Okea ASA

OSE:OKEA

Earnings Call Transcript 2022-Q3

[Svein Liknes, executive]

Good morning, and welcome to the presentation of the Third Quarter Results for OKEA for 2022. My name is Svein Liknes, I'm the CEO of OKEA. And together with me today, I have our CFO, Birte Norheim. She will take you through the financial results after I've taken you a bit through the highlights for the quarter and also some details of our assets.

Overall, the third quarter for OKEA has been a very strong quarter with a lot of volatility in Europe and also around us, the financial results and also operational results have been very strong. So the production, both on Draugen, Gjoa and Ivar Aasen has been very good during the quarter, but we are still seeing a more slow ramp up on Yme compared to what was anticipated and planned. So I'll get back to that when I speak about Yme in more detail a bit later.

On the financials side, we had a record high operating income and also a record high EBITDA and a very good profit for the quarter, and also, we generated above NOK 900 million of cash flow during the quarter. We've also recognized an impairment of about NOK 600 million on the Yme asset that I -- as I mentioned, we'll get back to when we speak about Yme a bit later on. Both our operations position and our financial position, again, strengthens the OKEA's position to continue our path on our strategy on value-accretive growth.

We are net cash positive. We have reduced our debt during the quarter by redemption of OKEA02 in July. We are very close to transferring the operatorship of Brage and also the remaining portfolio that we have acquired from Wintershall Dea. We have continued the dividend payment and will also do so in December. And we will also today announced that we have an intention to pay also NOK 1 per share in each quarter also for 2023. And for our projects, both our Hasselmus project and the power from shore is progressing according to plan.

As I mentioned, we've seen extreme volatility in the European gas market. Oil prices have been fairly steady, although they have dipped a bit, most likely due to the ongoing recession [ phase ] in the capital markets, but we have seen extreme volatility in the gas pricing, which obviously has affected the market. But we are still seeing very high prices in the market, both for gas and also for oil, obviously.

The U.K. market is still trading substantially through a discount compared to the European market for gas, but we expected that to be converged during the winter of 2022/2023. Our production of gas from OKEA is currently predominantly going to the U.K. market. That's for the Hasselmus. We will have the option and also for Nova have the option also to export to the European market in the future.

Back to the numbers. We've had, as I just mentioned, steady base performance, both in Draugen, Gjoa and Ivar Aasen. You can see on this graph here that we had a slight decrease in production from Draugen, but that was mainly due to planned maintenance activities and also wireline operations in the wells. And you can also see here that the performance on Ivar Aasen has increased quite significantly with double production. The gas compared to oil is very much in line with what we had in the previous quarters with approximately 1/3 of our production in gas. So very high reliability, both on the Gjoa asset and also on the Draugen asset.

Safety and emissions. You see a drop there in the serious incident frequency, and that is because one of the incidents we had more than 12 months ago has now dropped out of the statistics. That was the loose handrail on Draugen, so that has dropped. And the increase, you can see on total recordable incidents is 2 personal injuries that we have had on Draugen related to pinched fingers, et cetera. So no long-term damage to people or equipment. They are all back to work again, but obviously, it goes into our statistics, and it's something we are focusing on. Also happy to say that we've had 0 hydrocarbon leaks during also this last quarter.

When it comes to CO2 emissions, that is pretty much the same as we have noted previously in the last quarter. And production from Yme and also electrification of Ivar Aasen in the short term will positively contribute to the statistics slowing down, but the main contributor will, obviously, be the electrification of our Draugen operations later on.

So going into more details on each asset, back to Draugen. Good production and performance on Draugen, planned activities, both on maintenance and also well work, very important wireline operations on Draugen has been executed also to monitor the integrity of the wells and with a very positive result that has demonstrated that the wells we have on Draugen today do have the integrity to continue operations until 2035 and also to 2040, which was important information together.

Our projects, both the Hasselmus project is progressing in accordance with plan. We completed the drilling of the production well this summer in July, actually, which was ahead of schedule and also below budget. We are executing on the topside pre-fabrication as we speak and we are planning for production to start in the Q4 2023 with a plateau gas production of 4,400 barrels of oil equivalent of pure gas, which will convert to Draugen from a gas import of fuel purposes today, which is driving cost to actually starting to export gas from quarter 4 in 2023.

The last major project that we have is the power from shore project, which we are doing jointly together with the Njord. We have completed the studies. We have also approved the project in the Draugen license, and we are waiting then for the Njord license to also execute on the approval process later on this fall, so we can take a final investment decision jointly within 2022.

Gjoa asset, again demonstrated that the Gjoa asset, although we only have a working interest of 12% in the asset, it's extremely important to Gjoa. And we think the operator is operating the Gjoa asset very good. Very stable production, 100% reliability and high production throughput of more than 7,000 barrels of oil per day. The Nova tie-in that also comes into Gjoa commenced operations in July. And as we have announced previously, those volumes are being compensated for in-kind.

But also worth noting that in the Wintershall Dea transaction, Gjoa's also taking over 6% of the Nova assets that started producing this summer and is ramping up in accordance with plan. And the work is also ongoing to mature the new Gjoa Nord project, Nord project, which includes the Hamlet discovery that we announced earlier this year, towards the final investment decision by the end of 2022.

Then Yme, production, very much the same as during the last quarter, as we reported, but this has been very much influenced also by a 6-week shutdown on the Yme field due to leaking pipe work that was happening due to an incident on Yme. So Yme started producing again early in October, and it's still on a ramp-up phase. But as we have said before, the ramp-up is going much slower than anticipated, and that is also affecting the production numbers, obviously, for OKEA.

We have also seen during the first initial months of operation on Yme that the water cut is higher than expected, which are reducing the reserves by 2 million barrels net to OKEA during the period or between the period 2022 to 2035, hence, the impairment we are reporting today. Some of this reduction can be compensated later on through infill drilling, et cetera, and that is something we are obviously working on in the asset. The Beta North drilling campaign is ongoing and also the Gamma drilling campaign is due to commence in Q4 2022, putting on the additional wells on Yme. So we will see the plateau production of 6,600 barrels of oil per day net to OKEA during the first half of 2023.

Our Ivar Aasen asset, as I just mentioned, they had a rough second quarter, but have really picked it up in the third quarter, doubling production, which was the downfall in the second quarter was due to power generation issues from the other rig, which has been sorted. And Ivar Aasen has produced above plan since they resumed production. Ivar Aasen is also electrifying their operations during the fourth quarter of this year, having a positive contribution in the environmental footprint from the Ivar Aasen, which will also have a knock-on effect on the performance for OKEA.

The last asset that I would like to mention is the addition of the Wintershall Dea portfolio, here represented by the Brage platform, which is part of that portfolio we are taking over in addition to 6% in Nova and also in excess of 6% on Ivar Aasen. Obviously, the Brage comes with the platform and with people. So we got 140 new employees in OKEA with a target takeover date on November 1 this year, which is in accordance with the plan that we have announced previously.

We have all the approvals, both from the PSA, from the Ministry of Finance and also Ministry of Petroleum and Energy in Norway. So everything is now lined up for a successful takeover. And that is a very important part for OKEA, if we are going to deliver on our strategy to be the best mid- to late-life asset operator, we also need to demonstrate that we are the best ones to actually execute on these complex transactions and transitions as we have done on the Brage asset now. So we're really looking forward to November 1, and we can add the previously Wintershall Dea portfolio into the OKEA portfolio.

So with that, I will hand over to Birte, who, as I just mentioned, will take you through the financial results for the quarter.

[Birte Norheim, executive]

Thank you, Svein. And as you say, the third quarter has been another eventful quarter for OKEA, with operational performance from Draugen, Gjoa and Ivar Aasen continuing to be solid and in combination with higher realized prices, we delivered record high revenues, as well as EBITDA. On the more disappointing side is the performance at Yme, which resulted in significant impairment, as well as a reduction of our guiding for the year. Overall, however, we deliver a solid cash generation to capital providers, which has partly been used to buy back debt and partly to distribution to shareholders. At the end of the third quarter, we are net cash positive by NOK 1.4 billion, and we are ready to take on new assets to our portfolio.

But let's go in a bit more detail and start with our production and sales. In the third quarter, we produced 16,064 barrels of oil equivalents per day, which is more or less the same as previous quarter. Gjoa continued its solid production performance. And for Draugen, the lower production was mainly due to planned activities for scale squeeze of subsea wells and a wireline logging campaign on the platform wells. Production at Ivar Aasen has been stable during the quarter, but performance at Yme continues to disappoint with ongoing production disturbances, resulting in about 6 weeks of downtime in the quarter.

Sold volumes of 17,264 barrels of oil equivalents per day was an increase of 1,307 compared to previous quarter. This was mainly due to higher lifted crude volumes from Gjoa and Ivar Aasen. Compensation volumes from Duva and Nova amounted to 431 barrels of oil equivalents per day in the quarter. The average realized price for natural gas of $194.8 per barrel equivalent was more than double the price realized in the previous quarter, as well as the price realized last year. The average realized price for liquids was $106.6 per barrel, which is $6.3 per barrel higher than last quarter and $39.2 per barrel higher than last year. Overall, this resulted in total petroleum revenue of NOK 2,114 million, an increase of NOK 860 million compared to previous quarter and more than doubled compared to last year.

Liquids prices have come down somewhat over the last quarter with a starting price for the quarter of about $120 per barrel and a closing price below $90 per barrel. The graph to the left illustrates the OKEA allocated liftings of liquids over the last 5 quarters. And in the third quarter, OKEA had 6 partial cargoes with crude lifted with the majority of the volumes received in July.

We also illustrate some of the completed and planned cargoes for the fourth quarter. Marked in dark blue is the completed lifting of 67,000 barrels from Yme in October and marked in light blue is the expected liftings, which includes 652,000 barrels from Draugen and 158,000 barrels from Gjoa, both expected in November. Further guidance on liftings is not provided on Yme in the ramp-up phase nor on the assets acquired from Wintershall Dea prior to the completion of the transaction.

The graph to the right outlines the difference between the average market price of Brent for the quarter of $100.7 per barrel compared to the average realized liquids price for OKEA of $106.6 per barrel. The positive difference relates to the timing effect largely since the majority of the volumes were lifted in July at the time before prices came down towards the end of the quarter. In addition, we had positive price adjustments from previous periods relating to the norm price on Draugen.

On this slide, we illustrate the average volumes of gas sold per month since July last year and the observable monthly average market price in the same period. We export our physical flow of gas, which is currently from Gjoa and Ivar Aasen to U.K. on NBP day-ahead prices. And as Svein has stated, the prices have been extremely volatile recently. Following all-time high for European gas prices in August with NBP prices of $400 per barrel, gas prices have come down and NBP ended the quarter at just above $110 per barrel.

Let's look at the profit and loss statement. So we delivered a record high operating income of NOK 2.143 billion, consisting of the petroleum revenue of NOK 2.114 billion and other income of NOK 30 million. The other income mainly comprises tariff income at Gjoa of NOK 42 million, partly offset by a net loss on hedging positions of NOK 21 million. Production expenses amounted to NOK 425 million or NOK 253 per barrel. The cost is higher than what we expect going forward, both in absolute terms and in terms of cost per barrel.

The absolute costs were high, mainly due to the well maintenance and high prices for gas import at Draugen in addition to the continued high production cost at Yme during the ramp-up phase. The high cost per barrel was additionally impacted by the low volumes from Yme during the quarter. We recognized an impairment of NOK 609 million related to the Yme asset in the quarter. Earlier than expected, water cut in the wells have resulted in a reduction in estimated reserves of 2 million barrels net to OKEA over the lifetime of the field.

The impairment charge is partly offset by the related tax income effect of NOK 475 million, resulting in a net P&L impact of NOK 134 million. Please note that the Yme asset is subsequently recognized at fair value. Any changes in macro conditions and asset performance will result in further impairments or full or partial reversal of impairments going forward. As such, there is a potential for some volatility to the profit and loss statement going forward relating to Yme.

Exploration and operating expense amounted to NOK 63 million, consisting of NOK 45 million in SG&A costs and exploration expense of NOK 19 million. The expense in the quarter was higher than our run cost, mainly due to transition activities related to the transfer of operatorship on the Brage assets from Wintershall Dea.

Net financial expenses amounted to NOK 113 million and mainly relates to the net interest expense of NOK 52 million and NOK 17 million in call premium due to the early redemption of OKR02 in July. In addition, we recognized a net foreign exchange loss of NOK 41 million as the Norwegian kroner weakened by nearly 9% relative to dollars in the quarter. The foreign exchange loss relates to the dollar-nominated net debt and was partly offset by foreign exchange gain on the U.S. dollar-nominated cash. Tax expense amounted to NOK 633 million, which brings the net profit for the quarter to NOK 104 million.

Looking at the balance sheet. Cash and cash equivalents ended at NOK 2.668 billion. In addition, NOK 9 million was placed in low-risk investments, which brings the total liquidity to nearly NOK 2.7 billion. As the remaining outstanding bond loan amounted to NOK 1.3 billion, OKEA is net cash positive at the end of the quarter by NOK 1.4 billion. Trade and other receivables amounted to NOK 1.347 billion and includes a $10 million prepayment on the Wintershall Dea transaction. Tax payable amounted to NOK 1.749 billion and mainly relates to the accrued tax for 2022.

In July, we significantly reduced our interest-bearing debt through the buyback of OKEA02, which had NOK 100 million remaining outstanding. At the end of the quarter, the remaining outstanding NOK 1.3 billion relates to the OKEA03 loan, which carries a fixed coupon of 8.75% and matures at the end of 2024. Other interest-bearing liabilities of NOK 572 million relates to OKEA's share of the future obligations under the bareboat charter of the Inspirer rig at the Yme field. Total asset retirement obligations of NOK 3.6 billion is partly offset by the asset retirement receivable from Shell of NOK 2.5 billion.

As a result of the steady performance on most of our key assets, combined with high realized prices, the cash generation in the quarter was strong. Cash generated to capital providers amounted to NOK 916 million, which was used for the buyback of OKEA02 by NOK 1.1 billion and a dividend payment of NOK 104 million in total. Total liquidity ended just below NOK 2.7 billion. On 1st of November, the transaction with Wintershall Dea will be completed, which will reduce the cash balance in the coming quarter.

Cash flows from operations was as high as NOK 1.692 billion, and taxes paid of NOK 509 million relates to the first installment for the tax year of 2022. Cash used in investment activities was NOK 317 million and mainly relates to CapEx spending, about half of which for the Hasselmus gas development. Interest payment of NOK 24 million relates to the interest paid on the OKEA02 bond prior to the redemption late July, as well as the financial lease at Yme.

Looking at the total cash generation in the first 3 quarters, the very strong position of generation cash to capital providers of nearly NOK 2 billion represents a cash flow of more than NOK 20 per share. This has been achieved by solid operational performance on most of our producing assets in combination with a strong market. Total improvement in our liquidity position has been NOK 429 million on top of the early buyback of OKEA02 of NOK 1.4 billion in total for the year and total dividend payments of NOK 197 million. In addition, we have paid nearly NOK 1.1 billion in taxes and NOK 906 million has been invested in developments, drilling activities and acquisitions.

As we also indicated in our second quarter reporting, the ramp-up at Yme has progressed slower than what we anticipated. This development has continued with very low plant availability in the third quarter. The updated prognosis from the operator indicates that plateau production will be pushed back to the first half of 2023, which leads us to revise our production guiding for 2022 by 1,000 barrels of oil equivalent per day from a range of 16,000 to 17,000 to a range of 15,000 to 16,000 per day.

Note that the guiding level for 2022 does not include volumes from the Wintershall Dea transaction. And in addition to our own produced volumes, we expect between 900 and 1,200 barrels of oil equivalent per day as in-kind compensation volumes from Duva and Nova in 2022, which additionally increases our sales and cash flow. Production outlook for 2023 and CapEx guiding for 2022 remains unchanged.

Following the announcement of our dividend plan for 2022 in May, we paid our first cash dividend of NOK 0.90 per share in June and NOK 1 per share in September. We also stated an intention to pay NOK 1 per share in Q4 this year. The Board has now resolved to pay NOK 1 per share in December, and the Board is also stating an intention to distribute the same amount each quarter in 2023. This results in total dividend payments for 2022 of NOK 2.90 per share with an intention to pay total dividends in 2023 of NOK 4 per share. The dividend payments in 2023 is subject to an authorization from the general meeting and may be revised in case of significant changes in market environment, the company situation and/or value-accretive opportunities being available.

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. Before I go through the summary and outlook, I would like to make you aware that you can ask questions or send in questions using the links that you can find on our web page. And there will also be a Q&A session once we have concluded on the summary and outlook that I'll go through now.

The wrap-up from this quarter must be that OKEA has demonstrated that we are delivering on our growth strategy with the acquisition we have done from Wintershall Dea on the Brage and Nova and also the Ivar Aasen that will now be included into the OKEA portfolio from November 1 this year. We have continued solid performance, both on Draugen, Ivar Aasen and Gjoa, and we are also working closely with the operator on Yme on the ramp-up schedule, which has now been changed slightly.

The organic projects in OKEA is progressing well, both the power from shore project and also the Hasselmus project that will turn the Draugen asset from -- to become a gas exporter. We have a very solid cash position. We do pay dividends as a company to the shareholders, and we are also reducing the outstanding debt. This overall positions OKEA to actually continue the delivery on the strategy that we have set out to become the mid- to late-life operator on the Norwegian continental shelf.

So with that, I would just say thank you for attending the presentation today, and we are setting over the Q&A session shortly. Thank you very much.

[Operator]

[Operator Instructions] As there are no questions at this moment, I'll now hand the word back to the speakers.

[Unknown Executive]

Yes, we have a couple of questions on the webcast. First 2 questions from Ola Eikanger in SEB. As per Svein's comments regarding NBP prices, why do you expect the discount to close in the coming winter versus TTF?

The second question is, how do you assess the downward risk associated to 2023 production guidance? What is the assumed Yme contribution to the 25,000 to 27,000 barrels per day guidance?

[Birte Norheim, executive]

Okay. I can maybe take the first one, and Svein maybe you want to answer the second one. But this is the fact that we referred to the expectation -- the market expectation of the discount to close this is basically based on market observations on the forward prices. And we have seen that prices have started to converge. But we don't have a strong opinion on it. We just observe what the market is willing to price these different commodities at.

[Svein Liknes, executive]

Yes. And I can answer the next one was just regarding the Yme, and also the risk to the guidance. This is, obviously, a guidance we believe in. As I mentioned in my presentation, we expect plateau production from Yme during the first half of next year, which will contribute with 6,600 barrels of oil per day net to OKEA. Obviously, the annual average will be lower than that one, but we are not guiding asset by asset. But, obviously, we will then know how much it is. So we believe in that guidance.

[Unknown Executive]

The next question is from John Olaisen in ABG. M&A stated as part of your strategy. Do you have any particular transaction on the table at the moment? Should we expect any acquisition over the next 3 to 6 months?

[Svein Liknes, executive]

Yes, I can answer that one. We are looking at opportunities continuously. And I can, obviously, not be explicit if we have anything on the table at the moment. But growing the company and also making the company more diverse when it comes to asset base and also adding more barrels within the segment, where we have said that we are going to be leading, which is mid- to late-life operatorship in addition to quality partner-operated barrels is something we are looking at continuously.

And these processes, sometimes they go quick. Sometimes they take a long time, but we still think that our strategy fits the Norwegian continental shelf very well. And I'm quite certain that there will be opportunities that will fit our strategy and also within our kind of framework, but I will not time frame it, but it's something which is very important for our strategy.

[Unknown Executive]

Yes. That was all the questions asked on the webcast. Are there any further questions on the call?

[Svein Liknes, executive]

No? If there are no further questions, then thank you for your attendance for the presentation, and I'm looking forward to speak to you again in the next quarter in January. Thank you.