BW Energy Ltd

OSE:BWE

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. I am Emme, your Chorus Call operator. Welcome, and thank you for joining the BW Energy Q3 2020 presentation. Throughout today's recorded presentation [Operator Instructions] I would now like to turn the conference over to Carl Arnet, CEO. Please go ahead.

[Carl Krogh Arnet, Chief Executive Officer]

Welcome to this BW Energy update for third quarter 2020. This update will be hosted by our CFO, Knut Sæthre; our COO, Lin Espey; and myself, Carl Arnet. I then go on to the second slide. Please note our disclaimer. Then on to the third slide, our highlights. Our EBITDA for the quarter stood at $22.2 million with 1 lifting completed. Our cash position remains strong as USD 145 million. We are closely monitoring the COVID restrictions. We are hoping to restart our investment projects, and we will do so as soon as the COVID restrictions are of such a nature that we can efficiently undertake our projects. And I'll come back to that in more detail. We are planning for a restart of the Tortue Phase 2 drilling and tie-in operations. And we're also progressing on Hibiscus/Ruche. And of course, we acquired jack-ups to undertake that development and significantly reduce costs. So then on to Slide 4. We are tracking very well with respect to our ESG metrics. We are continuing to focus on resource-efficient developments based on reusing assets. And our -- this is just such an example. This will, of course, reduce significantly the greenhouse gas emissions associated with our development. We are continuing to support local communities where we operate, mainly Gabon, Brazil and Namibia in local initiatives. Our lost time incident rate was 0 for the third quarter, and we were equally -- doing equally well on our environmental incidents. We had 0 also in the third quarter. Then on to Slide 5. The projection of future energy demand and oil price in particular has always carried a lot of uncertainty. And we saw just from the start of 2020, until today, we have seen a significant shift in the forward curve of oil. It's basically gone extremely flat. Our response to this challenge is really how -- it's really the company's DNA and how we have been set up. We aim to be robust at these levels of oil price and have excellent returns on the current Brent forward curve. We are focusing on further reducing the breakeven by utilizing opportunities like our -- at the jack-up asset purchase. And we believe that fundamentally, cost-efficient oil and gas is to remain a substantial part of the energy mix in the foreseeable future. Then on to some more detailed commentaries of our assets. And I will move on to first Slide 6, Dussafu, and directly on to Slide 7. We had stable operational performance in the quarter. In Q3, we produced 1.42 million barrels, which is approximately 15,500 barrels per day gross. Our OpEx came down around from $21 in 2019 to $19.6. But we do expect to see some erosion of that for the full year. We hoped to get to $17 to $18 per barrel, but we are probably going to track closer to $19 and of course, it's the impact of the extended COVID-19 restrictions and associated costs. And we've also seen some impact of complying of -- Gabon complying with OPEC quotas. Then on to Slide 8. Restart of the Tortue development. And we are closely, as I said initially, we are closely monitoring the COVID-19 restrictions and their effect on execution. We do today have significant restrictions in moving people, in particular, across boundaries, with a lot of quarantine measures being implemented understandably by various nations. And this makes efficient project execution extremely difficult. We have put LOI in place for the continued use of the Borr Norve drilling rig. And we are planning for a tentative restart in March 2021. We do still expect the project, gross project investment for the Tortue Phase II to be around $238 million, significantly reduced from the original budget of $275 million. Based on achieving a tentative -- really our tentative drilling start in March, we expect to have first production from DTM-6H and 7H that needs to be drilled as well in the third quarter 2021. Then on to Slide 9. Our successful exploration activities in 2019, proved up the Hibiscus prospect. We have since also had the results from the seismic reprocessing, indicating that there could be a significant extension of the Hibiscus deposit and this was formerly called [indiscernible] and believed to be a separate structure. We have -- or we are planning progressing on our plans to develop the Ruche-Hibiscus complex. But of course, this later development indicates that this may be more a Hibiscus development than a Ruche development. And we are planning to have exploration, further exploration well in the Hibiscus extension as part of the upcoming drilling campaign. We have focused on further improvements in the development costs, and I'll get back to that in the next slide, Slide 10. We have acquired 2 jack-up drilling rigs. We have used the significant compression in the asset values in the drilling market to acquire 2 sister drilling rigs of similar design, Friede & Goldman. And our intention is to use the former bore Atla and convert it to Hibiscus Alpha and use it as the offshore installation on the Hibiscus development or Hibiscus/Ruche development. The -- as you can see from this caption on the right, this is how the unit is today. The main change we're doing is actually removing the drilling -- the direct and the direct skidding facility, and we put on a bulkhead or a well platform that can carry the [indiscernible] of the wells to allow the dry 3 units. And then we will drill over that, tempered with another jack-up rig. So it's a fairly simple conversion, and we are able to reuse a lot of the existing facilities on these drilling units. And that is why we are -- we expect to be able to reduce the overall CapEx of the project very significantly, as well as getting a much more capable installation where we have the living quarters and have substantial utility systems for life support as well as other facilities. Cranage among -- are among them. The other thing is the self-installation. The model is a movable unit, and of course, that gives us advantages, both in terms of installation activities and also in the effect we have on the seabed, where we avoid the very invasive need for piling that we would have with a conventional steel jacket. So this concept is a number of benefits to our development. And today, these concepts are extremely attractively priced. Then on to Slide 11. Dussafu production forecast. 2020 estimated production, we expect to come in at about 5.2 million barrels gross versus the previous forecast of 5.4 to 5.8, equal to an average of about 14,150 barrels per day. The main causes of this is, as I mentioned previously, the COVID-19 impact and the costs from the COVID and also a shutdown we had due to COVID infection. And then, of course, we have the bond OpEx reductions that we comply with. You see from the lower left-hand side caption, our quarterly production figures. And you see our lifting schedule in the right hand -- lower right hand projection. Then on to Slide 12. Dussafu economics is attractive at current oil price. We expect around $19 per barrel. We expect that to decline to approximately $11 per barrel when we reach FPSO nameplate capacity. Then on to Slide 13. We have a large portfolio of prospects, as we have previously related to you all. And the program we aim to implement is to drill 2 exploration wells per year for the coming 5 years. And we believe with a very modest chance of success of 40%, which is the assumption in this -- for this program, we should be able to add up to 100 million barrels of reserves. The 2 first exploration wells for next year, 2021, is included in the drilling rig LOI. That's all for Dussafu, and then I'll move on to Slide 14, Maromba. And then on to Slide 15 with some details. We have had our field development plan now approved by ANP. And our project team is now progressing towards also achieving environmental approval. We are planning a site. And so it's sort of a -- for the fourth quarter this year. The other activities ongoing is enhancing the project and field economics, optimizing CapEx and OpEx. We are trying to reduce the time from start of execution to first oil. It's, of course, extremely important in our model to have the shortest cycle time possible. We are also assessing the life extension program for Polvo. The FPSO Polvo has become available. And as it is on a nearby field producing very similar oil qualities, we see this as a very compatible FPSO candidate, almost 1:1. So that is, of course, a big advantage in -- for the Maromba development. So I would say we are on track for FID for the first phase. We now work on a sub $40 per barrel to give us 15% IRR, and we are tracking well to get to that. We're also doing some work pursuing tax reductions by getting marginal field status. And we believe that is in the interest of Brazil to, let's say, help their oil and gas industry by giving marginal field status to fields such as Maromba that contains significant resource that has so far not been developed in, let's say, due to -- well, partly ownership, but also partly due to the way of development where our paced approach will be successful, and we are very confident about that. So that ends the commentary on the assets, and then we'll go on to the financials, and I'll leave the word to Knut to pick up on Slide 16.

[Knut Ruhaven Sæthre, Chief Financial Officer]

Thank you, Carl. A few words to the financials, and we move on to the Slide 17 with the income statement. The way we recognize revenues is on volumes sold, and we had one lifting completed to the company in the quarter, realizing an oil price of $46 per barrel, which was somewhat better than what we had in the second quarter. The production cost on a gross basis was, as Carl mentioned, $19.60 per barrel. Which also included some additional costs, about $2 million of extra costs related to the COVID situation and mainly the fact that we are having 2 crews in-country in Gabon that is rotating out to the FPSO. So it's not possible to, let's say, move people freely around the world. So we have that under control in-country. So EBITDA was about of $0.4 million better than the second quarter. The depreciations are more or less in line and as expected, giving us an operating profit for the quarter of $4.4 million, which was $0.5 million better than the second quarter. On the net financial items, the net expense was $2.8 million, mainly representing the lease liability interest expense, as you can see, the $3.1 million, giving us a profit before tax for the quarter of $1.6 million. And then finally, after tax, we recorded a loss of $6.8 million. Moving on to the balance sheet on Slide 18. Not a lot of movements. The reduction in the Right-of-use assets are mainly due to depreciations. We also had a reduction in trade receivable due to the receipt of funds from oil sales, giving us also quite a good operating cash flow for the quarter. So the balance sheet is still very strong and solid. Strong cash position at $145 million. The balance sheet has also a high portion of equity, as you can see with about -- or about 50% equity ratio. Then moving on to the next slide. The cash flow overview on Slide 19. Here, you can see the operating cash flow, which was $26 million in the quarter. We had very low investments, just about $1 million. And then the payment of lease liabilities, which gave us the increased cash position of up to $145 million from $128 million. Moving on to the overview of CapEx. Here, you can clearly see our measures that we took back in Q1 when COVID happened and the oil price collapsed, and we were very much in control of our own destiny on CapEx spending, suspending all projects, showing that we're really in control, and we were able to reduce CapEx down to very low levels in the second quarter and the third quarter. Now for the fourth quarter, we expect that to increase again with the purchase of these 2 jack-ups. In addition to some other CapEx, we expect the fourth quarter CapEx to be around $20 million to $25 million. And then for '21, we will again increase our investment activities with the restart of -- the full restart of the Hibiscus/Ruche development and the finalization of Tortue Phase II. Moving on to the summary. And then to the Slide 22, which sums it up. On the -- this is through exploration. As Carl mentioned, we have reprocessed the seismic, giving us a much better view. And of course, in addition to our, let's say, ongoing production in addition to drilling activities we have done in the past, we learned a lot more about the field, and we are very comfortable with our portfolio. And as also was previously mentioned, we expect to drill a lot of wells going forward in the next years. For Tortue Phase 2, we plan to get onstream in Q3 with the 2 last wells, the DTM-6H and 7H, which will then give us 8,000 to 9,000 barrels of oil gross at peak. And then with also the current plans, we expect to see the first oil from the Hibiscus/Ruche development in Q1 2023. We also hope then to see that we have reached the capacity of the FPSO, which is 40,000 to 45,000 barrels per day nameplate capacity. We're also in a program where we are working on tank expansions. And we also there, hope to have time life that work in Q1, which will increase the storage capacity and could also enable us to do 950,000 barrels liftings instead of the current 650,000. And then we're also looking at the debottlenecking study that we also have mentioned in the past, that could give us an additional 30,000 barrels of oil per day capacity. On to Maromba, we had approval from ANP in August and are targeting FID in about a year's time with first oil from 2024 in the first half. And also, as mentioned here, the economics have improved, and we're further working on reductions. And yes, I also mentioned that the Polvo FPSO is now the new candidate for the Maromba development. So I think that sums it up. So then we can move over to the Q&A session, and I hereby give the word back to the operator.

[Operator]

[Operator Instructions] The first question comes from line of Anders Holte with Kepler Cheuvreux.

[Anders Torgrim Holte, Equity Research Analyst]

I have 2, if I may. First, it's related to investments for the rest of the year. I just want to confirm that -- or if you can confirm that the rest or the both part of the remaining investments for this year will be related to the Dussafu license. And also, if, as a follow-up on that, if the transaction that you mentioned is -- is the jack-ups to that, will that be accounted as CapEx for the projects? Or how should we look at that? And then the second question is bit more long term. I see that you're now pushing out more on the final investment decision even further, which is not necessarily [indiscernible] given abating where oil prices are. So I guess, I'm keen to get your thoughts on this, how you view Maromba versus dividends in terms of bit long-term payout to shareholders? Would you prefer to prioritize getting Maromba off the ground? Or will you prefer starting to pay dividends, perhaps at a slightly earlier stage than the original attempts?

[Knut Ruhaven Sæthre, Chief Financial Officer]

Thank you, Anders. Let me start with the first question. The way I understood it was related to the CapEx coming now in the fourth quarter, which I said was mainly related to the jack-ups. So that's about $15 million. And we also have some remaining CapEx from Tortue Phase II. And we also have the Hibiscus/Ruche project ongoing. So in total, that's about $20 million. And we are also capitalizing on the Maromba project, which is currently running at a $7 million to $8 million CapEx per annum, so $2 million-ish per quarter. That's what is related to Maromba. And as previously mentioned, all our activities on Kudu are expensed as operating expenses after the impairment in Q1. And then it was a question to Maromba versus dividend. I don't think we're pushed out Maromba, but at least not on first oil, it should be more or less the same. And what we have indicated is that we should be ready to take FID in the first quarter of '22. So I believe that's still our plan to get the big CapEx investments going before we start to pay dividends. That's also in line with what we communicated clearly in our IPO presentation, that we have a substantial CapEx program and we'll continue with that program until we are ready to -- at least where we have to say -- see some very good operating cash flows from this investment before we're in a position to pay dividends. And just to reiterate what we said in the IPO material on dividends, and that was that we intend to pay out up to 50% of net profits as dividends when we are -- when we see an end to the main CapEx programs. Did that answer your questions?

[Anders Torgrim Holte, Equity Research Analyst]

Good, indeed, except from the $14.5 million that you recorded for the 2 jack-up rigs. Does that pull back the account for as regular CapEx for -- but it just wasn't...

[Knut Ruhaven Sæthre, Chief Financial Officer]

Yes, that's regular CapEx and will come in, in Q4.

[Anders Torgrim Holte, Equity Research Analyst]

Okay. That goes into your cost oil approval?

[Knut Ruhaven Sæthre, Chief Financial Officer]

We have acquired the rigs now in BW Energy, and we'll see how we will transfer them over to the JV when the time is there.

[Operator]

[Operator Instructions] The next question is from the line of Nick Linnane with Sefton.

[Nicholas Linnane, Portfolio Manager]

I had a few, if that's okay. Firstly, can you just confirm, was there any DMO oil sold in Q3 or not?

[Knut Ruhaven Sæthre, Chief Financial Officer]

Yes, we had -- what was that, the 95,000 barrels. And the way we -- that comes in at the top line and also as an expense. So net, it is about $3.50 per barrel for, let's say, the closed net through the income statement.

[Nicholas Linnane, Portfolio Manager]

Okay. Next question. Can you say of the OpEx, like is there any material part that doesn't qualify under the PSC as final costs? Like is there any significant G&A part that's outside of what runs through the PSC?

[Knut Ruhaven Sæthre, Chief Financial Officer]

Yes, we have an organization that is not charging to do softly as well, as mentioned, the main CapEx related to Maromba is capitalized on the Maromba project. We have -- yes.

[Nicholas Linnane, Portfolio Manager]

[indiscernible] whatever is expensed that is not.

[Knut Ruhaven Sæthre, Chief Financial Officer]

What's expensed on Q2 is about -- the running cost there is about $0.5 million per quarter. And then we have yes, maybe another $0.5 million in general overheads that might fluctuate with -- as a business development activity, M&A activity. But I can't give you an exact number for that now in Q3.

[Nicholas Linnane, Portfolio Manager]

Okay. No rough, rough -- rough number's fine. And so just getting a bit more clear on the CapEx. Can you say for, Dussafu Phase II, how much CapEx is left for that between the Q4 and next year, like in total, how much CapEx left for Dussafu Phase II?

[Knut Ruhaven Sæthre, Chief Financial Officer]

For Tortue Phase II...

[Nicholas Linnane, Portfolio Manager]

Yes, sorry, for Tortue.

[Knut Ruhaven Sæthre, Chief Financial Officer]

We have the last well to be drilled, the 7H, the drilling and completion of that well. And then there's also the surf-related work, that is to connect those 2 well to the FPSO with the surf equipment. Should be around $40 million from the top of my head.

[Nicholas Linnane, Portfolio Manager]

Okay. And on CapEx, well -- so far, how much CapEx have you spent in total on Hibiscus/Ruche, like how much that counts towards the budget that you've given us?

[Knut Ruhaven Sæthre, Chief Financial Officer]

I mean, what you have in the balance sheet is what we have capitalized in total. That is not only for Dussafu. I mean, we have the rights of use assets that is the least liability for the FPSO, and then we have something called E&P tangible assets and other intangible assets. So I think you can read numbers out of the balance sheet. However, Maromba is about 50 of that and the rest is all Dussafu.

[Nicholas Linnane, Portfolio Manager]

I'm just trying to understand because you give -- I'm not seeing the number right.

[Knut Ruhaven Sæthre, Chief Financial Officer]

And then maybe -- maybe we could take more details offline, Nick, if that's okay.

[Nicholas Linnane, Portfolio Manager]

Yes. Okay. Okay. Maybe I can follow-up and clarify. And just one last one. Regarding the wells and production performance, how would you say the wells are performing relative to expectations?

[Lin Garner Espey, Chief Operation Officer]

Knut, I'll jump in on this one.

[Knut Ruhaven Sæthre, Chief Financial Officer]

Yes.

[Lin Garner Espey, Chief Operation Officer]

This is Lin here. The -- no. I think we're pleased with the performance in the wells to date, the main producing formation in Gamba. The wells are producing very well. I think our reserve projections are in line and water production pressure, they're all within the range of expectations, so. So far, so good.

[Nicholas Linnane, Portfolio Manager]

Okay. And the Dentale well?

[Lin Garner Espey, Chief Operation Officer]

Yes. Sorry, in the Dentale D6, we just got one well producing from that, and that's producing for expectations as well. So we've got 3 wells in the Gambon and one well in the [indiscernible] right now.

[Operator]

[Operator Instructions]

[Knut Ruhaven Sæthre, Chief Financial Officer]

We have some questions that have come in on the web as well. And maybe I can start with a few of those, if there are no more on the line. So we have one question that goes to Kudu, whether we have decided to sell Kudu and totally concentrate elsewhere. As I mentioned, we have Kudu on a low activity level, where we're working on the, let's say, an optimized concept, and are currently having a burn rate of about $2 million. So Kudu is alive. And hopefully, we can come back with some good news on Kudu in the year ahead. And we have another question from the web. And that goes to the -- a lot of jack-up questions here. What is the running layup costs per unit for the jack-ups? That is about -- currently, it's about $60,000 per rig. And another question, what is the expected operating life of the converted jack-up when installed on the field? That is -- should be a 20-year plus life, and we are designing them for the total life of the field, so 20 plus. Then there is another question, what is the total net exposure to BW Energy if you do not proceed with conversion and installation on the second rig? That should be -- the second rig was purchased for $4.5 million, and I believe the current spread cost is around $3 million. And of course, we have lay-up cost. So I think that covers it. But then there is another question that I might pass on to Carl. Why did you buy 2 rigs instead of 1 and what -- where do you see the potential targets for that unit? I guess that means location.

[Carl Krogh Arnet, Chief Executive Officer]

Yes. Well, first of all, I think we -- well, we don't -- we managed to get a package deal. And I think we have made the right call to buy 2. It's correct that we have immediate use of one and the other one is something we keep for the future. I think we pretty much hedged the bottom of the markets, and we have already received offers that would allow us to flip it and make money. So I feel very comfortable. But the main purpose, of course, is to continue the development of Dussafu. It's a great value for us to be able to use the cookie-cutter and run a second project based on the same concept and have sister vessels. We can, of course, do that. So we think with really number of drilling prospects we have, with the adaptability of this concept, this is a great opportunity for us.

[Knut Ruhaven Sæthre, Chief Financial Officer]

Good. Then there is another question. You say you might drill 10 wells over the next 5 years. Can you give some more granularity on the targets? And as a follow-up, could you possibly do exploration or appraisal wells before the drilling of the 7H production well?

[Carl Krogh Arnet, Chief Executive Officer]

I don't know if you want to take that, Lin?

[Lin Garner Espey, Chief Operation Officer]

Yes, I'll take this. Well, first, on the operational sequencing of wells, we're still working with our operational team, what's the best way to sequence an exploration well then a development well, the DTM-7H or how to do that. We've got flexibility in like, operation-wise, that makes some sense. As for the number of prospects, we've -- I think we've previously shown a listing of the inventory of prospects and leads that we have. And as everybody knows, we've had a very successful drilling -- exploration drilling campaign to date. I think we're 5 for 5 on exploration/appraisal targets. And with the high portfolio of prospects and leads out there, I think we've got a lot of stuff to do, a lot of wells, potential prospects to drill. And so we've divvied it up in a rough program that makes 10 wells and approximately 2 wells per year. As for particular targets, I think we're still working through that in the sequencing. And right now, we're focusing with the Ruche-Hibiscus area. And I don't think I want to give away too much, but we've got a lot to drill.

[Knut Ruhaven Sæthre, Chief Financial Officer]

Good. Then there is a brief question from the web. The production forecast on Slide 11 seems to show a lower forecast -- production forecast versus previous presentations. Does that reflect the new timing of the new Ruche wells coming online or something else like OPEC quotas/COVID? Can you take that as well, Lin?

[Lin Garner Espey, Chief Operation Officer]

Yes, I can take that one as well. What I think what it reflects is a deferment of production. It's a deferment of the Tortue, 6 and 7H wells. And I think that's -- so that's pushed back out into next year. And then the knock-on effect from that as well.

[Knut Ruhaven Sæthre, Chief Financial Officer]

Good. Then there is another question, and I guess we continue with you, Lin. What are the specific COVID-19 restrictions you need to see lifted to resume activity?

[Lin Garner Espey, Chief Operation Officer]

Well, we're monitoring the COVID restrictions closely. And I think we're all trying to figure out what the new normal is going to be. I think we all realize it's not going to be like a year or so ago, maybe 1.5 years ago today. But things are there is going to be a new normal. And so right now, we're operating, there is a quarantine protocol that we have when people come in to Gabon. And effectively, people have to go into quarantine, they take a couple of tests, but effectively quarantines people close to 2 weeks, 10 to 14 days. So there's also -- we look -- we're monitoring the flights. They've started to resume flights back down to Gabon. There's more frequency, those flights. That's come into place. Our vendors, our contractors, they've got to reestablish operations, be able to move their people freely from Europe or around the world into Gabon, in and out of the country, as well as movement of equipment as well. We're watching it closely. We've been able to continue to produce and now we're wondering, monitoring to make sure we'll be able to drill -- execute a drilling operation. I do note that one other operator in-country has restarted their drilling program. So that's encouraging signs. We're also working with the government, the health authorities, to increase the number of COVID testing sites in country, and we're starting to see some movement on that. So there's been some positive movement on that. Does that answer the question?

[Knut Ruhaven Sæthre, Chief Financial Officer]

Yes, I think so. So that concludes the questions that we had on the web. So over to you, operator, to check if there are any further questions on the line.

[Operator]

Yes. There are no further questions on the line at the moment. So I hand back to you for closing comments.

[Knut Ruhaven Sæthre, Chief Financial Officer]

Carl?

[Carl Krogh Arnet, Chief Executive Officer]

Well, I think we should just thank everybody for very good questions and look forward to speak to you all again and in the not-too-distant future. Thank you very much.

[Operator]

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.