year OpEx to be in the range of 17 to 18, probably closer to 18 if with the current trajectory of of events. Then on to Slide nine, we are preparing to resume TORQ phase two. We managed to suspend the project with minimal costs. Bore Norvel is currently in Port Chantilly, and we have entered into a letter of intent with Bore, and we hope that we will then be able to restart drilling early in 2021. We have managed to reduce the total spend of the TOR two phase two from about 275,000,000, which was the original FID budget, to about 238 according to our last estimate. It's a bit difficult to specify exactly what we mean by normal business and travel. Of course, it doesn't have to be back to what it was prior to the COVID, but at least we need a certain level of normality to move people, in particular, but also goods and services across borders, which is now restricted. So we are current we are continuously, supervising, let's say, these restrictions. And, the minute we see that we are ready and we to restart activities, we will do so. And the current expectation is that we hope to be getting first oil in the second quarter of twenty twenty one, but that is, of course, pending that these restrictions will be lifted to a certain level, and we can move freely the people and resources we need. Then on to page 10, the production forecast. The 2020 estimate is now 5.4 to 5,800,000 barrels versus our previous forecast of 5.8 from the four wells currently producing. Main reason for taking this estimate slightly back is that during the low, low oil price, we decided to do a comprehensive program of pressure buildup on our wells, and we deliberately curtailed the production a little bit to to do this program. In addition, we've had some effects. I previously told you about the four days of COVID shutdown. So there's been some some effects of the COVID as well. So we have taken our estimate back a little bit, but we we still expect very good production to through 2020. We are in compliance with the OPEC reductions that have been imposed on Gabon as a member of OPEC OPEC. As you can see from our lifting program in the caption in the bottom right hand corner of the slide, we have put one we have now two liftings in the fourth quarter and one lifting in the third quarter. So we have pushed one lifting from third to fourth quarter compared to previous plans. Then on to slide 11. Dussafu is very profitable still at a low oil price. We are using the project Hiatus to rework the Hibiscus Roosh field development plan with respect to CapEx and and schedule, and we have improvements in our current plans. And we expect to improve significantly on the on the previous sanction 15% IRR at $35 per barrel for the incremental Hitler Hibiscus development. The project restart decision will be made as again, as soon as the COVID restrictions are at acceptable level to perform work. We are planning further Hibiscus area exploration wells to appraise the Hibiscus discovery further and find the final localization of the platform, and that is going to be part of the the drilling program as soon as we restart the drilling operations. Then on to slide 12. As a result of our reprocessed seismic, we we find that the greater Hibiscus oil in place could could be significantly larger than previously anticipated. The reprocessed seismic indicates that this area called Hibiscus Mupala and Hibiscus South could be one large structure, one single structure. And in this case, we would have a significant increase in recoverable reserves and, of course, barrels of oil in place compared to the current 45,000,000. You can see the development in the from the caption in the the structure map in the left hand bottom corner that there's been a significant increase in the potential size. So this will require further exploration work, but we are, of course, extremely, pleased with the with this new information. And, we are, of course, going to to work hard to prove up further research the reserves in in the Hibiscus area. Then on to slide 13, there is, of course, significant remaining potential in in the Rouge EEA area. The more wells we drill, the more data we get, the better we can interpret the seismic. And we are seeing also other areas where where where interesting potential is showing up. Walt Whitman area is one such. The so called Walt Whitman Stream Of Pearls is is very interesting. But we also see new structures coming up in the Tortue area. So all in, it's a it's a very it's a very oily area. It's a very lot of very good structural traps, and we still have lots of exploration and further refinement of this huge area to do. Then on to page 14 and Maramba, quickly on to page 15. The project team is progressing towards regulatory approval. The field development plan has been presented to AMP, and the manage the management of AMP has, put it forward to their board for resolution. Current program is to optimize CapEx and OpEx and reduce time from FID to first oil, And we are also evaluating other FPSO candidates. There are alternatives now to Bergelena, and that may be more appropriate for this development in terms of technical fit. And we are currently looking at a very, very interesting candidate for for the this development, which would significantly reduce our development costs. We're also working with the government to optimize the, let's say, field economics by other means. We have we are in the process of requesting a field royalty reduction, due to the marginal field definition, in Brazil. So that's work going on. Then we move swiftly to page 16 and q two financials. And here, I will hand over to Knud that will cover the financials as usual. Knut? Thank you, Carl. Then we move on to the slide 17, the income statement. Good afternoon, everyone, by the way. As you can see, the revenues increased in the quarter, so we recorded $32,000,000 of revenues. We listed in in June, so we achieved a the average dated Brent oil price in in June, which was $41,000,000 sorry, $41 per barrel. We increased production during the quarter from the the two wells that Carl mentioned, giving us an average daily production of of 16,000 barrels, and OpEx per barrel was then reduced from the previous 21.6 to to 17. Out of those 17, actually, dollars reflects the the FPSO cost for for the lease of of BW Adolo. Depreciation increased according to to sales, $17,700,000, giving us an operating profit of $4,000,000 for the quarter. The lease liabilities have have changed. We have changed the the discount rate from 4.5% in in the previous quarter to 5.25% now, which will, going forward, give us a a higher lease liability interest expense, and and we also get some consequences for for the balance sheet that we'll see in in a moment. So the net financial expense was about 3.6 giving us a profit before taxes of 0.3 and after taxes, we have a net loss of 5,600,000.0 for for the quarter. So over to the balance sheet slide slide 18. BW Energy has a very robust balance sheet, and we are prepared to resume accretive investments. We have a strong cash position of a $127,600,000 with an equity ratio of 580.6%. And then to the the change in in discount rate impacting the right of of use assets and and lease liabilities. So just to to give you some clear of of what that is, that is a that is the lease liability for PWA dolo, where we have included more than twenty years of of FPSO lease in in those liabilities. So you can see here that the right of use assets is increasing by the change is $28,000,000 quarter over quarter. And and on the other side, you can also see that long term lease liabilities are decreasing. Also, in the quarter, we have a reduction in in pay payables as we have paid for most of the four two phase two developments in in in the second quarter. And then over to to the cash flow for for the second quarter, not a lot to say. Cash position, we started with $168,000,000. And as mentioned, we paid a lot of of the the invoices related to DusaFu, which you can see in reduction in trade payables, which then gave us a a negative operating cash flow of $23,000,000. Net investment that we recorded was 10,000,000, and then we had the lease liabilities of of eight, giving us close to a $128,000,000 in cash at the end of the quarter. And then over to the next slide showing an overview of our CapEx over time. We have removed from from this overview as this has been fully impaired in in the first quarter. So you can also see that the the recorded investments were very low in in the second quarter and also going forward, we have some $2,025,000,000 dollars of of CapEx remaining for for the rest of the year. And just to to remind you, we we suspended all activities due due COVID. So that's how we we reduced the original CapEx program from close to $250,000,000 down to 110 on on a on for for the full year of of 2020. And, yeah, I don't think there's more to say on this one. So then I leave it over to you, Carl, for for the summary slide before we open up for questions. Thank you, Knut. And, on to page 21 summary and, switch beyond to page 22. DW Energy is, I think we have a very strong strategy for the current oil environment. Our asset portfolio remains extremely robust, and it's developing in a very good and potentially extremely good way with further discoveries and further potential on Dussafu in particular. And our net certified reserves of QP reserves of 83,000,000 barrels is very strong, and we have 2C reserves of a further 164,000,000 barrels. So there's significant upside in our portfolio, and we have operational and financial robustness to move as soon as we see we have a certain level of normality and can under take the operations in a productive way. So, we are in root health, I would say, and, we're looking extremely positive, forward to to the future. We will then move on to slide 23, which is saying just BW Energy, which is really over to the operator who will organize the q and a for this session. Thank you very much. Thank you. Our first question is from Theodore Sven Nielsen from Sberbank and One Markets. Please go ahead. Good afternoon, and thanks for taking my my questions. A couple of questions from me, if I may. You mentioned, Carl, that you have moved one lifting from q four. But just to be clear here, will we still have or did you still have one listing in August? And if so, can you say anything about the prices you achieved on that one? Can you take that, Lynn? Yeah. Sure. The we're still scheduled to have a lifting in August. It'll be at the well, here we are at the very August. It'll be the August. It may wrap into September. And the the price that we realize is Brent roughly Brent plus a dollar. The average Brent price for the month plus a dollar. Okay. Thank you. And and then just regarding my to see that things are moving moving forward. Is it possible to to give a quick update on on on what we should expect in terms of CapEx either on a per barrel basis or or absolute numbers? That would be really helpful. Yeah. I I can start a little bit there. We we we have, as you know, we we've suspended the the Rouge and and the the latest or the the last well and and the connection of the last two wells on on to to phase two. So, yes, there is is CapEx there that is remaining that will mostly come in in '21. I think the number there is some 35 ish, if I'm I'm not mistaken. That remains on TOR two phase two. On on Rouge, we are as Carl mentioned earlier in the presentation, we're working on on a reduction reduction of CapEx, and it's a little bit premature to to go into details and and on CapEx per barrels. As you also saw, the the barrels might also change after we have proved up the new reserves with with an appraisal well. But the economics for now look a lot better for the Rouge development as well as we have interesting ways of of reducing CapEx. I don't know if you can add something, Lynn. No. I I think that that gives a if it's good summary of it. But then, you know, going forward, I think I also request to do it on a per barrel, but as you mentioned, we can we can take a look at that and and try to apply that that those guidance going forward. Okay. Do we have any further questions? Our next question is from Tom Erik Wiese, Brubakken Kluskiansen from Pareto Securities. First, congratulations on Hibiscus. That just seems to be growing even further. Could you comment a bit more on how much of the upside potentially being 3x as large as previously guided you can prove up with just one more well? And if that is successful, how should we think about the development? Will you basically just keep the so you have there full for an extended period of time, probably in many years more than what people expect, or do we see a potential here to bring in a second unit as well? I can a couple of questions. Okay. I can take the the first part or the actually, the the last part of that. I think we we are looking at potential expansion of the Adolo capacity. As we have told the market before, the nameplate current nameplate at around 40,000 barrels can be expanded and without, you know, significant cost. It's more of a debottlenecking activity. So we expect to be able to increase capacity by 50% with fairly nominal investment. On the more subsurface part of the question, I'll I'll let Lin answer that. Sure. And, yes, we we do think it's gonna take a a well or two to to fully appraise it. And we have already budgeted an an appraisal well, which was nominally scheduled for the Hibiscus South area, but we are also actively planning for additional appraisal, which would be more in the Mopali area as well. Those plans are not fully defined right now, especially with the COVID. We're in little bit of a flux area, but we're very excited about that. But it would take probably at least two wells to to further appraise that, and any sort of development plan that we would for restarting Ruche Biscuits would incorporate the the the possibility that the this greater hibiscus area is the larger larger size. Thank you. And one further question from me, if if I may. It was touched on during the presentation the potential for M and A. Can you say a bit more about what kind of opportunities you see out there now? And with the potential of the, call it, development portfolio you already have been growing now, Is it increasingly interesting to look at expanding the current production base as opposed to taking on a second, call it, more development focused asset? We I mean, the market is in influx. There's a lot of companies that have, let's say, without overstating its drained balance sheets that are looking to rejig their portfolios, and this creates a number of opportunities. So we are working flat out to evaluate the number of, actually, both types of of m and a activities. It both acquisitions of fields and but also acquisition of of brownfield production. So we're looking at both, but we don't want to be too specific at what we're looking at even though you can say the oil market is is returning to some sort of, I would say, a little bit of normality in in terms of oil price, it's still it's still a challenge. And and but there's still competition So we don't want to be too specific about what we're we are looking at in particular. But we're looking at both sets of opportunities that you mentioned. Okay. Thank you. Just a very short follow-up. How early at the earliest do you think it's possible that you can drill an appraisal where at the business approval of that bigger potential? Is that kind of assuming that your situation with travel and the restrictions like that normalizes so fast? Can you kind of move on that option? Well, I I I think that we are in the process of of putting together the new program, as Lynn mentioned. So it's a bit premature to be specific on on when, and but we are monitoring very closely restrictions, and we're talking constantly to our suppliers and and all the people we need to accomplish a smooth operation. We are, of course, very sensitive to start work without being sure that we can compete in an efficient manner, because that that is going to affect the the costs badly. So it is important that we are absolutely confident that we can undertake the business we're setting out to do. As an addition to what Lynn is saying, our board actually approved a further so we had one option we had one exploration well in the program that we that we deferred in Tortue, but our board actually approved a further exploration well as part of that program, one of the so called option wells that we had agreed with with board. So, of course, we we we're not holding the the the board to that, but I think the the the the new seismic interpretation and the opportunities indicates that we will be more aggressive rather than less aggressive in in in drilling to to prove up additional reserves. Thanks, Kyle. That was all from my side. And just as a final reminder, if you do wish to ask a question, please press 01 telephone keypad now. And there seem to be no further audio questions, so I will hand the word back to the speakers. There are some some questions that have come in on on the web. One is from Jurgen Bruaset in in Nordea. And the question is when will you conduct further appraisal on hibiscus? And can you give us an idea of the CapEx attached to the added barrels? I think this is the same question as we already got a little bit earlier in the call. It's a little bit too soon to come back to to to start discussing it per per barrel. We'll come back to that in in a later presentation. And as we said, the appraisal on Hibiscus might might take place when we can restart the drilling program in in 2021. Then we have another question that came in. What was the entitlement production in q two? And is there any impact on you if the government lifts profit oil at lower oil price than what we are getting? The answer to to the to the last part, no. We were not we we don't have any links to to, let's say, the government liftings. The the government had lifting in in April where the oil price was was really depressed, and they had another one in in July, but we are not affected by by the price they they achieved on on that listing. And our entitlement production was I mean, the net sold barrels to to BWE was 530 ish thousand barrels from from the listing that we did in in June. Just just to remind you in in revenues, we also have some sales from for for the domestic market obligations that flows through as as both sales and and OpEx. And and then we also have part of the of the state profit oil for for the barrels, and that was about 180,000 barrels That was for the the state profit oil in in in q two. And then we have the final question from Danske Bank, Christian Iguset. There seems to be plenty of resources to be developed and found in Gabon. Have you considered only focusing on Gabon and Brach, Brazil as the asset seems relatively marginal and risky? That's definitely a question for you, Carl. I think we're still of the opinion that Maramba is a very good asset, and we are working to optimize it. But that's not we we we see that as part of our ongoing work to always optimize what we're doing. But we we still have the view that when we move into Moramba, we will do so with a very, very good set of data. The previous operator spent a small fortune or even a large fortune, if you like, on on developing these assets, and we think it fits our strategy extremely well. We have also mitigated the the acquisition cost so that we are only we have paid a down payment, but we will pay the brunt of the cost much closer to production. So it fits very well our profile where we have short time from. We start to invest significant sums until we get cash back through production. So we we think Maromba still fits our strategy very well. So we our aim is to continue on. The long play we have is Kudu. That is it's a very long play, and that's we decided to write off our investment in that, which is, of course, an indication that it's quite we we see that as more of a of a, let's say, marginal project at this stage. But we let's we will revisit that when when the world comes out of the COVID crisis, and we see we take stock continuously, of course. Good. That concludes all the questions from the web. Okay. So I think then we can say, thank you to everybody for participating in this call.