Okea ASA

OSE:OKEA

Earnings Call Transcript 2022-Q1

[Svein Liknes, executive]

Good morning, and welcome to the First Quarter of 2022 Presentation from OKEA. My name is Svein Liknes and I'm the CEO of OKEA and as usual, I have my CFO with me, Birte Norheim, who will take you through the financial details after my operational update. There will be a Q&A session thereafter, but you can also ask questions in writing using the link on this presentation.

So what has dominated the first quarter of 2022? Obviously it's hard not to mention the crisis we have seen in Europe and the invasion in Ukraine. This has dominated the commodity prices and also the discussion of energy supply and the security of that is also then back on the agenda again. But back to the details on Q1 for OKEA. We had a production of 14,908 barrels of oil per day, which is about 1,100 barrels down compared to the last quarter mainly due to Gjoa had a planned shutdown to tie-in Duva and Nova fields and we also had a blackout on Draugen, which lasted for 3 to 4 days, which also had a minor contribution.

I'll get back to that when I go through the assets in more detail thereafter. We have also been waiting for the Yme ramp-up to be more steep and we did have a shutdown during Easter as we saw a small oil leak on the water. So we -- the operator took the right decision to close production and they have now identified the leak and they also have a repair solution and we are about to start up during these days this week. During the quarter as well, the financial position of OKEA strengthened further and as you can see, we had operating income of excess of NOK 1.5 billion. And as you can see as well, the cash balance increased with NOK 431 million in addition to a bond buyback of NOK 289 million. Q1 again has positioned OKEA to execute and deliver on our strategy, which is a strong well growth strategy. So we do have an operating position and also a financial position that enables this.

We are maintaining the production guidance that we gave last time of 18,500 to 20,000 barrels of oil per day although it will be in the lower range of this because of the delayed production ramp-up from Yme, but we are still believing that we are able to achieve this guiding and we will get back to that later on and keep the market updated on it. We have completed the acquisition of the 2.223% of Neptune's share in Ivar Aasen so that was concluded during the quarter. We had a discovery in the Hamlet, which is tied back to the Gjoa asset and so we are now working together with the partners and the operator how to commercialize this discovery and have a project back to Gjoa. And we're also progressing the Hasselmus gas project to Draugen, which was sanctioned last year and I will get back to that as well in a bit more detail when I go through the assets. So very volatile prices -- commodity prices during the quarter, but again I would like to reiterate that we are still on very high levels.

And as we said last year when we also launched our strategy, we believe in strong commodity pricing going forward and the energy crisis that we saw even before the Ukraine war was that we have a very fragile balance on the energy supply and demand in Europe and we think that will continue. And the Norwegian position in this -- in the role of OKEA as well and the Norwegian position on this is to secure energy supply to Europe in a reliable and safe way for the future and OKEA will take its part in that. Production volumes, as I just mentioned, production was just short of 15,000 barrels of oil per day and you can see the distribution here. We went down a bit on Gjoa due to the planned shutdown to tie-in and we are being compensated in kind for this at a later stage, most of it and we also had a small drop then of production on Draugen due to the blackout that we had when we had a power turbine that tripped for us.

And we produced 33% gas or 1/3 of gas production last quarter, which then again constituted 54% of our revenues. So again a good balance for OKEA in our production portfolio. High reliability on both assets, 97% and 99% is still high, but we're always achieving for the highest number so we are learning from the incidents we had in the quarter to prevent them to recur. Safety and emissions is always a prerequisite to deliver on and I'm glad to see that the total recordable injury frequency, as you can see here, is trending down. What you can see on the serious incident, the frequency is the one incident we had last year with the loose handrail, which was a potential incident. Nobody was hurt during that, but obviously it was a serious one so that is also trending downwards. And no hydrocarbon leaks during this quarter either. You see an increasing trend on the CO2 emissions. This is a trend that will drop downwards as Yme production is ramping up and it will definitely drop further down as we are electrifying Draugen.

So on Draugen. For the last quarter, we produced 6,877 barrels of oil equivalents per day net to OKEA. We did have the power outage that resulted in 4 to 5 days lost production during the quarter, but we ramped up again and we are now in stable operations. We also did the scale squeeze operation during the quarter, which will give us high reliability of these wells going forward. As I mentioned in the introduction, Draugen's activity is very much influenced by the Hasselmus project, which is gas tied back to Draugen, 4,400 gross barrels of oil equivalents of gas coming into Draugen in the fourth quarter of 2023. So that is progressing in accordance with plan. We are also drilling the well there this summer and project activities are ongoing both offshore and also onshore. In addition to that, we have the power from shore concept, which is very important for Draugen and also to reduce our emissions. In addition to Draugen, we are also doing this on behalf of the Njord asset.

So we are going through and planning to go through a final investment decision later on this year and we are doing preparatory work offshore as we speak. Gjoa again a very important asset for us, gives us the gas exposure we have. So even though it's only 12%, Gjoa is an important asset for OKEA. We think the operator in Neptune is doing a very good job both operating and also developing Gjoa assets further. There was a planned shutdown of -- on the 18th of March to 8th of April due to the tie-in of new tiebacks to Gjoa. And as I mentioned, deferred production will be replaced in kind when these assets or these fields are starting production. We also announced the Hamlet discovery together with the operator earlier this month and we are now working in the license to find a commercial development plan for this discovery to be tied back to Gjoa. Yme production of 1,345 barrels of oil equivalent, which is mainly due to a slower ramp-up phase as we had to restart or clean up wells directly to a shuttle tanker.

So we had to redo that plan. And then in addition, as I mentioned, we saw the minor oil leak during Easter and we shut down production on Yme, found the -- identified the league and have now a repair solution in place. Yesterday a shuttle tanker was also reconnected to Yme and the asset is just about to start the production again and will produce directly to the tanker while that leak is being fixed. Ivar Aasen, during the last quarter we completed the transaction with Neptune so we now have a working interest of above 2.7% in Ivar Aasen. Ivar Aasen as well had an issue with power interruption from Edvard Grieg during or late in the quarter, which has influenced production. They are now currently ramping up and are expecting as well to be back in full production by the end of May. So the operator has been working hard on that one and has solved the issue. So it's an important asset for OKEA still.

So with that, I will hand over to Birte Norheim for the financial details of the quarter and then I will come back afterwards with a summary before we then move into the Q&A session.

[Birte Norheim, executive]

Thank you, Svein, and as you said, the first quarter of 2022 was another great quarter for OKEA. The high petroleum prices during the quarter resulted in the second best top line in OKEA's history. However, due to a planned shutdown at Gjoa and Yme still being in the commissioning phase, volumes are lower than what we expect in the remaining quarters of the year. Produced volumes for the quarter amounted to 14,908 barrels of oil equivalents per day, which is a reduction of 1,130 compared to previous quarter. This was mainly driven by the planned shutdown at Gjoa, which started on the 18th of March and resulted in 12 days without production from Gjoa in the quarter. The majority of the shutdown stop related to tie-in projects for which Gjoa will be compensated for. Production on Draugen was also lower than previous quarter largely due to a trip of power turbines when starting up the loading pump for offloading.

However, the increased production on Yme partly offsets those effects. Sold volumes of 15,444 barrels of oil equivalent per day was 2,658 lower than last quarter, which is mainly due to no allocation from Ivar Aasen combined with the shutdown on Gjoa. In addition to our own production, compensation volumes from Duva amounted to 765 barrels of oil equivalent per day for the quarter. The market prices for petroleum products have continued to increase since the low point in mid-2020 and prices for both gas and oil were relatively volatile at very high levels throughout the quarter and strongly influenced by the Russian invasion of Ukraine. The average realized price for natural gas was slightly up from previous quarter and amounted to $189.8 per barrel equivalent, which is nearly 5x higher than last year. The average realized price for liquids was $89.6 per barrel, which is $11.6 per barrel higher than last quarter and nearly double compared to last year.

This resulted in total petroleum revenue of NOK 1.506 billion, a decrease of NOK 117 million compared to previous quarter and nearly 3x higher than last year. As mentioned, liquids prices have steadily increased over the last 1.5 years and the graph to the left illustrates the OKEA allocated liftings of liquids over the last 5 quarters. In Q1 OKEA had 6 partial cargoes with crude lifted with the majority of the volumes received in January. One from Draugen at 593,000 barrels on, one from Gjoa at 155,000 and 4 smaller liftings from Yme for a total of 91,000 barrels. We also illustrate the completed and some of the planned cargoes for the second quarter. The liftings which have already been completed is marked in dark blue and includes 632,000 barrels from Draugen in April, 2 liftings from Yme of 63,000 and 18,000 barrels, respectively and accrued lifting from Gjoa in the start of May of 8,000 barrels.

Marked in light blue is an expected lifting of 68,000 barrels from Gjoa expected in June. We also expect further crude liftings from Yme in the second quarter, but we do not provide any further guiding on this due to the ongoing commissioning. The graph to the right outlines the difference between the average market price of Brent for the quarter of $102.1 per barrel compared to the average realized liquids price for OKEA of $89.6 per barrel. The key difference relates to the timing effect since the lifting on both Gjoa and the lifting from Draugen was completed in January and prior to the price hike at the end of the quarter. European gas prices reached a new all-time high in early March after the Russian invasion of Ukraine. Gas was trading well above $400 per barrel equivalent for a few days, but came down to $200 per barrel equivalent towards the end of the quarter. The graph illustrates the average volumes of gas sold per month since January last year and the monthly average market prices in the same period.

The first quarter represents another strong financial quarter for OKEA with total operating income of NOK 1.5 billion, EBITDA in excess of NOK 1.1 billion and a net profit after tax of NOK 213 million. The total operating income of NOK 1.513 billion mainly consists of the petroleum revenue of NOK 1.516 billion and also includes a net loss on hedging positions of NOK 32 million. The recognized hedging loss comes despite a gain on the settlements made in the first quarter as it offsets the unrealized gain of NOK 52 million recognized in the fourth quarter. Production expense totals to NOK 287 million or $192 per barrel. That compares to NOK 171 per barrel in the previous quarter. Bearing in mind that the Q1 is the first quarter with 3 months production expense from Yme and the increase in cost per barrel is due to the lower volumes from Yme and Gjoa in the quarter.

Following the significant increase in forward prices for oil in the quarter, we are reversing the previous impairment charge of the Yme asset in full in the first quarter. This has a positive effect on impairment of NOK 363 million, which is partly offset by a tax expense of NOK 283 million, which results in a net addition to the P&L of NOK 80 million. Exploration and operating expense of NOK 115 million consists of NOK 23 million in SG&A costs and NOK 93 million in exploration expense, which mainly relates to costs for the dry exploration well Ginny. Net financial expenses amounted to NOK 61 million and mainly consist of expensed interest. The tax expense amounted to NOK 1.074 billion, which brings the net profit for the quarter to NOK 213 million. As for the balance sheet. Goodwill increased by NOK 36 million due to the acquisition of the additional working interest in Ivar Aasen, which was executed on the 31st of March.

The cash balance improved by NOK 431 million in the quarter and ended at NOK 2.470 million. In addition, NOK 209 million was placed in low-risk investments, which brings the total liquidity to nearly NOK 2.7 billion. Tax payable was NOK 1.364 billion and relates to the remaining tax due for 2021 and accrued tax payable for the first quarter of 2022. Interest-bearing loans -- bonds amounted to NOK 2.001 billion and the reduction from previous quarter was due to the buyback of OKEA02 for a nominal amount of $31.5 million. Other interest-bearing liabilities of NOK 480 million represents the net present value of our future obligations under the bareboat charter for the Inspire rig at the Yme fields. Total asset retirement obligations of NOK 4 billion is partly offset by the asset retirement receivable from Shell of NOK 2.8 billion. The reduction in both amounts was due to an increase in the discount rates used to estimate the net present values following a general increase in interest rates.

In Q1 OKEA generated a strong net cash flow of NOK 430 million in addition to the cash spent on the buyback of OKEA02 bonds of NOK 289 million, which represents a cash generation of about NOK 7 per share for the quarter. Total liquidity ended just shy of NOK 2.7 billion. Cash flows from operations was a solid NOK 1.266 billion mainly due to high realized prices and stable cost levels. Taxes paid of NOK 194 million relates to the fourth of 6 installments payable for the tax year of 2021. Cash used in investment activities was NOK 285 million, which includes NOK 106 million in exploration activities mainly relating to Ginny and Hamlet and NOK 46 million in net cash paid to Neptune relating to the Ivar Aasen acquisition and finally, NOK 133 million used in other investment activities. Interest payment of NOK 29 million relates to the quarterly payment of interest on the OKEA02 bond. Production guiding for 2022 remains at 18,500 to 20,000 barrels per day.

However, there is still uncertainty relating to the volumes from Yme in particular, which could lead to a later revision in the guiding. In addition to own produced volumes, we expect 900 to 1,200 barrels per day as in kind compensation volumes from Duva and Nova, which additionally will increase our sales and cash flow. CapEx guiding for 2022 is set to a range between NOK 950 million and NOK 1,150 million and excludes capitalized interest. As a final note and for our current shareholders, you should by now have received an invitation to our AGM on 12th of May, which will be held as a digital meeting. Information about the meeting, the procedure and the agenda is also available on our web page. As we are now in a position to pay dividends, the Board is requesting from the general meeting an authorization to approve distribution of dividends based on the annual accounts for 2021 and we intend to revert with a dividend plan during second quarter.

So that's all for me for now. And I'll give the word back to you, Svein, for some closing remarks. Thank you.

[Svein Liknes, executive]

Thank you, Birte. And before we go to the Q&A session, I will try to sum it up. Q1 2022, again a very strong quarter for OKEA. We are growing production. We are keeping our guiding as we have announced previously and we are growing the production in a very strong market. We have a very strong cash position, which also enable us to deliver on our growth strategy. And we are having high quality deliveries in our projects and also in our operations. So with that, we will then move into the Q&A session and you can now -- the lines will be open for questions and you will also be able to post the written questions if you use the link on our web page. So with that, I will end this with the final slide that shows our 3 strategic pillars, which is growth, we want to grow and to drive value creation and we want to show capital discipline while we are doing so.

So with that, I will then hand over to the moderator who will then take the questions and we will be ready to answer the questions you may have.

[Operator]

[Operator Instructions] The first question is from the line of John Olaisen from ABG.

[John Olaisen, analyst]

I had a couple of questions on Yme. You say you expect to restart production early in May, which I guess is good news that the leakage is identified and apparently fixed. Could you tell us a little bit more about the leakage? What did you do to fix it? And I also noticed that you changed the production system in the beginning at least you said in order to fix the leakage issue? A little bit about this, please?

[Svein Liknes, executive]

The leakage was a subsea leak in the caisson, which is connecting the platform to the subsea storage tank. There is quite a few pipes in there so systematically pressure testing of these pipes had to be undertaken to actually identify the leak in addition to observing it with an ROE. So the leak was detected last week and a shuttle tanker -- once we then knew what the leak as, a shuttle tanker was ordered, Bodil Knudsen, and she arrived yesterday at the Yme field and connected up. So the start-up is actually happening today because now we can produce directly to the tanker without the leak going to sea and then we will repair the leak. Obviously it's kind of awkward place to do this, but we do have a repair method or the operator has a repair method where we actually just insert a straddle packer into this pipe. So the time was mostly trying to identify where the leak actually came from in a very complex part of the caisson. So production is resuming actually today so that's good.

[John Olaisen, analyst]

How much extra cost would that then impact in OpEx for renting the oil tanker and I assume that's not a related cost to it. And also how -- what will you expect the cost to fix the issue?

[Svein Liknes, executive]

No, we have not received the details…

[John Olaisen, analyst]

Probably give some kind of indication.

[Svein Liknes, executive]

Sorry, we have not received details of that so -- but the tanker will not stay there longer than it has to be. So the repair is not a great undertaking. It's just that it's a bit awkward to get to it. So I do not have the details of how much this will actually add in OpEx. So the most important part for us was actually to identify where the leak was and it is manageable. So that is something we need to come back with the details on.

[Operator]

The next question is from the line of Teodor Nilsen from SB1 Markets.

[Teodor Nilsen, analyst]

Couple of questions for me. First on the Yme, as far as I understand, Svein, that will commence production today. Could you say something about the production level and should we expect in Q2? And also then maybe on the full year production guidance, of course you indicated there is some downside of risk to that depending on Yme performance and how much barrels per day are we talking about on that downside of the risk for the full year guidance? Second question just on dividend. Is it so that you intend to announce a dividend in Q2 or just confirm that you actually will pay dividend during Q2? And my third question is just a technical one on the P&L tax rate of 83%. Can you just help me to understand why that is higher than 78%? I guess it's maybe related to some financial items.

[Svein Liknes, executive]

The last question, Teodor, the third one, could you please repeat that?

[Teodor Nilsen, analyst]

Yes. The last question was on the P&L tax rate of 83%. I just wonder if you could walk me through why that is higher than the marginal tax rate of 78%? I guess that it's related to some financial items so some more details there would be good.

[Svein Liknes, executive]

Okay. I can cover the Yme question and then Birte will cover the rest. The volume and the impact obviously, as we have said, we will reiterate and we are still using the same guiding as before and what this means is that we are just pushing the production profile towards the right. But we do expect plateau production on Yme during the third quarter. That has always actually been the plan and that is due to new wells are being drilled as well and restarted. So we haven't had any losses of it. So that's the situation on Yme. Until we do actually have the ramp-up and the updated ramp-up schedule from the operator, it's very hard to kind of quantify what these volumes will be. And so I need to wait with that because then it may be misleading. So I need to get back to the volumes on a later stage. But the most important part for us now was that the leak was actually identified. There is no kind of deterioration of reserves or production profiles. It's just that we are skewing it a bit to the right, but we expect the plateau production in Q3 this year as previously planned. So on the dividend and the other parts, Birte.

[Birte Norheim, executive]

Yes. So the tax rate, you are pointing to the right explanation yourself, Teodor. It's relating to financial items and mainly due to the hedging loss, but also on interest that's charged through the P&L. I hope that outlined it. It's partly offset by the uplift, but this quarter the effect of the interest and hedge losses are exceeding that. And as for dividend, I guess what I should say is that we intend to announce it in the second quarter and I think we should wait until we announce that dividend plan would be more firm. As you may be aware, also we have obligation under our bond loans to offer the bondholders to buy back a similar amount of what we are paying as dividends and we need to assess the timing of that procedure as well. But as you see, we are quite cash heavy at the moment and we do have an intention to pay dividends in 2022 and further details on that will be announced in the second quarter.

[Operator]

[Operator Instructions] As there are no further questions on this call at this moment, I will now hand the word back to the speakers.

[Birte Norheim, executive]

Thank you. I see there's one question on the screen, and that is from [ Daniel Petland ]. He's asking what is the reason for holding back on the dividend policy?

And this is something that we are -- we have stated since October last year that we intend to announce a dividend plan during 2022 and we are now giving an update on -- that the plan is now to do that in the second quarter. So obviously we have to assess this in relation to all other activities that we're undertaking including the inorganic growth projects that we're looking at. So we're not holding back. We're just giving you a more precise timing on when we intend to provide a dividend policy.

So we get that question also from [ Paul Holter Daal ], who's asking are you able to quantify the growth ambition in further details. Reference is made to OKEA considers the near-term outlook as a good and solid basis for growth.

[Svein Liknes, executive]

Yes. Obviously the growth ambition is still there and as we have announced previously, we believe that we are very good in operating mid- to late life assets. So therefore, it's also quite clear that we are quite active looking for inorganic growth and in the M&A. But obviously it's something that we cannot comment on which processes we are in. But both organic growth for us around our assets is very important like the Hasselmus project and also the discovery in Gjoa that we will also tie back to Gjoa. The organic growth there is important, but we are quite forward-leaning when it comes also to inorganic growth, but it's very hard for me and to comment on the details there. But all I can say is that it's definitely a part of our growth strategy and on our agenda.

[Birte Norheim, executive]

And as there are no more questions, I'd like to thank all participants for the interest and please do not hesitate to get in touch directly with Svein or myself if you have any further follow-up questions. Thank you.