Okea ASA

OSE:OKEA

Earnings Call Transcript 2020-Q1

[Ståle Myhre, VP of Investor Relations]

Okay. Okay. Hello, everyone. Welcome to this webcast presentation of OKEA's first quarter result. We are sitting here at the office in Trondheim. [Technical Difficulty] Yes. Okay. Hi. It was testing the last time. Okay, we try again. Welcome to the webcast for the presentation of the first quarter results for OKEA. We will present this from our office in Trondheim. My name is Ståle Myhre, SVP -- no, sorry, VP Investor Relation. With me here in the office in Trondheim, I have our CEO, Erik Haugane; our new CFO, Birte Norheim; SVP, Project and Technology, Knut Gjertsen; and lead controller [Kjersti Hovdal]. Also joining from Kristiansund, our SVP of Operations, Tor Bjerkestrand. Okay, Erik. all right, you start.

[Erik Haugane, Founder & CEO]

Yes. Good morning, everyone. In this peculiar year that we are in now, we have, in OKEA, no corona-sick people. So that is good. We have had a very good operational quarter with no serious incidents in our operated activity. We have a good, stable production, a very good uptime on both Gjøa operated by Neptune and Draugen by OKEA. So operational-wise, we're really pleased with how the quarter went. Financially, it's, of course, less good, but the income has been NOK 0.5 billion. And our profit before tax and depreciation was NOK 312 million. However, according to accounting rules, we also have to adjust the values because of market conditions. The exchange rate Norwegian krone to a dollar has made our bonds more expensive. So if that continues till 2024, we will have those extra expenses. And also, of course, the outlook for the oil price is lower than it was at the start of the year. And we consequently have impaired more than NOK 600 million from our book value. CFO, Birte Norheim, will go through this in detail just after my introduction. What has been, of course, ours and most people's activities in the last month has been the reaction towards the corona epidemic and also adhering to the rules that the various countries have introduced, which, of course, has led to an enormous reduction in energy demand, which again has affected the oil price. Consequently, we have worked hard now to reduce spendings, and we have reduced the spendings this year by more than NOK 270 million. I look for another NOK 160 million in savings going forward. And the operating cost has been reduced. We -- immediately after the corona pandemic was declared, we reduced number of staff on board Draugen for example, from more than 70 down to 36. So we took action immediately to save cash. We have, because of the market perspectives, we see going forward, we have also postponed projects and all our exploration activities. So we do take this situation seriously, and I will get back to that at the end of the presentation. But right now, I leave the word to Birte that can go through the financials from this quarter. Please, Birte.

[Birte Norheim, Chief Financial Officer]

Thank you, Erik. Starting on the revenue side. We have seen a very strong production during the quarter in excess of 19,000 barrels of oil equivalents per day. The general fuel decline has been offset by the very high uptime seen both on Draugen and on Gjøa during the quarter in addition to production-optimization measures. The sold volumes are down by 22% compared to last year, which is partly due to a lower volume on the cargo from Draugen in the quarter as well as only 1 offloading of Gjøa compared to 2 last year. The realized prices are down, both on the liquids, but most notably on the natural gas, where prices has come down by as much as 56% compared to last year. And the lower sold volumes and the lower realized prices are partly offset by the strengthening of the U.S. dollars and the sterling compared to Norwegian kroner and results in a total petroleum revenue of NOK 504 million for the quarter. The financial statements, as Erik said, reflects the current market turmoil significantly impacted by noncash items, impairment and unrealized foreign exchange losses relating to our U.S. dollar-nominated owned loans. The total revenue of NOK 551 million, in addition to the NOK 504 million outlined on the previous slide on petroleum revenues, it includes unrealized gain on put options for oil and tariff revenue from Gjøa. The production expense reflects the volumes sold as well as a reduction in SG&A in the quarter and provides for an average production cost of NOK 87.3 per barrel. That brings the EBITDA to NOK 312 million, and it is the impairment of NOK 634 million and the net financial items of NOK 423 million, NOK 382 million of which relates to unrealized foreign exchange losses, which drives the net loss to NOK 785 million for the quarter. And a bit more on impairments. Obviously, we have observed some impairment indicators in the market as the pricing of petroleum products have changed significantly. And it is mainly due to the changes in forward curves that we are making such significant impairments. On the right-hand side of the graph, we are providing an overview or a split in between the different categories of impairment, and the most significant one is the technical goodwill of NOK 346 million, which mainly relates to Gjøa and Draugen. We have impaired ordinary goodwill of NOK 253 million, and a less significant impairment of Yme of NOK 35 million. On the cash side, we have a solid cash balance going into the quarter just shy of more than [ NOK 1.7 billion ], and we had a solid cash position going out of the quarter, just shy of NOK 1.3 billion. You may note that cash generated from operations are somewhat less than usual. That's partly due to the lower revenues but also due to changes in working capital, most notably to the final settlement on the Shell transaction, which took place during the quarter. Investment activities mainly relates to Yme and also on the P1 well at Gjøa and some investments also made at Gjøa -- at Draugen. You may have noted that we during the quarter performed our executed a partial buyback of the OKEA02 bonds. We bought back just in excess of USD 6 million nominal value at around [ 22% ] discount. And as Erik also said that the markets is beyond doubt challenging at the moment. But after all, OKEA is quite well positioned to manage through the turmoils. We have a solid cash balance. We have no maturities until 2023 and no near-term refinancing needs. In addition, we have production expense for the quarter, averaging at USD 8.3 per barrel, and we are continuing to focus in on preserving cash and reducing costs. However, we do see that in a continuing low price scenario for oil we risk ending in a breach of -- on the leverage ratio in our bond loans during 2020. And we are, therefore, intending to approach the bondholders to seek a waiver, and we have mandated DNB Markets as financial advisers in this process. As the final slide for the financial section for this presentation, we provide an illustration of the forecast cash development and also leverage ratio. In 2 different scenarios, both are based on the forward rates for gas and oil. And the yellow line represents the scenario where Yme startup occurs before the end of 2020. And the blue shadow represents a scenario where Yme startup is placed in second quarter. And as you may see, the Yme startup impacts for the low point on the cash balance and also on the leverage ratio. And the additional volumes from Ivar Yme, combined with increasing forward prices, supports the long-term cash generation for OKEA. And we intend to approach the bondholders quite soon. And with the ultimate target to summon for a bondholder meeting and get support for our waiver request.

[Ståle Myhre, VP of Investor Relations]

Okay. Tor?

[Tor Bjerkestrand, Senior Vice President Operations]

Yes, thank you. I'm Tor Bjerkestrand, SVP for operations in OKEA for both operated and non operated. And as Birte and Erik said, production has been excellent in the first quarter. In fact, we have beaten the target by 5% at Draugen and 2% at Gjøa. If you go to the next slide, Slide 13, you will see the Draugen details. And first and most important, I have to say, thanks to the organization for the fantastic work. We have no serious incidents or leaks in the first quarter, which is a fundamental principle of operations. And in addition, the availability, which has been achieved at Draugen is phenomenal. We are 97% availability at such a mature asset. And in combination with production optimization, we squeeze barrels out every day. We have reached a 5% production above target, which is a very good result for us. When it comes to the operation during quarter 1, of course, we are hit by the COVID-19 late in the quarter. We took measures straight away, reduced manning, implemented restrictions, and we have been in control of the situation since day 1. In addition to the COVID-19 situation, of course, taking down the OpEx and CapEx have been a process for us, and we have taken down the cost and also postponed and suspended cost, which is important for Draugen, our operated asset, is to keep the safety performance. That's the key of our operations. The availability is hard work every day. It doesn't come by itself. We will also now go to D2, one of our oil producers, to fix the downhole safety and get that back in production. And we are lifting our next load in May. That is a safeguarded -- it's a safe loading. And of course, continue to manage the COVID-19 situation. I don't think this is over by now. It's still -- it still can come back also. And of course, we have a big maintenance turnround coming up. We are in -- plants are ready, equipment are ready, contractors are ready. And I have to mention our contractors. Thank you all for an excellent job in the first quarter. Without the contractors, we haven't been able to deliver. When it comes to Gjøa., Neptune does a great job at Gjøa and operationally, and they have beaten the target by 2%. And they have 1 incident at 1 drilling rig at Gjøa license, but no leaks and a very high availability. Gjøa have also managed the COVID-19 situation excellent. And they are also, of course, in the same situation, thus reducing OpEx and CapEx. For Gjøa also keeping the safety performance is critical and availability. And of course, we are able to maneuver through this COVID-19 situation and the low oil price scenario. So my final remarks is that, first of all, no serious incidents or leaks at Draugen, our operated asset. That's critical. And of course, we beat our target on production first quarter, 5% at Draugen and 2% at Gjøa. Thank you.

[Ståle Myhre, VP of Investor Relations]

Okay. Thank you, Tor. And then on Knut on projects.

[Knut Gjertsen, SVP of Project & Technology]

Thank you. I will try to give a short update on the most important OKEA projects for now. First of all, we'd like to start with Yme where we have just completed an offshore campaign, and you can see on the picture to the right the wellhead module that now has been successfully completed. There is some remaining work that's quite within control. We are very pleased with the work done there. Also, during the offshore campaign, we pulled a deep set plugs in 2 existing gas injectors, quite a good achievement to manage to pull them well. And we managed it -- gather the information that we needed from the well to know what we had to do going forward. The Rowan Viking that was supporting the operation is demobilized, all well. Then going to Egersund where we upgrade the Maersk Inspirer, the progress has been lower than planned. Of course, the current COVID-19 situation adds to the challenge. The -- so to mitigate the situation, we work and the operator works, and of course, we all works very hard to source people, both Norwegian skilled workers and also foreign skilled workers, all within the current COVID-19 regime. So looking forward, we -- the current plan is to start production end of this year. But of course, given the current situation with COVID-19 and other challenges, we see that there is a clear likelihood that we go into 2021. It's really now hard to tell exactly the expected time. But hard measures have been taken to safeguard the schedule. The current situation, of course, also influences the OpEx on Yme, and the 2020 CapEx is expected to increase somewhat. Then going to the other projects. On Gjøa, the P1 project operated by Neptune. We have just completed the P1 project is to tie back to Gjøa. We have just completed geopilot. And we needed 2 additional sidetracks to meet the well objective, which, of course, draw the CapEx a bit up. We managed to get information from the campaign that we needed, which was quite good. And we now aim for a production start-up of Gjøa here and together with Neptune operator in first quarter next year. Third to the OKEA-operated Grevling/Storskrymten, which is a field development project. The current status that it has been matured towards concept selects -- select. It's fair to say that we had to move 2 exploration wells in the license, Ilder and Jerv, up to 2021 to safeguard our expenditures. So by doing that, we have reduced the spendings in 2020 significantly. The last project I would like to mention is the Hasselmus, also OKEA-operated, which is a gas tie back to Draugen. As you might know, we just passed decision gate 2 on that project but has now decided to suspend the project for the year. So we are in the middle of a process of closing it down controlled in close cooperation with our suppliers, which will enable us to have a quick restart when the time is right. By doing this, we, of course, reduce our CapEx exposure, both this year and not at least next year, significantly, which is quite good given this current circumstances. So even though we have taken strong measures to reduce our expenditures, it's fair to say that the situation on P1 Gjøa and Yme drives some additional CapEx for OKEA in 2020. Thank you.

[Ståle Myhre, VP of Investor Relations]

Okay. Thank you, Knut and then Erik.

[Erik Haugane, Founder & CEO]

Yes. Thank you all. In these peculiar times, the focus of the Board and the management is to prepare the company for the growth that will happen when we get out of this situation. And we have now been in a period now going forward have too much oil out in the market. And it is sensible for us to try to forward grow maintenance work and everything we need to do anyway to this summer in order to delay the next cargoes from Draugen. We have a cargo coming from Draugen now early May, which is partly hedged. And we don't know if Norwegian authorities will impose some production restrictions, but this make a good business sense anyway to concentrate any stops, any maintenance work due this summer to not add to the difficulties in the market. So we estimate that the next cargo from Draugen will be delayed till until August if that plan is carried out. So we are -- in addition to that kind of market adaption, we are protecting the cash and prepare ourselves for a growth position as the market conditions improves. We think that as analysts also estimate that a lot of production is taken fairly permanently out and that when market partly recovers, that we will see a better pricing of oil products. So in -- for this year and also into next year, we need to protect our financial position. And Birte already mentioned the waiver period. But the long-term outlook is very good. We will increase our production significantly when Yme is in production, and we expect a rise in product prices as to the market when it comes to 2021, 2022, and then we are in good shape. Because of this maintenance work and -- we do and also they do on Gjøa, we're also going to try in other fields, we will produce less the next 2 quarters than we did last year, which, of course, is a good thing in today's market conditions. So we prepare our company to grow into the future. And as everyone else, we, of course, follow various M&A opportunities as we go forward. So even though this year is financially challenging and not very profitable, the outlook for the company is, in my view, very good. We have a very good -- we have proven our concepts that 700 million barrels still on Norwegian shelf are profitable at normal oil prices and being the lead operator in this segment, we are going into a great future following this event that we experience today. So thank you very much for your attention for this presentation, and we look forward to answer any of your questions. Ståle?

[Ståle Myhre, VP of Investor Relations]

Yes. There has been a couple of question on the webcast. The first one is from Anders Holte. What realized oil prices have you seen so far in Q2? And follow up, any comments around the ability of selling cargoes? If oil prices stay at the USD 20 mark, what will be the cash burn for OKEA Q2 '20?

[Birte Norheim, Chief Financial Officer]

What do we want to say about the realized prices, Erik?

[Erik Haugane, Founder & CEO]

The only realized price is -- in Q2 is -- was from Europe. And I don't have the overview of that. No.

[Birte Norheim, Chief Financial Officer]

No.

[Erik Haugane, Founder & CEO]

So we don't know those yet. And as I said, the only 2 quarter cargo that -- which is most of our oil courses from Draugen will happen in early May, so it hasn't happened yet. And then we think the next cargo will be in August. So anybody's guess on oil price in August are appreciated. Send it to us if you know.

[Ståle Myhre, VP of Investor Relations]

Okay. There was one question on Yme. Knut, what is the status on Yme field development and production start, and I guess you pretty much covered that.

[Erik Haugane, Founder & CEO]

You can repeat it if you want.

[Knut Gjertsen, SVP of Project & Technology]

Yes. Yes. The plant production start for Yme is end of this year. But as I said, the current circumstances, of course, drives a big uncertainty to the startup time. So there is, of course, a significant risk to that -- but we will experience a delay beyond that. But we work, of course, very hard to safeguard the schedule. And we, of course, trust the operator and both Maersk and [indiscernible] to work hard on this going forward.

[Ståle Myhre, VP of Investor Relations]

Another question from [indiscernible]. How many production wells planned at Grevling/Storskrymten and also how many planned at Hasselmus?

[Erik Haugane, Founder & CEO]

I don't have the Grevling numbers, to be frank. Of course, we can provide that information. Hasselmus is basically 1 well. Since it's a gas field, that is fairly easy to drain.

[Ståle Myhre, VP of Investor Relations]

Okay. And from [ Karl-Frederiks at Peterson ]. Can you guide for quarterly production and quarterly sales?"

[Birte Norheim, Chief Financial Officer]

We are providing an annual guidance as was on the last slide, of 14,000 to 15,000 barrels of oil equivalents per day. Sales, yes, that's a function of both the market prices, which is uncertain at the moment; and the production, of course. But as Erik said, if we are pushing forward the maintenance, that will have an impact on our sales in second quarter.

[Ståle Myhre, VP of Investor Relations]

Okay. That was the question on the webcast. If you have -- after this presentation, I have -- okay, sorry, there was one -- there's one question coming up. I think we can go for that. What is the cash cost per well given the lower production output anticipated this year?

[Birte Norheim, Chief Financial Officer]

Well, we aren't guiding on that. We have -- we are providing the numbers for first quarter, which was 87.3, but we're not providing any further guidance on that as of now.

[Ståle Myhre, VP of Investor Relations]

Okay. I think with that, we conclude the webcast. If you have any more questions following this presentation, please feel free to reach out, and we'll try to answer as best we can. Okay. Thank you all for watching this presentation.