BW Energy Ltd

OSE:BWE

Earnings Call Transcript 2021-Q4

[Operator]

Welcome to the BW Energy Q4 2021 Presentation. [Operator Instructions].I'll now hand the floor to Carl Arnet, CEO. Please begin your meeting.

[Carl Krogh Arnet, Chief Executive Officer]

Welcome to BW Energy and our presentation of the fourth quarter of 2021 and full year. This presentation will be hosted by our CFO, Knut Sæthre; our CEO Lin Espey and myself, Carl Arnet.Please note our disclaimer.Highlights of the fourth quarter and full year we had an EBITDA of $147.2 million, which is 69% up on the previous year and a net profit of $52 million versus a loss of $41 million in 2020.Our Hibiscus/Ruche development is on track for first oil in late 2022, as previously announced and we are pleased to say that there is no change to this target. Our balance sheet remains strong with no debt and a cash position of $150 million at the end of the year.Our fourth quarter EBITDA was $58.8 million, a product of 2 liftings in the quarter with 117 million (sic) [ 1.17 million ] barrels sold, including DMO volumes. We had a net profit of $38.9 million. The average realized price was $79.2 per barrel, and we had a production of 113 million (sic) [ 1.13 million ] barrels in the fourth quarter.The final 2 Tortue Phase 2 wells were brought on stream in October and attributed to this result. Currently, we have 5 wells in operation and we have one well, which is supported by an interim nitrogen gas lift, and we will come back to that later in the presentation.Our ESG reporting, we had still some effects of the COVID-19 pandemic on our FPSO operation, in particular related to the modification work ongoing, but we do not see that this will affect our progress on the overall projects. We had no recorded LTIs in the fourth quarter and one LTI for the full year 2021, which was a significant improvement over last year's performance, where we had 5 LTIs in total for the year.The security risk at Dussafu remains low and we had no environmental incidents in the quarter. We have -- or rather our independent reserve auditor has just updated our reserves. And you can see from the figures that our updated reserves is reflecting the annual production of 4.1 million barrels, partly offset by some minor adjustments to the 1P and 2P numbers. The Maromba reserves remains unchanged and is contingent pending final investment decision.This gives the following production outlook. And you see the -- in the caption to the left, you see the gross production figures. And in the caption to the right, you see the net production to BW Energy. And we are still maintaining our target to reach 50,000 barrels net production when we had Maromba Phase 1 onstream in 2025.Then over to some more comments on Dussafu. We had Q4 production of 12,250 barrels per day. The increase from the third quarter reflects the 2 new Tortue wells coming in as well as better uptime on Adolo. We managed to complete the Phase 2 development, as we have previously told you with zero HSSE incidents and significantly below budget. So we are very proud of that achievement, considering we had a prolonged stoppage due to the pandemic.The production capacity has improved through interim use of nitrogen, supplementing a gas lift and we currently have 5 wells in production as opposed to 4 wells in the previous quarter. We are working to stabilize its situation until we get the permanent gas lift solution that is expected towards the fourth quarter or in the fourth quarter of 2022. And the impact of the lack of gas lift is not as we have said before, it's not affecting the long-term recovery rate from Tortue, it's deferred production.The Q4 OpEx was at $27 per barrel and that's including COVID costs and it, of course, reflects the increased production in the quarter. The pandemic is still affecting the operations, but we have not seen stoppages or any other incidents caused by the pandemic, but it is affecting our costs in particular.The production for 2021 ended up at or 11,300 barrels per day or 4.1 million barrels in total for the year. Our forecast for 2022 is 4.2 million to 5.2 million barrels at this point. We will, of course, be able to narrow this, let's say band and as we go through the year. We had an expected cost of -- lifting cost of $26 per barrel.The next lifting for BW Energy is planned for March and this will be 950,000 barrels that we have nominated. This is the new capacity of BW Adolo after tank upgrades has been completed and a useful increase of the cargo capacity. So in the caption in the bottom right corner, you will see the planned liftings of 2022. So we had 2 liftings in the fourth quarter. We planned one lifting in the first quarter of 2022 and no liftings in the second quarter, and then we have 1 and 2 liftings in the ensuing quarters.On the Hibiscus/Ruche field development, we are pleased that, that is progressing very much in line with our expectations. Hibiscus Alpha is currently at their Lamprell yard in Dubai. And we are carrying out there the topside work, which is obviously removing some remaining drilling equipment and this is progressing to plan. We are now seeing that the topside modules are starting to arrive at the Lamprell yard and that is arriving according to schedule with very minor COVID-19 effects to deliveries.We have seen Dubai being able to function quite well through the pandemic and they seem to have well-functioning COVID protocols that allows work to be carried out mostly according to plan. There are some minor effects, but not significant to our overall schedule.On the field work, we have contracted a rig from Borr Drilling. We expect to mobilize the rig in September 2022 and the program is 4 plus 4. So we have 4 firm wells and 4 optional wells. We are planning to drill 6 production wells and we have an option to drill 2 exploration wells within this program.Technip is contracted to manufacture and install the infield pipeline and carry out the hookup of this to -- between the Hibiscus Alpha and Adolo. So we are very much on track for first oil in late 2022 as previously announced. We are also pleased to say that our budget, revised budget where we expect about $100 million of savings compared to the previous plan of a new build platform remains very much on track.This is a very high-level schedule of the Hibiscus Alpha project or Hibiscus/Ruche development program. And you can see here the unit being completed at yard and transferred to site, where we will drill the first well towards the end of the year, while pipelay and surf tie-in is going on. And then we have the hook-up commissioning and first oil towards the very end of the year.And then, of course, the wells will follow as we complete the program with second, third, fourth, et cetera, wells coming consecutively in 2023. And with the production buildup that will, of course, be depending on these wells, as they come in, we will build up production.Maromba. A few words on Maromba. The FPSO Polvo is set to arrive in Dubai very shortly for final condition assessment. We are carrying out this condition assessment to define yard scope and also to select the most suitable yard to carry out this scope. And we are currently in dialogue with various yards, both in Dubai and other places -- other jurisdictions for this work.Apart from this focus on the main production unit, we are progressing on the approval process with the IBAMA and the environmental impact assessment. And we are also continuing on our optimization of CapEx and OpEx program for the field work. So we are very much on track to FID in this project in 2022 as we have announced with the expected oil in first oil in 2025. And again, just to repeat, we have a very good breakeven on this project with a realized price of $40 per barrel with 15% IRR.Then on to Kudu. We are discussing in discussions with NAMPOWER, the national power company and other stakeholders for our revised Kudu gas development plan. We have completed the purchase of a semi-submersible rig West Leo. We managed to get this unit for $14 million. And this is the intended unit to act as the floating production facility.We are also progressing on our concept development and we will -- we are planning to have 3 wells tied back to the floating production facility via flexible flow lines and we are planning a production capacity of 130 million standard cubic feet per day of gas processing capacity and 100 barrels per day of condensate.The gas will then be trunkline to a jack-up barge that will serve as the nearshore power plant at Elizabeth Bay. And this is to save on the very expensive surf approach with the pipeline, so we end the pipeline offshore, so to speak, but only 200 meters from the shore. And then we will transmit the subs -- we will transmit the power through a jetty -- a walkway from this barge to the shore, and we will then there tie into -- and this is a point that is close to the main power grid.And the aim of this project is to, of course, make Namibia power independent. But in that process, we will also replace the current import of, let's say, dirty coal-based electricity from South Africa that is currently the power supplier of Namibia with more environmentally friendly natural gas fired power, which, of course, will reduce the Namibian carbon footprint significantly and also allow major additions of more sustainable power sources because due to the flexibility of the gas fired power, of course.I will then hand over to Knut. Knut, please?

[Knut Ruhaven Sæthre, Chief Financial Officer]

Thank you, Carl, and good afternoon, everyone. Today, I'm very pleased to say that we have been working very hard on the financial side in the last few weeks to get all these reports and presentations ready for you.So today, in our press release and also on our website, you will also find the full Annual Report, the Sustainability Report, the reports on payments to governments and the annual statement of reserves. So there is a lot of material to be read. So please, there is a lot of work behind it. So it would be good to have some readers as well.So then I'm going to jump into and give some granularity on the figures. We had a fantastic fourth quarter, obviously fueled by the higher oil price. So you can see here, we had $103.6 million in revenues, mainly due to the 2 listings as well and the higher oil price. And in Q3, we didn't have any liftings. So obviously, we had a much improved EBITDA, an improvement of $50 million. So that was all good. And you can also see further down that the depreciations are increasing as well due to the higher sales and revenues.Then we had the impairment of Kudu. So if you remember back to 2020, we impaired the whole Kudu investment, and this has now been reversed in Q4 due to the higher, let's say, energy prices, the increased working interest that we now have in the Kudu license. We increased that up to 95% last year.And the final trade was also the acquisition of the semi-submersible drilling rig, which then also enables an optimization of the project timeline and significantly reduces the capital investments compared to previous development concepts.So that is the reversal of that impairment, giving us an operating profit of $52 million for the fourth quarter. Not much to mention under the net financials. So this then finally gave us a profit before tax of $48.6 million and net profit for the quarter of $38.9 million.So for the full year 2021, again a much improved EBITDA even if the production was lower in 2021. We had 4.1 million barrels and in 2020, we had 5.2 million. So -- but with the higher oil price, then we had an EBITDA of $147.2 million. A lot of that, as you saw came in from the fourth quarter depreciation and also for the assets, it's more or less in line, a little bit lower, but again giving us a very good -- with -- also with the reversal of Kudu giving us a very good operating profit of $98.4 million.The net financial expenses as you can see, there is very little interest we get on, let's say, our cash holdings. We didn't have any interest expense. We didn't have any external debt. And the lease liability interest expense that's related to the bareboat part of BW Adolo. The other financial items is related to our interest rate hedge that was -- had a positive mark-to-market effect during the year of more than $2 million.So finally, we recorded a profit before tax of $88.8 million, and after taxes a net profit of $52 million. So this is the balance sheet. I'm going to take you through the main changes. We had some reclassifications under assets under construction that was moved from intangible and up to tangible. We also made a change in the way we record the IP agreement.And just to remind you on what that was that was. That was back to 2018 when BW Energy finalized an agreement with a company called Seaboard Production for the transfer of intellectual property related to development plans, reservoir and geological and economical analysis that was going to be utilized over the development of the Dussafu field. The nominal payments under the original agreement amounted to $75 million, of which $7.5 million was paid in 2018.Now in the fourth quarter, based on recent triggers and events, we reassessed the contractual payout obligations and concluded that realization of performance targets are considered probable, so this was based on variable factors as exploration success of the field, the advanced progress of Hibiscus/Ruche development. The ongoing investment plans and also very much on also the steady higher oil prices.So now we have included the IP agreement both as an asset and liability, and this will then flow through the income statement as depreciations over the life of the field.And then as I mentioned, the Kudu reversal, I'm not going to repeat that one. On the inventories, we had an over-lift position at the end of the quarter versus an under-lift in -- at the end of the third quarter. And on the trade receivables, we had an increase due to the late December lifting where the payment was received early in Q1.On the liability side of the balance sheet -- equity and liabilities, again, the IP agreement that was mentioned and some smaller reductions in trade payables. So all in all, the year ended with a very strong balance sheet with still no external debt and an equity ratio of 59% and the cash position of more than $150 million.Yes. This is to give you an update on where we are hedging. We have in -- so far in the company not undertaken any hedging activity, but we have started to do something now in the first quarter. And the reason is, as you can see here, mainly to reduce the risk of the commodity price, the oil price, lock in some of the relative higher oil price that we see to also to help secure the free cash flows going forward.So the instruments we have used is a mix of swaps and zero-cost collars, as you can see here in the table on the right-hand side. So we have hedged now in total 1.5 million barrels, a large part -- or let's say, like 50% of the March lifting is hedged with swaps and zero-cost collars, as you can see here, the puts and the calls, and also for the remainder of '22 and '23, we have hedges in place, as you can see from this table. So in total, 1.5 million barrels.And we might -- we will carefully evaluate the situation going forward with the higher oil price that we see and we might enter into more hedges at these levels. So out of the -- we were still low on the hedge ratio compared to our forecasted production volumes for '22 and '23, but we might enter into additional hedges as we see that beneficial.So this is the cash flow from first -- fourth quarter. So we started off with $170 million in cash and an operating cash flow of $12.7 million. As mentioned, the December lifting came in, in early Q1. Then we had net investments of $24.6 million mainly related to the Hibiscus/Ruche project and the net financing activities that is related to the bareboat charter of Adolo, as mentioned earlier. So we ended the year with a cash of $150 million.And just to sum it up, the 2021 cash flows, we started the year with $120 million, operating cash flow of $108.9 million. The investments of $120.5 million, here also mainly to Tortue Phase 2 as well as the Hibiscus Alpha and also a part to Maromba. The Kudu or let's say, the West Leo semi-rig that we acquired back in November that was paid in Q1 -- early Q1, so that is not included in this figure.And then we had net financing activities that was mainly the capital raise from January last year of $75 million, offset with again the bareboat part of -- from BW Adolo. So net $41.9 million, ending again with a cash position of $150.9 million. So going forward on expected investments, we have the same figures as previous quarter where we see approximately $170 million for the Dussafu development net to BW Energy.On Maromba, that depends on the final investment decision. The current run rate shows about $30 million in CapEx. But again, if we are to take FID, but depending on timing of FID that number might increase. And on Kudu, we have the West Leo rig that came in the first quarter. In addition to that, a smaller concept development, approximately $1 million per quarter. So in total, we will have a CapEx program of between $200 and $250-ish million, depending again on the FID on Maromba.So that takes us through the financial part of this presentation. So if you move on please, to the outlook section. Our strategic priorities and value levers, that is still the same story, which is good.So on the production and exploration. We were pleased to see that we have managed to increase the output from Dussafu with increased gas lift capacity and hope to improve on that going forward with the final solution in place in the fourth quarter for the gas lift compressor, the new one.Then on the exploration side, we will carefully evaluate when to do that. We have a drilling program in place, as Carl mentioned, and we will start with development drilling later this year, and we will also access what to do as next steps on the exploration side.Our target this year is definitely to get Hibiscus/Ruche first oil late '22, that's the #1 imperative. But also to get some progress on Maromba on the FID is a very important milestone for us now in 2022.And on Kudu, we'll continue to mature the new rightsized Kudu development and see if we can get that to an FID in the coming years as well.On the corporate side, we definitely are focusing on maintaining a strong balance sheet. We might add on some debt this year mainly to finance the Maromba projects, but also to have a good buffer for other opportunities and we are progressing our RBL financing with a selection of international recognized banks.So to end it there, we expect to generate significant cash flows at these oil price levels and with a solid capital base that we have in -- from the balance sheet and also the access to the number of interesting projects, we -- which you can see here and we are also looking at other opportunities -- we expect to generate significant cash flows and create value for our stakeholders going forward.So by that, I'll conclude the presentation and hand over the word to you, operator, for questions from the audience.

[Operator]

[Operator Instructions] There currently seem to be no questions on the phone lines at this time. So I'll floor to our speakers for any e-mail or web questions.

[Knut Ruhaven Sæthre, Chief Financial Officer]

There are several questions on the Q&A from the web. So I will try to moderate that as good as I can. Let's start with -- there is a lot of questions about CapEx and our questions about CapEx going forward for the following years, '22, '23, '24.I mentioned that just now on the call or in the presentation that we -- for this year, we have about $170 million for Dussafu plan to finalize the Hibiscus/Ruche development. And then going forward for the following years, it's about $100 million every year up until '26.On Maromba, as mentioned, it depends on timing of FID. It's about, yes, as I said, $30 million to $100 million for this year on Maromba, depending on timing. And then for the following years, it's about $200 million and $300 million. So in total, it is about $200 million to $250 million for '22 and then $300-ish million for '23 and $400-ish million for '25. So that is it on CapEx.Then we have a question on inflation. Do you see any inflation pressures for the Hibiscus/Ruche project where equipment has become more expensive or do you see problems securing equipment, spare parts, how do you see access to employees? And also, do you expect increase on costs compared to the last quarter? As a broader question, maybe I leave it over to you, Carl.

[Carl Krogh Arnet, Chief Executive Officer]

Yes, we do see inflationary pressures. These are not affecting our current projects because they were all contracted before there were any significant price increases. But we do, of course, carefully monitor the cost inflation on steel and labor rates, et cetera, and equipment. We carefully monitor that because it will have relevance for a Maromba FID.We do see that rates for vessels, supply vessels, drilling rigs are getting stronger and further. But again, we have been very fortunate that so far, it's not given a significant impact to our current operations. Although we do expect the market to continue on a upward trend.With respect to access to people, BW -- nimble and envisage a huge increase in staff, although we do intend to take over some shared services progressively from BW Offshore as we continue on our trajectory to total independence. So we do intend to hire some. But we have so far not been experiencing not finding the right candidates. Hopefully, that's also due to the attractiveness of BW Energy as people can see that we are very active, and we have a high workload and we are seen as a fun place to work. So far, we have not been hampered by it. So that's, I think, yes, as general and specific as I can get Knut.

[Knut Ruhaven Sæthre, Chief Financial Officer]

Yes, thank you. I just move on with the other questions. There is one question on dividends. Is it possible that dividends may come earlier than 2025?I think we've been quite clear in our statements throughout the quarters and that we -- yes, we expect to generate a significant positive cash flow at this oil price, but we also have significant CapEx going forward and that the first oil on Maromba is the timing for starting dividend payments.And then we have another question, what is the main thing or things on the critical path to first oil for Hibiscus/Ruche in Q4? I think Lin can pick up.

[Lin Garner Espey, Chief Operation Officer]

Yes. Knut, thanks and good afternoon, everybody. The critical path for the first oil for Ruche Hibiscus is the sail away of the Hibiscus Alpha platform from the Dubai yards. And that's on track for -- to sail away in third quarter, and that will be the next significant milestone. And after that, it's sales down to Gabon. We install it, and then we'll commence the drilling program as well as the subsea tieback from the Hibiscus/Ruche platform to Adolo. We're on track right now to achieve first oil in December. So that's the major critical element that we've got to achieve.

[Knut Ruhaven Sæthre, Chief Financial Officer]

Thank you. Then there is a question around the IP agreement, Carl that I mentioned in my part of the presentation. When do you expect to make the first payment under the IP agreement and who are the owners of Seaboard?Just to the first one, on the first payment that has been announced we've already made now in February, $5 million. That is something that you can see out of today's material. And then now over to you, Carl.

[Carl Krogh Arnet, Chief Executive Officer]

Well, actually, we started our payments in 2018 with $7.5 million. And so this is the second payment under the IP agreement. The IP agreement is made with Seaboard production partners and the partners are individuals that are linked to the project and individuals who has, well, both intellectual property plans and competence that we sought when we were launching our very compressed plans for Dussafu. The only public person in that is our COO, Lin Espey and I think that's been announced before. The others, I'm -- well, it's not really in my place to talk about who they are and what participation do you have, that's an internal matter for Seaboard production partners.

[Knut Ruhaven Sæthre, Chief Financial Officer]

Yes. And just to be clear, this has also been very much specifically disclosed in the related Part D note in the financial statements regarding, Lin.

[Lin Garner Espey, Chief Operation Officer]

Yes. And also, of course, we're very prominent in the IPO material.

[Knut Ruhaven Sæthre, Chief Financial Officer]

Yes. Okay, let's move on. On the Kudu, there is a question, if it's possible to say something about when we expect to get the first gas?

[Carl Krogh Arnet, Chief Executive Officer]

We are currently in a period where we are negotiating with government bodies regarding the Kudu development. And although I would like to lean forward experience have taught me that that's very dangerous and difficult because it is negotiations. It will -- we are dependent on reaching reasonable agreements with the government or these government bodies and to predict when we can do that is, of course, difficult.But saying that, the power situation in Namibia is, I wouldn't say precarious or unresolved, but it is definitely -- it is definitely affected by what is going on in South Africa. The South African power market is getting tighter, and it has experienced rolling blackouts. That has not been the case in Namibia. But their power agreement is coming up for renewal this year, and we believe there is a significant momentum in the government to quickly get a more long-term solution in place, which would be like -- which Kudu would very much be a long-term solution for Namibia. So we believe we should have some good tailwind on our discussions with the government.

[Knut Ruhaven Sæthre, Chief Financial Officer]

Okay, good. Then there is some specific questions on CapEx again related to Maromba and the acquisition price, how that will be paid?And just to be clear, the Maromba acquisition price was $115 million, where we have paid $30 million at signing back in 2018. Then the next milestone payment is $25 million at the start of drilling activities and the final milestone payment is at first oil. So that is how that is divided over time and it was also included in the CapEx guidance that I just gave.Then over to -- there are a lot of follow-up questions. Do you have to fund all remaining CapEx for Hibiscus/Ruche via cash at hand or do you see additional financing needed? And if so, do you have access to the debt market currently?Yes, we have access to the debt market. And as I mentioned in my presentation, we are in the process of establishing an RBL. However, on, let's say, current oil prices and production, there is a significant operating cash flow generation. So it's not critical, at least not at current oil prices, but we are also looking at raising some debt for the company.And there is a question, is the amount of cost and profit oil we received under the PSC in Gabon influenced by your hedging price or your PSC entitlement is purely based on spot price? Lin, I don't know if you...

[Lin Garner Espey, Chief Operation Officer]

Yes. We -- so we take a look at our net production and part of our net production is our entitlement, so that's less royalty and the state share of the profit oil. And so that factors into our net forecast and then our hedging policies on that.And I think Knut you mentioned earlier that we're -- you gave that pro forma about how much we've hedged this year of our net entitlement and how much we have hedged next year as well. So it is taken into account. We just -- we look at our barrels that are net to us.

[Knut Ruhaven Sæthre, Chief Financial Officer]

Yes. Good. Then the final question that I see here is, you are producing now from 5 wells at Dussafu, what is the daily production volumes with these 5 production wells on stream?

[Lin Garner Espey, Chief Operation Officer]

Okay. I can certainly take that one as well. The current production is around 15,000-15,500 barrels a day with from these 5 wells. We just concluded the first part of February, a planned maintenance shutdown that spanned a little bit from January into February. So we've come off that, and we're producing again 5 wells. And so we're a little bit above target. So anyway, so production is pretty good right now.

[Knut Ruhaven Sæthre, Chief Financial Officer]

Good. Then I think I have covered all the questions. So then I leave it over to you, Carl, for final remarks.

[Carl Krogh Arnet, Chief Executive Officer]

Well, I think as you can understand from our presentation, we are entering a very active year. We are going to see some extremely important milestones for the company with the completion of the Hibiscus Alpha and transporting that, of course, to location and installing it and then starting to drill Hibiscus wells to feed back to Adolo. And so we're going to be looking forward to updating you on our progress.And as we say in BW Energy, the first, the second and the third priority is to get Hibiscus Alpha onstream, as this will significantly bump our oil production, and of course, with that, our contribution to the Gabon and also, of course, our well, bottom line, obviously, with current oil prices. And of course, this is a very important development to underpin, the continued development of BW Energy as a company.So a very exciting year ahead of us, and we are looking forward to come back to you and report on our progress. It's all looking very good. Thank you. Thank you.