BW Energy Ltd

OSE:BWE

Earnings Call Transcript 2023-Q1

[Carl Arnet, executive]

Thank you, and welcome to the First Quarter Presentation 2023 by BW Energy. This presentation will be hosted by Knut Sæthre, our CFO; Lin Espey, our COO; and myself, Carl Arnet. I will run through the first part of the presentation, then Knut will take over, and then we're all 3 ready for Q&A. So without further ado, please note our disclaimer, and then I'll go on to the highlights of first quarter '23.

The Hibiscus/Ruche first oil was achieved in early April, slightly outside the first quarter, but we are extremely pleased that we managed to do the project with excellent HSE statistics, and I will mention this again. We have our new gas lift compressor onboard the Adolo and it's undergoing commissioning. We expect to start it up in May. It may slide into June, but that is the world of commissioning, but at least we are now in the testing phase of this gas lift compressor. The RBL, we have now a committed accordion and the RBL will be -- is then at $300 million total. The first quarter gave an EBITDA of $18.5 million with a net loss of $5 million.

We had one lift in the quarter to BW Energy of 750,000 barrels, and we achieved a price of $77 per barrel. Our cash position was at $166 million, and we agreed to defer the takeover and the payment of the FPSO Polvo and this will be covered further in further detail later in the presentation. Our Zero harm to people and environment is, of course, extremely key to our business. We want to minimize the impact of the environment to -- on our -- to the environment of our operation. We want to work for local society, and we, of course, strive to have the best principles of governance.

So we are pleased that the first quarter was without any recordable lost time incidents, 1 of the key measures of this policy. And we are also -- we also had no environmental incidents year-to-date in 2023.

Then on to Dussafu. The Dussafu production was -- in the first quarter was 660,000 barrels equal to about 7,300 barrels per day. The production was, of course, greatly impacted by first of all the development activities of tying in Adolo -- MaBoMo to Adolo and also planned maintenance of the FPSO and annual maintenance campaign. This affected the OpEx per barrel, which was of course, much higher due to the lower production, and that was $58 per barrel. We had one lifting with a realized price of $77.

We expect to start up the gas lift compressor and this compressor is to support the production from the Tortue wells, the 6 wells we have in the Tortue reservoir. So far, we have not been able to produce all the wells simultaneously due to the lack of gas lift. And this has unfortunately taken much longer to realize due to COVID-related supply chain issues. But we are now finally at the stage where we have the compressor onboard, it's hooked up, and we are now testing the compressor undergoing so-called commissioning. And as soon as that commissioning is completed, we will be able to start production or get increased production from all the Tortue wells. And this is, of course, a long awaited situation.

Next, on Dussafu is, of course, the first oil from Hibiscus/Ruche that we achieved in early April, in line with our plans. We are very pleased with the well performance, which means we have a well-functioning reservoir and a very well functioning well in the first #3H well that we have drilled. And this is, of course, the most important because if you have a reservoir problem, that's serious. Other problems can always be rectified but the reservoir problem is a bit more serious. So we are pleased that the reservoir is very strongly performing, which bodes well for the Hibiscus/Ruche continued development, of course.

We had a very strong HSE performance in the project from day 1 until first oil, we had zero LTIs. And this includes yard work, this includes the installation work, everything. So we are extremely pleased with that, and we honor everybody that has been involved in that -- in the company because this is really a superior performance. The drilling and completion work is now underway with the second well the DHIBM-4H. We are currently in, let's say, drilling and completion phase of that well. So we expect to have that delivered to operations fairly soon, June-ish I would say, early June-ish -- campaign -- we are in the campaign. We are targeting 4 Hibiscus Gamba wells and 2 Ruche Gamba wells, these are the wells that have been given targets.

We have a further 2 options. So we have 4 firm and 4 options. We have decided to take 2 of the options. We have additional 2 options, and we are in the process of evaluating targets for these wells -- these optional wells as well. The 6 initial wells that are planned today is expected to add about 30,000 barrels per day of production when they are all completed and online.

The production forecast on Dussafu is about 8 million to 10 million barrels for the full year 2023 when all is said and done, and we expect OpEx per barrel of $20 to $25. The current production is approximately 16,500 barrels per day, which is -- we're very pleased with that production. And we expect the next lifting in May to be around 900,000 barrels. And you can see in the caption on the right-hand side, the production profile that we are expecting for '23 and then onwards from '23.

Then on to Maromba. We are still working hard on the final investment decision, which is due as soon as we have completed the project financing activities. The current situation is that project financing in the E&P space is getting increasingly difficult. And we are still working hard to put together something that will work for us and the finance years. But we are seeing some light, we hope, in the end of the tunnel. So we're working hard towards this goal. The difficulty of putting together the project financing has given us some time, and we have dedicated that time to reduce cost. And of course, in the current high inflationary environment, this is very relevant.

So we are stepping through all our project development plans and see where we can optimize and shave costs of the, let's say, current development plan. And we are having some success in that, and we will, of course, cover that in more detail later on. The deferred start-up of the project, we have negotiated with BW Offshore and also deferred the takeover of the FPSO and the payments that we agreed. So we now have an additional or initial payment in the fourth quarter '23 with the remaining payment in the second quarter '24. The expected annual production, just a reminder on Maromba is 30,000 barrels to 40,000 barrels per day when it's all -- when the first phase of the project is developed and on stream.

Then on to Kudu. We completed the 3D seismic survey in May. We have shot 5,000 kilometers of very high-quality 3D seismic over the whole license. This data set is going to go through several stages of development. We will have an initial report after 60 days, where we, let's say, get a more raw data interpretation, which will be then refined in a second report that will be completed in the third quarter '23. And then we will have the final report about 12 months after the shooting finished, which will then be May in '24.

You can see from the caption on the right side that there's been a lot of seismic activity in the Kudu area, Kudu neighboring blocks, of course, this is spurred or triggered by the successful exploration activities of Total and Shell, but you can see there are other large operators on the world scene that are busy in the area with Chevron and Woodside also shooting seismic, so very active area now in the Orange Basin in Namibia. So very interesting. So more on Kudu will follow shortly.

Then finally, to sum up on my part of this presentation. I'll say a few words on the Golfinho status. The Golfinho transaction has now been approved by ANP and this is 1 of the major approvals for realizing the takeover. And just to remind everybody, we are talking about takeover of 100% working interest in Golfinho and Camarupim clusters, and 65% in Brigadeiro as well as the FPSO Cidade de Vitoria from Saipem. The closing is subject to certain CPs and waiving of the CPs. And 1 of these is, of course, the restart of the field. The field has been shut in since June last year. And we -- one of the CPs is that Petrobras will now, after having sorted all the technical conditions that ANP had, will restart the field before handing over to us.

The expected production is approximately 9,000 barrels per day, and we have 38 million barrels of proven recoverable resource, and as well a significant gas -- recoverable gas resource. So -- as well as a lot of potential for future development. So we expect now this transaction to go into the final stage where we take over. The exact date is yet to be determined, but we are prepared. We have done all the preparations and everything is ready for our takeover, and we are now waiting for a production restart. That was my part. So I will then leave the word to Knut that will take you through financials and then summing up.

[Knut Sæthre, executive]

Thank you, Carl, and welcome, everyone, to my part of the presentation. A few words to the financials. So in the first quarter, we had revenues of $75.4 million. That was mainly due to the lifting that we had in March, the 750,000 barrel lifting. So just as a reminder, we achieved the average dated Brent and then there is also a differential. The differential was negative $1.50 for the March lifting mainly due to still higher tanker rates that we see in the market. We also had a small gain on our derivatives. And then we had a much higher operating expenses. That is due to our overlift position. Technically, that adjustment in inventory goes into OpEx.

So that's the main reason for the increased OpEx in the quarter, bringing down the EBITDA to $18.5 million. In addition to the OpEx, we also had the DMO delivery and somewhat also higher corporate costs. That was also then mainly due to the preparations for taking over Golfinho. Depreciation are in line. The depressions on the right-of-use assets, a little bit lower due to the lower production, bringing the operating profit to $3.5 million. On the financial income and expenses, that is something new that has happened in the last couple of quarters that we finally see some interest rates coming back to the picture.

So we actually get some interest income for our deposits. And with the RBL that we put in place last year, we obviously also have interest expense. It's not all of that flowing through the income statement. Some of that is also capitalized as part of the Hibiscus/Ruche project. Then we have the lease liabilities due to the FPSO lease more and more technical cost. And then that gives us total net financial expense of $3.3 million and a profit before tax of $0.3 million for the quarter. Income tax expenses have been lower in the quarter due to the lower production, resulting in a net loss for the period of $5 million.

Over to the balance sheet. Just to take you through some of the main changes, the E&P tangible assets is increasing every quarter because of the investments, quite significant investments, as you know, in the Hibiscus/Ruche development. Intangible assets also increasing somewhat, mainly due to the activities we have on the seismic side in the Kudu field. And also some costs related to Maromba and the Polvo FPSO. On the liability side, I can draw your attention to the interest-bearing debt. We had $200 million drawn under the RBL. So that initially amount of $200 million was fully drawn at the end of the quarter. And we have also, as previously announced, added another $100 million. The accordion was committed. So now we have increased the number of banks from 5 to 8 and the new total size of the facility is then $300 million.

There has also been an increase in the asset retirement obligations. So we have changed the policy in use of discount rate. So we have now moved over to the 10-year risk-free rate as most companies has done as well. It's quite common in the industry that is leading to a lower discount rate and hence, a slightly higher asset retirement obligations, and that is for our Dussafu asset. So still a very good and healthy strong balance sheet, close to 50% equity ratio.

Then over to the cash flow statement overview. So we started the quarter with $211 million in cash had operating cash flow of $13.4 million. And as mentioned, net investments of $73.5 million, quite high due to the Dussafu activities, a lot of CapEx going in there. And also, as mentioned, the Kudu seismic and a little bit also for the Maromba asset. Net financing activities that was a positive, mainly because of the final drawdown to get the RBL then up to the $200 million drawdown, as just mentioned, bringing the cash situation to $166 million at the end of the quarter and also then increasing our liquidity reserve with another $100 million, as just mentioned.

So that brings us to the summary just to draw your attention to the graph on the right-hand side. We expect a significant increase in production ahead of us. So the management estimate now for the end of the quarter is -- and just to be clear, that's a production level towards the end of the quarter, not an average for the quarter.

So with the new gas lift capacity, we will see an increase from the Tortue wells, bringing all 6 wells up to production. Hibiscus 3H is producing very well, as Carl mentioned. We also expect to see initial production then from the next well, which is the #4, bringing production up from Hibiscus/Ruche as well. And then with the assumption of closing Golfinho that will add on additional barrels as you can see here from the graph. So on the, let's say, production and exploration side, optimizing Dussafu, 3D seismic is the main activities on production and exploration side. On the development is to finalize Maromba plan and financing and progress to Kudu gas-to-power project.

On the corporate side, good cash position, all hands are on deck in our Brazil team and also on the corporate side to get the Golfinho acquisition closed. And situation on balance sheet and liquidity is also strong to pursue all these activities to ensure also operational cash flow to fund new projects and future shareholder returns.

So that finalizes our presentation of today, and we now move on over to the question-and-answer session. Then I give the word back to you, operator, to see whether we have some questions online, and I see that we also have some questions that have come in on the web.

So over to you, operator.

[Operator]

The first question will be from the line of Teodor Sveen-Nilsen from SB1 Markets.

[Teodor Nilsen, analyst]

Three questions from me. First, on Slide 8, you show your gross production profile from up until 2028. When I just compare that to what you showed in the fourth quarter presentation, it looks like the expectations for 2024 production is reduced by around 10%. I just want to clarify if that is correct? And if so, what's the underlying driver for that? Second question is on Golfinho [indiscernible] now approved the deal, but as far as I understand, you expect that deal to close and will not [indiscernible] weeks. Is that correct? And the final question is from Maromba Navy, we would be discussing this before the [indiscernible] around your future owner share of Maromba will be useful.

[Knut Sæthre, executive]

Thank you, Teodor. Good questions. As always, first question was on the graph. There should not be any changes to our production outlook. So I'm sorry if that is unclear in the presentation, but we still expect our production to be around FPSO capacity for 2024, that is. And then it comes down again until we get to the Phase 2 of the Hibiscus/Ruche project online, as you can also see in the graph. So no, there should not be any change to the production outlook.

And then the question on Golfinho about the closing, there has been a lot of regulatory approvals, and we've passed most of them, antitrust and there has been a regulatory body called IMA, had to give approval because of the pipeline that we're buying that goes into the national grid. We have been approved as operators. ANP has approved the transaction as such. But it's still pending some certificates that they have to send some evidence that they have handled every -- all information over to ourselves. It should be more like a formality.

So the main, let's say, issue now is to get the field restarted and that's what we are waiting on. So this is little bit out of our control. That's more between ANP, Petrobras and Saipan. They also need the Navy to approve this restart of the field. And it looks like this is going to slide into June. So that's the latest we know on that one.

I don't know, Lin, if you have anything to add from your side.

[Lin Espey, executive]

No, that's exactly right. It looks like we may have -- Carl may have experienced a little bit of technical difficulty and dropped out, but you and I will carry on in the meantime and see if he is able to rejoin. But -- no, and you're exactly right. Production forecast long term, there should be no material change. I don't know maybe slight adjustments here in the short term, but long term, no material change there either.

[Knut Sæthre, executive]

Good. And then the last question was around Maromba and whether we could give any updates. I mean I think we talked a lot about Maromba in the previous quarter, and we're still -- as we said in the presentation, we're still reviewing our CapEx and OpEx estimates and looking at maybe a slight change of concept.

I don't know if you have anything to add there, Lin.

[Lin Espey, executive]

Yes. So we're going through a review of the concept. And as Carl mentioned, the challenges with cost increases as well as difficulties in the E&P financing sector as well. So we're taking the opportunity to review the concept, and we're undergoing review. And I think we anticipate about Q3, we'll probably have an update on the direction that we want to take Maromba.

[Knut Sæthre, executive]

Good. Did that answer your question?

[Teodor Nilsen, analyst]

Can I just follow up. Yes, absolutely. So thanks for the functional clarification on production. But then I just wonder, is it the graph in the fourth quarter presentation that is correct or the graph in the first quarter presentation. In the fourth quarter, it looks like 2024 production will be 42,000 barrels, 43,000 barrels per day; while in the first quarter, it looks like it will be 38,000 barrels 39,000 barrels per day [indiscernible] could we rely the most on?

[Knut Sæthre, executive]

Well, what we have said several times is that FPSO capacity is around 40,000. That's the nameplate capacity of the FPSO, and that's where it should be the graph as well. We will have to produce the full capacity, that's the plan for next year.

[Operator]

[Operator Instructions]

[Knut Sæthre, executive]

Okay. Should we go over to the questions from the web, if that is okay, then we have...

[Operator]

Yes, that's fine. There are no more questions on this call. So I'll just hand it for you for any written questions.

[Knut Sæthre, executive]

Okay. Thank you. So we have a question from Chrysis Aristidou from Sefton Place.

Has Petrobras given any indication of when they are planning to restart for, I guess, that's Golfinho.

I assume there is a plan with a rough date given ANP approval. I think we mentioned that briefly in the previous question that we are waiting. And yes, there is a plan, and that plan always says it's more or less next week. So we see that this could slide into June, but it should be very short term until we see the production restart.

Then we have a question from Tom Erik in Pareto Securities.

What are the drilling plans that Dussafu beyond the current campaign? Will you have a halt for a significant period of time to see how the wells perform or rapidly return to drilling to maintain the 40,000 barrels of oil per day?

Maybe you can take that, Lin?

[Lin Espey, executive]

Yes, I can take that. So as Carl mentioned, we are currently drilling for sure, 6 development wells in this drilling campaign. We've already completed one. The next well should be completed by next month. But we have the option to add on 2 additional slots into this drilling campaign. And we're evaluating whether or not we want to extend that to make this an 8-slot drilling campaign and discussing that internally with partners on that front.

After that, then anticipate we'll take a pause. We still have future development wells to be drilled in the Ruche/Hibiscus for a total of 12 that we've got defined. So the duration of that pause will probably be dependent on reservoir performance. And once we get up to plateau, monitoring that technically and then decide when the optimal time is to come back in to drill additional development wells.

[Knut Sæthre, executive]

Good. Let me see if I can try to find any additional questions about Dussafu. Yes, there is 1 from Ola Eikanger in SEB.

On Hibiscus/Ruche phase 1, should we still expect gross CapEx of $450 million, as communicated previously?

Yes. I mean, we are in the middle of the drilling campaign, and we might see some increased costs. We had some issues including the cables down to the ESP. And we also saw some issues now on the second well that could increase CapEx, but it could also be savings that we could achieve later in the year. So we don't have a new update as such.

[Lin Espey, executive]

I think that's fair. And I think it's -- it's fair to say that all the capital costs associated with the installation, the facility, that's the pipeline. Those have all been completed. So that's all done behind us. And as you said, the only remaining is drilling costs. And historically, we've had a good track record of drilling costs. These first 2 wells, we've had a few things that we've had to work through. The first one, as you said, the completion -- some completion issues, but we're able to work through those and we had a casing issue on the second, but we're working through that as well. We'll work through that. So -- yes -- so...

[Knut Sæthre, executive]

And then there is another question here, can't see who is from.

Can you say when you expect to have the DHIBM-4H online producing?

I think we said [indiscernible] would be in June.

[Lin Espey, executive]

Correct. That's right.

[Knut Sæthre, executive]

And then there is also a question to the compressor. We said that, that also might slide into June. But can you elaborate a little bit more on what it takes to get it fully up and running?

[Lin Espey, executive]

Well, we've -- it's -- we've had experienced some difficulties in the construction and installation logistical phase of it. But the good news is it's offshore, and we've achieved mechanical completion, so we're -- the team offshore is working through the final bits of commissioning and pressure testing and all that.

We're in the final throes of getting that online and it will be coming online. We may have to work through a few remaining issues through the commissioning that we anticipate it coming online.

[Knut Sæthre, executive]

Good. I think that was all questions that we had to the Dussafu status. Then there is -- and we've also covered Golfinho. So then we are on to Maromba from Ola Eikanger in SEB.

Are you still expecting first oil from Maromba in 2026 and phase 2 in '27? Or is this previously communicated [ project limit postponed ]. It's hard to read what it says here.

[Carl Arnet, executive]

But I can take an answer to that, Knut. I think I think what we need to, let's say, explain is that we are working to get the financing in place. And from the point where we have the financing in place, we will use approximately 2.5 years. That is the schedule. So until we can actually say now all the financing is in place, we can't really push on and make meaningful progress. That's why we have decided to use this hiatus well. We're waiting for the financing package to be completed that we will use that to step through the project to see if we can work or find some efficiencies.

[Knut Sæthre, executive]

Okay, good. Then there is also a question to potential farm downs in Maromba. In the past, we've said our door is open. I think we've also been clear on having our studied finalized before we can enter into more specific discussions. I don't know if you would add something to that, Carl.

[Carl Arnet, executive]

Well, a farm -- a farm in, farm out is depending on outside of table you are sitting on is a business deal, we are never adverse to discussing. But we are not going to be rushing around until we have a very clear project, and we have a defined value. I think it's quite obvious that people will be more interested in buying into something where they can see a clear path to value.

[Knut Sæthre, executive]

Good. Then there is another question to Golfinho from Chrysis in Sefton Place again.

How long after the Petrobras restart to do plan to take over Golfinho?

[Carl Arnet, executive]

That's a good one. We will be looking for some consistency in the production before we lift our final CPs.

[Knut Sæthre, executive]

Yes. And I think to add to that, we also need to see the [indiscernible] approval, which is the final one for us on our side.

[Carl Arnet, executive]

Yes.

[Knut Sæthre, executive]

Good. Then there's a question to also Golfinho BWE will be the owner of the FPSO Cidade de Vitoria, what is expected to be OpEx on Golfinho?

I think we also mentioned this in the past. We have to get this closed before we can give further details on OpEx levels, OpEx per barrels. It depends, of course, on production as well. So if that is okay, I prefer to delay those questions to a future webcast.

And then the next one, the Brazil deal has to be closed, but when you expect to commence the drilling campaign covering the 2 infill wells, 1 gas and 1 oil. Maybe you could say something there, Lin.

[Lin Espey, executive]

Yes. Well, we -- part of what we like about the Golfinho opportunity is there's -- we've identified a number of infilled wells that we could drill that will enhance production create value and 1 of which is oil well -- infilled oil well and one of the existing producing fields. We're very excited about that. That's a well that's been targeted up dip.

So we're working that through. First step is we need to close the deal and then officially become the operator. And then -- but we've got that well, and we've got another prospect that we like. It's a gas well. Again, both these are low risk, what we feel is low-risk targets. And so -- but not only those 2 opportunities, we've got a whole host of other ideas that have been targeted. And that's in a large part, what helped attract us to this opportunity.

[Knut Sæthre, executive]

And to add to that, there is a follow-up question.

Brazil is an urgent need of gas. When do you expect to start gas production on Camarupim? And -- if so, will that be tied back to the FPSO Vitoria?

[Lin Espey, executive]

Well, at the Camarupim gas field is one of the ideas -- the reserves that are sitting out there that we want to target. How best we develop that is still open, but one of the ideas is exactly what the Germans stated that we would tie it back to the Cidade de Vitoria FPSO and then go into the existing gas pipelines to the shore.

[Knut Sæthre, executive]

Good. Then we have a question from Oddvar Bjørgan in Carnegie. Do you have an updated CapEx guidance for 2023?

There is not a major change to the CapEx guidance. I think we guided on 250-ish in the previous quarter. So there might be some increase in Dussafu as mentioned, but it's early days still because we're in the middle of the drilling campaign. Maromba should be as previously guided. We have, as also mentioned in the presentation, deferred some of the payments that we will add to the CapEx when paid.

And then on Kudu, it's mainly the seismic shoot plus some man hours. So it's -- it should be in the same range. And then of course, after closing of Golfinho, we have to come back to what plans we have, both in terms of our operating philosophy, but also -- and OpEx, OpEx per barrel, but also then on our plans for investments and timing of those investments.

So then we have -- I think I saw some Kudu question from Alejandro regarding the 3D-seismic data acquired in Namibia. Did it reach deeper layers underneath Kudu?

[Lin Espey, executive]

Well, I think I can take this -- what I can say is we completed the seismic. It's a modern 3D seismic. And what we can say is the quality of the seismic seems to be very good. Does it -- in terms of the depth, it certainly covers all the formations of interest and that are out there and -- including the Kudu gas formation, as well as the shallower campaign formations, which is what all the -- our neighbors out there are making the discoveries on. So it goes deep enough -- well deep enough to cover all the zones of interest.

[Knut Sæthre, executive]

Good. Then there was another question on Kudu. To what extent are you in dialogue with other years, oil companies holding a neighboring licenses?

[Lin Espey, executive]

I think it's probably premature to discuss that. We're certainly aware of what our neighbors are doing, and I think they're aware of what we're doing, and we've elected to shoot the seismic and get the results of it and do our own little valuation. And then from there, we'll put forth our strategy and set our course.

[Knut Sæthre, executive]

Good. Then there is a question from Michail. Has there been any -- no, that was on Kudu again.

What is the expecting lifting schedule for 2023? And has there been a lifting after March?

Yes -- or yes, no. We're just about to do a lifting now in late May, as mentioned in the presentation. Going forward with the increased production, we then hope to see monthly liftings going forward, at least from July and forward. Is that right, Lin?

[Lin Espey, executive]

That's right. I mean, literally, I think the next lifting is in the next few days.

[Knut Sæthre, executive]

Okay. I think that concludes the questions we have on the web for today. So then I'll leave it over to you, Carl, for closing.

[Carl Arnet, executive]

Well, I think I will, as usual, thank everybody for their participation and interesting questions, and we look forward to speak to you again in about 3 months' time. Thank you.

[Knut Sæthre, executive]

Thank you, all.