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Earnings Call Transcript 2021-Q3

[David Cook, executive]

Good morning, and welcome to the Noreco 3Q Results Presentation. I'm David Cook, CEO of Noreco; and I'm joined today by John Hulme, the COO; and Euan Shirlaw, our CFO, who will both be sharing the highlights of the quarter's strong performance as we go through the presentation.

Some quick upfront highlights just to make sure we get the headlines out for everyone, please. We've got, again, a strong production performance. Our third quarter has shown us within guidance, and in fact, in the upper range of our annual guidance. We're continuing to see positive impacts through the use of the Noble Sam Turner as our wells program adds additional production.

That production strength has given us $150 million of revenue contribution from all of the production across the assets, leaving us with EBITDA of approximately USD 65 million. Our operating cash flow of $84 million supports the remaining cash on the balance sheet of $152 million. And through a successful resolution obtained by our bondholders of NOR14, we've amended the covenant and that resulted in further revenue for pre Tyra completion.

We're also advancing activity inside this and in support of the energy transition. We've tangibly now joined Project Bifrost, which is a DUC partnership with Ørsted and the DTU. We'll speak about that a bit later. And we're also evaluating further potential for carbon storage inside of Denmark. Perhaps excitingly, the Tyra redevelopment continues to see certain progress. We sailed away the Tyra East topsides from Sembcorp in July, and then we've had a successful offshore installation through the quarter.

In a moment, as I mentioned, John and Euan are going to go through some of the details of this quarter's performance. But let me just highlight upfront a few of the key points on the next slide.

We've delivered predictable and reliable near-term growth, and we have further growth in deleveraging on the horizon. We continue to be fully funded with material cash flow generation up through and beyond Tyra. All this is very tangible.

Our near-term 2021 and 2022 is focused on the base securing Tyra and making sure we use our hedging to minimize our market volatility. In 2023 and onwards, it's a step change for the business. as our operational profile will grow to production in the area of 50,000 barrels of oil equivalent a day post Tyra. We are fully funded to the Tyra first gas, and we have significant liquidity, we have strategic hedging in place, and we'll see the material deleveraging post Tyra.

With the RBL refinance in 2021 and the NOR14 covenant headroom that I mentioned earlier, we're in a very strong position. We have a sustainable material cash flow and can generate nearly $1.8 billion from the period 2023 and 2027, the 5 years after Tyra start-up in cash flow in that period. Our disciplined capital allocation has balanced the objectives of both our equity and our debt holders.

Any of our future investments will continue to support the long-term balance sheet and our cash flow generation objectives. We also now are very actively in a meaningful but measured contribution to the energy transition. Tyra itself, which we've been investing in since 2019, will significantly increase the Danish gas production and reduce the overall emissions from the DUC.

We have a commitment to further reducing emissions intensity, and we've demonstrated that through our RBL linkage. And now, as we've mentioned, and we'll talk further, we have taken additional steps looking at the CCS potential in Denmark through Project Bifrost.

With that quick introduction, let me hand this over to John, who will take us through some of the operational details.

[John Hulme, executive]

Good morning, everyone. This is John Hulme, Chief Operating Officer for Noreco. And we'll start with Slide 7, looking at the quarterly production. So we had a challenging first quarter with some of the hangover from the COVID issues. But Q2 and Q3 have been very strong. You can see 27,200 barrels a day equivalent for the quarter, very steady from Q2 and production continues to be steady in Q4. So we fully expect to be in the upper range of guidance as we are now in terms of the external position within the market.

The key build up from Q1 through the rest of the year has been based on the very successful workover program, which got delayed due to COVID using the Sam Turner jack-up rig. So we have a number of workovers that we brought forward. We've been very successful. We are at north of 5,000 barrels a day on those workovers, slightly ahead of our expectations, and this has been delivered at a lower cost than expected. And we have a number of these workovers that will continue through Q4 and into 2022.

So moving on to Slide 8, we'll talk about the Tyra redevelopment, which really is a significant milestone for Noreco. And you'll see on the bottom right-hand side that it will change the mix of this company very much from predominantly oil company to a much closer to a 50-50 mix of oil and gas and obviously, gas prices in Europe right now are incredibly strong. Production for the company will move up to around 50,000 barrels a day when Tyra comes online and a significant improvement in all of the metrics from a production perspective and cost perspective, and Tyra will have a very long life delivering predominantly the bulk of the gas to Denmark which will lead into, obviously, the energy transition.

So let's look at the Tyra project specifically on Slide 9. We've successfully installed 3 of the 8 top sites that are being redeveloped. So the Tyra East have been installed by the Heerema's Sleipnir, the 3 Wellhead & Riser platforms. We have an additional 3 Wellhead & Riser Horizon platforms in the SNLPR in Singapore and they are fully on track to be completed here in the next few months and to sail that in Q1 and be installed by the Sleipnir at the beginning of Q2 next year. The accommodation module is also going to be installed in that same window. And I've actually just visited that module and actually in Valdemar and walked around it.

It's very close to completion. So we expect 7 of the 8 platforms to be fully installed at the beginning of Q2 next year. The remaining facility is the large gas processing platform, which is being constructed at the Batam yard in Indonesia, just across from Singapore. Progress in there has been steady. And we've actually now locked in the sail away and the installation dates for that topside modules.

So that will sail in Q3 and be installed later in Q3 in the August, September window. And then we're basically into the Hook-up & Commissioning phase of this project where we're collecting everything together, getting ready for first gas. And our first gas target remains June 2023 late Q2. So Hook-up & Commissioning has already commenced. So the Harald rig is transporting to the field and we'll start initially with the Tyra East platforms that are installed, and then that combination vessel will support Hook-up & commissioning crew throughout the entire program.

So you can sling on Slide 10, what this does for our production profile. So that the base assets that we see production from this year remains strong. That is the Halfdan, Dan and the Gorm hubs, they continue to produce through. And then you see as Tyra comes online in '23, we have a ramp-up to full production in 2024 is where we see our full year of Tyra production.

And we also remain committed to developing the Halfdan North and Valdemar South mature projects that you can see in the profile there. And then we have additional projects backed up behind these to continue to deliver a strong production profile going into the future.

And with that, I will hand over to Euan Shirlaw, our CFO, to take you through the financials.

[Euan Shirlaw, executive]

Thank you, John. Before going into the detail of Q3, I thought it would be helpful to offer a reminder of where Noreco sits on its journey today. Following the completion of the acquisition of Shell's interest in the DUC in 2019, we hold a large-scale portfolio with over 400 million barrels of 2P reserves and 2P resources. This offers long-term growth and value delivery to the current license expiry at the end of 2042.

Today, we have 3 producing hubs, which John has run through offering a stable base and allowing us to benefit from the current positive commodity price dynamics. We also have meaningful growth inherent within our portfolio through our participation in the ongoing Tyra Redevelopment project. This is consistent with our explicit external commitment to developing and delivering against our ESG objectives.

Our first key contribution to that, which shouldn't be overlooked is that we have been investing significantly in bringing more gas on stream at a time when there is significant short significant tightness in the market. It also demonstrates the important role that gas has to play in the energy transition and has allowed Noreco to start playing its part in helping achieve that difficult balance that our industry faces, investing sufficiently, where there are competing goals and approaches when it comes to the deployment of capital.

Finally, we sit today with a robust capital structure that will allow us to deliver on our operational plans. As we look forward to tomorrow, Noreco will undergo a step-change transformation with the start of Tyra. Production will grow to approximately 50,000 barrels a day and this will lead to a significant reduction in unit OpEx.

It will also result in material free cash flow generation and allow us to deliver a substantial sustainable shareholder return profile. Future investments will, at least, in part, be graded based on the extent to which they support this goal.

Finally, our business delevers significantly, and we will continue our commitment to maintaining a strong capital and financing position. The completion of Tyra is integral to this ongoing shift. And we have, through the last 12 months, positioned ourselves to ensure that we continue to be fully funded to first gas.

Turning to look specifically at our third quarter results. We have, during Q3, delivered strong operational and financial performance. The stability and predictability of our business is shown through the flat quarter-on-quarter production, which is at the top end of our annual guidance. The financial contribution this has provided has been further enhanced by the current commodity price environment.

Ensuring cash flow visibility to Tyra has been 1 of our key objectives, and this will continue to be the case. However, we are now in a position where we are comfortable that our existing hedge portfolio provides this position. As we move further into 2022, we will benefit from increasing exposure to spot prices, particularly on the gas side and our approach to further hedging will be strongly guided by both the prevailing spot and forward market environments.

Our capital structure remains robust with liquidity at the end of Q3 of over $250 million. Following the RBL refinancing earlier this year, we also, during this quarter, concluded the NOR14 written resolution process. This ensures that we have sufficient leverage headroom to allow us to use the cash that we have available to deliver Tyra.

Finally, the long-term nature of our portfolio supports our similarly long-term capital structure. And as a result, we have no principal repayments of debt prior to the startup of Tyra in 2023.

From a hedging perspective, our portfolio continues to provide the floor to cash flow generation that underpins our financial position pre Tyra. However, we also recognize the impact of this mitigation and what that has on our exposure to spot prices. This is the inherent trade-off that we have to look to balance where visibility comes with lower realized prices in strong markets. While we will continue to take a proactive approach to hedging, our existing hedge book decreases in 2022 and beyond.

Looking at oil first. During 2021, we had 6.3 million barrels of oil hedged at around the mid-$50 per barrel level, of which 1.4 million barrels remain during Q4 2021. As we move into 2022, this decreases to 4.3 million barrels, and this trend continues through 2023 and 2024, decreasing to 4 million barrels and then 1.8 million barrels in each of those years, respectively.

This provides an increasing proportion of unhedged volumes and will allow us to participate more materially in the current spot oil market strength.

On the gas side, we have a relatively limited forward hedge portfolio that is focused on winter 2021 and 2022. Any further hedging we put in place will be focused on taking advantage of what we see as a supportive commodity price backdrop. And we will look for opportunities to lock in attractive prices where they exist.

From a capital structure perspective, within Noreco, we take the view that our capital structure is key only insofar as it allows us to deliver against our underlying operational objectives. With this backdrop, we've proactively managed our position through the last 12 months to provide us with the tools we need to be confident in our ability to deliver Tyra. Completing the RBL refinancing in May 2021 was an important step. The current $1.1 billion facility enhanced our forward liquidity position, while also deferring by 2 years the timing of when amortizations commence.

Our liquidity position now totals $252 million, including cash on balance sheet and undrawn RBL capacity. This is expected to provide us with a degree of flexibility as we move forward, recognizing our desire to achieve the joint and complementary objectives of maximizing both our financial strength and the value that we provide to existing equity holders.

Turning to look at the position in more detail where we will be tomorrow. As we start to look at when we -- at the cash flow generation that we will have once Tyra is on stream, it's important to recognize the materiality of that impact, not only on our production, but also on our free cash flow. At current commodity prices, based on both Brent and TTF forward curves, we expect our portfolio to deliver over $1.8 billion of free cash flow from 2023 to 2027.

This will support the objectives that I outlined at the start of today's presentation and allow us to carry over carry out our intention of making material distributions to shareholders, while at the same time, delevering materially.

Turning to the next slide. With that cash flow generation, it's important that we have a clear set of principles around how we intend to allocate our capital. We will continue to look to have a robust capital structure, whether that be today when we are investing or in 2023 onwards when we benefit from that investment.

Once Tyra is on stream, that event in and of itself has a material deleveraging impact on the business given the EBITDA contribution. And we intend to use this as a base to ensure Noreco's capital structure remains fit for purpose. In addition, material shareholder returns will be a key part of our offering. We will balance short-term returns against our desire to ensure that this profile is sustainable, and our dividend policy will be set such will be set as such.

To achieve a sustainable dividend profile, we will consider further investments where they are supportive of this objective. Their contribution must go beyond value and also be supportive of the cash flow generation that we will look to benefit from.

In short, and to conclude, our focus remains on the delivery of the business potential that we have today. We continue to be well positioned to do so and look forward to demonstrating this progress against the short, medium- and long-term objectives we have set.

With that, I will pass over to David to discuss our sustainability approach.

[David Cook, executive]

Thank you, Euan, and John. So a good overview of where we are coming through the third quarter. I'd like to spend a few minutes as well going over our advancing contribution through sustainability. Noreco is actively growing now with visible support of the energy transition. Our strategy has been to achieve a set of very meaningful ESG goals and to make sure that the activity behind those is quite visible as well. We have clearly been focusing on doing everything we can to facilitate the improved technical...

[Technical Difficulty]

[Operator]

Sorry, can you unmute?

[David Cook, executive]

Hello.

[Operator]

Good. Thank you.

[David Cook, executive]

Apologies. Let me restart that. I'm not sure when we got muted. A few minutes on talking about our advancing contribution to sustainability. Our activity, Noreco's activity is growing. We have visible activities now supporting the energy transition. Our strategy is overall to achieve a set of very meaningful ESG goals. The company has been focused on improving their technical and commercial and economic framing all of our environmental initiatives.

And that is included, along with the partners pursuing the extended life of offshore installations, looking at how we can embrace and integrating sustainability goals. We also have a flexible approach and recognize that this is needed given the emerging nature of the various proposals and technologies in the area of sustainability and the energy transition. Nonetheless, we aim to be in the forefront of the evolution of these technologies.

In the near term, we have 2 key pillars. The first, as I've been outlining, is increasing the DUC sustainability and efficiency. And the second is beginning to look at the potential offshore opportunities, including electrification, and then through a broader evolution and evaluation, contribution and participation in carbon capture and storage, potentially greener blue hydrogen, PtX, et cetera. Overall, we want our activities to be meaningful, but we recognize they need to be measured in order to maximize the impact that we are having in terms of our contribution to the energy transition while remaining appropriate for the company and our investors.

We've made this very tangible with our link to the recent RBL refinancing and that has very specific ESG targets. In the areas of emission reduction over the course of now until 2027, we expect to see a reduction of our emissions down to below 16 kilos of CO2. And through the introduction of Tyra gas, the facilities reconfiguration and valuation electrification, et cetera, and ultimately by bringing on and accessing renewable power.

Renewable power also has its own metric, and we're looking at how we can invest in that over the near term as well, where we'll be focused on front-end studies in the near term, identify opportunities and ultimately take these through FID to replace our existing power generation and ultimately replace mechanically driven units.

We also, on the next slide, have recently announced some concrete participation in more of the energy transition through Project Bifrost. Here, we're going to be looking at how to potentially -- mature the potential for carbon transport and storage at the Harald field. If this is successful, the project could have a storage capacity of 3 million tons of CO2 per year. The DUC partnership has combined with Ørsted and the Danish Technological University in Project Bifrost, and we're aiming to try to reuse the existing North Sea infrastructure and an attempt to store CO2 in a depleted offshore gas field.

Project Bifrost for Noreco is the first tangible step. We are a co-owner of unique and significant infrastructure here. We're also well positioned, and we know that CCS is an important part of that green transition. And the use of existing infrastructure for CCS should be attractive from both the climate as well as and an economic perspective.

Let me take a couple of seconds and close out for us, if I may. You heard the story, and I just want to repeat. We are actually very, very happy coming through the third quarter. We've talked about the fact that we are fully funded and de-leveraged. We repeatedly talked about our material resource and reserve base. Our 2P reserves sitting in the area of 200 million barrels of oil equivalent and 2C at roughly the same level with the OPAP potential to access these through additional projects. Our base production is providing significant operating cash flow and the DUC assets continue to show low decline rates, and we've demonstrated with the Noble Sam Turner, our ability to offset these with further investment.

We have certain near-term growth through Tyra. When we reach the Tyra restart, we will produce in the area of 50,000 barrels of oil a day equivalent. And that path to that restart is becoming more and more clear as we've seen our 2021 milestones underpinning the delivery of the project inside of the Danish Shelf.

We continue to intelligently look at our spectrum of growth opportunities, including both the low-risk organic opportunities we have within the DUC. These are high value and low CapEx. We also look at how we could potentially utilize tax balances to support potential inorganic opportunities and access.

As Euan's outlined, we continue to mitigate volatility and our pre Tyra cash flow is secured through hedging with oil in the order of 11.5 million barrels of oil, oil in the order of 11.5 million barrels and gas of 1.2 million megawatt hours all hedged through Q2 of 2024. Our oil hedge prices of $52 to $62 per barrel and the average gas prices of EUR 29 per megawatt hour, put us in a strong position to be certain of our cash flow profiles.

We continue to sit in a strong financial position with diversified funding sources. And again, no near-term debt maturities or capital repayments and an expected cash flow post Tyra in the first 5 years in the order of USD 1.8 billion cumulative in that period.

With that, I'd like to close. Thank you for your time, and we will try to address the questions that have been sent through, and we'll continue to look for any additional questions that come through as well. Thank you. Cathrine?

[Cathrine Torgersen, executive]

Thank you, David. So the first question, is it possible to lock in the current forward prices for your Tyra volumes?

[Euan Shirlaw, executive]

As we start to get closer to the Tyra first gas date, clearly, our to approach hedging those volumes will become a much more important focus. I think what is important to bear in mind, at the current point is that we still sit roughly 2 years away from first gas.

But in addition to that, the current level of backwardation that there is in the forward curves, where the spot price is significantly higher puts us in a position where what we're keen to avoid doing is locking in prices from a hedge perspective that may end up being lower than when we finally get to that point in time when Tyra starts up. So the hedging approach to Tyra will be something that we will increasingly focus on as we go forward. But it's not something that we are looking to hedge out at the current time.

[Cathrine Torgersen, executive]

And Euan regarding Slide 16, how much of the USD 500 million do you intend to pay out as dividend, assuming that prices stay at the current forward curve level? And how is your or the board's preference of cash dividends versus buybacks?

[Euan Shirlaw, executive]

Our clear objective and what I think we've communicated today is that as we move forward, the free cash flow generation that we have a clear intention is to pay out a significant return to shareholders as part of that generation. What we will do as we move forward is define the principles of that dividend policy based on the circumstances at the time when the dividend will be paid, balancing some of the objectives that I mentioned in terms of deleveraging investment and also returns to shareholders.

So the main message is that it is expected to be a material return, but the level at which it is set will be defined as we move forward. That is also a similar point around whether it's a cash dividend or a buyback the preference of that will, in part, depend on the position of the company at the time and the levels at which we are trading when we get to that point. So it will be defined as we move forward.

[Cathrine Torgersen, executive]

We have no further questions. So that concludes the earnings call. Thank you for listening in.

[David Cook, executive]

Thank you, everyone.