BW Energy Ltd

OSE:BWE

Earnings Call Transcript 2022-Q1

[Operator]

Welcome to the BW Energy Q1 Presentation. [Operator Instructions]

Today, I'm pleased to present Carl Arnet, CEO. Please begin your meeting.

[Carl Arnet, executive]

Welcome to BW Energy First Quarter Presentation. This presentation will be hosted by Knut Saethre; our CFO, Lin Espey; our Chief Operating Officer and myself, Carl Arnet.

Please note our disclaimer.

Highlights for the quarter. The decision to proceed with Maromba development has increased company 2P reserves by 135, which, of course, is a significant increase. The first oil from Hibiscus/Ruche development is still on track for an end of 2022 first oil. We have also achieved in principal commitments from a consortium of banks for an RBL facility with -- based on Dussafu -- the Dussafu asset.

The Q1 EBITDA was $65.5 million with a net profit of $35.6 million. This was based on one lifting to company with a net sold volume of 1 million barrels. That's including DMO volumes. The average lifting price achieved was $120 and with the gross production of 1 million barrels. Income statement impact from hedging positions is, we did hedge volumes. And we had a certain effect from these hedges, but more of that will come later in the presentation.

The balance sheet remains strong with no debt and a cash position at the end of the quarter of $111 million and that's before receiving the proceeds from the quarterly lifting in the first quarter.

On the HMS score, we are still seeing effects of the COVID-19 pandemic. And this is mainly related to project execution, equipment deliveries and of course, in particular, the FPSO operation and offshore modification work. It is being managed, but we still see effect of COVID-19. I think in most peoples' perception, the COVID-19 pandemic is gone, but still affecting us in operations.

We had fortunately no LTIs in the first quarter recorded. And we achieved 1 million manhours without any LTI at the Lamprell shipyard, where the Hibiscus Alpha conversion is taking place. The security situation at Dussafu remains low. And we have had zero security incidents as well. And further to that, we had no environmental incidents either, so all good on that score.

So production outlook remains the same. The big increase will be when we get Hibiscus/Ruche Phase 1 up and running, which is end of this year, as I have stated. And then, of course, you have the net production estimate as well. And of course, the next big uptick will be the Maromba first oil.

Then on to Dussafu. Production at Dussafu was 1 million barrels in the first quarter or 11,600 barrels per day average. The decrease from the fourth quarter was due to a 12-day plant maintenance shutdown of the FPSO. That gave a cost of $33 per barrel or OpEx, and that includes the COVID-19-related costs.

As previously stated, we do need additional gas lift capacity to reach the full potential of the wells we have. We could today produce up to 18,000 barrels. But due to the gas lift capacity, we are somewhat curtailed in the production capacity. We have tested some nitrogen, used nitrogen for gas lift. And it has worked, but that has only been intermittently.

The long-term recovery rate for Tortue remains of course unchanged. And so this is deferred production and not any production loss as such. The production forecast has been revised slightly down. And this is due to the unfortunate, let's say, situation that we have -- we are now anticipating a further delay in the gas lift compressor delivery. And this is caused in -- specifically by the problem of getting semiconductors. And it's affecting the control system for the new compressor. So there's no drama as such. The compressor hardware is in the process of being delivered. But we will have an 8-week delay in the start-up of the compressor.

We assume then an OpEx for the full year of $32 per barrel. We completed, as I've already said, 950 barrel lift in March. And you can see the lifting schedule in the caption on the bottom right-hand side of this slide. And you see we will have zero liftings in the second quarter. And then we will have a lifting in third and a lifting in the fourth quarter.

Hibiscus/Ruche development. The Hibiscus/Ruche field is estimated to add about 30,000 barrels of production. And this will be based on 4 Hibiscus Gamba wells and 2 Ruche Gamba wells. That will be the object of the initial drilling campaign.

The jack-up rig conversion at Lamprell Yard is going well. And we now have scheduled the sale away for August, and the time window is end of July, beginning of August. We have been able to mitigate delays. We've had several delays to equipment delivery caused by the COVID-19 pandemic and lately in the war in Ukraine. But to a very large extent, we have been able to mitigate and changed the sequence of things so that we have been able to maintain overall progress.

The planning or preparations for the installation of the 20 kilometer pipeline from Hibiscus Alpha to the FPSO Adolo is going well. And this will be done by Technip as soon as we have the main facilities in place, of course. We have contracted bore for the drilling campaign as previously related. It's a 4 plus 4 option program. We plan to do 6 wells, as I said. And we have then a further 2 options for the -- for an exploration program.

First oil is planned end of '22. We are now seeing a slight increase in the CapEx that we expect to complete this project. This has been partly caused by, let's say, the disruption that I've just spoken about. And the -- then we have -- you can basically put it in 3 buckets. Part of it is caused by increases in costs due to delivery schedule and changes to sequence and variation orders related to that and partly to increased cost of energy. This is related to the transportation and the field campaign, which is, of course, we're naturally hedged for that, but it will show up in the project budget as a cost increase. And then we have some increases in the costs related to the modifications to the FPSO.

But just a reminder that when this project was sanctioned, we had an original plan of having oil in the first quarter of 2023 and a total budget of $490 million. So we are still ahead of the sanctioned budget and plan.

Then on Maromba. In the quarter, we decided to go ahead, push ahead with the Maromba project. This has increased the 2P gross reserves with 105 million barrels. We do have additional Maastrichtian sands in the Maromba license with an additional 2C gross reserves of 41 million barrels that we aim to unlock later on.

The development plan has been approved by ANP. And we have partial approval by IBA, but the IBAMA environmental -- full environmental approval is, of course, expected in due course. We are -- for this final investment decision, we have a subject and that is completing -- completion of the project financing activities. And that is work we are currently attending.

First oil is planned in 2025. And this will add a useful 30,000 to 40,000 barrels of oil per day at peak production. We entered into an agreement to purchase the FPSO Polvo with BW Offshore for a total consideration of $50 million. The revised Maromba development plan then is a redeployment of the Polvo after life extension and refurbishment. This has a production capacity of 65,000 barrels of oil per day. And the initial production will be from 6 subsea wells. We will complete 3 wells in the first drilling campaign in 2025 and then a second set of 3 wells that will be drilled in 2027. And we're also including a gas import pipeline as this field will be gas deficient, not very long after startup.

The redeployment of an FPSO is, of course, work we are very familiar with. It is a very CapEx-efficient and low-risk development. The FPSO is well known to Brazilian authorities as it has been operating in Brazil until quite recently. And it was operating on a nearby field, the Polvo field, which is close to Maromba.

The Polvo field is very similar characteristics with respect to the crude oil. And we are consequently going to be able to retain a large part of the process systems. There will be some, of course, work required. There is steel renewal and repainting program. We will do updates to the accommodation. And we will change the swivel. And we will do some modifications to the turret area.

We will also replace boilers to be sure that we have a very stable steam system for power. And we will do certain adjustments to the process, but nothing significant. This will give us also a 1.2 million barrel storage. We can then, due to our turret boring, we can offload directly to standard Suezmax Tankers. We do not need DP tankers.

Then on to Kudu. The company has recently presented the revised Kudu development plan, a gas to power project. And we have presented that to Namibian stakeholders. The revised plan is to develop or convert the recently acquired jacket, the LEO, to an offshore production facility. The unit will be placed on the Kudu field and export gas through a 12-inch pipeline running to Elizabeth Bay, where we will install a power plant of 420 megawatts.

The plant today -- the power plant will be tied into nearby transmission system that feeds directly into the Namibian power grid, which is today being supported with power from South Africa. The initial phase of production will be 65 million SCFs per day. The facility will be designed to accommodate twice that, so 130, to cater for an increase in power production as we expect markets to develop over time.

And of course, the availability of more power in the Sub-Sahara region will be very well received. We are currently negotiating with the authorities for a power contract. We've also, of course, noted the recent oil and gas discoveries made by Total and Shell in the same basin as Kudu. And we are -- currently we have acquired additional 2D seismic to evaluate this potential or this news also for the Kudu and the implications for the Kudu license.

Kudu is up-dip of these discoveries. So we do see a similar potential in the subsurface of Kudu. We are -- in addition to, let's say, this new development for oil with oil discoveries, which is the first oil discovered in the Namibian offshore. We are also looking at what is called Kudu North, which is a northern rich to the existing discoveries in Kudu existing gas discoveries. And we see a significant potential up in this northern area, its large structures. And we see some very high potential for additional gas to the already discovered gas.

So all in, we are extremely pleased with the developments in Namibia and with the new potential. And this is looking extremely positive for Namibia, but also, of course, for our Kudu license.

I will then hand over to Knut that will take you through the financials.

[Knut Sæthre, executive]

Thank you, Carl. I will give you some more details on our first quarter financials.

So please go into next slide, which is the income statement. We had a good increase in operating revenues in spite of having one cargo lifted compared to 2 in the fourth quarter of last year. However, we had a higher volumes lifted. It was 950,000 barrels of oil in one lifting that we did in March compared to the 2x 650 in the fourth quarter. So this was a Suezmax lifting. March also gave us a very good average oil price. The dated Brent average for the first, sorry, for March was $120 per barrel. So that gave us $133 million in revenues.

We also had some losses from the hedges that we entered into that we disclosed to the market back in the fourth quarter. So we had $22 million in losses on derivatives where 50% were realized in the first quarter, coming a little bit back to that later on, on a separate slide.

Operating expenses somewhat higher, and as Carl explained, we are suffering also from higher energy prices on the cost side. Just as an example, you have diesel consumption, you have helicopter costs going somewhat up with higher energy prices and also the disruptions in the supply chain that we see also affecting us also on the operational cost side. But again a very good EBITDA for the quarter of $65.5 million, even better than the fourth quarter.

Depreciations more or less in line, giving us an operating profit of $46.2 million. If you look away from the impairment reversal in Q4, that is also much better than in the fourth quarter of '21. On the net financial items, I just wanted to highlight that we still have our interest rate swap that gave us a good positive effect of $3 million in the quarter.

So then finally, after taxes, we had a net profit in the quarter of $35.6 million compared to $38.9 million in the fourth quarter of '21. To our balance sheet, it is growing somewhat with our investments. Our investment activity on the Ruche/Hibiscus project and also the purchase of the semi-submersible rig West LEO increased the tangible assets somewhat.

Then we have had a big increase in trade receivables with lifting that we did towards the end of March. However, that was paid end of April and gave us a very good cash position at the end of April. You can also see here how we have accounted for the hedging losses, so some is coming in under longer term and some in the shorter term lines.

But again, we have a very strong and robust balance sheet with close to 60% equity ratio. And just bear in mind, the only liabilities we have here is related to the FPSO contract, so no external debt. So we are very pleased with the situation we have going forward.

To our hedges, you can see there that we had hedged 570,000 barrels of oil for the March lifting, which was then realized position of losses of $10.9 million. And then we have some hedges in place for the rest of '22 and some for 2023, where the unrealized position at the end of the quarter was $11 million. And just to remind you, we entered into these hedges to support funding for ongoing development projects. And this is also a requirement under our RBL facility that I'm coming a little bit back to in the next slide. So that's the background for our recent hedge activity.

So going to the next slide. We have our first quarter cash flow. We started off with $151 million in cash and had an operating cash flow of $12.5 million in the quarter with our investment activities, as mentioned, West Leo and mainly done in the Dussafu investments where we invested about $45 million, ending up with a cash position of $110 million at the end of the quarter. And as just mentioned, we received the payment for the March lifting of $140 million end of April.

And then a few words to our progress on the RBL facility that we have mentioned many times over the last few years. We're finally there where we have in principal commitments from an international consortium of banks. The facility is up of up to $300 million. There is an accordion attached to that. So we're looking at about $200 million in the first round and then an accordion of another $100 million. And we do expect to complete this facility, have it closed and available for drawing in the third quarter, giving us a good reserve and buffer with all of our activities. The margins are between 500 and 600 basis points above so far. And again, we are very pleased with finally getting a conclusion to this project.

So then we go over to the next slide, the outlook. So just to -- as a reminder on the strategic priorities and value levers, on the production and exploration side, our main focus is on Dussafu output to ensure that we produce as much as we can on these higher oil price levels and are working hard on the increased gas lift capacity to get that final result in the fourth quarter, also evaluating the Dussafu exploration program. And we'll come back to more details going there coming out of that in the future.

And what is new on this slide is, as Carl mentioned, we have acquired some 2D seismic from TGS to evaluate a very exciting Kudu potential. On the development side, bringing Hibiscus/Ruche to first oil towards the very end of '22 is obviously something that is very important and in addition then getting Maromba to the final investment decision.

We are working hard on the financing side, both for an FPSO financing and also for field development financing. A lot of that development will, of course, also be financed out of operating cash flows from our Dussafu field. And then on Kudu, also working, as Carl went through on the new right-sized Kudu gas power concept, which has given us a lower CapEx and improved timeline.

On the corporate side, our focus is to maintain a strong and flexible balance sheet, ensuring operational cash flows to fund new projects and future shareholder returns. We are also active on the M&A side and hope that we can announce something during the course of the year, focusing on -- more on brownfield acquisitions. And then to the ever coming question to dividends, we intend to pay dividends when we have completed the Dussafu and Maromba developments.

And then finally on the, let's say, shorter-term financing, we hope to complete the RBL financing now in the third quarter.

So that concludes our presentation for today. Then I'll leave it back to you, operator, for any questions from the audience.

[Operator]

[Operator Instructions] And our first question is from the line of [indiscernible] from Pareto Securities.

[Unknown Analyst]

A couple of questions from me. With what's happening in global supply chains at the moment, how confident are you on getting a best solution on-stream by the end of this year? And if there are some delays there, are we talking about minor things? Or should there be a significant delay -- where you suddenly see that first time instances moved to the second quarter next year or something like that? So kind of how much risk is on that time line. And in addition to that, we will kind of increase the cost inflation coming in. How confident are you that we have secured enough rig capacity to be able to drill a lot well to get to the FPSO capacity when rigs starts to produce?

[Carl Arnet, executive]

Okay. Yes, this is Carl. I'll try to answer that. It's -- of course, there's always risk to project completion. We are very happy with the progress that we have made in Lamprell. And we -- as I said, we have now confirmed the window for the heavy lift vessel that will take the unit from Dubai to Gabon.

So the installation and also the pipeline campaign, we're very confident. We have a program with -- that needs execution, and that's on the FPSO. There are some uncertainty in that. But we hope BW Offshore is on top of it. So far they are reporting that they are on top of it. So we trust them on that. The other thing is, of course, the availability of the rig. And we have -- the rig is currently drilling for VAALCO. And the -- so far, what we are seeing is that VAALCO is taking -- they've taken some options in their drilling program. And what we see now is that there is a good match to these schedules. But that's contingent on VAALCO not declaring further options. They do have another 2 options that they can declare. And if they declare them, then we would have a delay to our drilling campaign. I think that's the best way to explain it. But that's -- so far, that's not happened. And we expect to get the rig timely as per plan. I hope that answered your question. Or was there more?

[Operator]

[Operator Instructions] And as we have no more audio questions registered, I hand back to our speakers.

[Knut Sæthre, executive]

Well, thank you. We have lots of questions on the web. Let's go first to a Kudu question. And that is whether Kudu-North is the main new opportunity you see in the Kudu license? Or are there significant other opportunities? And in particular do you see potential for oil prospects?

[Lin Espey, executive]

Hello, everyone. This is Lin, Lin Espey, the COO. And well, for -- I guess, in regards to the significant discoveries made by Shell and Total outboard, I think it's too early to say what the exact impact is to the Kudu block, although it's certainly interesting that these discoveries have opened up the -- a new play in offshore Southern Namibia. And we're taking a look at that. We're evaluating that. We've acquired some more 2D seismic to help us evaluate that. So it's probably a little bit early to talk further about that. And then -- but also of interest is we've been evaluating the gas horizons of the known Kudu reservoirs. And we're starting to recognize that there is greater potential in the -- in these gas reservoirs. So we'll continue to evaluate that. And then -- it's then following on from that would be how best to, if in fact there is more gas, how we would develop that, but early days right now.

[Knut Sæthre, executive]

And as a follow-up, still on Kudu, when could we expect to see FID and whether the Maromba FID would affect the Kudu development plan?

[Carl Arnet, executive]

Well, I think we see Maromba and Kudu as 2 independent prospects. And Maromba, we have decided to push forward. The crucial thing for Kudu is that we can be a power purchase agreement or a memorandum of understanding will be the starting point with the Namibian off-takers so that we have an underpinning for the base power of the project. That is the first order of business.

We have a very attractive power price. So we are very hopeful that, that is -- will be seen as good for Namibia. And also I think it is a good environmental project because today Namibia is getting 60% of their power from Eskom in South Africa and all their power is based on coal-fired power. So this will significantly reduce the CO2 emissions in the region.

So attractive price, price stability and it will improve Namibia's trade balance significantly by being able to produce power from a domestic resource rather than importing and paying for the kilowatt hours they buy from it South Africa today.

[Knut Sæthre, executive]

Good. And then we have lots of questions related to Maromba, mainly on the CapEx side, inflationary pressures, how to deal with those and also about a reminder on the acquisition price.

And let me start and then you could -- might fill in. So the total acquisition price for Maromba was $115 million. And we paid $30 million at closing a couple of years ago. And then the second milestone, that is $25 million, that is at start of drilling activities. And the final one is at first oil.

And then there is a question here, when in '25 the first oil is?

And in our current plans, that is in the first half of '25. We have to come back to more details when we have more contracts in place for it. Right now we are negotiating the different contracts with yards and key suppliers.

On the CapEx, the total CapEx for Maromba is around $1.2 billion in 2 phases, where we will get to first oil with 3 wells. And to get there, the current plan is that we have to -- about $50 million in total this year in investment and next year it ramps up to $250 million in '23 and about $400 million in '24.

And then on the inflationary pressures, yes, there definitely are. And then we have to come back to, let's say, more details on the CapEx when we get closer. I don't know if you have anything to add on the inflationary pressures for Maromba.

[Carl Arnet, executive]

Inflationary pressures are certainly quite visible in the market. But there is a little bit of frothiness now as well. So we expect things to stabilize. We have been confirming some pricing that we had previously received from suppliers that we are going to use for Maromba. And so far, indications are around 5% to 10% is what we're seeing, which is definitely within what we can manage and we have a much improved plan with the use of the Polvo. So we're, I would say, we're tracking quite well with what we know today. Early indications from yards are also fine. It's not showing any huge increase. So we have obviously a lot more work to do, but it's not looking too bad as we speak.

[Knut Sæthre, executive]

Good. And then there is a question around what's the kind of sources of financing we're looking at for Maromba. And that is our very -- very high priority for us right now is to secure a financing for the FPSO conversion. So that's going on. And hopefully we have some updates there in the next quarter. And then secondly, it is the potential development financing, either in forms of an RBL or some trade or financing could be potentials. And then we will -- yes, I think we'll have to get back to you on more as we progress. But I would say the FPSO construction financing is our top priority right now. And as I mentioned in my slides, we also have the operating cash flows from Dussafu that we'll plough partly into the Maromba investment.

If I go on the list, we have nitrogen usage question, Lin. It worked well in the first quarter and if you could say something for the rest of the year?

[Lin Espey, executive]

Sure. Yes. We had a successful trial case went up in the first quarter. I think we're all very pleased with the added benefit. We were able to bring one of our wells that's down due to lack of gas lift capacity, bring it online. And I think we're very pleased with the results we are in. Now we need to wait for a few parts to allow us to run the nitrogen unit in a more continuous manner. And we anticipate to have that shortly. So hopefully second quarter we'll be able to report.

[Knut Sæthre, executive]

And if you can say also something about facility uptime in the first quarter?

[Lin Espey, executive]

Facility uptime in the first quarter, we did have the planned maintenance downtime and I think that was a little over 10 days or so, 12 days. And -- but other than that, the spurious downtime was low. So that was positive. So I think overall in line with the expectations.

[Knut Sæthre, executive]

And then there is a question to the gas lift compressor after installation of a new larger gas lift compressor and first oil at the end of this year. Can you say something about the OpEx?

[Carl Arnet, executive]

Well, our production should increase with the additional gas lift compressor. So therefore our OpEx per barrel cost should decrease. So we do expect to see a bump or improvement in that when we bring on the gas lift compressor because that in turn will allow us to bring on more production.

[Knut Sæthre, executive]

Good. I also have a question to CapEx guidance for the year.

And if I take that asset-by-asset and start by Kudu, that's on -- it's still being worked on concept-wise and also commercial negotiations. So we're spending about $2 million per quarter right now, which should add up to $8 million in total. Maromba, as I said, we have an estimate around $50 million. And for Dussafu, it's around $200 million for the total year with another $100 million in '23 and $100 million -- another $100 million in '24, as previously guided in our last presentation. So I think that was it for the CapEx guiding.

Then there's an M&A question mainly related to Brazil. There are a few -- maybe I can bundle them. There is one question to -- a very specific question to Petrobras and their appointment of the third CEO in a very short time, whether that had an impact on, let's say, deal activity in Brazil?

[Carl Arnet, executive]

It's a bit early days to say actually. So we didn't see much of an impact on the last change of CEO of Petrobras. So I expect the CEO of Petrobras to be continuing on its M&A activities as they have.

[Knut Sæthre, executive]

There's a follow-up question to more general M&A activity, whether there is any negative impact given, let's say, the increasing energy prices, both gas and oil? Or are there still bargains out there that might be possible to capture?

[Carl Arnet, executive]

I think what we're seeing is that larger deals are maybe we priced a bit due to the higher oil price. We certainly see upward pressure. But the size of deals we have been targeting, we have not really seen any significant impact of the oil price increase. We are looking more at, let's say, strategic divestiture where they are -- they're not looking at selling a high cash flow. They're looking at coming out of something that is beyond the size they can, let's say, productively focus on.

[Knut Sæthre, executive]

And then again, another M&A question related to Brazil, very specific. To borrow a -- oilfield is located next to Maromba and has been returned to ANP. Is this abandoned oilfield of no interest to BW Energy?

[Lin Espey, executive]

Well, I think we're certainly very familiar with the region field surrounding in Maromba, but I don't think it's appropriate that we can comment on any specific opportunity.

[Knut Sæthre, executive]

Good. Well, thank you. I think that concludes the whole list of questions. So then I'll just give it back to you, Carl, to conclude.

[Carl Arnet, executive]

Well, I think all in, we're quite pleased with the quarter. Yes, we do have issues that we have told you about that I think everybody in most businesses actually have these days, which is related to disruptions of supply chain and due to pandemic and war. And I think we are proactively managing it and we are managing it in a good way, I think. So all in, I think we're very pleased actually with developments. And, yes, we look forward to getting the production increase that we have planned for Polvo.

Yes, that's it. Thank you for listening in.

[Lin Espey, executive]

Thank you.

[Knut Sæthre, executive]

Yes, thank you everybody.