BW Energy Ltd

OSE:BWE

Earnings Call Transcript 2021-Q3

[Operator]

Welcome to the BW Energy Q3 2021 presentation. [Operator Instructions]. Today, I am pleased to present Carl Arnet, CEO. Please begin your meeting.

[Carl Krogh Arnet, Chief Executive Officer]

A warm welcome to this BW Energy Third Quarter 2021 presentation. The presentation will be hosted by Lin Espey, our COO; our CFO, Knut Sæthre and myself, Carl Arnet. I will take you through the initial slides on the operational status as usual, and Knut will take you through the financial status and then we'll all be available for any questions after the presentation. Please note our disclaimer then on to highlights for the quarter. We will comment on the -- in more detail later in the presentation on the successful completion of the last 2 Tortue Phase 2 wells in October, which also concluded the Tortue Phase 2 development. We are pleased to announce that this came in $45 million below budget and we consider that very good results given the hiatus, the significant hiatus we had in the project caused by the pandemic. We will also comment on the provisional award of operatorship for 2 blocks in Gabon's 12 offshore licensing round, Block G and H. More on that will follow. And of course, we maintain a strong balance sheet with no debt and cash position of $170 million. Managing the impact of COVID-19 pandemic on operations is key to us, and we are still in pandemic state that cycles around the world, and this has implications for a lot of the things we do. The Q3 EBITDA came in at $8.3 million with a loss of around $10 million caused by no liftings to the company in the quarter. We did produce about 0.8 million barrels in the third quarter, gross. We are planning liftings in fourth quarter. We have already completed 1 in November, and there's a further lifting for company planned for December. The Hibiscus-Ruche development activities are on track, and we will comment on that in more detail. And we have acquired the semisubmersible rig Leo and that will be a key to unlock the Kudu gas to power development in Namibia, and that will -- more on that will also follow in the presentation. Our HSE efforts were awarded with no LTIs in the quarter. We had 1 incident that we recorded on BW Adolo with a minor spill to the environment, where 15 liters of oily water was released. Further the security risk at Dussafu remains low, and there's been no security incidents in our region. The COVID-19 is still affecting in particular, the FPSO operations and our ability to do modification work. And as I'm sure everybody is noticing it's also affecting the general supply chain and availability of a number of products today. The production outlook. We have reduced our expectation for '21, '22 on production from Tortue and that is reflected in the gross production estimate seen to -- in the left caption. And of course, likewise the net production estimate in the right caption. We will comment further on that later in the presentation. Then on to Dussafu. Production at Dussafu was 0.8 million barrels, equal to about 9,000 barrels per day. The production was affected by plant shutdowns and the limited capacity -- gas lift capacity that we are suffering from. The gas lift limitations will continue to defer production until capacity can be increased in the fourth quarter of 2022. We are planning to install an additional machine for implementing higher gas lift capacity. But due to the restrictions we have on offshore work and also the problems with the supply chain, we will not be able to do this until the fourth quarter and that will affect our production from Tortue. The Q3 OpEx was $36 per barrel, and that's including the COVID costs in this quarter as well, while we expect the revised full year now with the new production figures to be around $30 per barrel. The Tortue Phase 2 was successfully completed. And with the tie-in of the DTM-6H and DTM-7H, the 2 wells were brought on stream in October. First, DTM-7H and then later -- a bit -- a week later, the DTM-6H. Both performed according to our expectations, with DTM-6H being a positive surprise in terms of its capacity. So we are pleased with the wells. But -- and we are extremely pleased with, of course, the overall project result with the final cost estimate of $230 million, which meant we didn't -- at all the project contingency we had set aside, and we also managed to reduce a bit further. So that's extremely well, considering the duration of the project, and it's also showing that we managed to completely stop all activities and all costs during the hiatus we had caused by the pandemic. So the total project, as I'm -- just to remind everybody, that was a further 4 production wells tieback to the FPSO and the new inlet manifold on the FPSO. The production -- 2021 production forecast has been revised to 4.1 million. This is caused partly by the number of trips we've had in the operation on the FPSO but mainly caused by the lack of gas lift capacity. With the wells we have now completed, we have a well capacity of 19,000 barrels but we can only use part of that due to the gas lift capacity. We will not see an impact on the overall recovery from Tortue but we will have deferred production. And as I'm sure you know, the barrel we produce -- don't produce today is one of the later barrels we will produce. So when we have the production, the gas lift capacity increased, we will be able to increase production somewhat from today's level as you can see from this caption on the top left-hand side, but we will then also have, in the meantime, seen some decline in the reservoir. So the balance is not a large increase. But overall, we will not see an effect to the recovery from Tortue, and we expect a number of barrels to be produced from Tortue to remain unchanged over the life of the field. The Hibiscus-Ruche field development project is progressing according to plan. Hibiscus Alpha, as you can see from the picture was in the drydock, at Dubai Drydocks, and the first phase of the conversion is completed with demolition of drilling equipment and preparation for the units to go to Lamprell where we will do the topside work. We have purchased all major equipment packages. We are seeing a well-functioning COVID-19 protocol in Dubai that allows us to get people, particularly service people and people associated with the packages in and out of country. So it looks very promising. We are monitoring the situation very closely, though, because of the general problems we see in the supply chain. At this point, all are major equipment packages are tracking to schedule. But of course, we have to stay alert to any mitigation if there are problems that we discover later on. The field work is also progressing according to plan. We have just tendered for the drilling program, which will be a -- well firm plus 4 optional wells program. The planning is also done to perform up to 2 exploration wells as part of this drilling program. So we are very much on track for first oil in late Q4 2022 from Hibiscus-Ruche. And in terms of budget, we are tracking very well to meet our improved budget where the repurposing of the jack-up as opposed to building a new platform is -- will give us savings of $100 million -- approximately $100 million. Hibiscus North post-drill implementation -- interpretation, sorry, is shown in the caption on the right-hand side. We have discovered oil in Gamba and Dentale formations as expected. But basically, we found the reservoir a little bit deeper and the oil water contact a little bit shallower than expected from the seismic interpretation, which gives lower -- somewhat lower volumes than the predrill expectations. We will, of course, now take this data to update the reservoir model and our interpretation. We will see a potential to have the -- at this reservoir as a future stand-alone subsea tie-in to Hibiscus Alpha, but that will be later on when we have started production and are seeing decline from the main Hibiscus-Ruche reservoirs that will be targeted for the first phase of this development. The well cost came in at as expected at about $20 million for this well. We are currently in negotiations for operatorship of bloc G and H in Gabon. We were provisionally awarded these concessions in the 12 offshore licensing round. We are now negotiating with governments on the details of the PSC for these 2 blocks. As you can see, these are very large concessions. The bloc G is around 3,000 square kilometers and the bloc H is around 2,000 square kilometers surrounding the well-known Etame and Dussafu fields. We are planning. If we can conclude these negotiations for an 8-year exploration period with potential for 2-year extension. The commitments is to drill exploration wells and do a 3D seismic on both blocs. So we are -- we represent a partnership where you see some well-known suspects, it's Panoro Energy with 25%, VAALCO Energy with 37.5% and BW Energy as operator and also with 37.5% ownership. Then on to Maromba. With the release of the Polvo FPSO from its current contract, it has become the lead candidate for the Maromba development. We are currently evaluating yards to carry out the upgrade, repair and refurbishment that is required. And we are now stepping through all long lead items to make sure that we have full control over those. Continuing work alongside this, of course, on the main approvals and the outstanding approval is the environmental approval from IBAMA, and we are carrying on with that work as far -- and while we are also then, of course, optimizing the field CapEx and the OpEx and time to first oil. We are well on track to achieve final investment decision in 2022 and we are also seeing a very, let's say, we are very much on track to achieve the 15% IRR, which is our target for $40 per oil -- per barrel oil price. So we are quite optimistic on the further development of the Maromba at this point in time. And we see the Polvo FPSO as a very much instrument in achieving this. Then Kudu. With the acquisition of the semisubmersible drilling rig Leo for $14 million, we have, let's say, the key component in achieving a gas to power project for the Kudu development. It's a totally integrated gas to power project, where these Leo semisubmersible will be the floating production unit located on the field, producing gas through a pipeline to shore where there will be a power barge with a total capacity of 420 megawatts, of which 250 will be baseload and 170 will be available for peak -- peaking power in the local market. This significant optimization of the project and the project time line versus the previous development concept, it makes us able to meet a very attractive local power price for the base power as well as, of course, the obvious environmental benefits of this project for Namibia, where they will replace then if this project is done, they will replace import of coal-based electricity from South Africa with natural gas electricity. This will, of course, also make it possible for Namibia to -- with a very high degree use renewables in addition to this gas-powered power as they can then use the flexibility of the gas power to fill in when the other forms of power, solar and wind are not available in the grid due to either night or lack of wind. So this will create a lot of flexibility and we'll give a very sustainable project for Namibia. So we are extremely pleased to, let's say, renew our efforts. And based on this key change and key possibility where, of course, this acquisition there's a lot of flexibility in the production at a very, very aggressive price point. Then on to financials and Knut, over to you.

[Knut Ruhaven Sæthre, Chief Financial Officer]

Thank you, Carl. A few words to the financials. They're not that exciting in this quarter as we had no liftings, but let's take you through and go to the next slide, please. The income statement. So the operating revenues in the third quarter relates to the state profit oil and our domestic market obligations. We had an EBITDA of $8.3 million, a significant increase due to the fact that we didn't have any liftings. The depreciations are also lower. We only have a small portion, which is related to the state profit oil. That depreciation is following sales mainly. And then we have also have depreciation for right-of-use assets which follows production. Production was a little bit lower in the third quarter compared to the second quarter and ended up with $6.1 million, giving us operating profit for the quarter of close to $1 million. Then we have the financial items, not a lot to mention previously. We've also highlighted that we have an interest rate swap that fluctuates on a mark-to-market. And in the third quarter, we had a gain on that swap. Profit -- or sorry, that is a loss before taxes in the quarter was minus $1.9 million and then we had the taxes of $8.4 million, giving us a loss for the quarter of $10.3 million. So if we go to the next slide, which is the balance sheet. There, we if we should pick something that is mentioned to -- important to mention is an increase on the E&P tangible assets, that is the capitalization of the 7H well offset by depreciations. And then on the intangible assets, we capitalized the Hibiscus North well. And also, we have, of course, the Hibiscus-Ruche development where we're incurring costs in our yard activities mainly now at Lamprell and also the previous stay with Dubai World Drydocks. And we also had the Kudu Farm-in, in July, where we will come up -- we have worked on a business case. And in the fourth quarter now, we hope to conclude on the business case, and we will then start to capitalize Kudu going forward and also reverse some of the past impairments that we had on the Kudu project. That will all happen now in the fourth quarter. On the inventories, there has been an increase. That is then due -- mainly due to the underlift position we had in the -- as we had no liftings in the quarter. The trade receivables have reduced significantly because of the receipts of the June lifting funds in that we got in July. And then on the liability side, there's not a lot to highlight. We have a very strong equity position $530 million of equity, which gives about a 60% equity ratio. And just to remind you, there is still no external debt. The long-term lease liabilities for the BW Adolo is what we have shown here as our debt position, no external debt, but the -- we have the liabilities for Adolo. So if we then move on to the next slide, showing us the cash flow in the quarter, we started off with a very healthy cash position of $216.5 million. Good operating cash flow of '21 and quite significant investments, as I mentioned, the drilling campaign, the Hibiscus-Ruche project and also the payment for the Farm up in Kudu. In the fourth quarter, we still have significant CapEx spending on the Hibiscus-Ruche project. And we also will record the cash outlay for the purchase of Leo that was just mentioned. So that will also come in the fourth quarter. Then the net financing activities, which relates to the bareboat of BW Adolo, giving us a cash position of $170.6 million at year-end. So on the production and exploration side, we're working hard on optimizing that there's a full output to see how we can get an improved gas lift capacity and have an optimal production of the 2 latest wells together with the 4, let's say, old wells. So that is something that is ongoing. And hopefully, we'll have that stabilize sooner than later, but the permanent solution will not be ready until the fourth quarter next year where we have another module installed. Then we will, in the fourth quarter, now complete, the Hibiscus North oil-in-placement assessment with our external reserve auditors and get out with those results for the annual reserve report that we will issue together with the annual report in February. And we're also in the planning for the next steps of the Dussafu exploration program. We have quite a significant drilling campaign coming up next year with drilling of all the Hibiscus wells, and there we also might have another goal for another exploration well, but that has not been decided yet. On the development side, our #1 and 2 and 3 target is to get the Hibiscus-Ruche to first oil, which will give us a significant increase in production in late Q4 next year and continue into '23 where we will add on new wells, new production and operating cash flow. Then another imperative is to progress Maromba to FID in '22. We're currently in an assessment of the Polvo and waiting for Polvo to be released from Brazil to enable us to get to a yard, get things going and the plan is to get to first oil late '24. And then as Carl just mentioned, maturing the new concept of Kudu, get it rightsized with a lower CapEx and improved timeline. It's also something that is important for us and that will continue during next year and into 2023. On the corporate side, we have as an imperative to maintain a strong balance sheet, which we currently have. We have a good cash position. We have good operating cash flows that can fund new projects and future shareholder returns. The intention is then to pay a dividend of up to 50% of net profit once we're fully operational at Dussafu and Maromba. And finally, we have restarted our RBL financing initiative. So we have reconvened our discussions with the banks and hope to see some progress and a conclusion towards the end of the first quarter in '22. So by that, that was our final slide before we move on to the Q&A session. So then I'll leave it back to you, operator, to see if there is any questions online, or if not, then we will take the ones we have from the web.

[Operator]

[Operator Instructions] Our first question comes from the line of Teodor Nilsen of SB1 Markets.

[Teodor Sveen-Nilsen]

A couple of questions from me. First on the 2022 production expectations. So you say that the current gas lifting issues obviously will reduce 2021 production where you have indicated precisely 13% lower production. But I just wanted for 2022, how much will the gas lift issues impact 2022 production compared to your expectations a few months ago? And second question is on your investment level for 2022, should we expect you to invest slightly more in 2022 compared to 2021? And my last question is on bloc G 12 to 13 and H 12 to 13 in Gabon. When should we expect the first activity there?

[Carl Krogh Arnet, Chief Executive Officer]

Okay. Maybe I should start then on the gas lift question or 2022 production, it is -- we have just started production from the 2 latest wells. And that is -- they are performing very well. We are currently optimizing with the gas lift capacity we have. And we're obviously trying everything to, let's say, augment the position while we are waiting for the last -- the new and upgraded gas lift compressor that we have ordered. So it is a bit early days to say exactly or to have a very firm figure for you on the production. Currently, we're producing around 15,000 barrels per day, and that's a reasonable result given the lack of gas lift. I don't know if you have anything to add to that, Lin.

[Lin Garner Espey, Chief Operation Officer]

No, other than the -- once we install the additional gas lift capacity, we will end up tripling our current capacity. So it is quite an increase from where we stand today. But Carl, it was a good summary.

[Carl Krogh Arnet, Chief Executive Officer]

And then for the investment, Knut, I suppose you take that?

[Knut Ruhaven Sæthre, Chief Financial Officer]

Yes, I do. On the CapEx guidance. We have been very active over the second quarter, and most of the invoices came in, in the third quarter. So we had a good progress on Hibiscus-Ruche and also the finalization of Tortue Phase 2. So the total -- for the total year of this year, I think our previous guidance was around $160 million. We've -- as you have seen, we have acquired a semi drilling rig. So that will increase by that amount plus a little bit extra. So I think it's more in the $180 million plus that we will end up with. It's of course, always hard to see which side of the December 31, you will receive or pay invoices, but they're around there. And for 2022, we have, of course, continuous high activity in Dussafu with Hibiscus-Ruche project, where we will also later on start with the drilling campaign and also this gas lift initiatives. So we have CapEx of around $230-ish million related to Dussafu as we stand now. And then we have Maromba, which is around $7.5 million per month by around $30 million, a little bit of Kudu, a little bit extra. So I would say roughly $275 million in total for '22 as a CapEx guidance. And then the final question was to bloc...

[Carl Krogh Arnet, Chief Executive Officer]

Yes, Lin will probably take that.

[Lin Garner Espey, Chief Operation Officer]

Sure. The initially -- so the first step is the partnership -- so we've been invited to negotiate the PSC production sharing contract with the government. So that will be the next steps we anticipate to start those detailed negotiations here in this quarter. And then -- but there is uncertainty on when exactly that will be concluded. That's an uncertain that could be within the first quarter of next year or perhaps quite a bit longer as well. But once that happens, and the first step is to do geologic studies on it, including evaluating whether we want to shoot new seismic on that process. And I don't think we anticipate to start drilling on it for a number of years from now. Was that -- does that answer the question?

[Teodor Sveen-Nilsen]

Yes, absolutely. Just a follow-up on the current production. You said that current production rate is 15,000 barrels gross. Is that a fair estimate for the total production in Q4 as a whole?

[Lin Garner Espey, Chief Operation Officer]

No, I think the additional wells didn't really come on until the end of October, so beginning of November. And we've also been experiencing a bit of operational difficulty ups and downs, and we're trying to get all that lined out. I think -- I don't think that's -- I think we're going to be -- we're not going to average 15,000 for the quarter. I think we're going to be -- with the operation...

[Knut Ruhaven Sæthre, Chief Financial Officer]

I think we have given the guidance there Lin -- sorry for the interruption of 11 to 15 for the...

[Lin Garner Espey, Chief Operation Officer]

For the full year.

[Knut Ruhaven Sæthre, Chief Financial Officer]

Yes.

[Operator]

[Operator Instructions] There seems to be no further questions from the phone line. So I'll hand back to our speakers for the questions on the web.

[Knut Ruhaven Sæthre, Chief Financial Officer]

Thank you. Yes, there are a lot of questions on the web and a lot of them are related to this gas lift discussion that we just had, just trying to see if there's anything in this? Well, it says something here about given your compressor issues, what's the production ability currently and what you expect for the next quarter. So I think that has been mentioned. And then on what risk of not getting the new compressor installed by 2022, what are the risks to that time line equipment, crew, et cetera? Does the compressor issues impact your Hibiscus-Ruche plant at all? What impact will Hibiscus-Ruche have if the compressor installation is delayed beyond 4Q '22?

[Carl Krogh Arnet, Chief Executive Officer]

Okay. So very quickly, the -- this compressor -- additional compressor for Tortue and Adolo does not affect the Hibiscus-Ruche at all. And we do not expect to see any spillover. There is a general concern about the supply chain these days as we know from, let's say, the general walk of life that there is difficulty with lots of deliveries, cars, what have you. So it is a general issue, and we have to -- we believe we have a conservative estimate when we say Q4 2022. And we definitely believe today that this is our best estimate and very conservative estimate. So -- but it only affects Tortue production, not Hibiscus-Ruche production. That is self-contained in the Hibiscus-Ruche development that we are currently undertaking. And will -- all of these things will be dealt with on the platform that we will install on the Hibiscus-Ruche.

[Knut Ruhaven Sæthre, Chief Financial Officer]

Okay. And then we have another question on guidance on the short-term Q4 results. What we've said there is that we have 2 liftings. Actually, we've done one of those liftings. So we -- and the second one is planned for December. So given that, that lifting will take place as planned, we will have a very good quarter. We have also guided on $30 per barrel OpEx. So whatever comes out of that in terms of oil price, for lifting that we did now in November. The month in terms of oil price started really well. Now it's a little bit down, but we're still above the $80 barrel average. Then we have a question, does the USD 230 million Tortue development include the new order compressor to increase gas lift capacity? No. The Tortue development has now been finalized and closed, and the newly ordered compressor is part of the CapEx guidance that I just gave to Teodor.Then we have a question on Maromba and more the timing of the FID for Maromba. You say in the presentation that is for 2022. Can you say something about what are the triggers for getting to that FID?

[Carl Krogh Arnet, Chief Executive Officer]

Yes. There is -- first of all, we are, let's say, awaiting BW Offshore to demobilize the unit from the field. We believe that will happen very shortly. And then we -- they will take the unit to a suitable location Middle East, most probably. And that is where we will then take over and get access to the vessel for the final inspections and the assessment of the condition of the vessel. We expect to be able to make a decision on the FID in the course of first half of the year, probably towards the very end. So that is our internal target to have the FID within the first half of 2022.

[Knut Ruhaven Sæthre, Chief Financial Officer]

Good. And then we have another question related to more M&A activity. There is a question here that the media in Brazil have pointed to BWE as a potential bidder for the Golfinho oilfield cluster offshore Brazil. Is this an ongoing process? And may it lead to a possible deal with Petrobras? Well, then I referred to, let's say, a more general statement that we also issued back in October that we note the press speculations regarding the possibility of BW Energy, making an acquisition for the Golfinho. But specifically, we've had no formal decisions to acquire any of the assets currently being marketed by Petrobras. But maybe you could elaborate a little bit more, Carl, on -- because there are more questions related to the same. What we are looking at, are we looking to buy brownfield, greenfield and maybe something about geographical areas that we are involved in.

[Carl Krogh Arnet, Chief Executive Officer]

Well, it is correct that we for quite some time have been defining brownfield acquisitions as part of our strategy. And yes, we are looking in the very areas where we currently have assets. So Brazil is obviously an area where we are keenly looking at the possibility of acquiring brownfield opportunities. So that is, yes, definitely within our strategy. And yes, definitely within our geography. So we are very interested in pursuing these opportunities, and we see that as beneficial to the company and the shareholders and also would spread some of our production risk, which is good. But we don't comment on specific questions like whether we are -- Golfinho or not because that's something we will announce to the market as and when we have something concrete to announce to the market.

[Knut Ruhaven Sæthre, Chief Financial Officer]

Good. And then over to, Kudu. There are several questions related to Kudu. One of them is you have acquired a semi drilling rig. Does that mean that you would substitute the FPSO that was in the previous plan. And if I merge that with another question as well, what are the next milestones? And when can we expect first gas from Kudu?

[Carl Krogh Arnet, Chief Executive Officer]

Well, first of all, on the suitability of the semisubmersible. We -- obviously, it's a question of price. And with the current close to scrap price we achieved on Leo, we consider this to be an extremely well-suited asset for what we need on Kudu. Kudu is quite harsh environment. An FPSO could have worked as well. We're not saying that it isn't a viable solution technically. It's just that semisubmersible is much cheaper for this particular job where we do not need any storage. The condensate production on Kudu will be extremely low, and we do not need to have the tanks of an FPSO available for condensates. So the gas is dry, semisubmersible is ideal for this type of environment. It seem -- it's quite harsh conditions. So Leo is a very well-suited unit. It will need to be converted to permanent mooring, but that's not a huge conversion. And of course, we will benefit from sale of a lot of the quite new drilling equipment that is on board and we will have very ample deck space to do the processing required for the gas to meet pipeline specification. The other thing to note with Kudu is that it's now an integrated gas to power project, where everything including the power barge is in the project scope. So it's field development plus, pipeline plus, power barge. This gives a much better guarantee structure, and we're looking forward now to discuss this new solution with the government in Namibia. It's a very viable solution for them. We also have the possibility, of course, to divert the gas to South Africa. And the current need in Africa is in South Africa is there. And there's been a number of LNG to power projects already being launched and are -- that are bid, but there's still a lot of replacement of coal-fired power that will take place in the years to come. So Namibia is our first quarter call. If we do not get the traction we're looking for, for this project there, we will look at South Africa as well. So we are very optimistic. But of course, we need to find the power contract, we need to sell the power, and that is the trigger for the project.

[Knut Ruhaven Sæthre, Chief Financial Officer]

Good. And I think we are down to the bottom of the list. There are a few questions left, and they are related to the share price. And it seems like we have someone that is not that happy about the current share price. And there is 1 question, I guess, goes to you, Carl. Because you have bought a lot of shares recently, could you please tell us why you believe in the company?

[Carl Krogh Arnet, Chief Executive Officer]

That's an interesting question. Well, I have a lot of confidence in what we're doing. And I think our future looks extremely good. We -- all our projects are tracking well. Yes, we do have some issues with the current production, but it's mainly deferral of production. It's not really not giving us the barrel. The end game is still the same. So I think the company is extremely viable and it's going to have a great future. All our investment projects are coming in well below our estimates and our budgets, which is good. And I'm sure the shrewd investors will know that, that's key in this market that you control your costs. We will manage to solve these temporary operational issues with respect to the, let's say, irregularity of the FPSO and the gas lift that we have suffered from lately. That's work in hand and I'm still very optimistic about solving these issues in the not-too-distant future.

[Knut Ruhaven Sæthre, Chief Financial Officer]

Very good. That concludes the questions from the web. So then it's for you to close call.

[Carl Krogh Arnet, Chief Executive Officer]

Okay. Well, thank to everybody for attending.

[Knut Ruhaven Sæthre, Chief Financial Officer]

Thank you.

[Carl Krogh Arnet, Chief Executive Officer]

Wish you all a very good day.