Good afternoon, ladies and gentlemen, and welcome to this conference call arranged by Statoil. My name is Hilde Møllerstad. I am Head of Investor Relations in Statoil. I have with me here today, Statoil CFO, Mr. Torgrim Reitan, Statoil's Executive Vice President for Strategy and Business Development, Mr. John Knight, the Senior Vice President for Performance Management and Analysis, Mr. Svein Skeie, the Senior Vice President for Finance, Rob Adam, Senior Vice President for Communication, Reidar Gjærum, and we will also, later on today, be joined by the General Counsel, Hans Henrik Klouman. This morning, we announced that Statoil entered the Bakken and the Three Forks oil plays through a cash acquisition of the Brigham Exploration Company. The announcement can be downloaded from our website. Do we still have connection? Hello?
Yes, your line is open.
Do you have the connection?
Your line is open.
Thank you very much. statoil.com, along with the presentation regarding the acquisition. In a minute, Mr. Torgrim Reitan will give a brief introductory comment, followed by a short comment by Mr. John Knight . After that, there will be an opportunity to pose questions. The operator of this conference call will explain the procedure for asking questions immediately before the Q&A session. The conference call will last approximately 45 minutes. I now leave the word to Mr. Torgrim Reitan. Please go ahead, Torgrim.
All right. Thank you, Hilde, and welcome everyone, and good morning to you in the States, and good afternoon to Europe. I'm very pleased to invite you to this conference call. Today, Statoil ASA, we have entered into a merger agreement with Brigham Exploration, where Statoil will acquire all outstanding shares for 36 and a half dollars per share, and this is an all-cash tender offer. This translates into an equity value of $4.4 billion, and taking into account the net debt at the end of second quarter, it corresponds to $4.7 billion in enterprise value. Brigham is an Austin-based company with 100 employees in Austin and North Dakota. They have a strong position in the attractive Bakken and Three Forks basins.
These are tight oil plays within the Williston Basin in North Dakota and Montana. This transaction will give Statoil slightly more than 375,000 net acres in the Williston Basin, and around 40,000 acres in other areas. The resource estimate is between 300 and 500 million barrels of equity barrels. This is a very important milestone for Statoil. It builds on the stepwise experience from Marcellus and Eagle Ford, and it establishes Statoil as an operator within the U.S. unconventional. Unconventional is a substantial resource base, and we consider it to be increasingly important part of the future energy supplies. This will add significant resources with long-term scalable oil production to Statoil.
At our Capital Markets Day in June, we presented our updated upstream strategy, where unconventional was a very important building block. This deal is very much aligned with the strategy that we have communicated. This deal will also add immediate production and cash flow, and it gives us an early mover. We are an early mover amongst the IOCs into the Bakken area. When it comes to the financial situation, for Statoil, we had by the end of second quarter a net debt of 14% that had decreased from 25% by year start down to 14%. We had around $15 billion in cash and cash equivalents by end of second quarter. We have the financial capabilities to lift a transaction like this.
I would also like to remind you that portfolio management is an integral part of what we're doing in Statoil. Just to remind you, we IPO'd our fuel and retail business one year ago, proceeds $0.9 billion. We divested 40% out of our Peregrino assets in Brazil, $3.1 billion, and 40% of our Kai Kos Dehseh business or the oil sands business in Canada, $2.3 billion. Lastly, we announced divestiture of our transportation ownership in transportation systems at the Norwegian Continental Shelf, and that is expected to be closed during this year, and that will provide us with more than $3 billion in proceeds. This is a next part of the way we are operating.
When it comes to the offer and the structure of the offer, it will now be five to 10 days until the offer is given to the investors, and then there will be a 20-day time for them to accept it. There are final closing things that needs to be done before it is finally closed. That was my introduction. Hilde?
Thank you very much to Jim. I will then welcome Mr. Jonny Knight to make a few introductory comments as well. Please, John.
Good morning and good afternoon, everybody. Before we go to the Q&A, I thought I would just spend a bit of time to take us back to what Statoil's thinking has been around development of this sort of activity. In 2006, we started to notice the increasing importance of unconventional resource, particularly onshore in the U.S., in the global energy mix. Between 2006 and 2008, we undertook extensive study of this phenomenon, including looking at a wide range of opportunities. It was not until 2008 that we felt that we had identified an appropriate opportunity with the transaction that we did with Chesapeake, which was something that we analyzed from beginning of that year through to the closure in the fourth quarter.
You will recall that part of that transaction involved the secondment of personnel into the operating systems of Chesapeake. The second thing that we did, which happened about this time last year, was the movement into the gas liquids and wet gas phase of the Eagle Ford. We, before that transaction, we had examined many different possibilities for moving into liquid phase, including black oil phase. We felt that the one where we could get most value was the Eagle Ford transaction. Also we felt that the joint operatorship arrangements with Talisman was the most appropriate way of increasing our own exposure and understanding to operations. This transaction now takes place as a building block towards deepening our operating capability.
Again, we have examined many possibilities in different parts of North America for entry into tight oil. This transaction at this time seems to us to be the most value-creating. What I'm trying to do is give you a sense of the phased involvement and increasing operating capability based on a wide range of possible transactions that we've undertaken in the space of the last half decade. With those remarks, I will finish, and Hilde, you will now open it for Q&A.
Thank you very much, John. I will then ask the operator to reiterate the procedure for posing questions, and then the floor will be open. Operator, please explain the procedure for calling in.
Thank you. Today's question and answer session will be conducted electronically. If you would like to ask a question, please press star one on your telephone keypad. As a reminder, please press star one to ask a question at this time.
I suggest to go ahead with the first question immediately.
We'll now take our first question from Brendan Warn from Jefferies International. Please go ahead.
Right. Thanks, guys. It's Brendan Warn from Jefferies. Just one question in terms of projection of frac crews and rigs. Obviously, we can see what the company was proposing going into this. Still, are you still maintaining that sort of level of activity in 2012? If we can look out to 2013 and just the expectation of CapEx into 2012. Just secondly, in terms of the risked resource number, are you able to provide a split between Middle Bakken and Three Forks, please?
Okay, thank you. When it comes to CapEx or investments, Statoil is currently investing for $16 billion in 2011. We have also stated that we intend to do that in 2012 as well. This transaction will take some additional investments, and we expect that to be around $750 million a year going forward. When looking at this set of assets, we also expect them to be self-financed from 2013, 2014, and onwards. When it comes to the splitting of the resources into the subsets in the basins, we are not ready to give that.
Frac crews and rigs, Brigham has 12 rigs operating currently, and ambitious plans going forward. We will work closely with them to find the optimal step up.
Right. Thanks for that.
Okay, next question, please.
We'll now take our next question from Jon Rigby from UBS. Please go ahead.
Yeah, hi. Two questions. The first is, you talk about a break-even price of $55 per BOE. Can you just confirm, is that an all-in cost or a going forward cost? And is it an economic break-even or a cash earnings break-even? Second, just on your self-financing remark, I take the point you probably won't give us a production forecast, but can we just assume something around the ratable increase between the number you're producing now and the potential at the end of the five-year period is a number we can work with to get that self-financing level?
Okay. Thank you. The break-even that we have stated in the presentation material, mid-50s, that is a going forward break-even price. It is not the cash break-even, it's sort of the economic break-even price. When it comes to the production buildup, currently Brigham is producing 21,000 barrels per day in equity terms. That is including the royalty paid. That is just very recent numbers. Going forward, we estimate the production to step up to between 60,000 and 100,000 barrels per day within five years time. I think that's you know, the framing around the production growth as such.
That translates into, you know, self-financing in the period 2013-2014.
Which is sort of halfway through that period, roughly?
Yeah. Exactly.
Yeah. Thank you.
Next question, please.
We'll now take our next question from Jason Gammel from Macquarie. Please go ahead.
Thanks very much. I actually have two questions. The first is that Brigham was pursuing a strategy of drilling and completion that included very long laterals and a very high level of intensity on completions with something generally over 30 stages. Would you intend to continue drilling and completing in the way that Brigham has laid out? Second question is related to transportation realizations in the region. Right now, I believe that transportation is actually reasonably tight. Will you be relying on incremental rail transport, or do you believe you'll be able to get pipeline transportation out of the region? And where would you expect your realizations would be relative to WTI?
Okay. John, would you like to comment on the drilling completion? Please.
Yes. One of the reasons that we have given you a range of resource rather than something narrower is because we intend to design a drilling program which is obviously to increase production but involves a degree of piloting. We have a debate with Brigham about the number of wells per double section that is appropriate. We think there's a lot of optionality and upside in this asset. We want to undertake a number of pilots about the level of interference and appropriate spacing for the wells before we become more definitive about it.
Thank you. On your second question on transportation and realization. In the initial phase, we will be dependent on some rails, but we expect to be sufficiently covered with the pipes from, you know, around maybe 2014. That, you know, translates into realization. In the first years, we have assumed a discount to WTI of, you know, around $7-$10 per barrel, and that is sort of gradually decreasing as we move forward.
Thanks very much.
Next question, please.
We'll now take our next question from Hootan Yazhari from Bank of America Merrill Lynch. Please go ahead.
Hi there, gentlemen. Just a very quick question regarding the resource potential. You are talking about 300 million -500 million. I'm just interested in getting what you see as the upside that's really on the cards here. Just simply because the price that you've paid looks to be relatively full for a resource number. Quite clearly, you do see some upside in resources. Can you potentially quantify the unrisked level that you're looking for, just to give us some sort of idea of the size of the prize here? Thank you.
Yeah. In general terms, this is early phase technology development as we see it, and that is certainly part of why we want to enter into it, and we see we have the skills that we can contribute with, in that respect. 300 million -500 million barrels is based on what we see today and the technology that we have today. Then there is a lot of things to be evaluated when it comes to the intensity, the well spacing and all of those issues. If you confer with Brigham's investor pages, you'll see 1,300 wells, and you also see an EUR number.
If you use those numbers, you come to a higher number than what we have stated here, as such. This is based on what we see today, and yes, we see upsides.
Thank you.
Can we have the next question then, please?
We'll now take our next question from Iain Pyle from Sanford C. Bernstein. Please go ahead.
Thank you. Firstly, I just wondered if you could give a cash margin per well figure or perhaps a cash breakeven price for the assets. Secondly, clearly, the Brigham assets have a very high flow rate per well, but also have a number of fracs per well that's double many of the peers. I wonder if that's something that concerns you and something that you would expect to continue going forward. Thank you.
I suggest, John, you answer the flow rate and the frac issues, and then we will prepare on the cash per well. John, please.
I think this issue is very much related to the earlier question as to why we have given such a wide range of resource and the well spacing that we intend to undertake. We've had the opportunity of talking to the Brigham executives for quite an extended period and also sharing with them areas of additional pilot drill and seismic that we might be able to bring to this area. They're quite excited about that. As Torgrim Reitan says, if you want to look at what might be an optimal case, the best thing to do is to look at what Brigham has set out already.
We've taken a deliberately more cautious approach to it than that and based our valuations on that. When we have, if the tender offer is accepted and we have consolidated the business within existing Statoil activities, then we will, and when some of the pilots are undertaken, we will become more specific at that point.
Okay. Thank you. On the breakeven, we stated, you know, mid-50s at the breakeven going forward, and that is sort of the best number I can give on the activity as such. $55 per barrel is what we recovered all the cost involved.
Okay. Thank you.
Next question, please.
We'll now take our next question from Teodor Sveen-Nilsen from First Securities. Please go ahead.
Yes. Hello. I have two questions. First one is, do you have an estimate of how much this acquisition will contribute to your 2020 production ambition over 2.5 million barrels per day? Second is, could you give an indication of the OpEx per BOE? Thanks.
Yeah. Okay. Thank you. On the 2020, that was the roadmap on production growth towards 2020, 2.5 million barrels per day. We announced that in June at a Capital Markets Day. That one is based on the project pipeline that we have at hand and provides us with growth in that period. This transaction will add production also in the 2020 perspective, so it will make us even more comfortable in you know, reaching that ambition. We don't have the intention to redo that in any way, but it certainly makes us even more comfortable as such. Yeah.
On the OpEx per barrel, I think the best way for us is to refer you to Brigham and their investor relations unit or refer to their internet pages and quarterly reports.
Okay. Thank you.
Can we have the next question, please?
We'll now take our next question from Judey Delgado from Alpine Associates. Please go ahead.
Yes, good morning. I'm wondering if the companies could detail exactly what regulatory approvals are required for the tender closing?
All right. Okay, thank you. I'll leave that to Hans Henrik Klouman, the General Counsel of Statoil. Hans Henrik, please.
There are actually none. It's a waiting period in the U.S. antitrust law. You have to give a notification to the Federal Trade Commission, and the waiting period is at the shortest 15 days from the notification. That's the only formal process going on.
Could the company detail, then, why the closing timing is so long in the press release? It notes a closing by the end of first quarter 2012.
That's actually stipulated as the longest possible closing period. The main benefit of a cash tender offer is, however, that theoretically can take shorter time, much shorter time, actually. It can take theoretically less than 30 days to get control of the target company. After that, less than 20 days to formally close the whole transaction. If you compare to for example BHP acquisition of Petrohawk, that transaction took 42 days to close entirely, actually. That's a possibility here as well.
I see. Okay. Could the company just confirm whether the CFIUS filing is also required?
Sorry?
Would there be a filing?
Could you repeat the question?
Yes. There's another regulatory filing that was not mentioned. I believe only the U.S. antitrust filing was mentioned. I'm curious if there is also a filing here in the U.S., due to the company's foreign entity status with CFIUS.
Yeah. Which we have, as far as we can see, we don't need that filing, actually.
Okay, great. Thank you for the clarification.
Thank you.
We'll now take our next question from Drew Figdor from Tiedemann Investment Group. Please go ahead.
Yes. I think it was answered just then. If I can just follow up. The timeframe is just the longer dated timeframe. Was that assuming the front end of the tender offer being closed and then closing the back end would take that long? Is it your assumption that the tender offer will close after the standard 20 business day launch?
That totally depends upon how much of the shares are tender, of course. If you will have more than 90% of the shares, then we have thought we'd close this transaction after the 20 business days, as you said.
Terrific. Thank you very much.
Next question, please. We'll now take our next question from Barry McCarthy from Royal Bank of Scotland. Please go ahead.
Hello there. I want to come back to the $55 per barrel break even, please. My question is, what proportion of the purchase price is folded into that calculation? You include something saying an implied $8,000 per acre paid. Is that and nothing else included, or have you included the bulk of the remaining funds that will be invested in the Brigham acquisition? Thank you.
The $55-per-barrel break-even price that is not including the acquisition price. This is a going-forward break-even price in this asset. The dollar per acre that is the acquisition price as such. That is adjusted for the dollar per acre. It is sort of adjusted for midstream and other assets and also acreage outside the Williston Basin.
Okay. What's the implied?
Excuse me, production, and that is using the Derrick methodology as such that you will find.
I understand. What's the implied value per acre for the non-Bakken assets?
Yeah. That is not something we have disclosed. I can only say that the majority of the value is of course related to the Williston and the Bakken and Three Forks play.
Thank you.
Next question. We'll now take our next question from Lydia Rainforth from Barclays Capital. Please go ahead.
Good afternoon. Could you tell me what measures you're taking to retain staff? Because I notice this is actually, you know, corporate transaction rather than an asset deal, and I assume, yeah, that's part of the incentive to retain that management edge. What is, you know, is there a sort of time, you know, sort of issue there in terms of how long senior management will remain in place or?
All right. Thank you, Lydia. John, if you can, address that would be appreciated.
Yes. It's our intention to retain as many of the staff as possible, save for the CEO, his brother and the CFO. We have transition arrangements with them. Two of the key staff in the operating and subsurface have got market-based retentions, as have the next level of staff below them, and the whole company staff pool has got appropriate arrangements. These are very much at market and based upon benchmarks that we have seen in Atlas and Petrohawk. We also have bonus arrangements with key staff, which are tied to performance of the asset over the next two years. These are the retention arrangements. These here are essentially based on a two-year program.
Thank you.
I think we can go to the next and last question, I believe.
We'll now take our next question from Rashed Barhang from Jefferies International. Please go ahead.
Hi. Just one question. Could you comment on your plans for Brigham's bonds? Are they going to remain outstanding?
Excuse me. If you could repeat the question, that would be appreciated. Please.
Brigham has two issues outstanding, notes. What are your plans for those two issues of bonds? Are they going to remain outstanding? Are you going to, you know, do T+50? What are your plans?
All right. Thank you. They have two bonds outstanding, and we will not comment on our plans to what to do with them currently. I mean, in due time, as such, we will revert to that issue.
Thank you.
We have a couple more questions. Please, introduce the next one, operator.
We'll now take our next question from Ethan Arguell from Lioneye Capital Management. Please go ahead.
Hi, this is Dean Machado from Lioneye. I got on the call late, so I apologize if you've already talked about this, but can you talk a little bit about the background of the transaction? How the two companies came together, how long you were in discussions, if negotiations were exclusive or if there were other parties involved?
All right. Thank you, Dean. John, you are the right one to address that one. Please, John.
I will sketch the answer to that. I will not go into depth of detail. This is a discussion that we started in the part of this year. We have spent most of the summer engaged in due diligence, both on the company and the assets, and we have had extensive discussions and fruitful discussions with management around future industrial program and integration. A number of the management have met with senior management of Statoil, both in America and also here in Norway. The board has been advised throughout by Jefferies and received appropriate advice on the situation. I'd rather not comment on the effectiveness of the situation.
I think that's something to address, for you to address with Brigham itself.
Okay. Thank you.
Thank you. We will then take our last question today.
We'll now take our next question from Neil Morton from Bloomberg. Please go ahead.
Thank you very much. Just a couple of questions left, please. Firstly, could you comment on Brigham's hedging policy and whether you're likely to continue that? Secondly, perhaps comment on your sort of future strategy in lower 48 unconventionals. Have you now reached critical mass and likely to leave it there? Thank you.
All right. Thank you, Neil. I'll take the first one, and then, John, you can prepare for the second one. On the hedging policy, we are not in a situation where we need to hedge on an asset-by-asset level. We have enough predictability in that we have, you know, cash available at all time, and all of that. It is not a necessity for us to hedge our production as we go. We have the sufficient capital and cash available, so we will think long-term to develop these assets and these set of assets. You are right, there is a hedging policy in place.
What we will do with the existing program and so on, we will have to revert to at a later point in time. On the future strategy, John, please.
We see volumes available from these kind of resources, not only in North America, but also worldwide, increasing as technology and costs associated with extraction improve. We've seen those improvements in the Marcellus. We've seen cost effectiveness improve as this technology has been applied to liquids more generally. What you're seeing here is a deepening of our presence throughout the value chain, and one of the attractive things about this particular transaction is that it brings with us a more extensive land organization. We intend to continue to make infill acquisitions in all the North American onshore where we're present.
You'll recall from the record that both in the Marcellus and indeed in the Eagle Ford, we have made additional acquisitions and disposals as we, with our partners, as we have high-graded the acreage. You can expect us to continue to do that after this transaction, both in the Bakken and the Eagle Ford.
Thank you. Do you see other sort of sizable discrete deals?
Well, we remain very focused on the opportunities here and continue to evaluate these opportunities as they come. I don't want to say more than I have about that.
That's great. Thank you.
I mean, this is not the end of our North American unconventional strategy, let's put it that way.
All right. Thank you very much. This then closes our Q&A session and our conference call here today. Any further questions can be directed to Statoil's Investor Relations department. Thank you all very much for your participation, and have a good day.
Thank you for your participation, ladies and gentlemen. You may now disconnect.