BW Energy Ltd

OSE:BWE

Earnings Call Transcript 2020-Q2

[Operator]

Hello, and welcome to the BW Energy Trading Update Q2 2020. [Operator Instructions] Please begin your meeting.

[Carl Krogh Arnet, Chief Executive Officer]

Good afternoon, and welcome to BW Energy presentation of the second quarter and first half 2020. This presentation will be hosted by myself, Carl Arnet; our CFO, Knut Sthre; and COO, Lin Espey. The presenters will be myself and then followed with Knut, who will take the -- through the financials. And then we will all be present to answer any Q&A that will be organized later in the call. So on to our disclaimer, Page 2 of the presentation. Please note our disclaimer. Then on to Page 3, our highlights. The second quarter gave an EBITDA of 28. -- $21.8 million, and we had continued to have a strong cash position at the end of the second quarter of $127 million. We completed one lifting in the second quarter to the company. We did, as you know, defer our investment projects due to the COVID-19 restrictions, affecting our smooth operations of project. We have focused on protecting our employees and partners from the COVID pandemic, and we have had certain effects on our operation as we have related to you before. Dussafu production increased in March 2020 with the addition of 2 wells, part of the Tortue Phase 2 campaign. But we then held the second phase of Tortue campaign, deferring 2 wells due to the COVID restrictions. We did do some further reductions in our capital spending from the first quarter, and our estimate for the current year is now $110 million versus the previous estimate of $115 million. I'll go then on to Slide 4, in safety. We did have COVID effects in, of course, this quarter as well. And movements in and out of Gabon was restricted. But mainly, we have been able to contain the situation. We did have one incident of COVID infection on Adolo, affecting operation. And we shut down for 4 days and deep cleaned the vessel and was able to resume production thereafter. In 2020, we've had 4 LTIs. These were previously reported as well. There's no further LTIs in the second quarter. We have 0 environmental incidents and have now produced 2.5 million barrels. On to Slide 5. We have an active program supporting local communities in Gabon and other places we operate. We have certain activities related to the COVID-19, particularly in Namibia and Brazil with relations to local agencies. And in Gabon, where we are producing, we have, of course, a more comprehensive program, and you see that related on the Slide 5. Then on to Slide 6. This is our path to, let's say, restart our activities. We are waiting, of course, to see what effects we have of COVID and when restrictions caused by COVID can be lifted, and we can resume normal operations in terms of project execution. Our current plans based, of course, on the caveat that this depends on the restriction imposed by COVID is to restart the Tortue Phase 2 program, complete the drilling of 7H well and the tie-in of the 6H and 7H. DTM-6H was -- is already drilled in the previous part of our program prior to the COVID restrictions. And our aim is to have first oil from these 2 wells in the second quarter 2021. We are doing engineering work that we can undertake at this point to refine our Ruche Phase 1 program. And of course, the objective is to reach first oil in the first quarter of 2023. But we will tell you more about that program later on in the presentation. Then we have Ruche Phase 2, which will take us up to 2024. At Maromba, we are working on the field development plan and move towards final investment decision in the first quarter of 2022 to achieve oil in 2024. Other activities is, of course, the RBL, which we will also cover later and of course, other activities related to farm-ins or acquisitions. I will then move on to Slide 7 to cover Dussafu in more detail and then swiftly on to Slide 8. We have had continued strong operational performance in the second quarter and have produced 1.4 million barrels or equal to about 16,000 barrels gross per day. The performance of the 2 wells of Phase 2 that we were able to put in production, the DTM-4H and DTM-5H, has been strong. And they have been performing in line with our expectations. The Q2 OpEx is in line with plan and reduced from about $21.8 per barrel to about $17 per barrel in the second quarter. We expect the full year OpEx to be in the range of $17 to $18, probably closer to $18 if -- with the current trajectory of events. Then on to Slide 9. We are preparing to resume Tortue Phase 2. We managed to suspend the project with minimal costs. Borr Norve is currently in Port Gentil, and we have entered into a letter of intent with Borr. And we hope that we will then be able to restart drilling early in 2021. We have managed to reduce the total spend of the Tortue Phase 2 from about $275 million, which was the original FID budget, to about $238 million according to our last estimate. It's a bit difficult to specify exactly what we mean by normal business and travel. Of course, it doesn't have to be back to what it was prior to the COVID. But at least we need a certain level of normality to move people in particular, but also goods and services across borders, which is now restricted. So we are current -- we are continuously supervising, let's say, these restrictions. And the minute we see that we are ready, and we -- to restart activities, we will do so. And current expectation is that we hope to be getting first oil in the second quarter of 2021. But that is, of course, pending that these restrictions will be lifted to a certain level, and we can move freely the people and resources we need. Then on to Page 10, the production forecast. The 2020 estimate is now 5.4 million to 5.8 million barrels versus our previous forecast of 5.8 million from the 4 wells currently producing. Main reason for taking this estimate slightly back is that during the low, low oil price, we decided to do a comprehensive program of pressure buildup on our wells. And we deliberately curtailed production a little bit to do this program. In addition, we've had some effects. I previously told you about the 4 days of COVID shutdown. So there's been some effects of the COVID as well. So we have taken our estimate back a little bit, but we still expect very good production through 2020. We are in compliance with the OPEC reductions that have been imposed on Gabon as a member of OPEC. As you can see from our lifting program in the caption in the bottom right-hand corner of the slide, we have put one -- we have now 2 liftings in the fourth quarter and one lifting in the third quarter. So we have pushed one lifting from third to fourth quarter compared to previous plans. Then on to Slide 11. Dussafu is very profitable still at low oil price. We are using the project hiatus to rework the Hibiscus-Ruche field development plan with respect to CapEx and schedule. And we have improvements in our current plans, and we expect to improve significantly on the previous sanction, 15% IRR at $35 per barrel for the incremental Ruche-Hibiscus development. The project restart decision will be made as -- again as soon as the COVID restrictions are at acceptable level to perform work. We are planning further Hibiscus area exploration wells to appraise the Hibiscus discovery further and find the final localization of the platform. And that is going to be part of the drilling program as soon as we restart the drilling operations. Then on to Slide 12. As a result of our reprocessed seismic, we find that the Greater Hibiscus oil in place could be significantly larger than previously anticipated. The reprocessed seismic indicates that this area called Hibiscus, Mupale and Hibiscus South could be one large structure, one single structure. And in this case, we would have a significant increase in recoverable reserves and of course, barrels of oil in place compared to the current 45 million. You can see the development from the caption in the structure map in the left-hand bottom corner, that there's been a significant increase in the potential size. So this will require further exploration work, but we are, of course, extremely pleased with this new information. And we are, of course, going to work hard to prove up further reserves in the Hibiscus area. Then on to Slide 13. There is, of course, significant remaining potential in the Ruche EEA area. The more wells we drill, the more data we get, the better we can interpret the seismic. And we are seeing also other areas where interesting potential is showing up. Walt Whitman area is one such. The so-called Walt Whitman string of pearls is very interesting, but we also see new structures coming up in the Tortue area. So all in, it's a very oily area. It's a lot of very good structural traps, and we still have lots of exploration and further refinement of this huge area to do. Then on to Page 14 and Maromba. Quickly on to Page 15. The project team is progressing towards regulatory approval. The field development plan has been presented to ANP, and the management of ANP has put it forward to their Board for resolution. Current program is to optimize CapEx and OpEx and reduce time from FID to first oil. We are also evaluating other FPSO candidates. There are alternatives now to El Burg Delta, and that may be more appropriate for this development in terms of technical fit. And we are currently looking at a very, very interesting candidate for this development, which would significantly reduce our development costs. We're also working with the government to optimize the, let's say, field economics by other means. We have -- we are in the process of requesting a field royalty reduction due to the marginal field definition in Brazil. So that's work going on. Then we'd move swiftly to Page 16 and Q2 financials. And here, I will hand over to Knut that will cover the financials as usual. Knut?

[Knut Ruhaven Sæthre, Chief Financial Officer]

Thank you, Carl. Then we move on to the Slide 17, the income statement. Good afternoon, everyone, by the way. As you can see, the revenues increased in the quarter. So we recorded $32 million of revenues we lifted in June. So we achieved the average dated Brent oil price in June, which was $41 million -- sorry, $41 per barrel. We increased production during the quarter from the 2 wells that Carl mentioned, giving us an average daily production of 16,000 barrels. And OpEx per barrel was then reduced from the previous $21.6 to $17. Out of those $17, actually $12 reflects the FPSO cost for the lease of of BW Adolo. Depreciation increased according to sales, $17.7 million, giving us an operating profit of $4 million for the quarter. The lease liabilities have changed. We have changed the discount rate from 4.5% in the previous quarter to 5.25% now, which will, going forward, give us a higher lease liability interest expense. And we also get some consequences for the balance sheet that we'll see in a moment. So the net financial expense was $3.6 million, giving us a profit before taxes of $0.3 million. And after taxes, we have a net loss of $5.6 million for the quarter. So over to the balance sheet, Slide 18. BW Energy has a very robust balance sheet, and we are prepared to resume accretive investments. We have a strong cash position of $127.6 million with an equity ratio of 58.6%. And then to the change in discount rates impacting the right-of-use assets and lease liabilities, so just to give you some flavor of what that is, that is a lease liability for BW Adolo, where we have included more than 20 years of FPSO lease in those liabilities. So you can see here that the right-of-use assets is increasing by -- the change is $28 million quarter-over-quarter. And on the other side, you can also see that the long-term lease liabilities are decreasing. Also in the quarter, we have a reduction in trade payables as we have paid for most of the Tortue Phase 2 developments in the second quarter. And then over to the cash flow for the second quarter, not a lot to say. Cash position, we started with $168 million. And as mentioned, we've paid a lot of the invoices related to Dussafu, which you can see in reduction in trade payables, which then gave us a negative operating cash flow of $23 million. Net investment that we recorded was $10 million, and then we had lease liabilities of $8 million, giving us close to $128 million in cash at the end of the quarter. And then over to the next slide, showing an overview of our CapEx over time. We have removed Kudu from this overview as this has been fully impaired in the first quarter. So you can also see that the recorded investments were very low in the second quarter. And also going forward, we have some $20 million, $25 million of CapEx remaining for the rest of the year. And just to remind you, we suspended all activities due to COVID. So that's how we reduced the original CapEx program from close to $250 million down to $110 million on a -- for the full year of 2020. And yes, I don't think there's more to say on this one. So then I leave it over to you, Carl, for the summary slide before we open up for questions.

[Carl Krogh Arnet, Chief Executive Officer]

Thank you, Knut. And on to Page 21, summary and swiftly on to Page 22. BW Energy is -- I think we have a very strong strategy for the current oil environment. Our asset portfolio remains extremely robust, and it's developing in a very good and potentially extremely good way with further discoveries and further potential on Dussafu, in particular. Our net certified reserves of -- 2P reserves of 83 million barrels is very strong, and we have 2C reserves, that's further 164 million barrels. So there's significant upside in our portfolio. And we have operational and financial robustness to move as soon as we see we have a certain level of normality and can undertake the operations in a productive way. So we are in good health, I would say, and we're looking extremely positive forward to the future. We will then move on to Slide 23, which is saying just BW Energy, which is really over to the operator, who will organize the Q&A for this session. Thank you very much.

[Operator]

[Operator Instructions] Our first question is from [ Theodore San Nielsen from SpareBank 1 Markets ].

[Unknown Analyst]

A couple of questions from me, if I may. You mentioned, Carl, that you have moved one lifting from Q4, but just to be clear here, will you still have -- or did you still have one lifting in August? And if so, can you say anything about the prices you achieved on that one?

[Carl Krogh Arnet, Chief Executive Officer]

Can you take that, Lin?

[Lin Garner Espey, Chief Operation Officer]

Yes, sure. The -- we're still scheduled to have a lifting in August. It will be at the -- well, here we are at the very end of August. It will be at end of August. It may wrap into first part of September. And the price that we realized is Brent -- roughly Brent plus $1. The average Brent price for the month plus $1.

[Unknown Analyst]

Okay. And then just regarding what was -- to see that things are moving forward. Is it possible to give a quick update on what we should expect in terms of CapEx either on a per barrel basis or absolute numbers? That would be helpful.

[Knut Ruhaven Sæthre, Chief Financial Officer]

I can start a little bit there. We have, as you know, we have suspended the Ruche and the latest or the last well and the connection of the last 2 wells on Tortue Phase 2. So yes, there is CapEx there that is remaining. That will mostly come in '21. I think the number there is some 35-ish, if I'm not mistaken, that remains on Tortue Phase 2. On Ruche, we are, as Carl mentioned earlier in the presentation, we're working on a reduction of CapEx, and it's a little bit premature to go into details and on CapEx per barrel. As you also saw, the barrels might also change after we have proved up the new reserves with an appraisal well. But the economics for now look a lot better for the Ruche development as well as we have interesting ways of reducing CapEx. I don't know if you can add something, Lin.

[Lin Garner Espey, Chief Operation Officer]

No, I think that's a good summary of it. But going forward -- and they also request to do it on a per barrel. But as you mentioned, we can take a look at that and try to provide those guidance going forward.

[Operator]

[Operator Instructions] Our next question is from Tom Erik Kristiansen from Pareto Securities.

[Tom Erik Kristiansen, Analyst]

First, congratulations on Hibiscus. That just seems to be growing even further. Could you comment a bit more on how much of the upside potentially being 3x as large as previously guided you can prove up with just one more well? And if that is successful, how should we think about the development? Will you basically just keep the FPSO you have there full for an extended period of time, probably in many years more than what people expect? Or do we see a potential here to bring in a second unit as well?

[Carl Krogh Arnet, Chief Executive Officer]

I can take the first part or the -- actually, the last part of that. I think we are looking at potential expansion of the Adolo capacity. As we have told the market before, the nameplate -- current nameplate, around 40,000 barrels, can be expanded and without significant cost. It's more of a debottlenecking activity. So we expect to be able to increase capacity by 50% with fairly nominal investment. On the more subsurface part of the question, I'll let Lin answer that.

[Lin Garner Espey, Chief Operation Officer]

Sure. And yes, we do think it's going to take a well or 2 to fully appraise it. And we have already budgeted an appraisal well, which was nominally scheduled for the Hibiscus South area. But we are also actively planning for additional appraisal, which would be more in the Mupale area as well. Those plans are not fully defined right now, especially with the COVID, we're a little bit of a flux area, but we're very excited about that. But it would take probably at least 2 wells to further appraise that. And any sort of development plan that we would -- restarting Hibiscus would incorporate the possibility that this Greater Hibiscus area is the larger size.

[Tom Erik Kristiansen, Analyst]

I have one further question from me, if I may. It was touched on during the presentation, the potential for M&A. Can you say a bit more about what kind of opportunities you see out there now? And with the potential of the, call it, development portfolio you already have been growing now, is it increasingly interesting to look at expanding the current production base as opposed to taking on a second, call it, more development-focused asset?

[Carl Krogh Arnet, Chief Executive Officer]

We -- I mean, the market is in flux. There's a lot of companies that have, let's say, without overstating it, strained balance sheets that are looking to rejig their portfolios, and this creates a number of opportunities. So we are working flat out to evaluate a number of actually both types of M&A activities. It's both acquisitions of fields but also acquisition of brownfield production. So we're looking at both. But we don't want to be too specific at what we're looking at. Even though you can say the oil market is returning to some sort of, I would say, a little bit of normality in terms of oil price, it's still a challenge. And -- but there's still competition out there. So we don't want to be too specific about what we are looking at in particular. But we're looking at both sets of opportunities that you mentioned.

[Tom Erik Kristiansen, Analyst]

Okay. Just a very short follow-up. How -- earliest do you think it's possible that you can drill an appraisal at Hibiscus or prove of that bigger potential? Is that kind of assuming that situation with travel and restrictions like that normalized on that? Can you kind of move on that opportunity?

[Carl Krogh Arnet, Chief Executive Officer]

Well, I think that we are in the process of putting together the new program, as Lin mentioned. So it's a bit premature to be specific of when, but we are monitoring very closely restrictions, and we're talking constantly to our suppliers and all the people we need to accomplish a smooth operation. We are, of course, very sensitive to start work without being sure that we can compete in an efficient manner because that is going to affect the costs badly. So it is important that we are absolutely confident that we can undertake the business we're setting out to do. As an addition to what Lin is saying, our Board actually approved a further -- so we had one option -- we had one exploration well in the program that we deferred in Tortue. But our Board actually approved a further exploration well as part of that program, one of the so-called option wells that we had agreed with Board. So of course, we're not holding the Board to that. But I think the new seismic interpretation and the opportunities indicates that we will be more aggressive rather than less aggressive in drilling to prove up additional reserves.

[Operator]

[Operator Instructions] And there seem to be no further audio questions. So I will hand the word back to the speakers.

[Knut Ruhaven Sæthre, Chief Financial Officer]

There are some questions that have come in on the web. One is from Jorgen Bruaset in Nordea, and the question is, when will you conduct further appraisal on Hibiscus? And can you give us an idea of the CapEx attached to the added barrels? I think this is the same question, as we already got a little bit earlier in the call. It's a little bit too soon to come back to or to start discussing it per barrel. We will come back to that in a later presentation. And as we said, the appraisal on Hibiscus might take place when we can restart the drilling program in 2021. Then we have another question that came in. What was the entitlement production in Q2? And is there any impact on you if the government lifts profit oil at lower oil price than what we are getting? The answer to the last part, no, we will not -- we don't have any links to, let's say, the government liftings. The government had a lifting in April, where the oil price was really depressed, and they had another one in July. But we are not affected by the price they achieved on that lifting. And our entitlement production was -- I mean, the net sold barrels to BWE was 530-ish thousand barrels from the lifting that we did in June. Just to remind you, in revenues, we also have some sales from -- for the domestic market obligations that flows through as both sales and OpEx. And then we also have part of the state profit oil for the barrels, and it was about 180,000 barrels. That was for the state profit oil in Q2. And then we have the final question from Danske Bank, Christian Yggeseth. There seems to be plenty of resources to be developed and found in Gabon. Have you considered only focusing on Gabon and dropped Brazil as the asset seems relatively marginal and risky? That's definitely a question for you, Carl.

[Carl Krogh Arnet, Chief Executive Officer]

I think we're still of the opinion that Maromba is a very good asset, and we are working to optimize it, but that's not -- we see that as part of our ongoing work to always optimize what we're doing. But we still have the view that when we move into Maromba, we will do so with a very, very good set of data. The previous operator spent a small fortune or even a large fortune, if you like, on developing these assets. And we think it fits our strategy extremely well. We have also mitigated the acquisition cost so that we are only -- we have paid a downpayment, but we will pay the brunt of the cost much closer to production. So it fits very well our profile, where we have short time from we start to invest significant sums until we get cash back through production. So we think Maromba still fits our strategy very well. So we -- our aim is to continue on. The long play we have is Kudu. That is -- it's a very long play, and that's -- we decided to write-off our investment in that, which is, of course, an indication that it's quite -- we see that as more of a, let's say, a marginal project at this stage. But let's -- we will revisit that when the world comes out of the COVID crisis, and we see -- we take stock continuously, of course.

[Knut Ruhaven Sæthre, Chief Financial Officer]

Good. That concludes all the questions from the web.

[Carl Krogh Arnet, Chief Executive Officer]

Okay. So I think then we can say thank you to everybody for participating in this call.