Okea ASA

OSE:OKEA

Earnings Call Transcript 2020-Q4

[Erik Haugane, Founder & CEO]

Welcome, and thank you for logging on to OKEA's fourth quarter presentation. The details of the presentation and the report itself, you will find on our website, www.okea.no under the tag Investors.The fourth quarter was an excellent quarter for the company. We delivered excellent results in production. We had a net profit of NOK 182 million. Let us just jump into the details, and Birte Norheim, our CFO, will present you the financial result. And Birte, please continue.

[Birte Norheim, Chief Financial Officer]

Thank you, Erik. Production reliability were high both at Gjøa and Draugen during fourth quarter. And production increased by 22% or nearly 2,900 barrels a day compared to third quarter following completion of the turnaround at Draugen and the planned downtime at Gjøa. Production were 5% lower compared to last year or about 850 barrels a day. The lower volumes at Draugen were partly due to gas previously being exported, currently being used as power supply and replacing diesel; and also the temporary shutdown at the P1 well, which was now back up and running again in February.At Gjøa, we had 5 days of reduced production in relation to the union strike, which ended in October. Sold volumes were 36% higher than last year or nearly 5,000 barrels a day. That was mainly due to allocation to OKEA of a crude lifting from Ivar Aasen, as well as a large lifting from Draugen in October.We have observed significant improvements in market prices for petroleum products over the last months. However, we did not get the full effect of the liquids pricing in Q4, partly due to the Draugen lifting occurring very early on the recovery curve. The realized price for liquids were 36% lower than last year, down from $61 a barrel to $39 a barrel. The recovery was, however, significant for natural gas, which was realized at prices 48% higher than last year. That brings the petroleum revenue to NOK 581 million, an increase of 9% compared to last year and more than double the average for the previous 2 quarters.As for the income statement, the operating income of NOK 584 million mainly consisted of the petroleum revenue of NOK 581 million, as just outlined; tariff revenue from Gjøa of NOK 16 million; and partly offset by cost and accrued losses relating to hedges of NOK 15 million. Production expense amounted to NOK 189 million or NOK 110 per barrel compared to NOK 121 per barrel last year. That lower cost and that improvement largely relates to the very high production reliability and good performance both at Draugen and Gjøa.In Q4, we are reversing an impairment at Yme of NOK 117 million. That was mainly driven by a very important milestone being achieved on New Year's eve when Maersk Inspirer was installed at the Yme field offshore. That significantly reduces the time line risk towards production start up. In addition, the improved macro factors significantly increases the fair value estimate. And as we are now, for all practical purposes, recognizing Yme at fair value, we should expect to see further changes in these estimates, which will result in either future impairments or future reversal of impairments. And these effects will be largely driven by macro factors at balance sheet date.Exploration and operating expense consist of NOK 44 million in exploration expense, mainly relating to field development activities at Hasselmus as well as seismic purchases. SG&A cost of NOK 48 million is above average and is a result of an annual recalculation of cost allocated to licenses as well as bonus awards under our share incentive program. SG&A costs for the full year amounted to NOK 87 million, a decrease of NOK 16 million or 16% compared to last year due to cost-cutting initiatives.Net financial items is a gain of NOK 243 million, which mainly consists of an unrealized foreign exchange gain relating to the dollar-nominated bond loans as NOK strengthened by 10% compared to dollars during the quarter. This is partly offset by an interest expense of NOK 23 million. Tax expense for the quarter amounted to NOK 227 million, representing an effective tax rate of 55% and brings the net profit for the quarter to NOK 182 million.Cash and cash equivalents amounted to NOK 871 million, and I will get further back to this. The current tax refund of NOK 296 million comprised NOK 86 million relating to exploration refund and NOK 210 million relating to the remaining installments for tax losses in 2020. Interest-bearing debt amounted to NOK 2.4 billion, and this amount has come down partly due to buybacks and also due to unrealized foreign exchange gains. The asset retirement obligation of NOK 4.2 billion is partly offset by the NOK 3 billion in noncurrent receivable, as the cost of removal from Gjøa and Draugen will be born by Shell.Cash at the start of the quarter as well as cash at the end of the quarter is just shy of NOK 900 million. Cash from operating activities amounted to NOK 108 million. Taxes received of NOK 164 million is the net of 2 tax installments received, each of NOK 154 million, partly offset by the residual tax for 2019, paid NOK 144 million.Cash to investment activities of NOK 188 million mainly comprised investments relating to Yme, Gjøa P1 project as well as the gas import project at Draugen. Interest paid of NOK 71 million relates to both OKEA02, which is payable quarterly; and OKEA03, which is payable semi-annually. During the quarter, we also did a partial buyback, an additional buyback of OKEA02 for a nominal value of $2 million or a cash outlay of NOK 16 million. This is a discount of 11%. And we note that currently, the bonds in OKEA02 is currently trading around par.We are also providing guiding on production as well as capital expenditure for 2021 and an indication of expected production given our existing portfolio for 2022. As for 2020, we're pleased to deliver above our guidance production of 16,100 barrels a day compared to the guiding of 14,000 to 15,000 a day. It's due to the strong performance we've seen throughout the year both for Gjøa and Draugen, resulting in an outperformance compared to our guiding in excess of 1,000 barrels a day. And capital expenditure is just below or at the low range of the guiding, ending at NOK 980 million compared to our guiding of the range between NOK 1 billion and NOK 1.1 billion.As for 2021, the production guiding is in line with the actuals for 2020 at 15,500 to 16,500 barrels a day. And we have a few factors driving that. We have a few positive drivers, which is relating to the 2 new wells at the Gjøa P1 project, which we expect to come on stream now in February, as well as the Yme startup expected in second half the year. These effects are offset by 45 days of planned shutdown in Q2 at Gjøa. Parts of this will be compensated as deferred production in 2022 and as well as general field decline. The increase in the 2022 outlook of 17,000 to 18,000 barrels a day is mainly due to an expected full year of production from Yme.CapEx guiding for 2021 of NOK 600 million to NOK 700 million is a significant reduction compared to 2020, which is mainly due to both the P1 project as well as the Yme new development project both nearing completion.So on that note, I'll give the word back to you, Erik. Thank you.

[Erik Haugane, Founder & CEO]

Thank you, Birte, for enlightening us about the excellent results of the fourth quarter. I will now talk a little bit about our projects and our assets, and let me start with the production, as already shown.Here, you see the production result of the entire year also compared to the fourth quarter in 2019. And we did, last quarter, as already said, produce more than 16,000 barrels a day on average, which is almost exactly the same as we did for the entire year of 2020. As you see, half of the production of -- for OKEA comes from the Draugen field, and the other half is gas coming from Gjøa. So right now, we are about halfly exposed to gas and half to oil.Let me first talk about the Draugen field. Draugen has -- is in its late life, even though it's another 20 years to produce. That meant that we had to start -- we didn't have enough gas in the field. So we have used diesel to fuel the energy system on Draugen. But in the fourth quarter, we rebuilt the system such that we could import gas. So we are now importing gas, which started in the fourth quarter, imported gas from the Åsgard transport system. And now we are fueling energy on Draugen with gas from the Åsgard transport system. But also, what is important on Draugen is to keep the wells in operations. And we have, together with Oceaneering, we had, just the other day, managed to repair one of the BOPs. And you see here the operations going on at 280 meters water depth, where we actually managed to get the valves to work. And this is a well that has been shut down since 2019, and it yesterday started to produce again.So the next thing that will happen in the Draugen area is the Hasselmus gas discovery, just north of Draugen, is planned for development. Not only will we produce between 1 billion and 2 billion cubic meter of gas from Hasselmus, but it also will probably be an enabler for producing the Galtvort gas discovery further north of that again. But by producing gas from Hasselmus, we avoid importing gas from Åsgard system, and we can also then export our condensates from Draugen, which has a high -- pretty high-value, and rather than use the condensate for fuel. So a lot of good work is done on Draugen. And at the same time, we operate that with a very, very high regularity.And we expect that we will make a decision on Hasselmus in the first half of this year. And it's possible then to have first gas from Hasselmus in 2023. With the very high CO2 taxes that is announced, we are really incentivized to find other power solutions to Draugen. And we have come quite far in establishing a project where we can have power from shore. And we also expect to do final investment decisions sometime during this year. And so the plan for Draugen is to try to produce as much as 70%, to extract as much resources as possible. With investment already done, it's a very sensible thing to do in a circular economy-type of philosophy. And we plan to operate such that we can be in production until at least 2040 and produce as much as 70% of the reserves in the field.As far as Gjøa concerns, where the rest of our production comes from, a new development project in the so-called P1 sector has just finished. And the 2 wells there will be put on stream anytime now, and that will also contribute to a better production on Gjøa. Gjøa is, of course, also of interest for us for 2 other reasons. One the thing is that we have acquired shares and operatorship of Aurora, which is the gas discovery. And it is possible that we will drill a pressure well on Aurora to make sure that we have the quality that we say on the gas and the volumes that we say, in order to get a reasonably good tie-in contract to Gjøa before we develop that field. That is going be a small one well development. And the pipeline is already laid over the Aurora area. And in addition, as I will return to, we also got awarded a license just west of the Gjøa platform.A very important thing that did happen at the end of the quarter was that the Yme platform was finished in the Egersund yard and towed out to its location. So New Year's Eve, it actually landed next to the wellhead platform where it shall stay for the next 10 years to produce the Yme field. And this event really derisked the timing of the project. So now we are really confident that first oil will be seen from the Yme field later this year, and that will have a significant contribution to OKEA's production.Another thing we did in the fourth quarter was to acquire the Vette discovery. It's another 40 million barrels discoveries, about the same size as Grevling. We have been working very hard to get the cost down on Grevling. And not only with a lot of good engineering work for the facility itself, and we look upon a combination or a coordinated development between Vette and Grevling as an enabler to get the breakeven cost even further down and significantly down. So we're working with the partners how to -- see how to develop those 2 fields in a kind of combined solution.In addition, we work around Grevling where we -- the same partners as Grevling also hold the license south of Grevling operated by Chrysaor, where 2 prospects, Jerv and Ilder, will be drilled this year. Actually, the spudding of the first well is already in March. And of course, a discovery in one of these prospects will have a significant impact on the development plan and the value, of course, of the Grevling field.And as also mentioned before, we were successfully awarded 6 licenses. It's 8 discoveries in these 6 licenses. And we, OKEA, operate 4 of the 6. I go into the -- there are 3 areas these 6 licenses are in. One is, of course, around Draugen where we have a kind of core area right now and where we have 4 licenses together with Wintershall Dea, with Equinor, with Vår Energi, with Pandion, with ONE-Dyas and with M Vest. And several of these new licenses contains discoveries already. And that would be really interesting to see, whether we can find development solution or additional reserves that enable us to develop these fields.Another area we picked up a license is north of the [ Norne ] field, together with Lime Petroleum, where there are 2 discoveries. And so -- and those are example of finding discoveries to see whether there is possible to develop it with modern technologies and a new view of the area.The third area where we acquired a was, as already mentioned, right west of the Gjøa field, and that is together with DNO and Pandion. And of course, that's also an area we are already engaged in. So that also would be interesting to follow. DNO is operator of that license.So I want to wrap up by having some comments on the outlook. And first, let me mention how the market has developed. As you see and already seen from illustrations earlier today, the realized oil prices was pretty low in the second quarter and have increased a bit since. So the general tendency of -- with the oil price is -- seems to be -- go higher. And as the world is kind of getting back to normal sometime after corona, we think we will again see, as also most agency, we'll see, again, the need of oil is growing significantly. But we also see the gas prices are picking up.And as I already mentioned, OKEA produces also a significant amount of gas. And what has happened the second half of 2020 and seem to still be the trend is that the gas prices have picked really up. There was actually an LNG cargo going in Asia for equivalent of $240 a barrel, but that was kind of an anomaly in the market. But it really shows the volatility of oil and gas and the value of also gas going forward, we think.And as for the outlook of OKEA, we maintain that we will produce around 16,000 barrels a day also this year. And that will increase next year because of Yme will be in full production. And from 2023, we assume and plan that the production from new developments will kick in, both Hasselmus and the Grevling, Vette. And it's -- these are not sanctioned, of course. And we have not, here, at all forecasted anything from the new licenses that I just mentioned. So we are pretty confident that we, within 5 years, have picked up production about 20,000 barrels a day.But we have a lot of triggers also in the short-term in 2021. Already within a few days and definitely in February, we will see 2 new production in operations from -- in Gjøa. And we will have production from Yme this year. We will make the final investment decision on Hasselmus. We are partners in 3 firm exploration wells. And the first one is actually spudding now in March. We'll possibly drill another well on Aurora, as already mentioned. And we expect that we and partners will discuss and agree on a concept selection for Vette, Grevling.And not at least, we will mature a significant larger portfolio now than we used to have had following the April 2020 award. We have doubled the number of operatorships following this award. And we have 8 new discoveries to look into, and another 15 or so new prospects in that portfolio.So that concludes the presentation. Thank you for listening. And now it's open for questions, which Birte and I will try to answer the best we can. So please post your questions now. Thank you very much.

[Operator]

[Operator Instructions] And we'll now take our first question. It comes from Anders Holte from Kepler Cheuvreux.

[Anders Torgrim Holte, Equity Research Analyst]

And it's also good to see that 2021 looks to be quite a turnaround year. I just have a couple of questions, if I may. First, you gave quite solid guidance on spending levels for this year and also your production. Now I'm curious if you can give us any flavor in terms of the spend on exploration for this year. And also, if you can give anything in terms of operational costs, either in NOK per barrel or dollar per barrel, that could also be good.And then my second part is more related to the capital structure of the company. Now with the current tax incentives in place and your quite lower spending level in 2021 compared to last year, this is because of a cash building up on the balance sheet. Just curious to know if there's any thoughts of refinancing any of your debt structure in order to take down cost of capital. Or how do you see the capitalization of OKEA going forwards?

[Erik Haugane, Founder & CEO]

Birte, please.

[Birte Norheim, Chief Financial Officer]

Yes. Thank you, Anders. Well, there was a few questions. We don't provide guidance on spending on exploration. But as Erik said, we have 3 firm wells planned.And as for the capital structure, yes, we are having quite a solid cash balance at the moment, but we are also planning to embark on quite a few projects. So at the moment, we don't have any plans to do any refinancing, and we are exploring various options to finance new projects but not in the very near term. So in the near term, we don't foresee any major changes to our capital structure.Production expense per barrel for 2021, we don't provide guidance on that, but I think the track record that we have for 2019 and 2020 is a good indication, while that we have also communicated before that we are working on reducing the cost on -- particularly on Draugen our operated assets. But we don't provide specific guidance on that.

[Operator]

And we'll now take our next question. It comes from Teodor Nilsen of SB1 Markets.

[Teodor Sveen-Nilsen]

A few questions from my side. First one on Yme. I just noted that you changed your wording marginal that you now indicate first or the second of this year compared to what you previously said was 2021. So I just wonder, is there actually a change in the outlook there? Or is that the -- or what's the reason for the minor wording change?Second question on Gjøa. Positive to see that there will come in a new well. I just wonder what should we expect in terms of production increase in the first quarter from Gjøa?And third and last question on Draugen, you're talking about power from shore and 130-kilometer of cable. Could you indicate what that project will cost?

[Erik Haugane, Founder & CEO]

Yes, it's Erik here. I can start on Yme. The -- of course, Yme has been that project that has created a lot of aging in the partnership because of delays. And when we assess Yme in, I would say, third quarter or during the fourth quarter, we put in space for a lot of -- we came into the winter season, and we put in a lot of space for significant weather standby during the process. So the fact that the Yme platform landed on the site on New Year's Eve was one of the fewer lucky incidents in the Yme project because it was the -- because the weather went down just immediately following the completion at the yard. And that, in theory, took away like 4 months of hypothetical weather standby.So when the platform is there physically and we see the project now going forward with Maersk and Aker Solutions to hook up everything on the rig. There are still weather uncertainties for some of the work. But with the rig in place, we have taken away the biggest risk of significant delays. So that make us -- there are still 4, 5 months' work left. And then, of course, there might be some work that is hindered by weather during the winter. But now we are very confident that we will see first oil from Yme after the summer into the second half of 2021, and the risk of delay that to 2022 seems to be extremely small.With the -- Birte, exact number of the [indiscernible] from -- [indiscernible] will produce. So we are...

[Birte Norheim, Chief Financial Officer]

It is included in our guiding figures for the year.

[Erik Haugane, Founder & CEO]

Yes. And [indiscernible] besides is operated by Neptune, and it is their estimates and figures that they found. But of course, that will be seen in the monthly report that the industry delivers or the entity delivers. So we will -- will production not be a surprise when it comes to the end of first quarter.The power from shore project from -- to Draugen will cost -- is a pretty long distance. So -- but it's probably costing around NOK 2 billion to do it. But what we are working together with Equinor is to work this project together with them to use on [ yard ]. And how we share the cost and what it eventually will cost then, we don't know yet. So that's what we are working at right now and expect to have a firm project proposal to the license. And the same goes with Equinor that they will have a firm process towards their license. And then we have a joint decision hopefully before the summer. And so -- but it looks like this project can be feasible with the -- all the kind of subsidies and support that we can have to realize that project.A benefit for us, in addition to our -- paying less CO2 taxes is, of course, that having electricity as an energy source on Draugen will also enable us to really reduce the operation costs more than -- towards the tail end of the field, more than we can with the present [ turbines ]. But you will get the numbers when we have the numbers. So they are quite tentative right now.

[Teodor Sveen-Nilsen]

Okay. So -- but just to be clear, those NOK 2 billion will be shared with the Njord and Draugen partners, right?

[Erik Haugane, Founder & CEO]

We don't really have a full overview of what the extra cost will be between the 2 because we have 2 different frequencies of currency on the 2 platforms. And so it is a project going on now with the different suppliers and kind of competitive ideas of how to do this in terms of what kind of currency you bring to air, et cetera, et cetera. So there are still issues up in the air, but the cost [indiscernible], it's a quite extensive project, of course. But -- yes. Probably for both licenses, we probably be north of that.

[Operator]

[Operator Instructions]

[Trond Frode Omdal, Vice President, Investor Relation]

Okay. This is Trond Omdal from OKEA. On the web, we have a question from Jørgen Torstensen from Fearnley Securities. Two questions. Could you please add some color on the higher SG&A for the quarter? And the second question, do you have a rig lined up for the exploration program this year?

[Birte Norheim, Chief Financial Officer]

Maybe I can take the first, at least. So maybe this was posted before I elaborated this in the presentation, but it's basically relating to the fact that we've done reallocation of cost to licenses during fourth quarter. And as we are ending up at the lower cost than what we initially budgeted due to the cost-saving initiatives, we have a reversal of the previous allocation to licenses. And also the effect of the bonus awarded in the fourth quarter in relation to the share incentive program is also a part of the effect that we see in fourth quarter. And we have some more information also in the quarterly report in Note 13. And yes...

[Erik Haugane, Founder & CEO]

Yes. As for the rigs, we -- the 3 firm wells, there are rigs allocated. And of course, the innovator is the first one going through this Jerv, Ilder prospects, spudding in maximum already. With respect to the potential Aurora pressure well, we have not assigned any rig yet. But for the firm wells, there are rigs assigned.

[Trond Frode Omdal, Vice President, Investor Relation]

Another question from the web from [indiscernible] of [ Soft Value ]. Could you give any clarity on CapEx level in 2022?

[Erik Haugane, Founder & CEO]

In 2022?

[Birte Norheim, Chief Financial Officer]

Not at this stage because this will depend on what projects, how the projects, as we are now having important milestones. This is progressing. So that's why we have limited the guidance to 2021.

[Erik Haugane, Founder & CEO]

But of course, the 2022, of course, will -- a lot of these projects requires that we submit the PDOs or other things that have to be approved by government, et cetera, et cetera. So the real investments will probably not seen before the [ early end ] of 2023, '24. But the fastest project going forward is Hasselmus where we will see some investments taking place in 2022. But we don't know exactly how much now.

[Trond Frode Omdal, Vice President, Investor Relation]

Okay. Are there any more from the moderator?

[Operator]

There are no more questions over the phone.

[Trond Frode Omdal, Vice President, Investor Relation]

Yes. One other question here. You're drilling 3 firm wells here, Jerv, Ilder and Ginny. Can you say -- are they oil or gas? And can you say a little bit about the prospect size?

[Erik Haugane, Founder & CEO]

Jerv and Ilder, it's -- so one of them is gas. The other is most likely gas. Other is most likely oil or actually most likely dry for both, most likely water in both of them. That's how the question goes on. And the size, expectation is in the 50 million, 60 million barrel range. So they are not huge projects, but of course, 50 million, 60 million barrels next to Grevling will make a huge difference to the economy of the 2 joint projects because then you have like 100-plus in one development. So that would be really significant.

[Trond Frode Omdal, Vice President, Investor Relation]

Okay. If there are no more questions, I'll just say thank you here from OKEA. And if there are any other questions, just we have given our contact details, and I'll be very happy to get back to you. So thank you again.