Okea ASA

OSE:OKEA

Earnings Call Transcript 2021-Q1

[Erik Haugane, Founder & CEO]

Hey, everyone, and welcome to this first quarter presentation for the 2021 results. I'm Erik Haugane, the CEO of OKEA. And with me today, Birte Norheim, CFO, will present the financial details, and we both will be available for -- to answer questions following this presentation.So first, let me present some of the key data from this quarter. And the highlights are -- and starting with what is the most important for us, of course, is our operations on Draugen. They have been running smoothly, and very high regularity and no serious incidents, and the COVID situation was handled very well in the entire company. We have had no incidents, neither on Draugen nor in any of our offices.We did produce a bit more than previous quarter, 16,557 barrels per day. Financially, we had a good quarter. We -- revenues was NOK 536 million. Birte will go into the details why that is a bit different to last quarter. EBITDA there was better than last quarter, NOK 240 million. We had a net profit of NOK 23 million, and we are still growing our cash position. With another NOK 100 million, we are now almost NOK 1 billion in the accounts.We are positioned for further growth. And most importantly, this year, the start-up of the Yme is expected later this year. The investment decision on Hasselmus is expected within a few weeks. That will be the first tie-in resources to be produced on Draugen. We are presently drilling an exploration well at the Ilder prospect, I'll get back to that. And we also planned, as a partner, to drill the Ginny prospect later this year. And of course, we continue to look for other business opportunities in the Norwegian -- on the Norwegian continent shelf.Here, you see a graphic -- graph of -- presentation of the key differences between the second -- of the last quarter, the fourth quarter last year and this quarter. And you see, we increased the production. However, we sold less petroleum than previous quarter, and that has to do with the listing program, and Birte will go into those figures in detail. That also means that we had less crude, in particular, to sell, which led actually to a bit smaller petroleum income, but with much less volume than in the fourth quarter.And then, let me start with Draugen, our most important asset which we operate, and half of our income from Draugen. We have, since we took over the operatorship, worked very hard to have high regularity and good operating performance, and we have been quite successful in that. We now have 97% reliability on the platform. We -- earlier this -- or last -- this quarter started to import gas from the Åsgard Transport System rather than spending diesel to fuel the turbines to get the power on the field. That, of course, led to a reduction of the CO2 emissions from the field, and the planned investment now where we expect to make the final decision within a few weeks. On Hasselmus, we'll actually supply not only gas for export, but we can also use gas then for overall energy needs on Draugen.The ambitions on Draugen is to reach 70% recovery rate. And we are now working, on the old formalities, to extend the lifetime of the Draugen field to 2040. And succeeding in that, we would actually double the remaining reserves from the field.The announced high CO2 taxes on the Norwegian shelf, do, of course, incentivize us to see if we can have other power sources than gas. So we are, together with Equinor, looking at the possibility of bringing hydro power from shore to both Draugen and Njord. We expect to make a final decision of whether that should be an investment or not in 2022.Gjøa is the other asset for income for the time being. New production wells were put in -- on stream earlier this year. Presently, we have a 30-day shutdown, actually, 2 more weeks on that, to tie-in the Duva and the Nova field to Gjøa. We will be, as I will show later, also be compensated for the loss of production that we incur because of this. And in this area of Gjøa, we are already engaged in several exploration licenses to the west of Gjøa, and we operate our results the Aurora discovery, where we also found additional prospectivity. And we are presently looking for a partner to drill a pressure well on Aurora. Aurora itself has proven like around 14 million barrels oil equivalent, can be 30 million. But we also need to get the better samples of the gas from Aurora in order to have a proper arrangement with Gjøa to produce that gas. So a pressure well on Aurora is a necessity.And then, of course, Yme, which is the project that OKEA has been involved in the longest is finally now approaching production. We see production from the field later this year. And behind me here, you see pictures taken during the tow out of Maersk Inspirer to the field. And to the left, you see picture of that -- the oil tubes, and things have been hooked up between the [indiscernible] platform and the Maersk Inspirer itself, preparing it for production. And the remaining part of the Gjøa operation and everything has to be done before production is on-schedule for a production start later this year, hopefully not too -- in a too long time.The net effect for OKEA, when this is on plateau, will be 7,500 barrels a day, which, of course, is quite significant for a company presently producing 16,500.We are also, as we speak, in a partner in drilling the Ilder prospect, just south of Grevling. If this is a discovery, that will, of course, impact the Grevling development. We are the operator on Vette, which is a similar sized field, 40 million, 50 million barrels. And we are looking at ways of joining forces in using the same equipment, using the same production unit between Vette and Grevling. That actually make this, in effect, a 100 million-barrel development, which looks promising, but of course, a discovery on Ilder will change the game a little bit here because sufficient amount to make Grevling a stand-alone development will also impact the strategy between those fields. So we will see when we have the result of Ilder.So then, I leave the word to Birte, who will explain and go into details with the financial data. So thank you. And Birte, please.

[Birte Norheim, Chief Financial Officer]

Production reliability continues at high levels, both at Gjøa and Draugen also during the first quarter, and a production of 16,557 barrels per day represents an increase of 2% or nearly 300 barrels per day compared to last quarter, mainly due to the P1 wells, which came on stream in February. Sold volumes of 15,198 barrels per day is 19% lower than previous quarter, mainly due to an additionally large lifting allocated to OKEA in previous quarter and only one lifting from Gjøa in the first quarter compared to two in the previous quarter. In the previous quarter, OKEA was also allocated about 100,000 barrels from Ivar Aasen, which occurs quite regularly, given that OKEA only holds about 0.5% working interest in the Ivar Aasen field.As for realized prices, we have observed quite significant improvements in petroleum prices over recent months. However, we do not get the full effect in the first quarter on the price of liquids as the lifting from Draugen occurred in the very beginning of January, and we will get back to a bit more detail on these liftings on a later slide. However, the realized price of liquids was still 27% up compared to last quarter at $49.5 a barrel compared to $39 realized in the previous quarter.The realized price for natural gas, as the prices have continued to increase, we have realized the price 28% above what we realized in the previous quarter, which is more than a doubling of the prices in the first quarter last year. This brings the petroleum revenue to NOK 536 million, a decrease of 8% compared to last quarter, and an increase of 6% compared to previous year.And we have added a new slide to illustrate the impact of timing of the Draugen liftings. And in volatile markets, the timing can have quite a significant impact on the realized prices for the quarter. The recent OKEA allocated liftings from Draugen have occurred early in fourth quarter and early in the first quarter. And when the market prices have continued to increase, this -- when we look at the quarter in isolation, this does not fully represent the average pricing for the month. And we have, of course, benefited from the recent price developments, but not to the full effect as the prices have continued to increase during the quarter.The graph outlines the differences in the average Brent price for the first quarter of $61 compared to the average realized liquids price to OKEA of just about $50 a barrel. And as can be seen, the key difference relates to the timing effect, which represents $7.6 a barrel of the difference and the NGL impact, which is about $3.3 a barrel of the difference. The quality and price adjustments can vary over time, but is quite insignificant in the quarter. The OKEA-allocated liftings, in the last 5 quarters, including the lifting that took place now in the second quarter in April, which happened at pricing -- market prices of about $65 a barrel. The next lifting from Gjøa is planned for May, and the next lifting from Draugen is planned for third quarter.As for the income statement, we delivered an increase in EBITDA of NOK 240 million compared to NOK 229 million in the previous quarter. However, the high net profit of NOK 182 million in the previous quarter has been reduced to NOK 23 million in the current quarter. And this is mainly due to the very positive impact of the reversal of impairment on Yme of NOK 117 million as well as unrealized foreign exchange gains in the fourth quarter not being repeated in the current quarter. In addition, in the current quarter, we are expensing the Jerv well of NOK 92 million, following concluding Jerv and noncommercial discovery in March. The operating income of NOK 524 million mainly consists of the NOK 536 million in petroleum revenue and also tariff revenue from Gjøa, an offset -- which is offset by cost on hedging. The production expense amounted to NOK 176 million or NOK 102 per barrel compared to NOK 110 in the previous quarter. And the lower cost per barrel was mainly due to continued stable production and reliability at both Gjøa and Draugen as well as the additional volumes from the P1 segment.Exploration and operating expense consist of NOK 109 million in exploration expense, mainly relating to the mentioned expensing of the Jerv well of NOK 92 million as well as field evaluation activities on Aurora, Vette and Grevling. SG&A costs of NOK 16 million represents OKEA's share of costs after allocation to license activity.The net financial items of NOK 5 million in net cost mainly related to expensed interest, partly offset by foreign exchange gains. And as the dollar-NOK relationship has remained quite stable during the quarter, the impact of foreign exchange on our dollar-nominated bond loans is quite limited in this quarter of NOK 10 million. The tax expense for the quarter amounted to NOK 40 million, an effective tax rate of 64%, which brings the net profit for the quarter to NOK 23 million.As for the balance sheet, the cash and cash equivalents amounted to NOK 978 million. And as always, we will get into the further details of this. We have a current tax refund of NOK 211 million, of which NOK 86 million relates to a refund of exploration expense from 2020 and NOK 113 million relates to the remaining tax installments for 2020. The interest-bearing debt amounted to NOK 2.4 billion. And again, due to the limited change in the foreign exchange rate, this has remained quite stable during the quarter.The asset retirement obligation of NOK 4.2 billion is partly offset by the NOK 3 billion in noncurrent receivables, due to Shell carrying the cost of removal from Gjøa and Draugen. And our cash position has increased by NOK 107 million during the quarter, ending at the closing balance of NOK 978 million. The increase is mainly due to cash from operating activities of NOK 224 million, which reflects a fairly good operating margin as the market prices have recovered, and partly offset by the payment of the Jerv exploration expense.Taxes received of NOK 97 million is 1 of the 3 remaining tax installments for 2020, and we expect to receive 2 more in the second quarter. And we have a payment estimated to NOK 81 million, which is due in Q4. Cash to investment activities of NOK 182 million mainly related to Yme and the P1 wells, which was completed in February. The interest paid of NOK 24 million relates to the quarterly payment of the OKEA02 interest.So on that note, I'll give the word back to Erik. Thank you.

[Erik Haugane, Founder & CEO]

Thank you, Birte. I will wrap up this presentation by going through some of the outlook for the future. And as we have already guided is that we expect a slightly higher production about the same as we did last year. But in 2022, we will have a significantly higher production for 2 reasons. One is, of course, that Yme will be in production. And you see here that We have added another 1.2 to 1.5 compensation to us because of the tie-in of the fields Nova and d Duva into the Gjøa field. That is a compensation for the lost production in 2020 and 2021, but that will be repaid in a way in times during the remaining part of the field. So this is just a time effect of production that we otherwise would have had in 2020 and 2021, which we now get in 2022.And also, looking at the CapEx, we have had 2 field developments ongoing for a while. And in 2020, we both had heavy investments on Yme and the development on the Gjøa P1 segment. That will be finished. So -- or are finished for the use case. So the investment in 2021 will be significantly lower than it was last year. And this -- our figure is based on a project that is ongoing or approved. And what we promise you to deliver are basically listed here. I am sure I'm confident that Repsol will get Yme on stream later this year, hopefully, earlier than later. We will submit to the partnership, and we expect approval of investment for the Hasselmus development, which we will present when this is finally approved, but it's a very lucrative development has a breakeven price well below $30 a barrel. And that looks like a very good project to be handled by OKEA and be in production already in '23.Ilder, I mentioned, is currently being drilled, so we are excited to see if we have a positive result on that or not within a few days. Ginny will be drilled later. Whether Aurora will be drilled this year or later, it depends very much on whether we get a partner into that project. And we expect to make the concept selection for Vette-Grevling, both with or without success on Ilder later this year.And we are, of course, maturing our portfolio around the assets we are operating and with our partners. And there are several decisions for appraisal and exploration wells lined up during this year and next year, so that will be really exciting. We received 8 new discoveries in the portfolio that we had in the last APA round, and a lot of prospects that would be interesting to pursue.We are, of course, always looking for other opportunities on the Norwegian shelf. And being the only smaller oil company that is a prudent operator of actually fields -- physical fields in the -- on the Norwegian shelf, we think that the business opportunities for mergers and acquisitions is quite good for OKEA, and there is not much competition in that segment where we are positioned ourselves, besides the bigger companies, of course. So that is also something that you may expect some movements during the next couple of years.And finally, this is also my final quarterly presentations to you. Since we started this in 2015, I've been running OKEA. And I have since relisted the company. I also had numerous of presentations like this. But the 1st of June, I will step down and Svein Liknes will take over my position as CEO of the company. The company looks really forward to see him onboard, and all the employees are really excited what he can contribute to the further growth of the company. I will still be with the company for a couple of years as adviser, but it's now run by Svein from the June -- 1st of June. So I will thank you all for not only listening to this presentation, but having listened to me on several occasions before. So thank you very much. And then we will continue with questions, where both Birte, myself and Trond Omdal will be available. Thank you very much.

[Operator]

[Operator Instructions] The first question comes from the line of Teodor Sveen-Nilsen from Sparebank.

[Teodor Sveen-Nilsen]

And also thanks to you, Erik, for being -- good luck with new adventures. So 3 questions from me. First one Yme. It looks like you expect for oil pretty soon. So I just wondered what are the key milestones remaining into your first oil? And is it fair to assume that actually we'll see first oil this summer and not late in second half as you have guided for a couple of quarters now? So that's my first question. Second question is on this Gja compensation. How much will actually that be in dollars? And how is that compensation cost structured? Is it a dollar per barrel or any other kind of mechanism? And my final question is related to cash refunds. Birte, did you say NOK 64 million for Q2 expected? And are you in a position to provide any guidance for Q3, and forecast refund?

[Erik Haugane, Founder & CEO]

Yes, thank you, Teodor. First, on the Yme timing. Most of the physical hookup operations are finished, but there's some work remaining. All that is done by our Aker Solutions. In addition, Aker Solutions also have the contract on the commissioning. And the commissioning -- if this run -- I think Repsol has been out in the market saying that the startup will be during 3Q. But commissioning is always something that partly weather-dependent, even though we are approaching the summer. But just to take high for -- if commissioning discovers anything. That has to be, of course, mandated. The purpose of decommissioning is that you when you push a button, it's actually -- the expected response of that must be correct. And if it's not to relate computer data programs that needs to be checked before we can start production. But if it goes smoothly, we expect production in the mid-third quarter just after some -- if there are hiccups, then they need the necessary time. But we are very confident that the production will start during this year.And with respect to the compensation regarding the delays because of tie-in. That's a normal thing in Norway that you get paid in kind. So all the oil that were kind of pushed out in time because we have to stop because of this high end of the other field, which accumulates to 650,000 barrels. That will be kind of delivered, subtracted from the owners of the tie-in fields when production starts in -- so that will mainly happen in 2022. But then it will be leveled out throughout the rest of the lifetime of the field. So that the end result would basically be as was expected, as if this tie-in have never happened. And then, in addition, of course the -- on the model platform do get a tariff for the work of producing third-party gas in this case. First, Birte, do you answer the last question?

[Birte Norheim, Chief Financial Officer]

Yes, I can. Teodor, so for the 2020 tax refund, we expect 2 installments in Q2, which is equal to the one we received in the first quarter, so 2 times NOK 97 million expected to be received. And we have estimated and residual tax to be paid in fourth quarter of NOK 81 million. That's for the 2020 ta returns. And on top of that, we have an exploration refund of NOK 206 million, which we also expect to receive in the fourth quarter.

[Teodor Sveen-Nilsen]

Okay. So you don't expect any tax returns in the third quarter?

[Birte Norheim, Chief Financial Officer]

No, not in third.

[Operator]

The next question comes from the line of Anders Holte from Kepler Chevreux.

[Anders Torgrim Holte, Equity Research Analyst]

First of all, I'd like to thank [indiscernible] Erik for true interesting stories over a number of years. I guess, as you leave OKEA, it would be good to hear your thoughts on where you see the company heading in terms of a bit of a longer view. I'd also like to just pick up on your comment when it comes to the M&A front. Like do you see any larger movements? I mean, are there -- is there asset opportunity sets, is it widening? Or do you see any kind of shakeouts in terms of any divestment programs coming from the larger holders of assets on the Norwegian content...

[Erik Haugane, Founder & CEO]

Yes, we see the movements already, of course. As you all know that some companies are in the process of pulling out from Norwegian shelves because of changing the strategies. There are companies who have announced that they are changing the strategy away from fossil fuels, and they are still in Norway, so they will eventually go out. And so we see an opportunity in 3 -- along 3 columns. Those companies who is actually divesting. And then there are the bigger companies, I think they will -- they need to continue to prioritize because of their internal resources. Hence, there will be some assets that they will either relinquish or sell out.And thirdly is that there is still a group of pure exploration companies that will have financially and perhaps organizationally, difficulties to also engage in field development and production because their funding is based on the kind of annual refund of the exploration expenses, which will not happen when they invest in developments. So successful exploration from an of this company will, of course, also give us access to fields and discoveries that we can develop with our capacity. So I think the -- and also, of course, with the expected good cash flow we see in OKEA, I expect that also OKEA will grow organically with doing more both operational drillings, exploration drillings and eventually also field developments. And as we also explained now in the presentation, we go ahead with the Hasselmus development, which we presented details of soon as the license has approved the development plan. But that's also not only an investment but also a project where OKEA can either kind of demonstrate our capabilities in various new ways. So I think OKEA is very well positioned for significant growth going forward.

[Operator]

[Operator Instructions] The next question comes from the line of Karl Pedersen from ABG.

[Karl Fredrik Schjøtt-Pedersen]

This is Karl Pedersen with ABG Sundal Collier. Two questions from me, if I may. The first question relates to the compensation. Is it fair to view this as a kind of a cash flow boost in the near term, and then you'll have the interest component that you'll have to repay over time? And the second question is, can you elaborate on the work streams that is required in order to extend the life of Draugen? What are the main hurdles as you see it?

[Birte Norheim, Chief Financial Officer]

Yes. Yes, I would look at it as a cash flow boost. It's basically -- we're getting volumes now that we have to repay later. So it's like a contribution in kind and in addition to the interest element. So we will get additional volumes for sale on top of what we produce in 2022 mainly, and we will repay those volumes over the remaining life of Gjøa. So I think it's a correct way of looking at it. And I assume, you mentioned on your second question...

[Karl Fredrik Schjøtt-Pedersen]

No, just a follow-up on that question before we go to Draugen. So that means that the net volumes will be approximately the same. It's only the interest component, that will be the difference between the ARPUs in 2021, 2022 and what you have to repay over the following set of years.

[Birte Norheim, Chief Financial Officer]

Yes, that is correctly understood.

[Erik Haugane, Founder & CEO]

But I wouldn't call it interest, but you basically -- because you get the same volumes in kind, you don't pay anything. But you get cash flow effect or it...

[Birte Norheim, Chief Financial Officer]

Yes, but you get an interest paid in volumes on the top or the actual -- yes.

[Erik Haugane, Founder & CEO]

Yes. Okay. Regarding Draugen extension, the -- I think the formal extension is very straightforward. It is just lots of documentation about the field infrastructure to actually our case staying there and the way it's maintained for the next 20 years.With respect to the production, I think we are home free to -- for a production with the present plan into the 2024. And we are working on -- and one of the projects that we will embark on probably next year is some sidetrack from existing wells. And we do plan for a more extensive water injection program pretty fast, and then also later new infill belts on Draugen. So to enhance the production on Draugen is basically a question of all investments in additional wells if we shall reach 70% recovery, as I mentioned in the presentation. But there is no kind of specific obstacle that has to be caused.

[Karl Fredrik Schjøtt-Pedersen]

Okay. So essentially, it's an investment decision that will trigger more drilling and consequently increased reserve base?

[Erik Haugane, Founder & CEO]

Yes and yes.

[Karl Fredrik Schjøtt-Pedersen]

And thank you so much for your efforts. And good luck with your new endeavors.

[Erik Haugane, Founder & CEO]

Thank you. Thank you. And I'm not planning to start a new oil company, that's for sure.

[Operator]

As there are no further questions, I will hand the word back to the speakers.

[Trond Frode Omdal, Vice President of Investor Relation]

Okay. There is one question -- a couple of questions from the web. First one is, after Ginny, what's next when it comes to drilling campaign? How many wells does OKEA plan to drill or explore in 2022?

[Erik Haugane, Founder & CEO]

Yes, there are 2 groups of wells. One is the exploration wells where the Calypso prospect, west of Draugen, Neptune's operator is going to be drilled next year. We'll probably also drill Mistral, which is a gas -- actually, there is more like an operational well because of the gas discovery south of Tor Bjerkestrand. And then we have Aurora, which we also would like to drill an exploration well on as soon as we get the partner. It may happen this year, but definitely next year. And then, of course, the Hasselmus production well. And we are planning one sidetrack from an existing well on Draugen also next year. But depending on how that well produces this -- and we will do that sidetrack when existing production in that particular well is dropping between -- below specific level. So that may be delayed if it produces too well. So we see like 4 to 5 well operations in 2022. And which one of them is a pure exploration well, actually.

[Trond Frode Omdal, Vice President of Investor Relation]

Okay. And one other question from the web. Your CapEx, you maintained the CapEx guiding of NOK 600 million to NOK 700 million. Does that not include post-FID investment in Hasselmus, or will that change, and you will update your CapEx estimates after the FID?

[Erik Haugane, Founder & CEO]

That includes the investment this year. That is on Hasselmus. We assume that, that will be approved. So that's why we have it in our cash forecast.

[Trond Frode Omdal, Vice President of Investor Relation]

Okay, that's all. Thank you again to the analysts and for the questions and those who have followed on the web. If there are any requests, you can contact Erik Haugane, Birte Norheim or myself, Trond Omdal, and the contact details are on our web page, and also, if any investors want one-on-one meetings. And next time, it will be our new CEO, Svein Liknes, who will head the Q2 presentation. Look forward to seeing and hearing you then. Hopefully, live due to COVID.

[Erik Haugane, Founder & CEO]

Yes. Thank you very much, everyone.