BW Energy Ltd

OSE:BWE

Earnings Call Transcript 2022-Q3

[Carl Arnet, executive]

Welcome to this third quarter 2022 presentation of BW Energy. This presentation will be hosted by Lin Espey, our Chief Operating Officer; Knut Sæthre, our CFO; and myself, Carl Arnet.

Please note our disclaimer. In this presentation, we will cover the following highlights. We are pleased to announce that Hibiscus-Ruche is on track for first oil in first quarter next year. We have installed BW MaBoMo and the subsea pipeline, and we will cover that in more detail later on in the presentation.

We are also progressing very well towards closing of the Golfinho acquisition, also in first quarter next year, and we have been approved as a deep-water operator Class A in Brazil. We have also launched a 3D seismic survey that will be performed in the first quarter next year of the Kudu asset.

Further, we will cover, of course, our results where the Q3 EBITDA was $61.5 million, with a net profit of $33.8 million. This was based on one lifting in the quarter for BW Energy of 680,000 (sic) [ 682,000 ] barrels. The average lifting price achieved was $101 per barrel, and we had a gross production in the quarter of 960,000 barrels. This gave us a strong operational cash flow. And with a RBL drawdown, we have a very healthy cash position and good liquidity going forward, in line with our high activity level. And of course, this will be covered later on in the presentation.

Again, we had a good quarter with respect to our HSE performance. We had no recorded LTIs, no recorded environmental incidents. And our project, in particular, MaBoMo, which is the biggest man-hour contributor, performed very well with zero LTIs. The security risk at Dussafu also remains low.

Our production outlook does not include any approximations for the Golfinho production. And this will, of course, be added later as the transaction is closed. This shows the production expected from Tortue and the Hibiscus-Ruche Phase 1 and 2 as well as Maromba 1 and 2 phases.

Then on to Dussafu, where we have the most significant news for the quarter, our production was according to expectations, about 960,000 barrels equal to about 10,400 barrels per day. This was achieved at a OpEx of $36 per barrel.

We are also pleased that we have finally managed to get our gas lift compressor delivered, and it is now sitting on a barge in Gabon ready to be taken offshore. And we are awaiting the delivery of the heavy-lift vessel that is mobilized to lift this unit on to Adolo, where it will be integrated, and we are expecting start-up of this compression -- gas-lift compression facility in the first quarter 2023 as well.

The production forecast is as previously related, about 4 million barrels for 2022, at an OpEx estimate of $35 per barrel. We did one lift in the third quarter lifting as per the plan, and we are planning on one further lifting to company in December, as you can see from the caption in the lower right corner.

This picture, this caption shows the MaBoMo installed on location in Gabon, and we are currently undertaking commissioning and start-up activities and preparations as well as some minor punch list activities related to the completion of the facility. The -- We have also installed a 20-kilometer subsea pipeline, the fixed, the rigid pipeline from MaBoMo to Adolo. This will be connected with flexibles, and the Flex lay campaign is planned for late December, early January. And with that, the 2 units, MaBoMo and Adolo will be connected with the pipeline. And the -- as such, the Mabomo will then be ready to receive or to produce oil as soon as we have performed the drilling operations.

Adolo is also being prepared for the receipt of the oil from MaBoMo,and we expect Adolo be completed end of February, in line with our drilling program. And we continue to have a very strong HSE performance on the completion of this project.

We are very much on track for first oil, end of Q1 2023, we expect to take delivery of the Borr Norve jack-up rig in December, and we are preparing to spud the first well in January. We have a program of approximately 60 days per well, and the initial drilling campaign will target 4 Hibiscus Gamba wells and 2 Ruche Gamba wells.

We have a contract with 4 firm and 4 option wells. So we can perform further drilling of production wells or exploration wells as we see fit at the time. The 6 wells we have planned to drill are expected to yield about 30,000 barrels per day of production, and this is gross, of course.

The CapEx for the project is still tracking well within our budget, and we have today an expected gross CapEx. This is including the drilling program of the 6 wells of $440 million. Our original budget was $490 million. So we -- in spite of, let's say, significant inflationary pressures lately, we are still tracking well on the overall project.

Then on to Maromba. A very quick update on Maromba this quarter. We are still working on completion of the financing activities. The unit is in lay-up. The Polvo is in lay-up in Dubai, and we are still planning for first oil in 2025. So that's the quick update on Maromba.

On Kudu, we are seeing significant activity in the -- on the Namibian shelf. We can -- we also note the reentry of Chevron on the tail of large discoveries made by Total and Shell previously this year. We have consequently decided to go ahead with a 3D seismic campaign, and we have contracted our -- we have contracted the seismic company to do this acquisition. It will cover the 4,600 square kilometers. Kudu is a very large license. And this is, of course, to further enhance our understanding of the depositional model and additional reservoir presence and potentially also exploration targets.

We are keen to have this work completed ahead of the details or let's say, the detailed FEED work where we are in the process of doing, but not -- having not completed yet on the Kudu Gas to Power project as well as, of course, to undertake, let's say, few potential future farm in discussions.

Our MOU discussions is going well, and we are in discussions with the power company in Namibia for heads of terms, and they have also notified internationally that the Kudu Gas to Power project is making progress, and we take that as a good sign that we are in a good workflow with the local power company.

Then on to Golfinho. We are preparing to take over the operations of the Golfinho cluster as well as the Brigadeiro -- undeveloped Brigadeiro field, 65% of the Brigadeiro field, and of course, the FPSO Cidade de Vitoria. In these preparations, we have very pleased to announce that we have now been approved deep-water Class A operator by ANP, which is necessary for us to be allowed to take over the operations on Golfinho. We are currently building up our local organization and working to be prepared to take over the operation of this field. And we expect that the transaction will close in the first quarter.

This will add approximately 9,000 barrels per day to our production and is based on 38 million proven recoverable reserves and a future 0.7 Tcf that is potential for future development. We also take possession of a gas pipeline from this field to shore which will, of course, then make it possible for us to monetize this gas -- potential gas accumulation.

So as you can understand, the first quarter is going to be a momentous quarter in the history of BW Energy. A lot of things is coming together and a lot of things is happening, and a lot of positive news flow is expected in first quarter.

With that, I will leave the word to Knut, who will take you through the details of the financials.

[Knut Sæthre, executive]

Thank you, Carl. A few comments to the third quarter financials. First to the income statement. We had revenues in the third quarter of $83.5 million compared to $16.3 million in the second quarter. This is mainly due to the fact that we didn't have any liftings in the second quarter. So the revenues recorded are more of technical art with some taxes and the domestic market obligations and the big increases then, because of lifting that we performed in August and also received the funds that you will later see in the cash flows in September.

We did that, as I said, in August. The dated Brent averaged a little bit more than $100 in August. So that gave us very good revenues and EBITDA. We also had some positive effects from the commodity hedges, where we had gains as the oil price were falling a lot from June up to September. So we recorded a $16 million change in the result from the derivatives.

On the operating expenses, they came in as expected. As was earlier mentioned, it was about $36 per barrel. So that gave us an EBITDA of $61.5 million versus $5.5 million in the second quarter. Then depreciations, everything according to plan, giving us an operating profit of $45.4 million and the net financials with a slight negative as usual from the lease liabilities. That is the bareboat rate of the FPSO. And we also, again, had some financial gains on our interest rate swap, giving us a total of an expense of $2.1 million in the quarter. So a profit before tax of $43.3 million and after taxes, $33.8 million.

To the balance sheet, we are adding our investments to the balance sheet. So you can see there was an increase on the E&P tangible assets up to $468 million, mainly due to the Hibiscus-Ruche development CapEx and also a slight change to the inventories where we had an underlift adjustment in the quarter.

The big news on for -- let's say, for the balance sheet is that we are adding interest-bearing debt. The RBL was closed and drawn upon in the quarter. So we had the first drawdown of $100 million. And that's what you can see here on the liability side of the balance sheet.

There was also a small effect and also on the result from hedges that you can see on the derivatives lines, long term and short term. But still a very, very strong balance sheet, taking us through the high activities that we're having in the company, and we have an equity ratio of 55%. Having said that, a lot of the liabilities are also due to the long-term commitment of the FPSO contract.

Then over to the cash flow. We started off with $123 million in cash at the end of June. Good operating cash flows. As mentioned, we received the funds from the August lifting in September. So we had operating cash flow of $42 million and a very high activity level on the CapEx side, $65.2 million. And again, then the net financing activities were mostly came from the RBL of $86.2 million, which gave us then a cash position of $186.5 million at the end of the quarter.

So to get to the summary of this presentation, our strategic priorities and value levers. We have -- as you can see from the graph, we have some very exciting milestones in the shorter term. Tortue production will increase. We will also increase production from the first Hibiscus-Ruche well. And if the Golfinho transaction gets closed as planned, then we'll also add additional production, as you can see from the graph here in the first quarter. And of course, towards the end of the year, that will give us increased production all the way.

So on the production and exploration side, optimizing Dussafu output with the new gas lift capacity will bring us up to the full production there from all the 6 wells. And yes, and also then on Kudu, as Carl mentioned, exciting suite of seismic for Kudu. A huge field that we -- where we have proven reserves from the development that is existing, but we would definitely like to know more about the other areas of the field in more detail to evaluate that going forward.

On the development side, obviously, bringing Hibiscus-Ruche to first oil. On Maromba, we are working hard to get to the financing progress for the project. And we are in discussions with banks to see where we can get on that one. In Kudu in Namibia, we are in advanced discussions with local power company for the heads of terms of Kudu Gas to Power projects. So that's the milestones on the development side.

On the corporate side, we are looking to complete the Golfinho acquisition within the first quarter. We are also exploring financing opportunities for Golfinho that is a producing asset that could give us some shorter-term debt capacity as well. Most importantly, for the future growth is the production and the operational cash flow, that gives us to continue to fund our projects and future shareholder returns. And again, we are very pleased to have closed the RBL and to maintain a strong balance sheet and liquidity supported by that facility. So a lot of exciting things going on.

And now we are ready to take the questions. So I'll leave it back to you, operator, for questions from the audience.

[Operator]

[Operator Instructions] We currently have no questions coming through phone. Thank you.

[Knut Sæthre, executive]

Thank you, operator. Then we will continue with the questions that we have received on the Q&A function. We also have some questions that have come in by e-mail.

The first question was related to OpEx, why that was higher than expected in the quarter.

The answer to that is that it should be higher than expected. I mean, I think we were very much accurate in our guiding about $35, $36 per barrel on Dussafu. I think it needs maybe a little bit further explanation, what goes into the total expense line where there are several items in addition to, let's say, the operating expenses from Dussafu. We have, for example, crude oil inventory adjustments, DMO purchase. There are royalty expenses, corporate expenses. But we -- as we see it with more or less in line with expectations. So -- and there's also some very technical complexity to all that, and that is an IFRS 16 adjustment that we can explain in further detail if you reach out to us directly.

Then we have another question to CapEx on Hibiscus-Ruche. How much CapEx net to BWE remains to first oil?

I don't have that figure in detail. I mean what is still ongoing is the connection to MaBoMo with the flexibles, and then we will -- then continue with the drilling program. So that will be CapEx all the way next year. So for this year, we are about $160 million in total, and next year -- no, sorry. This year, it's about $190 million in total CapEx for Dussafu. And for next year, it's another $100-plus million and then also the following year $100-plus million. And then we will get into the, let's say, the Phase 2 of this project as well. So there will be CapEx for the next few years, as we have also previously guided for Dussafu.

Then there is another question. This is from Martin [ Ulrichsen ] in Pareto. Are you still targeting FID at Maromba in 2022?

[Carl Arnet, executive]

I can answer that one, Knut. We -- Yes, the company has already done the FID. So we -- internally, we have approved the project. What we notified the market that when we did that, was that we are still working on the financing and specifically, on the financing of the Polvo units that will be converted to BW Maromba. So that has been a bit delayed, unfortunately. So we are still working on the financing. We are making good progress, but -- well, how should we put it? There is -- I wouldn't say it's difficulties, but we do see that the financing of hydrocarbon activities is not as easily forthcoming as it used to be. So it's still, let's say, work in progress. But we expect to start the project as soon as we have clinched this financing for the main unit. And of course, our strong operational cash flow will cover the other parts of this development.

The -- We still aim to have first oil in 2025, but we have slipped a few months in 2025 on first oil. The -- so that's still the target, and we have done, let's say, a lot of investments already in long lead items to preserve schedule as best we can.

[Knut Sæthre, executive]

Good. Then there is a follow-on question to that, and that is the financing of Maromba and whether we would target a specific RBL facility for that development in addition to the FPSO project financing.

So just to recap, I mean, we have several avenues on financing activities these days. So as we have mentioned earlier, we are working out of Dubai with a project financing for Polvo. That is progressing, however, not at pace that we would like to see it. So that has been somewhat delayed. But it's still something that we are working on.

We also started to talk to different banks on a specific RBL. So we have -- for Maromba, we have progress on that as well. Then we have, let's say, more on near-term action, and that is on the Dussafu accordion that we're working to get additional banks in for the accordion. As you remember, we had $200 million committed out of the $300 million facility. So we're working on filling that up to $200 million to $300 million amount.

And we're also exploring financing, potential financing for our Golfinho investment. So that is also something that is ongoing. So we have a lot on our plate on the financing these days.

[Operator]

Sure, I'll open up the line from Ola Eikanger from SEB.

[Ola Eikanger, analyst]

Just going back to the operating expenses for one second. If the operating expenses were as expected this quarter, can we then expect other operating expenses to be in the range of $20 million plus going forward also?

[Knut Sæthre, executive]

Yes. I think the operating expenses, they were about 30 -- or the total expense worth about $33 million in this quarter. It varies with our listings. So if you go back to the second quarter, we are where we had no liftings, it was 7%. If we go back to the first quarter, where we had a very big listing, it was 45%. So it's also following sales mainly on the royalty expense line and other. Yes, and below that line also the depreciation varies with sales. So that goes up and down. But we can take that in more detail offline, then I can explain it more to you all the different lines that goes into the total expenses. Was that, okay?

[Ola Eikanger, analyst]

Yes. Great. Yes. Yes.

[Knut Sæthre, executive]

Was that all from your side? Or did you have another question?

[Operator]

There's no further questions at this time. Thank you.

[Knut Sæthre, executive]

Okay. Then we'll continue on the questions from the web. We have a question from Nick, in certain place, what can you say about specific prospects in the Kudu block that you can see on the 2D seismic? And in particular, do you see any prospects that you believe are likely to be oil prospects? If so, what can you say about them?

[Carl Arnet, executive]

I think we're shooting 3D seismic to get a much better view. But obviously, the 2D seismic has compelled us to invest in a 3D seismic because we see a lot of scope from the 3D -- 2D seismic that we acquired earlier this year. But I don't know if you want to add anything more specific, Lin, on this?

[Lin Espey, executive]

No. Thank you, Carl. No, I think you've covered it. The 2D lines gave us a compelling indication that we should move forward with the 3D seismic survey, which is what we're doing.

[Carl Arnet, executive]

I think just to add, I mean, the Kudu license is very large -- covers a very large area, 4,600 square kilometers. The existing seismic is quite old, and some of the main discoveries on Kudu was made 30 years ago. So plus -- so with the modern 3D seismic, we do really envisage to see a lot, and we have a number of penetrations in this block. So from the penetrations and a new 3D seismic, we will learn a lot more about our assets. So that's really the target here. Yes, I think that's what we can say at this point.

[Knut Sæthre, executive]

There's a follow-up question on Kudu, whether the results of the gas and near well will have any read across to the Kudu block.

[Carl Arnet, executive]

Yes. I think -- there will be read across us from other, let's say, activity in the basin, yes. And of course, the other activities in the basin is attracting or making this basin, let's say, more prolific in the sense that you now have availability of assets to undertake 3D seismic as well as drilling because of the activity, which is also good and will assist us in our future, let's say, development of the asset.

[Knut Sæthre, executive]

Okay. Then there is a question whether we would consider a share buyback program if the share performance continues to be sub NOK 30.

I previously commented on share prices and dividends. I think we've been very clear that we are doing our best to deliver on our promises, and dividends/share buybacks would then come when we have the main investments now on stream talking about Dussafu and Maromba.

[Carl Arnet, executive]

Yes, I think I just want to add to that, that when we listed back in early 2020, obviously, our plans were not really premised on a pandemic hitting the world. And as such, we have definitely been affected by the pandemic. And we -- I think we were prudent to curtail our activities when the scope and scale of the pandemic and the disruption that it caused became, let's say, apparent, we curtailed our activities to preserve firepower and make sure that we survived the outcome. And we immediately -- when we felt it was physically possible to restart activity, we restarted.

But it's no denying that this caused a disruption in our plans of 12 to 18 months. And I think we have done a good job of catching up on that, and we will be very close to delivering on our target or the targets we set in our 5-year plan when we listed.

[Knut Sæthre, executive]

Okay. Then there are -- there is a question to CapEx, more detailed breakdown in the quarter and also going forward. I think we have to take that off-line. I gave some high-level figures on Dussafu. We, of course, have a breakdown, but it's also hard to say in exactly which quarter those -- that CapEx will hit the books. I mean, whether it will be on this side of '22 or into '23, that's just how it is with all these activities. So please reach out us if you want to have a further detailing on the CapEx going forward or also the breakdown of what we had. Main Maromba is running, it's more mostly man-hours that we are investing there. So it's -- yes, in the quarter, it was about $6 million. We had the FPSO assessment as well in the yard -- just to tell you about some of the activities that are ongoing on Maromba. And of course, you know about all the Dussafu activities.

On Kudu, it's a little bit the same, where have mostly man-hours that we are spending like a couple of million dollars $2.5 million per quarter. And that will also be the case going forward, but we -- there, we have -- in addition to that, we have then the seismic survey that we will shoot in the first quarter.

Okay. Okay. Then operator, it says that Ola has another question on the line?

[Operator]

Yes. I will open up the line now. The line is open now. Please go ahead.

[Ola Eikanger, analyst]

Again, just going back to Maromba and the production outlook that you have provided in today's slide deck and comparing it to the production outlook that you shared in Q2. It seems that the Maromba contribution has been reduced quite significantly. So I was just wondering if that was solely linked to the financing problems or just the financing being delayed or if it's something else.

[Carl Arnet, executive]

It's just a straight time shift of when we expect to do the first drilling and have the first oil. So it's just a time shift. There's been no change in our assessment of the Maromba and the, let's say, oil that we will recover from Maromba and our development plans. It's just a straight time shift. But of course, depending on how much oil you produce within the year will, of course, make it look a bit different in the profile, but that's -- it's just a time shift. Any further questions, Ola?

[Knut Sæthre, executive]

Okay, good. Then I think we are getting to the --, sorry, there is 1 question. What do you think would be the optimal time to farm down the Kudu block? Would it be once you get the 3D seismic analysis? Or do you think you might be prepared to drill an exploration well without farming down?

[Carl Arnet, executive]

I think we -- I can start on this, and then maybe Lin wants to chime in. But the -- of course, if you were to enter into a farm down or farm-in discussions, it is wise to understand what you are, let's say, selling. So we think, yes, it's definitely prudent to do the 3D acquisition ahead of any farm-in discussions. That's, I think, very easily understood.

With respect to whether we are prepared to drill, I think that's really a question. We also have to answer when we have the results of the 3D seismic. I think, yes, you can have hydrocarbon shows from a seismic, a modern seismic. So depending on the results, I wouldn't preclude that we would even be willing to sink an exploration well. But that would depend on also availability of drilling rigs, cost of mobilization, et cetera, et cetera. Would you like to add anything, Lin?

[Lin Espey, executive]

No, I think that's a good summary. And it's just to reiterate, there's been a lot of activity in that oil play and offshore Namibia. And a lot of recent farm-in activities that have occurred, and so a lot of activity, I think it behooves us to get a better assessment of the potential at Kudu block before we do our final evaluations and entertain any farming activities.

[Knut Sæthre, executive]

Oh Lin, then there is the final question here. In other words, new state-of-the-art 3D seismic can show a much larger potential for Kudu than what we have today.

[Lin Espey, executive]

Correct. It's a generational old seismic acquisition on the Kudu block. And what the more recent modern 3D seismic is shown, especially outboard on the Total block where the discovery is as well as the Shell block, where they had their discovery, is that the quality of the seismic is a significant step change different. So we are going to undertake that modern survey, which we're following on. Total is going to do another survey shoot this winter, which is summer down in Namibia. And we're going to follow on them and use the same vessel and do a survey seismic shoot over the Kudu block.

[Knut Sæthre, executive]

Okay. Thank you, Lin. And that concludes the questions we had from the web. So then I'll leave it to you to close call.

[Carl Arnet, executive]

Well, I think -- thank you, and I would say also thank you to those that have asked questions. There was a lot of questions and interesting questions. So I hope that clarifies our position and our plans going forward. So we look forward to speaking to you again in about 3 months' time. Thank you.