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Earnings Call Transcript 2021-Q2

[David Cook, executive]

Welcome. Thank you for joining Noreco's second quarter earnings call. I'm David or CEO of Noreco. And I'm joined today by John Hulme, our CFO; and Euan Shirlaw -- I'm sorry, John, our COO; and Euan Shirlaw, our CFO. We look forward to sharing our 2Q results today. We ask that if you have questions, you submit them throughout the call so that we may address them at the end.

With that, let's step to the highlights for the quarter. Our second quarter production continued to show the strength of our reservoirs, supporting solid base production. Operational uptime was equally solid, delivering ultimately production in the upper end of our guidance for the second quarter in a row of production within the guidance range.

We should note that we've also had the Noble Sam Turner now start enhancing our production through a workover and well maintenance program, which we look forward to further positive results from. We also have got our hedging in place to secure the pre-Tyra cash flow. This is minimizing our exposure to price volatility, and we've also managed now to put our first gas hedges in place.

We announced in May the successful completion of our RBL increase. That facility closed in May. We now have a borrowing base of greater than USD 1 billion and over $170 million of undrawn availability at the end of May. We have a strong liquidity position. We are fully funded to deliver at Tyra at prices below $55 per barrel based on the current forecast. And our recently announced NOR14 bond leverage covenant amendment will further enhance that capital structure.

We delivered $135 million in revenue, and that contribution was primarily from the strong production of our base assets. I'll underpin that -- or delivering around the back of that was an adjusted EBITDA of USD 60 million. We're further excited by the development in Tyra. We've got high activity at levels in the yards. And the first of our top sides have been loaded from the fabrication onto the HTV in Sembcorp, preparing for sail away later this summer. We've revised the internal budget for Tyra on a gross basis to $22 billion, mainly driven by COVID impacts.

I want to point out a couple of key messages that you'll hear throughout this, especially as John and Euan go through the details of the quarter. Main point here is that the near-term growth through Tyra is certain and that we have deleveraging immediately after that on the horizon. That tangible near-term growth is, in the next 2 years, focused on continuing to deliver our base, securing the Tyra exposure and ultimately, through hedging, minimizing our market volatility.

From 2023 onwards, with the start-up of Tyra redevelopment, we will have a step change in our operational profile, the production growth and the cash flow. Again, reemphasizing we are fully funded to Tyra first gas, and we are continually and actively managing our capital structure. We have significant liquidity. And with our strong hedging program in place, we're very confident of the delivery through Tyra. That's further been underpinned by the recent, again, refinancing of the RBL and the recently announced NOR14 bond engagement for additional covenant headroom.

Once we bring Tyra on stream, the cash flow we generate is very significant, in excess of USD 1.4 billion from 2023 to 2027. When we reach that point, we'll continue to have disciplined capital allocation, and we'll make sure that we balance the objectives of both our debt and equity holders. Any further investments when we reach that point will support our long-term balance sheet and cash flow generation expectations and objectives.

I should point out that we also are contributing to the energy transition. We've already shown that commitment through our RBL, where we've shown an intent to reduce emissions intensity, and we put that on paper. Any of our investments associated with contribution to the energy transition will, as a prerequisite, need to be appropriate for our own expectations as well as our holders of our balance sheet.

With that, I'll hand it over to John to go through the operations in a little more detail, to be followed by Euan. John?

[John Hulme, executive]

Thank you, Dave. And yes, on to Slide 7 here. So this is a much more exciting Q2 than Q1. We've picked up our production to 27.3% on average, 1,000 barrels of oil equivalent per day net to Noreco. It's around 10 million barrels a year. That's a significant improvement and significantly increased operational efficiency in uptime versus Q1.

One of the biggest factors, the Noble Sam Turner was supposed to arrive in Q3 2020. It was delayed due to COVID reasons, but it has now arrived. And the first 3 workovers have been significant in terms of additional incremental production, raising our base profile by more than 2,000 barrels a day, about 2,300. And we have a continuation now with additional workovers adding volume and really getting these assets and the 4 hubs back up to where they should be.

Next slide, please. I think this is quite a familiar slide. We are focusing on the Tyra project. Dave really sort of covered the high level in the first few slides there, but significant increase in production going to pretty much double our production base here when we're online in 2023. We've made some good progress in the yards. We've had some challenges, as Dave mentioned, with COVID, and we've had a slight cost increase that we're focused on in terms of the reality of delivering this project on time, on budget.

Next slide, please. So the schedule there is probably the most important slide. And what you see is the accommodation module. There is a little bit of uncertainty right now in terms of the progress there in Italy and in terms of sort of the cost balance. Now there's a slight cost impact on TEH, but there's no real schedule impact. The schedule impact is primarily TEG.

We're highly confident in terms of our numbers, the first gas in Q2 2023. And the operator actually has some targets that are more aggressive than that. We're hopeful we're bringing that on early. But in terms of the marketplace, we're extremely confident in Q2 2023, and we're hopeful that bids will come on earlier than that.

The Singapore yard, the wellhead and riser platforms has been excellent progress. You'll see that in the next slide. And Batam, Indonesia has the TEG platform, and the Rosetti in Italy has the TEH, which we'll be close to. But if we go to the next slide, you can see here, this is very exciting for us. The -- this has all happened in the last 10 days. You can see the wellhead and riser platforms. These are the smaller platforms versus TEG and TEH, but they're already loaded on to the BIGROLL transportation vessel, the HTV, the heavy transport vessel.

This will travel to the North Sea. It's approximately a month straight to the Tyra field, and then these will be loaded on. We have 3 more of these in this yard for the Tyra west, and we also have TEH and TEG, which will sail away. And TEG will be installed in Q2 2022. And then we'll have -- so this is 3 out of 8. There'll be 8 topsides installed and ready for the hookup and commissioning, which you can see at the bottom right here, which goes from Q2 2022 through to first gas in Q2 2023.

Next slide, please. So from a cost perspective, we have, in our judgment, increased the cost slightly from -- up to DKK 22 billion. We -- we're comfortable with these numbers at this point in time. We think this is an extremely cost-competitive project. In 2021, we've spent approximately about $50 million in Q1 and about another USD 50 million in Q2 on this project. We're moving forward. And the continuation through to -- you can see on the bottom left there, through to 2022 and 2023. And first gas, May, June 2023.

Hello? Sorry. My mic cut out there. Let me go to the next slide now. So from a reserves perspective, we put out our reserves base in April this year. We've got 201 million barrels in the 2P reserve category, proven plus probable, and approximately 200 million in the 2C category. You can see on the sort of right-hand side there the evolution of these reserves from 195 million in 2018 through to a production basis for '19 and '20 of 28 produced out and on the revenue line to a pro forma 167, and then we've had some positive revisions and new projects that have been added in, which is Halfdan North and Valdemar Bo South, which are projects that will be moving forward in the next 12 to 18 months, giving us a 201 million barrel reserve profile. I talked quite a bit about the reserve basis, I think, on the Q1 when we put out the reserves report from RISC, who are our independent reserves assessor. So happy to take any questions on reserves, and I'll flip to the next slide here, which is the production profile on Slide 13.

So you can see here our base profile. Obviously, as soon as Tyra is online in 2023, we take a significant step up, almost doubling our current production base. And we have a very strong healthy portfolio of projects rolling through in terms of the projects that we talked about on the last slide, all the way through to potential developments of these additional incremental projects inside the DUC and the 2C resources that we have on our books.

I think that's the last slide on the operations here, and we'll move on to the finances, and I'll bring Euan in here. Are you there, Euan?

[Euan Shirlaw, executive]

I am indeed joined. Thank you very much.

[John Hulme, executive]

Okay. Go ahead.

[Euan Shirlaw, executive]

Fantastic. So kicking off the financial section. So the presentations that we've given historically have focused very much on quarter-by-quarter performance. And before getting into that, which we will cover in the same level of detail as we normally do, I wanted to just take a step back and give a little bit of context, particularly looking at what we've done in 2021 to date and how that impacts the future for Noreco.

So 2021 has seen us take significant steps to strengthen our capital structure. As Dave mentioned at the start of the call, we completed the RBL refinancing, which has added significant liquidity to our profile, but also deferred amortizations. We've also had a process around the covenants on NOR14. That has been supported by 2/3 of the bondholders for the proposal that we have put forward. And on the basis of that, we have launched a written resolution process that will refocus the covenants on liquidity and reduce our exposure to leverage that we feel is not core to the Noreco credit story.

As a consequence of both these material developments, we are fully funded to deliver Tyra, which John has covered the progress on, to -- we're fully funded to deliver Tyra at prices that are significantly below the current market. This positions us well to unlock the future significant uptick in performance once Tyra's onstream. With production expected to increase by more than 90% and unit costs coming down significantly, that leads to substantial free cash flow generation. This enables us, in turn, to continue our focus on having a robust capital structure with future allocation decisions being driven by a principle of discipline and balance across the objectives of deleveraging, distributions and investments for further growth.

Moving back to the quarterly performance in the second quarter. The strong operational results that we've talked through have translated strongly into a significant uptick in financial performance versus the first quarter. Our revenue in Q2 of $135 million, which in turn generated EBITDA of $58 million, reflects both increased production and increased price realizations across the period.

Well, our realized price of $57.50 per barrel reflects the impacts of our hedging. I think everybody recognizes that hedging is a balance. There are times when it is a benefit, and there are times when it comes across to your financial statements as a cost. However, from a Noreco perspective, the key focus that we look at when we think about our hedging arrangements is the overall benefit that they provide through minimizing our exposure to commodity price volatility and securing cash flow pre-Tyra.

Our liquidity position of $245 million at the end of the quarter reflects a working capital build during the 3-month period that we have just gone through, driven by movements on both the trade receivables side, which is driven by the effectively improved performance from both a cost -- sorry, from both a price and a production perspective, but also the payable side. And that, fundamentally, we expect it to unwind throughout the remainder of 2021.

Turning on to the next slide. Our capital structure as a high-level overview is now set for the delivery of Tyra. The liquidity position which I've just covered means that we are fully funded based on our current forecast at prices significantly below spot. Following the RBL refinancing, we have ensured that there are no debt principal payments on a cash basis prior to the start-up of Tyra. And that refinancing itself deferred effectively $450 million of amortizations that would have been due prior to when they are now payable to the start of repayments under the revised facility.

I talked through NOR14 a little bit at the start, and I'm going to have -- I'm going to come on to the page that we have on that specifically. But I think just again, just to give you the high-level message, we now feel that with the written resolution process that we have launched, upon successful completion of that, NOR14 will be set in line with our current business plan. And with 2/3 of bondholder support received before launching that, we are confident that we will reach a successful conclusion. The liquidity position that we have of $245 million is driven by cash on the balance sheet of $145 million and undrawn RBL of $100 million.

From a hedging perspective, our pre-Tyra focus is very much on minimizing cash flow volatility. To do that and maximize cash flow visibility, we've hedged roughly 14 million barrels. This has historically been oil-weighted. But recently, given the positive market dynamics, we've added gas volumes for the summer and winter period of '21/'22. Given the Brent and TTF curves are both steeply backward-dated, we naturally prefer the hedging of near-term volumes, and we will continue to do so as we go forward.

On the gas side, in particular, we will look where we can to add volumes over the next 12 months, reflecting the strong near-term prices that we have. But given particularly, on the gas market, the levels of backwardation and also the liquidity in the hedging markets once you get into periods beyond the next 12 months, our gas hedging is likely to be extremely near-term focused in the near term.

From a structural perspective in terms of how we execute our hedging program, as I mentioned, the focus is on effectively maximizing the price level at which we guarantee our volumes can be sold. On the basis of that, our focus is on doing that through swap transactions effectively. As we move closer to Tyra and then beyond the Tyra period, we will consider both what hedging levels are appropriate, recognizing our capital structure and the requirements of our various capital providers, but also the structure that we used to put that hedging in place. And we may see a shift towards more of a collar structure post Tyra, where we have both downside protection, but also exposure to higher prices going forward.

On NOR14, particularly, just to spend a couple of minutes also talking about the background to that, we wanted to reflect the steps taken that we've made in 2021 to date to strengthen our capital structure. The RBL refinancing was a strong base upon which to look at where we were from a capital perspective and consider what we could do and should do to ensure that we had a strong position that was set to deliver Tyra.

We also wanted to ensure that the covenants that we were being held to were best reflective of the core of the Noreco credit story. Therefore, well, we are not currently forecasting a breach of any covenant under NOR14. We preemptively went to the bondholders to seek an amendment to the covenant structure to add additional headroom on the leverage basis. And that was to refocus on liquidity rather than leverage levels at a time when the business is not operating at a steady-state financial performance.

And that's one of the important things to bear in mind when you look at the credit structure of Noreco is that because Tyra is such a step change in Noreco's business, it is not a typical leverage structure where effectively, you have either a decline or an increase in leverage driven by commodity prices or underlying operational performance. There is one inherent event that leads to material deleveraging, which is first gas from Tyra.

So refocusing the covenants on liquidity, which enable us -- the liquidity which enables us to deliver Tyra, rather than leverage. From our perspective, we felt that, that was supportive of the overall principle of having covenants that reflected the credit position of the business. And that also reflects the amendment that we went out with. So in exchange for a higher leverage covenant during the Tyra redevelopment period, we offer a higher liquidity threshold supported by our forecasts and also a change in the call structure to reflect the risk profile of the Tyra redevelopment period and also the post-Tyra redevelopment period.

With this proposal having been supported by more than 2/3 of the bondholders prior to the launch of the written resolution, we're confident in its success. And the voting period ends on the 23rd of July, by which time we expect to be able to provide the market with an update.

That covers a lot of where we are from a current perspective, both the quarterly performance and also the recent steps that we've taken on the capital structure. So to spend a little bit of time just looking at the forecast, hopefully, everybody has also had the opportunity to review the Capital Markets Update presentation that we published at the end of June. That provided a significantly more detail in terms of how the business is expected to perform going forward in a much more granular level than we had done in the past. So I think that is a useful reference and starting point.

But just to cover some of the main points here as we go through from a finance perspective, starting with CapEx. As we look forward, there is a material change in the CapEx profile from 2023. John mentioned that we've spent roughly $100 million in 2021 year-to-date on Tyra. And the remainder of that will be spent across the second half of 2021 and into 2023.

We've currently sanctioned no further capital projects beyond Tyra. And any future decisions around sanctioning of growth projects will be determined, at least in part, by our focus on capital discipline and the balance between the objectives that I outlined at the start and we'll cover a little bit more in detail at the end of this presentation.

From a production CapEx perspective, we have a minimal level of sustaining CapEx in our profiles going forward. And that is reflective of the production profiles that we have shown previously in this presentation and that John outlined. And I think that's an important point to note because while there are further opportunities that we may think are attractive at the time to mitigate the expected production decline, i.e., to achieve a better level of decline than is implied by the current profiles, the cost structure needs to reflect the production levels that we are forecasting. And effectively, if we are to spend more on production CapEx, we would expect that to have a positive impact on our production. And therefore, it is important that the CapEx that we are looking at is reflective of the underlying production profile that we are looking at and people are forecasting as we go forward.

Turning over to OpEx. As we've noted significantly in the past, but haven't provided as much detail on, we expect a significant reduction in OpEx once Tyra's onstream. That reflects both a more efficient Tyra operating hub, which is primarily a function of these being new facilities that are coming on from a topside perspective, but it also reflects the total cost focus going forward. The organization that we have today partly reflects what is needed for Tyra. And therefore, on an operating cost per barrel basis or a unit cost per barrel, it leads to higher costs today than we expect to have in the future.

So to just quote the direct numbers, from a direct field OpEx basis, we expect in Tyra's first full year of production, that direct field OpEx to be below $13 per barrel. The total DUC OpEx, which includes production G&A, will be below $15 per barrel. And the total Noreco operating cost will be below $18 a barrel, incorporating our transportation and tariff expenses.

Beyond 2024, we have given an indication of what the future cost base may look like with the 2030 column. But I would highlight that, that is clearly dependent on future decisions that are taken around the business, so whether that is sanctioning decisions or how the business just develops on an underlying basis. So the cost profile will be set to be appropriate for the business going forward, depending on what the production levels are that we have supporting that cost base.

Moving over to Slide 22 -- sorry, Slide 22. Dave mentioned at the start of the call the cash flow generation potential of our business. We -- looking at it from a forward curve perspective, we expect to generate over $1.4 billion of free cash flow on an operating and investment activity basis. That substantial generation will lead to, effectively, the pace that we're about to come on through our own choices around capital discipline and ensuring that we are using that capital effectively, but balancing the objectives that we have of our various capital providers and also the business that we are looking to deliver.

The point that I would also make on this curve in particular is that we're looking at the forward curve and the range is based on $55 to $75 per barrel. The range itself includes the gas price on a forward-curve basis. As I mentioned to -- when we were -- as I talked to when we were discussing the hedging page, the gas market is steeply backward-dated from a forward-curve perspective. So there is potential for a positive development of this profile depending on where gas prices are. And as everybody will be aware, we are more exposed to gas pricing once Tyra is back onstream.

Finally, just to look briefly at our approach to capital allocation, we are very focused on ensuring that while there is significant cash flow generation of the business, that we are using this in a way that is appropriate for the Noreco business. I think in the first instance we are focused on the inherent deleveraging that comes once Tyra is onstream.

And we have set ourselves a leverage target from a steady state or a run rate basis of below 2x net-debt-to-EBITDA. And that will drive a lot of the future decisions as we look forward. And clearly, with such substantial cash flow generation capital returns to our shareholders, which are supported by our balance sheet, will be a big part of our profile going forward. And we have set a corporate objective of establishing a sustainable long-term dividend profile. But again, with the caveat that, that needs to be measured against the strength of our capital structure and also ensuring that we have an approach that is disciplined and reflective of the overall goals of the company.

Finally, from a growth perspective, I mentioned that we have currently no sanctioned further capital investment projects, and we will also look to sanction investments only where they meet our internal returns thresholds, but also are supportive of long-term cash flow generation potential of our business.

And with that, I will hand back to Dave to cover our sustainability.

[David Cook, executive]

Thank you, Euan and John. Wanted to explicitly spend a couple of minutes just talking about Noreco's role in the energy transition. And we do have a role, and we actually are participating in that role.

We have set out our principles and our strategy to make sure that we can make a contribution which is substantive, quantifiable and very much achievable. And again, we've done that perhaps quietly, but on paper in terms of what we've done to link our emissions and overall ESG objectives to our RBL. We have laid out the strategy and it says, for us, we want to be a meaningful participant in the energy transition. And then we're going to make sure we focus on the ongoing and improving technical, commercial and economic framing of the various environmental initiatives.

That's a lot of words, but what it really says is that we are really focused on doing the best we can with the installations and the opportunities that we have to make sure that they are continually improving, that the emissions that come from these are better with each barrel we produce. We'll make sure that this is true for any new investments as well as for the life of any going offshore installations that we are operating or part of operating.

We know that the overall ESG framework and the opportunities that are out there are currently evolving, and we need to be flexible within that in terms of how we participate. We'll make sure that we are actively participating and monitoring the proposals and technologies as they develop, and we'll make sure that we continue to stay in the forefront of the deployment of these opportunities and this evolution.

In the near term, we're really focused on 2 key pillars: the first one being increasing the overall sustainability and efficiency. We're therefore reducing the emissions associated with the DUC along with our partners, Total in the North Sea Fund. And then the second is to really look at the very specific objective of electrification in the offshore. We've laid out a time line to make sure that the studies for this sort of work is ongoing in the first next couple of years. with the intent of achieving FID for these sort of opportunities by the time that Tyra has come back onstream and we can look at investment. And then longer term, looking at converting not only -- or reducing not only the emissions, but converting the source of our power to some component of renewables, as laid out, sort of 30% by 2027 and we're at 80% and greater by 2029 and beyond.

We want this to make -- we wanted to point this out because we believe that our emissions-reducing activities need to be meaningful, and we believe these are, but we also want to make sure that they are measurable and measured in order that we maximize the impact and, therefore, the reduction of emissions while making sure we keep the investment appropriate for Noreco.

With that, I can go to the last slide before we go into questions. This is really reemphasizing what we've said in the past and a little bit more of what we said today. You've heard this from all of us. We are fully funded and a company that has a very certain growth profile and we're deleveraging significantly after 2023. As John has shown in detail, we have a material reserves and resource base of over 200 million barrels in 2P and 200 million barrels in 2C. Our base production is very reliable and is providing significant operational cash flow. The decline rates from our reservoirs are low, and we have continued opportunities to invest and further offset this, such as we are doing now with the Noble Sam Turner and the workover and maintenance program that we've initiated in 2Q.

Our near-term growth is certain. We will be bringing Tyra onstream, and that will be moving us to approximately 50,000 barrels of oil equivalent per day following the restart of the Tyra redevelopment. We know that certainty is there as we're seeing our milestones in the fabrication and the sail away from the shipyards being delivered. We also continue, as Euan pointed out as well, to have a spectrum of growth opportunities. Within the DUC, these are very low-risk or organic opportunities. They're low CapEx, high value. And they're choices that we'll be able to make as long as they fit within our expected capital profile and create the value we need.

We also have advantageous tax balances both within Denmark and beyond, which can support potential inorganic opportunities should we see that they fit the objectives that we've laid out. We do have the pre-Tyra cash flow quite secured, again, by a strong reliable base, more importantly, through the hedging to remove the effects of commodity price volatility. And we're seeing those hedge prices will deliver the project with certainty, and we've also entered into our first gas hedges now looking forward at a very strong position.

And finally, as Euan has laid out quite clearly, we have a very strong financial position and a very strong capital structure. Our diversified sources of funding have carried no near-term debt maturities. There's no near-term capital repayments. In fact, we've improved that over the past quarter. And post Tyra, we expect cash flows on a simple strip basis to be approaching $1.5 billion over the period of 2023 to 2027. All of this and what you've heard, I hope, lets you understand our confidence inside of what we have inside of Noreco, not only in terms of our base, but in the certain growth that's coming to us and the opportunities thereafter.

With that, we'll wrap up the presentation now and look forward to addressing any questions that may be out there. Thank you for your time.

[Cathrine Torgersen, executive]

Thank you, David. It looks like we only have 1 question which hasn't been covered during the presentation. The question is for John. Do you also expect Q3 production in the upper end of guidance?

[John Hulme, executive]

Yes. So in the Q&A, Cathrine, thank you. We were obviously down in Q1, and we had a strong performance in Q2. I would expect us looking forward to the plans and the shutdowns and the operational efficiency of the way things are working to be sort of mid- to upper end in Q3 of our guidance. It would be my expectation.

[Cathrine Torgersen, executive]

Thank you. And that concludes the Q2 earnings call. Thank you all for participating.

[David Cook, executive]

Thank you.

[John Hulme, executive]

Thanks.