Okea ASA

OSE:OKEA

Earnings Call Transcript 2019-Q4

[Ståle Myhre, VP of Investor Relations]

Hello, everyone. Welcome to OKEA's Fourth Quarter Result Presentation here in Oslo. Both welcome to you present here in Oslo, but also to you watching and following the webcast online. My name is Ståle Myhre, I'm VP, Investor Relations in OKEA. Please, come in.And with me here today for present our results is our CEO, Erik Haugane; our SVP, Accounting and Controlling, Kjersti Hovdal; SVP Operations, Tor Bjerkestrand. Following the presentation, there will be a Q&A session. And for those following online, there's also an opportunity to post question on the webcast. Okay, Erik?

[Erik Haugane, Founder & CEO]

Yes. Thank you, and welcome. We had last year was extremely not only important, but a year of big change for OKEA. It was the year that we moved from a group of 40 people to 200, where we moved from being a company with a lot of aspiration of doing development and production, to actually become one of the very few operating -- field operating companies in Norway. And the most important thing, we set out 1 year ago was that we needed to demonstrate a prudent, good, efficient and cost-efficient and technically efficient operations on Draugen. And that's why also Tor Bjerkestrand will hold most of this presentation to show you what we actually have done there and how we have basically through that -- through the last year been qualifying ourselves to be in the premier league of oil companies in Norway. But we -- first, we -- which is very important is the first zero, work every day, every hour to make sure that management and the workers are very aware of the risk that is within this industry, and that we actually work in a way that we, on behalf of the Norwegian government and the Norwegian people, to produce oil in a very secure manner. And we are really pleased about that result, but that is not something that we -- will come in itself, and we have to continue improvement on that field. We did produce almost 19,000 barrels a day in average throughout the year. And we have a decent cash flow of more than NOK 2 billion. That kind of demonstrate the size of the company. The highlights was operational, to a larger extent, and financially, Kjersti will go through the figures, but the main figures are that we did also refinancing of the OKEA01, the first bond we had, USD 120 million. What is also important with that bond is that, that bond is also very flexible in terms of how we're going to refinance the company in the future. We had, during the fourth quarter, a quarter of the [ USD 2 billion ] [ USD 500 million ] that we earned in the fourth quarter and our profit from operating activities was NOK 55 million and the cash flow from operations in the quarter was NOK 238 million. As for new opportunities acquired through the work in 2019 was the annual licensing round for 2019, which was actually awarded in January, but we got 5 new licenses, all of them in areas that we have defined as a key areas to -- for hub, so to say, for OKEA. So we are not exploring, doing well cutting. So we are not collecting a lot of licenses around on the shelf, but in mature areas, where we know there are discoveries. In at least one of these, there is a discovery that we hope we can develop also pretty fast. So that is the overall picture of what we have done in 2019. I will return at the end of the presentation with the outlook. So what we plan to do going forward -- but most of our key objectives for the first year is that we actually in such a short time -- if you compare it to other companies, you'll see both 2 and 3 years before they actually are up on full speed as operators, we managed that through 2019. So hereby, I leave the word to Tor who is the boss of operations in OKEA. Please, Tor?

[Tor Bjerkestrand, Senior Vice President Operations]

Thank you, Erik. And hi, everyone, and to everyone looking at the live stream. I will take you through the fourth quarter results from operations, but I will also tell a bit of the story in OKEA, going from acquiring Gjøa and Draugen from Shell and then becoming what we are today. And I'm responsible for the operated assets. It means Draugen, which -- we are an operating company, so we are then operating Draugen. And then you have licenses, where we are not operating. So that's the nonoperated, which is, Gjøa and Ivar Aasen for us. So for quarter 4, we have a slightly lower production and mainly because of a well at Draugen, where we have a safety valve in down in the well, which is not functioning as it should, and then we had to close it. That's regulatory. And it's -- yes, so that was closed in the fourth quarter. Secondly, the gas from Gjøa and several other fields go through the SEGAL system to U.K., and on the U.K. side, they had problems with receiving the gas, and then it affects the production. And secondly, at Gjøa, we had a compressor technical issue. So that was also the reason behind. So there is no well potential reasons, there are technical reasons. When you come to Draugen itself, where we are the operator, fourth quarter was set a bit lower than expected because of that well. But looking at the operational efficiency, we are showing a 95% availability or uptime at Draugen in the fourth quarter, which is then compensating for some of the loss of that well and that is very high for the Draugen. And in the same period, we did also finalize the Skumnisse and Infill Ø, the 2 wells that we drilled, and those were plugged and abandoned, with a lot of results coming out of those logs after doing the drilling. We're looking at how to restore the well, and we are planning to do an intervention now in Q2. I will mention Hasselmus here, which is a small gas field, discovered quite a number of years ago, close to Draugen, inside the license, and that is like a gas tank. There are well-defined volumes. It's a relatively straightforward development, but we, in OKEA, have made that commercially attractive. And we are now passing -- we passed DG2 in OKEA and the Board, I guess, approved that development yesterday. So now, that will be up for the license approval, and we will then kick off that project as the first tieback in OKEA. It's a fantastic project. .We're also looking at other prospects close to Draugen. I will come back to that a bit, because it's interesting how much oil, which is still there in that area. The story of 2019 is quite interesting, because at the point of OKEA acquiring Draugen, the license, the whole concept of Draugen was to harvest. It was to take out the resources, which are in place and then keep it going. Changing that into a development mode, that is a significant change. That means that you're starting to invest, look for and then develop the assets for more volumes and more volumes creates a longer lifetime. So the first thing we did was to set up in the license with Petoro and Neptune, the agreement of 2035 and how to get there. Then we had to set up the organization to be able to speed up because we didn't have the budget plans for development. So in a couple of months, we had agreed targets for drilling. We have got a rig, and we did the drilling. And that was done in 8, 9 months, and I think if you look into other drilling campaigns, that is quite a good story, and no serious incidents or spills from that part. If you go to the -- I can also mention the ambition for the license and for OKEA and for Draugen is to keep Draugen producing until 2040. And then, we are close to showing you that is a concept that is possible. If you look at the operations itself, in addition to the drilling performance, we have had through the year, 88% availability, and that's a number, I think, I can now use production efficiency, it's the same. How many days of the year are the factory up and running? And that is a quite high number. And if you look back in the history of Draugen, there's only 1 year in the last 10 years that have been better. So going from the previous operator to OKEA, we have still maintained and improved the operations' efficiency and that has been instrumental in protecting the production and then the value and then the earnings. Being an operator, it's quite a complex organizational structure. It's not something you can develop just in a day or a week or a month, it's years and years of experience, which now sits in OKEA's organization, which are now operating Draugen and can take on more. The other important part for an operator company is to execute projects, and in the start of 2019, we had 2 major projects ongoing. We had to change a significant part of the oil piping onboard Draugen and that was done in a record -- on the record schedule. I think the number of days from shutting-in to being back in production, changing 190 meters of piping, was 10 days, without any incidents and on cost. We also have done other projects during the year, where we have done it according to plan and no incidents. When it comes to the emissions part of Draugen, you have emissions to air, you have emissions to water and we have several projects ongoing, which are attacking that. And let's say, for one of them is the flare. We always have a flare, which is there just to protect when you have a shutdown, you need to get rid of the gas and that goes to the flare, and we have no project ongoing to close the flare and that is about 1 megawatt reduction in energy. We also have projects ongoing to make the compressors more effective and these are big machines, so it's -- if you do improvements, there are significant reductions. Of course, the big change for all offshore installations is power from shore, and we are now ahead of competition, I would say, in the area for assessing the ability to do power from shore and to [ hold a bunk in area ] and to Draugen in specific. So we are a pre-DG1 on looking at that. Very interesting, and since we now have access to water power and -- hydropower and wind power in [ trentalogue ], it's a real option to use that energy. The fourth thing I will talk about is digitalization and the projects we have. And I will mention especially one or I can take the drilling campaign first, where we have the first ever live streamed the information that the driller have offshore on our website. And geologists around the world, they were looking at this stream because then you could actually see what happened 1,600 meters down there at the drill end every second. It was quite a change to be able to do that, but in the end, we made that happen, and I think sharing of data is an important thing in our industry, and by doing that on that drilling campaign, it was a change in how we do it. I will mention briefly the work we're doing together with ABB. At an installation offshore, you have a control system. That is a system where we have hundreds, thousands of instruments, logging data at any time. That data has been a kind of a protected source and used for specific programs and for specific activities. What we've done now, and I should really stream the live screen for you, but I can't, it's a presentation. This is a snapshot and we can build pictures like this, showing all that data on your mobile. And for those that knows how that data is collected and being transported know this is a significant change. This change is so significant, then if you go to Hewlett Packard in Houston, you will find this screen on their showroom, and in difference from others, we will also share this data. So by sharing this data, you are then connecting up to the real-time data, which is collected by the instrumentation offshore. Okay. That was the story of 2019, a fantastic year for the organization and for all of us. I would just like to show you the -- how the license work. There are 3 partners at Draugen license, which is Petoro, Neptune and OKEA. That license is the board of Draugen reserves and the values and you need to have a quite clear strategy for how to develop. It's not -- it is not like week-by-week or month-by-month or the whole year, you need to look ahead, and we are looking ahead towards our vision 2040 Plus. So this is nothing just an OKEA vision and dream. This is Petoro, Neptune and OKEA together in the Draugen license saying, our vision is 2040 Plus. And how do we do that? This is the value drivers behind how you develop such a license forward. And we are updating this every year. In fact, that update is ongoing as we speak. We're having 2 days now, together with the license partners, developing this for the next -- for the second time. Here, you see the change from a harvest mode to development mode. I will mention a couple of elements here. Ultimate recovery, 70%. Compared to the existing plan, we are talking about 30, 40 million barrels. It is still a lot of value in the Draugen reservoir. The challenge is, how to get it out. To buy new technology, buy new ways of looking at the reservoir, we expect -- we have an ambition to get 70% recovery. We're even talking 75% recovery, then you're talking 40 million barrels more. These are ambitions. These are the plans that we would like to chase and to deliver on. We are near-field exploration where we have -- we did the drilling in Skumnisse, and we are now looking at other prospects nearby. And of course, with the lifetime of 2035, 2040, Draugen as an hub is now an option, so nearby discoveries can be then transported to Draugen, in the case they need that infrastructure. Yes. I think also the availability, also the ability to keep the factory running every single day, year out, year in, that is our most important task, because it's easy to look at those volumes that are in front of you that you have to discover and the new oil. But caring for and securing, safeguarding the existing production is all about availability, and by having that, we can deliver the volumes. I'll just mention that we just got the January numbers for Draugen, 97% availability, on cost, no incidents in January and we will continue doing that. That's our ambition. So I'm looking forward to going on the plane back to Kjersti this afternoon and sitting together with the license and look at the update we're going to do today and tomorrow and even sharpen the ambitions. Just finally, a short look at Gjøa where we are a partner and not an operator. And as I said, the reasons for the lower production was SEGAL Export System and the U.K. side, which we could not receive the gas and the gas export compressor, which had a technical issue and has had to be changed. Yes. P1, interesting project for us. First oil in quarter 1 next year, on schedule, being managed well by the operator and looking forward to see that being completed. So thank you.

[Kjersti Hovdal, Senior Vice President Accounting & Controlling]

Thank you, Tor. I will take you through the highlights on the financial side this quarter. Tor already mentioned that oil and gas volumes were reduced this quarter and the main reasons was the production issues on Gjøa with the turbine replacement and the SEGAL restrictions, and also the shut-in well D2 on Draugen. The sold volumes were reduced with 17%. And on Draugen, we lifted the same volumes in the third and the fourth quarter, but the reduction here on sales was a result of the reduced production on Gjøa. And also, we went into the quarter with an overlift position on NGL on Gjøa, meaning that we had previously lifted more than our proportional share in the license. So that position was neutralized in the fourth quarter and causing reduced sales. The realized prices increased, both for liquids and for gas. So a combination of the volumes and the prices resulted in revenues of NOK 534 million in the fourth quarter. Some more details on our income statement. I already mentioned the revenues that goes into the operating income, but I will also talk about the production expenses and the exploration expenses, financial items and taxes. The production expenses were a bit higher than the average because we did some well maintenance work on 3 of the wells on Draugen in the fourth quarter. The exploration expenses, we had previously expensed the cost on Skumnisse that had incurred until the third quarter, but the drilling continued into the fourth quarter and the remaining parts were expensed in the fourth quarter, and the same was the case for the Kathryn well nearby Yme, and we also had seismic costs related to future possibilities in the area south of Grevling and also in the Draugen area, and costs related to field evaluation is mainly on Grevling and Storskrymten.On the financial side, we had a favorable FX position at the end of the quarter that resulted in an FX gain. But we also did the refinance, the OKEA01 bond and replaced it with OKEA03 and we had financial expenses that were expensed as a consequence of that. The profit before tax for the entire year was NOK 419 million. The taxes ended at NOK 491 million and consists of 2 elements. It's taxes payable and the amount of taxes payable is NOK 430 million and the other component is changes in deferred tax. So we normally, as a starting point, expect 78% taxes. But the fact that we had more than NOK 100 million of impairment that is nontax deductible, that cost us the relative tax percentage to be higher than 78%, and in addition, we get an uplift on the CapEx investments we do. And finally, the financial items are partly allocated to the offshore tax regime, so that costs, in total, the tax percentage should be 117% for OKEA over the entire year. The cash flow, we had a very strong cash flow from the operating activities in the company. So before we deduct the taxes, we had NOK 2.3 billion generated, and we paid taxes of 172 , both related to 2018 and prepayments for 2019, and we had investments on 847 related to Yme and the P1 project on Gjøa, and also some CapEx projects on Draugen. We had the share issue last summer as part of the IPO process, that we had NOK 283 million from. And as mentioned, we repaid the bond OKEA01 and refinanced with OKEA03, causing repayment and additional net proceeds this quarter. And finally, we paid interest of NOK 232 million. So we ended the year with a cash position of NOK 1.7 billion close to. So that was the summary of the financials. So over to Erik for outlook and concluding remarks.

[Erik Haugane, Founder & CEO]

Thank you. We have -- in addition to what we already talked about, we are involved in 3 development projects. One is Yme, which is Repsol operated. There is an offshore campaign going on to prepare for the hook-up of Maersk Inspirer to start production. OKEA Solution has come up with a revised plan to complete the onshore modifications and we trust that reputable company and a reputable yard, managed to actually do that. And according to our own inspections and the operator's forecasts, the work is progressing very well right now in action and we trust that they managed to complete all onshore modification and leave the yard in second quarter. The operator will come back with an exact estimate of first oil, but the ongoing work offshore is meant to mitigate any time delay in the hook-up process. So we expect production start-up during the summer 2020. With respect to Gjøa, another ongoing, which is also quite significant. It gives more than 2,000 barrels a day to net to OKEA, is the P1 Gjøa project. There, we can report a good progress from Neptune. And there will be 2 more wells, production wells drilled later this year, and the plan is an early start-up production in early new year. With respect to Grevling and Storskrymten, which is operated by OKEA, we have matured the project to the extent that it was a hugely negative value project when we took over to a positive value project. We are not fully satisfied with how positive it is, and as you also may have noticed that we have employed a new Senior Vice President for development, Knut Gjertsen, coming from Equinor, extremely reputable person in the industry in Norway. And one of the ethos will actually be to go review the whole Grevling development and see if our estimates seems to be right and see if there is -- there could be additional improvements. But also in the Grevling strategy, the same partners are involved in 2 wild cats just south of Grevling, and of course, added reserves into that development will change the game totally. So the result of that drilling campaign, of course, has a major impact on the economy of Grevling. We were -- we have, as I said, applied for licenses quite selectively. We applied for 5 licenses in the license round and we got 5, and as you may see on the map, they are all in close by existing licenses -- we have -- and close to fields we have. Just will mention one that is particularly important to us is, together with Equinor, Equninor as operator, just northwest of Draugen, where there is a gas discovery already. And we're quite sure that when we develop Hasselmus, as you may see in just north of Draugen, the distance to that a bit smaller gas discovery, that license is such that, suddenly that become economic again. It's kind of building on the previous investment. So we, of course, prepare the Hasselmus development, so that's easy to tie in another pipe into that system, and the volumes talk about here is also straightforward for Draugen to assimilate. The Hasselmus discovery is going for a so-called DG2 decision in the license right now. And the importance of that is that it both provide energy to Draugen, because we don't have a sufficient gas going forward to run the turbines on Draugen, but it also gives us quite a significant oil export capacity in the existing pipelines from Draugen. So we will continue to apply for licenses in the licensing rounds. We will look at all kind of -- all the wells, all the discoveries that has been made, is somewhat underestimated, et cetera. So there will be also applications from OKEA this autumn. So finally, the outlook going forward is, as Tor already mentioned, first thing you have to do is to maximize the value of things you already have in your household and particularly, Draugen, and to increase the recovery, it is an extremely -- as you know, extremely good reservoir for kind of -- your hydro [indiscernible] kind of next that type of reservoir, is a big, big pile of the sandstone reservoir.And we see that it produces extremely well and we think it's absolutely possible. There are still 500 million barrels left in Draugen. So how much of that can we extract? That is the key issue. And as Tor mentioned, there are absolutely within reach to take out another 100 million barrels out of Draugen. The 2 wells we drilled was extremely important. They gave us a lot of value in terms of now remodel and make a new reservoir model for Draugen. We were surprised by some of the information we got there that is now implemented in the new model to really understand what goes on in Draugen and also next to Draugen. With respect to next year, mainly because of a delay of Yme, we expect to produce almost 6 million barrels of oil throughout the year, which is a bit lower than the -- perhaps throughout half a year ago. We do also have a biannual maintenance project going on Draugen this year. But the financial flexibility is good. We have a very good cash flow. I think the estimate is that we will -- we might pay NOK 1 billion in tax next year, so -- this year. So that will help some, I guess. And we're also pleased with the structure of the OKEA03 bond, which gives the company a lot more flexibility in the future financing of also additional projects. Already mentioned that we will be partner in 2 wells on south of Grevling and also 1 well on Gjøa, in addition to the production wells going on in the P1 project in Gjøa. But to grow the company organically is not sufficient, we want to make OKEA significantly bigger than we are today. And we are, of course, actively pursuing M&A opportunities that we see on the Norwegian shelf. We think that the dynamics we have seen in the last few years is just continuing in restructuring and company pulling out. And being one of the few, which is our main asset, we are one of the very, very few field operators with the field operating competence on the Norwegian shelf, which is completely dominated by Equinor, of course, and that is something that we will capitalize on going forward in with respect to M&A opportunities. So that concludes our presentation.

[Ståle Myhre, VP of Investor Relations]

Okay. Thank you, Erik. Let me move over to the Q&A session. So raise your hand and -- okay, Teodor?

[Teodor Sveen-Nilsen]

Teodor Nilsen from Sparebank Markets. First of all, on the 2020 production guidance, how much contribution have you included from Yme?

[Erik Haugane, Founder & CEO]

Less than you think.

[Teodor Sveen-Nilsen]

Have you included anything in Q3 at all?

[Erik Haugane, Founder & CEO]

No. That's been the estimate, but we definitely expect production to start in Q3.

[Teodor Sveen-Nilsen]

Okay. And then second question on Grevling. As far as I understand, the 2 exploration wells in the south are very important for the economics. Let's assume that there won't be any discoveries there at all. Is Grevling commercial now on a stand-alone basis without any discoveries?

[Erik Haugane, Founder & CEO]

As we see it today, Grevling is commercial on a stand-alone basis, but it has inherited the risk in P50 sets is definitely a commercial project. But that is with smaller projects like Grevling, we talk about less than 50 million barrels, a lot depends on how the lease of the production unit, et cetera, is organized. But even in that case, the P90 of that well -- that kind of -- in the uncertainty level, the very certain part of what we have as -- at the oil prices, we look at as a negative value. And it's also a philosophical question, but will you spend another NOK 500 million to NOK 1 billion to do a test production and find out whether it is worthwhile doing or not, because Grevling contains 200 million barrels of oil. So it's a very low recovery rate in the way we plan to produce it. And -- but then, you can find out, well, it is more than we thought, so we can actually develop it, but then you have lost that money. So we will come back to how we can improve the economy on Grevling to make it even profitable at the low scenario reserves that we have. So we're working with Halliburton, and we are also -- will give Knut the challenge to really go through some of the cost estimates and the uncertainties on the development with that -- in that respect.

[Teodor Sveen-Nilsen]

Okay. And then just final question for me. Erik, you talked about the M&A. Could you just briefly discuss how you view the M&A market on NCS now and whether you will focus on M or A or both going forward?

[Erik Haugane, Founder & CEO]

Yes, of course, we look at both, but of course, buying assets is not straightforward and easy. Those who sell asset -- you don't get any for free. So it's basically no one is a distressed asset. But we think that the market of late life fields, for example, as Draugen, as other field, is a market that is interesting to OKEA. And then, of course, you have an ongoing production, which is also easier to finance than go in and buy asset directly. But we look at all kind of possibilities on the shelf. Obviously, some deals, as you know, are too big for us. So there are some we don't even look at.

[Halvor Strand Nygård, Analyst]

Halvor Nygård from SEB. Returning a bit to Yme. How confident are you in the summer 2020 start-up targeted date? And what kind of time frame do you foresee from sale way, which Maersk is saying, [ refurbishment ] work would be done in late Q2? So the lead time from sale way to start-up with the hook-up and commissioning and also knowing -- and noticing that Maersk is saying, they expect limited EBITDA contribution from Maersk Inspirer in 2020.

[Erik Haugane, Founder & CEO]

Of course Maersk, they don't get paid before we have produced a certain number of hours. So they must take their kind of precautions. But the original plan for the hook-up process was 3 months work. But with the rig out there now, which is actually present going to take the plugs out and prepare that, there's a lot of work done. So the operator said that we are mitigating a lot of the time that was supposed to be done by Maersk Inspirer and -- but they have not submitted to the license a revised plan yet, because it is not fully concluded how much offshore work will actually be completed before Maersk Inspirer leave the yard.So what we have been focusing on in the partnership, in the license, is actually to now finalize the work on execution in order to get the rig out before the summer, so we could take advantage of the summer seasons in terms of the hook-up work. But the operator will get back to how many weeks the actual hook-up process will be planned for. And we have no information about that, except that is expected to be significantly less than 3 months, that was the plan when the PDO was submitted.

[Ståle Myhre, VP of Investor Relations]

Any further questions? No. So thank you all for joining and...

[Erik Haugane, Founder & CEO]

Okay. Thank you very much, and have a good day.