BW Energy Ltd

OSE:BWE

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Hello, everyone and welcome to BW Energy Q2 Presentation for 2024. [Operator Instructions] This call is being recorded. I will now turn the call over to Carl. Carl, please begin.

[Carl Arnet, executive]

Thank you, operator. A warm welcome to the second quarter 2024 presentation by BW Energy. This presentation will be hosted by Lin Espey, our COO; as well as our new CFO, Brice Morlot, and welcome to you, Brice, on this forum and myself, Carl Arnet.

We'll jump straight into the presentation. Please note our disclaimer. And then on to the first half of 2024 and the highlights from the first half. Our net production increased by 130% year-on-year and came in at 25,500 barrels per day. Our revenue increased by 104% year-on-year and came in at $346.2 million, and our OpEx reduced by 25% year-on-year and came in at $32 million.

The EBITDA increased by 143% year-on-year and came in at $185.6 million. Net income was up by 200x and came in at $61.9 million from a very low result in the first half of 2023 and the operating cash flow came in at $85.1 million, which is up 19% year-on-year.

So that was the result compared to 2023. Then on to the second quarter highlights. We had a net production in the second quarter of 23.6 barrels per day, and this was after completion of an annual maintenance shutdown of the Adolo.

We strengthened liquidity significantly in the quarter. First of all, we raised a bond of $100 million and then with the sale and leaseback of the MaBoMo facility for $110 million, total $210 million in strengthened liquidity.

We had a successful appraisal in -- during our drilling campaign, and we appraised Hibiscus South and Hibiscus main. And that came in with 23 million in -- that has -- is a recent management estimate at this point in time, but very successful, and I will cover that in more detail later on in the presentation.

We are on track to restore Dussafu production, and we have a well work-over program and have received the conventional ESPs that will successfully replace the defective ones.

Dussafu surpassed 30 million barrels of oil produced in the first half of -- or since 2018 in the first half of 2024 and that's, of course, an unmitigated success comparing to our ambitions when we started back in 2018.

The EBITDA for the second quarter was $75.9 million with a net profit of $14.5 million. We had 3 liftings in total of 1.7 million barrels with an average price achieved of $84 per barrel. This delivered a cash flow of $63.4 million from operations and we had a cash position close to $250 million after repaying $70 million on the RBL.

So our production profile, of course, is showing that we have started to get some traction with our well work-over program, and we can see that the Hibiscus production is increasing, and we expect that to be going on into the third and fourth quarter as we replace our ESPs.

On the ESP, we have so far recorded one LTI in 2024. We have no environmental incidents. And we are working very actively as always to support local communities where we operate.

Then on to Gabon with some more granularity Dussafu production. Q2 gave a net production of 1.4 million barrels equal to 15,570 barrels per day to company. In that, we had a 3-week annual shutdown of the Adolo mainly addressing tank work, but also some top sides and some improvements. So that was successfully completed in May and June, and we are now up and running again.

The OpEx came in at $29 per barrel due to the maintenance period, which, of course, affected volumes. We expect that to reduce down to around $20 in Q4.

The program of installing the conventional ESPs is underway. We are in the process of receiving 11 complete systems. And of this, we will use 8 on the 8 producers, we will have on MaBoMo when the campaign is finished.

The first successfully installed was on the Hibiscus South 2H well and that's performing very well. And in August, we completed the 3H change-out that is also now up and running well.

During the period of acquiring the new ESPs, we have juggled a bit with rig time, and this has allowed us to undertake some appraisals. And we have appraised the northern flank of the Hibiscus main, giving us a very successful result with the 77 pilots.

And we have also appraised the northern flank of the Hibiscus South, which has given us the very successful now producing 2H well. This has a conventional ESP, as I mentioned. And has been a very fast track from appraisal to production and is now proving to be one of our best wells producing 7,700 barrels per day as we speak.

The 7H targets. That's the one that will pick up on the 7P pilot is extremely interesting because it's the first well that will produce from a Gamba-Dentale horizon. And we expect that to be coming on stream fairly shortly.

We expect to complete all the workovers within fourth quarter. And our ambition is still in the same or in this drilling program to also drill the Bourdon Prospect or the Prospect B, as we have called it before, and that is -- has a potential gross recoverable reserve of 30 million barrels in Gamba and Dentale formations.

Then on to Brazil. On Golfinho, we have pivoted slightly from our previous announced plans and it's a bit the same, not surprisingly that we discovered that the current market for subsea equipment is extremely -- is affected by extreme cost inflation currently.

And we have decided to focus our attention on optimizing the current production and stabilizing field reliability and performance as well as the artificial lift system on existing wells. We also have some existing wells that are not being produced, and we intend to open them and get production from them. And we will also undertake some modification and upgrades to the FPSO to accept this production.

This does not mean that we intend to leave these opportunities idle forever, but we are going to focus our attentions on where we think we can get some increased income in the shorter picture and then revisit how we will undertake these subsea developments. And hopefully, we can do that with a different cost profile than what we currently see in the market.

On Maromba, as I said, a bit the same story. We are currently looking at also integrating drilling facility in our wellhead -- dry wellhead platform. And these studies, we hope to conclude by the end of 2024. Work in the yard in China is going on as we speak to plan detail -- detail the plans for the work scope of the upgrades of the FPSO.

So that's not affected, but we do need some more time, and we see some further opportunity in integrating drilling, as again, drilling capacity has also become -- or is also coming at a premium these days in the Brazil market.

Again, the final investment decision remains subject to conclusion of the project financing activities that are going on in parallel with these studies and deliberations. But we -- our aim is to achieve significant cost reductions in the overall development of the project, of course.

Then on to Namibia. Very exciting times in Namibia and our Kudu exploration program is we are going ahead with our plans, working on defining the first target for an exploration well. We are in the process of securing all the long lead items.

We are also preparing an independent rig tender, saying that, we are working very closely with other operators in the Orange Basin to explore potential common use of rig and also other facilities associated with an exploration campaign.

We acquired, as you may remember, some additional seismic, so-called [indiscernible] and we are currently processing this to optimize the positioning of our first exploration well. The concept selection for Kudu gas-to-power is still being discussed with the relevant stakeholders. There's not a lot of new thing developments there to report.

We decided to expand our footprint in Namibia with also making a small investment in ReconAfrica and potential high-impact exploration program onshore in Namibia. Could be interesting in the gas-to-power project scenario, and we have found a ReconAfrica with its new management team to be a very experienced and interesting company to work with in this endeavor. So they are currently drilling the exploration well, Naingopo #1, which is expected completion in the fourth quarter.

As you may remember, we acquired 6.6% of the company of their outstanding shares as well as 20% in the exploration license PEL 73 that is associated with this campaign. We also have some warrants that we may or may not exercise.

That covers my part of the presentation. I will then leave the word to Brice that will take you through the financials and summing up our second quarter. Over to you Brice.

[Brice Morlot, executive]

Thank you, Carl. For those of you I have not talked to yet, I joined BW in July, and I look forward to meeting more of you investors and analysts in the coming weeks.

Now let's just dive in the Q2 financial section. We have been busy on adding new financial resources. We successfully placed a $100 million bond issued in June 2024, with a coupon rate of 10%. The placement was significantly oversubscribed with strong Nordic and investor -- international investor demand. The bond will be listed in the coming weeks on the Oslo Stock Exchange.

In addition, we entered into an agreement on the sale and leaseback for gross $150 million, which is $110 million for BW Energy according to our ownership of the license. This is to fund further our growth strategy, including the Gabon development project and it's a 10-year lease with an option to repurchase the unit from the end of year 7.

$70 million of the Dussafu reserve base lending facility has been repaid in Q2 2024. And we've also been active on other financing for Maromba where we are working on the Chinese ECA financing and also with banks in the Middle East.

To the income statement of the second quarter, we had operating revenue of $165.9 million compared to the $185 million last quarter. We had 3 liftings of 1.8 million barrels in the quarter. This is one for Dussafu and two for Golfinho versus 2 million last quarter, and it two for Dussafu and one for Golfinho. That's the main reason for the reduction in revenue.

Dussafu production was impacted by a planned shutdown, but globally, the time is excellent in Dussafu with 97% of time. Golfinho had lower production due to underperformance, mainly the [Technical Difficulty] production facility issue. But in August, we have our first planned shutdown of Golfinho since taking over a year ago, and we expect to improve the uptime significantly.

We had a loss from oil derivatives of $1.5 million. This is to compare the $3.3 million last quarter. Operating expenses were higher, $88.5 million versus $72 million last quarter and this is an accounting effect mainly due to higher number of liftings on Golfinho compared to Dussafu, which gave us an EBITDA of $75.9 million for the second quarter. So another good quarter for BW Energy with significant investments in the reliability of our assets.

Depreciation and amortization are in line, giving us an operating profit for the quarter of $40 million. We had the usual interest income. The main difference there is the bigger cash balance and interest expenses of $5.6 million versus the $2.9 million in Q1. That's mainly difference you can see here is an increase due to the MaBoMo sale and leaseback interest for $2.4 million.

What standout here on other financial items, $1.6 million is income from Petrobras ARO receivables in Q2, an adjustment for Petrobras contingent payments for Golfinho in Q1 for $2.8 million. So the profit before tax is $30 million and an income tax expense of $16.4 million. This is an increase in Brazil income tax offset by lower State Profit Oil in Gabon. So we ended the second quarter with a net profit of $14.3 million.

To the balance sheet, the decrease in right-of-use assets is [indiscernible]. It's just depreciation. Tangible assets, we are increasing as long as we have investing activities. We are adding assets to the E&P tangible asset. So that's mainly from Hibiscus/Ruche development.

Intangible assets, we have an increase of $6.4 million. This is mainly the seismic acquisition for Kudu and studies on Maromba. Studies are capitalized to intangible assets before FID. We have an increase on other noncurrent assets of $40 million compared to last quarter. This is mainly MaBoMo sale and leaseback capitalized in noncurrent assets.

Inventory is stable. We ended the quarter with $244 million in cash. This is boosted by the bond and the sale and leaseback.

Over to the equity liability side of the balance sheet. Here, we can see the effect on the interest-bearing debt of an additional $100 million for the bond plus $135 million for the MaBoMo sale and leaseback and offset by a reduction of the RBL loan of $70 million.

The reduction of our long-term liabilities is because of Adolo lease. You can also see that we have a very high activity on investing side, giving us higher trade and other payables. It's mainly due to drilling. There is a slight decrease compared to Q1 and is due to a decrease in Dussafu accruals related to the drilling program.

And also, you can also see the effect of the addition of MaBoMo sale and leaseback on interest-bearing current debt with an additional $14 million. So all in all, still a very strong balance sheet for the company with more than 38% of equity ratio and an interest-bearing debt of about $455 million. That was $292 million last quarter.

To the cash flow, we had a cash flow at the end of March of $150 million, $190 million last quarter. We had operating cash flow of $63 million, $99 million last quarter, a net investment of $125 million, which was $80 million last quarter, and it's mainly related to Dussafu developments and Maromba FPSO acquisition.

Then net financing activity of $155 million, $14 million last quarter and that gave us $244 million of cash at the end of the quarter, which was $150 million last quarter.

Lifting schedule and hedging. We -- here, we have some guidance to our lifting schedule and on hedging. On the graph on the right-hand side, you can see the quarterly lifting schedule to BW Energy, divided between Gabon and Brazil for Dussafu and Golfinho.

On Dussafu, we had one Q2 lifting of 734,000 barrels with an average realized price of $80. And in Golfinho, we had two liftings of 0.5 million for -- in April and in June at a realized price of $90 per barrel and $83.

We have one Dussafu and one Golfinho lifting in August. And a few words on hedging. We have requirements to hedge in the RBL facility for Dussafu 40% of the year 1 -- 40% of the production and 25% of the year 2.

So currently, we have 4.6 million barrels hedged for the year 2025 and 2026, and this is a mix of puts, zero cost collars and swaps. We have also entered into swaps for some of the Golfinho barrels hedging about 20% of the annual production.

Then over to the summary. Our updated production guidance is in the range, 10 to 11 barrels net to BW Energy. And this is within the previous guided range, but we are narrowing to the lower end due to Golfinho production liabilities. That said, we do expect the uptime at Golfinho to materially improve after the planned shutdown.

On the production cost, no change in the guidance, $30 to $35 per barrel. And on the net CapEx, we are having new guidance. The new numbers is around $350 million reflects additional investment in Dussafu following the recent drilling success in Hibiscus main and Hibiscus South and also investment in Recon Energy Africa and additional pre-FID studies on Maromba. On the G&A, it's a slight increase to $25 million with general cost increase.

To our final slide of the summary. On the production side, our target is to complete all ESP changeouts with conventional ESP before the end of the year and maximize Dussafu production. We expect to reach the 40,000 barrels per day by the end of Q4 this year. We've all the ESP change with conventional ESPs.

We have, of course, had the great success of Hibiscus main and Hibiscus South discovery with excellent wells, perhaps the best of the license and that's hedging significant material results.

On the exploration side, we plan to drill Bourdon appraisal that might be a high impact well and also to complete 3D seismic evaluation to assess the Kudu potential and prepare for the exploration program.

And on the development side, it's to complete Hibiscus/Ruche drilling campaign, optimize Golfinho production from existing wells and continue to optimize Maromba developments and also continue to progress the Kudu gas-to-power project.

On the corporate side, we will continue to fund investments though a strong operational cash flow supported by the debt facility and lease financing. And we are also expanding in Namibia with strategic investment in ReconAfrica.

So that brings us to the end of the presentation. And then I leave the word back to the operator for questions from the audience, and then we will continue here with the questions we have received from the web.

[Operator]

[Operator Instructions] As no one has lined up for questions in this call, I will now hand it back to the speakers for any written questions.

[Brice Morlot, executive]

Yes. So we have a question on the web. How would you confirm that there is excess capacity above the nameplate of 40,000 barrels per day on BW Adolo. And are there one or more restricting factors? And is it possible to solve them, if required? Would you want to take it, Lin?

[Lin Espey, executive]

Sure, sure. This is Lin Espey, the nameplate capacity -- production capacity or capacity on the FPSO Adolo is 40,000 barrels a day, but the teams have been working on how we can increase the throughput and I think we're well advanced, and we're targeting to see if we can increase that by up to 10%, but first step is to get to 40,000, and the teams are making good progress.

I'm reestablishing production with conventional ESPs and as Carl mentioned earlier in the presentation, we've got -- now we've got two of the conventional ESPs installed and production has been ramping up and we're heading towards that 40,000 barrels a day towards the end of the year.

[Carl Arnet, executive]

Yes. Generally speaking, we can say that the easiest way to test the nameplate capacity is to push more oil to it and see where you have the pinch points. Of course, you can do theoretical simulations, but they're only going to give you so much and within tolerances. So we feel very comfortable that we will be able to get more through. But we first have to establish the production, and then we will push as much as we can through and see where we have the pinch points.

[Brice Morlot, executive]

Thank you. Another question from the web from David Mirzai. How do recent capital allocation decision, Gabon expansion, Golfinho infilled wells and ReconAfrica forming would impact the timing of the company's intention to pay dividend of up to 50% of the net profit?

[Carl Arnet, executive]

I think we have been very clear that the big project for BW Energy, all the way since we listed the company has been Maromba and getting Maromba onstream. The -- it's taken a bit longer than, let's say, what we thought pre-COVID, but we are very confident we will get there, and we're working hard to achieve it. And as soon as we have that on stream, I think the company will be in a position to pay dividends as we have said from more or less day 1.

[Brice Morlot, executive]

Another question on how are we progressing on the financing of Maromba?

Maromba is currently located at the Cosco Dalian Shipyard, and we are working with Chinese institution, China Export Credit Agency and China Export and Import Bank, and it's working very well, and we hope to be able to close the financing before the Q4 2024.

[Carl Arnet, executive]

I just want to add, Brice, that what we're looking for is the most efficient financing. As everybody is aware, it is more difficult these days to finance E&P projects, and particularly E&P greenfield projects. So -- yes, you can always finance, but the price is also relevant, the cost of financing, and we are working hard to find the most attractive financing in terms of the cost to the company as we see that as being important for shareholder value.

[Brice Morlot, executive]

Thank you, Carl. Another question from the web. To what degree to the change execution plan at Golfinho represent cost inflation, change capital allocation prioritization or changed view on the subsurface potential?

[Lin Espey, executive]

Well, I can -- Carl may jump in. I can at least talk to the -- the subsurface potential hasn't changed at all. We still very much like its tiebacks. We think they're low risk from a reservoir or subsurface perspective. I think the most dramatic change has been the cost of the capital.

The market is, in general, in the oil industry, has seen tremendous growth these past couple of years and in Brazil in particular. And a combination of those factors has caused us to rethink that project. We still like it very much, but we see how we can better do this project.

[Brice Morlot, executive]

Thank you, Lin. Another question on OpEx. Could you elaborate on the higher operating expenses during the quarter?

[Lin Espey, executive]

Well, I think that's primarily a function of lower production in Dussafu in the second quarter. We had the shutdown and that was scheduled. That's expected, this quarter was always going to be our lowest production quarter, coupled with the issues that we're having with the ESPs, which we think we've resolved, the way forward, and we got through the annual shutdown. So we expect to have better OpEx per barrel in the second half of the year, and that was expected.

[Brice Morlot, executive]

Yes. Thank you, Lin. And another question on Golfinho OpEx. How do you see the optimization on Golfinho to reduce the OpEx?

[Lin Espey, executive]

So the -- I also think I see another question in there, the -- related to if we defer the Golfinho infilled well project, how will the other projects to reduce OpEx be impacted?

And -- so as we said, we're looking -- as Carl mentioned, we're looking at projects to boost production from the existing wells and maybe reactivate one of the inactive wells.

This won't have as great as impact as the infilled wells because the increased production won't be as much. But if we successfully execute these projects, I think we would see, in order of magnitude, a 10% to 20% decrease in OpEx per barrel once these projects have been implemented.

[Brice Morlot, executive]

Thank you, Lin. Another question on Brazil also. Could you please elaborate a bit of ways to mitigate current situation and how you see this country in our strategic map?

[Lin Espey, executive]

The overall strategy, Carl, I may toss that one over to you.

[Carl Arnet, executive]

Yes. The overall strategy for Brazil remains firmly that we think Brazil is an interesting market. We believe there will be plenty of opportunities also in the future to acquire brownfields. We are also working on our greenfield development of Maromba. So I don't think there's any change as such.

Yes, we do see cost inflation in the market. And that's affecting certain areas, subsea developments, in particular, which has caused us to pivot a bit on Maromba. And let's say, I wouldn't say stop but pause our plans on Golfinho and focus on lower hanging -- more low-hanging fruit. But we don't see a major -- we don't regard Brazil differently due to this cost inflation.

We also think with time that as the supply improves or that supply will improve with improved prices and that we will also see more competition going forward as the market expands to fill, let's say, the capacity or the need of the market. So the supply fills the need of capacity. So we are still, I think, quite optimistic about Brazil as a market.

[Brice Morlot, executive]

Thank you, Carl. Another question on Bourdon. What are the chances of success for Bourdon and is Bourdon pilot -- if Bourdon pilot is successful, how do you intend to develop the field and how quick can you reach first hole?

I think we are all very excited about Bourdon, the potential is great. And in case of success, we would be in a very good position to use Jasmine, who is the sister jack-up of MaBoMo that already belongs to the company, and we could develop this field in a fast and very efficient way. Lin, do you want to add anything on Bourdon?

[Lin Espey, executive]

No, you captured the spirit just right. We're very excited about Bourdon. It's scheduled. It's going to be the last well drilled of this drilling campaign. We really like the geology and the self surface in that Dussafu block. And as Carl mentioned earlier, we've had a couple of successful appraisal side tracks, which is increased reserves. Bourdon is not too far away and fingers crossed, we'll be successful there as well.

[Brice Morlot, executive]

Thank you, Lin. Question also on RBL. How do we use our RBL and could we repay more of the RBL, knowing that we have quite a high cash at end.

We manage our RBL -- our RBL is a revolving facility. So it's very interesting to manage our interest costs and we tried to maintain enough liquidity in the company for the ongoing capital expenditure, and we constantly monitor our liquidity.

A question on the seismic of Kudu. Do we have more news, Lin, and some updates on the study for Kudu?

[Lin Espey, executive]

Sure. The -- so the seismic is in the final throes or the processing of the seismics and the final throes of being completed. I think it's scheduled to be completed at the end of September now, and then there will be -- that will be the final [indiscernible] and then a final interpretation on that.

And so that project is very exciting. There's been a lot of exciting news in the region, especially our partners -- or not our partners, our neighbors to the West Galp recently announced a major discovery, and we're working towards that as we speak.

[Brice Morlot, executive]

Another question on Kudu, what would be the cost for an exploration well in Kudu?

[Lin Espey, executive]

Yes. I don't know if we've officially announced that, but I think cost of exploration wells in the region have ranged from $80 million to $120 million a well, somewhere in there.

[Brice Morlot, executive]

Okay. A question on Dussafu. When do we think we could reach the 40,000 barrel per day?

I think we did answer that. We should reach that by the end of the year. Is that right, Lin?

[Lin Espey, executive]

Correct. Absolutely.

[Brice Morlot, executive]

Excellent. Then I think we have covered the questions from the web. If you have other questions, please do not hesitate to send us an e-mail on [e-mail]. Thank you very much for your participation, and I leave it to you, Carl, to close.

[Carl Arnet, executive]

Well, thank you, Brice. And again, thank you to everybody that is following us and lots of interesting questions today. So very good. We enjoy the interest and to repeat what Brice said, please contact us if you have any further questions. We are happy to answer them.

So without further ado, I thank you all for participating. Thank you, and bye-bye.