Panoro Energy ASA

OSE:PEN

Earnings Call Transcript 2018-Q3

[Operator]

Hello, and welcome to the Panoro Energy Third Quarter 2018 Results. My name is Emilia, and I will be your coordinator for today's conference. [Operator Instructions] I would now hand over to your host, John Hamilton, to begin today's conference. Thank you.

[John Andrew Hamilton, Chief Executive Officer]

Thank you, Emilia, and good morning, ladies and gentlemen. Welcome to our third quarter 2018 results conference call. And my name is John Hamilton, Chief Executive of Panoro Energy. And on the call with me this morning are Qazi Qadeer, our CFO; and Richard Morton, our Technical Director.I'll make a brief introduction, and Richard will then take you through an update on our assets. We will turn it over to Qazi to take you through some of the financials. And then we'll make some closing comments before opening up to any questions you all may have.As a reminder, today's conference call contains certain statements that are or may be deemed to be forward-looking statements, which include all statements other than statements of historical fact. Forward-looking statements involve making certain assumptions based on the company's experience and perception of historical trends, current conditions, expected future developments and other factors that we believe are appropriate under the circumstances. Although we believe the expectations reflected in these forward-looking statements are reasonable, actual events or results may differ materially from those projected or implied in such forward-looking statements due to known or unknown risks, uncertainties and other factors.For your reference, our results announcement was released this morning, and a copy of the press release on our third quarter of 2018 report are available on our website at www.panoroenergy.com.So a lot has happened since our last results call. Since then, we've announced 2 successive transactions in Tunisia, and we've achieved first oil at Dussafu. In combination, these have completely transformed Panoro's outlook and prospects.On a pro forma basis, our reserves, resources and exploration potential have all materially increased. Our production, on a pro forma basis, is 9x our 2018 quarter 2 production. So we really have moved the needle on the production front as well.Now some of you may have listened to our call just last week, but I will touch back on a few of the points that we made on that call, so apologies to those of you who have participated in last week's call as well, but I think they're worth repeating.As shareholders know, we've been very busy trying to broaden the portfolio of the company by adding production assets and long-term growth. And last week, we announced such transaction which we think provides us with such a foundation when taken in combination with our existing asset base. The announcement we made last week also I think puts the DNO Tunisia deal that we completed last summer into sharp focus and context.Yesterday -- I'm sorry, last week, we announced an agreement with the OMV Exploration -- E&P GmbH, which is a subsidiary of Austria's large oil company, OMV, to acquire 100% of the shares of OMV Tunisia Upstream GmbH for $65 million based on an effective date of 1st of January 2018.This company holds a 49% interest in 5 oil-producing concessions in Tunisia with 2P reserves -- net 2P reserves to OMV of 8.1 million barrels and net-net production of approximately 2,000 barrels a day from 14 different wells. The company also owns 50% of TPS, which serves as the operating company for the 5 oil-producing concessions; the other half is owned by ETAP, the state-owned oil company.OMV is still very active in Tunisia and have a large billion dollar project in the South of Tunisia. But the TPS assets, as we're calling them, have become less material to them and as we've seen many times in the oil business around the world, this provides a great opportunity for ambitious smaller companies to take them over.The concessions are long-life and low-risk producing oil fields with stable production history since the 1990s and contains significant amounts of oil yet to be recovered. We've employed [ 5 ] Gaffney, Cline & Associates to do a competent person's report, and again they have attributed 8.1 million barrels on a 2P basis net to the OMV position. There also exists significant 3P and exploration potential as well within these assets.The Concessions benefit from low operating costs, approximately $12 a barrel at the moment. And we also inherit a significant materials and drilling inventory in the warehouse valued by the seller at approximately $5 million as of the start of 2018.Since the start of these assets in production in the '80s, they've been run through very, very high standard, first, by British Gas as the joint operator with ETAP, and later by OMV. And ETAP together with the National Oil Company, who hold the remaining shares, have run a very, very good operation. The Concessions are currently jointly managed and jointly operated by ETAP and OMV through TPS, which is a long-standing respected joint venture in the country.TPS is located in the oil town of Tunisia called Sfax and has approximately 130 full-time employees and a number of contractors as well. Panoro will have the right to appoint the Deputy General Manager as well as the Development Manager in TPS. So the future strategy and work program at TPS would be jointly managed by Panoro and ETAP, and we've already identified a number of opportunities to enhance production and increase reserves from the Concessions.So looking at the transaction we did announce this summer, the DNO transaction, if you look at the location of the Sfax offshore permit that was within the DNO portfolio, you can probably see that the puzzle we've tried to put together here in terms of connecting these acreage positions, which really deserve to be together. The OMV concessions create a unique opportunity for Panoro to unlock the development in exploration potential in Sfax offshore permit through the tie-in to the existing TPS infrastructure and pipeline system.As announced on 31st of October, we are planning to drill the Salloum West-1 well on the Sfax permit in the first half of 2019. This well is subject to the entry into a third renewal period on the Sfax permit for an additional period of 3 years, and we're in advanced discussions on the renewal with the Tunisian authorities.I encourage you all to look at the maps in our presentation to give you an idea how combining these assets makes perfect industrial sense. The team that we now have from the ex DNO team will form the foundation to manage and grow our Tunisian business. It's worth also noting that our general manager in Tunisia until recently ran the TPS assets on behalf of OMV. So we have what we believe to be the right team in place to manage these assets.In terms of the money side of things, we agreed to purchase price of $65 million with an effective date of 1st of January. We estimate upon completion in mid-December that there will be about $15 million of working capital in our favor which represents the cash flow generation since the effective date. And the remaining balance of roughly $50 million will be financed through a combination of debt and equity financing and the introduction of a strategic co-investor across our Tunisian business portfolio.Mercuria Energy, one of the world's largest independent energy traders, has a long-term strategic relationship with us and is providing an acquisition loan facility of $27 million. They have worked very closely with us over the past year or 2 supporting our growth, and we're thrilled to have them in this transaction.Our strategic investor is Thyna Petroleum, which is a privately held oil and gas company focused on proven oilfields. And this company is founded and fully controlled by a Tunisian energy investor, Slim Bouricha. Panoro and Beender have entered into a strategic agreement, whereby we will jointly pursue all Tunisian growth opportunities on a 60/40 basis through a new holding company.We also announced the completion of a private placement recently to fund our share of the acquisition and also to attract some developing capital principally for Gabon and Tunisia and general corporate purposes. Private placement was oversubscribed multiple times, and we're able to price the shares at a premium to the 15-day [ view app ]. The private placement was heavily supported by existing shareholders, and we thank them, and many new substantial shareholders as well. The placement is subject to a general meeting of shareholders, which has been announced to happen on the 29th of November.So I'll turn it over to Richard now to talk you through our existing asset base. Richard?

[Richard Morton, Technical Director]

Thank you, John, and good morning, everybody.For first of all, in Gabon, during the quarter, as you know, Phase 1 development activities at the Tortue field in the Dussafu PSC were completed, and the first oil was achieved at the field in September of this year. We're pleased to announce that the Phase 1 of the project was completed safely, on budget and comfortably within the guided timeframe.The 2 initial horizontal development wells, DTM-2H and 3H, are now producing oil from the Dentale and Gamba reservoirs into the BW Adolo FPSO via the installed subsea trees and flow lines.The wells in the FPSO process plant are still being optimized for the Phase 1 production, but the -- and pressure build up tests are being conducted, but stable production rates, which are in the middle of our guided range of 10,000 to 15,000 barrels per day, from the 2 wells are being achieved. We're expecting an initial lifting of crude from the FPSO in the coming months.Following Phase 1 at Tortue and the earlier successful appraisal of the western flank of the field with the DTM 3 well, which was drilled in the first quarter of this year, we're looking now at the Phase 2 development plans and finalizing the next step at Tortue.So Phase 2 at Tortue is likely to consist of up to 4 additional subsea wells, which will be tied back to the FPSO. And BW Energy, the operator, estimates 2P gross reserves for the Tortue Phase 1 and Phase 2, together, to be between 30 million and 40 million barrels recoverable in total. The first oil from Phase 2 is planned to start up in 2020.As you know, in August 2018, we drilled an exploration well, DRNEM-1, on Ruche North East prospect that was drilled to a vertical depth of 3,400 meters within the Dentale Formation. We acquired log data, pressure data and fluid samples; and that data indicated approximately 15 meters of good quality oil pay in the Gamba Formation, which is the main reservoir in Tortue. And along with 25 meters of oil pay in stacked reservoirs within the Dentale formation.In September, we drilled a side-track, approximately 800 meters to the northwest of the original borehole, and found approximately 34 meters of total oil pay in the Gamba and Dentale reservoirs.In addition, several other stacked sands with oil shows were encountered. These newly discovered resources at Ruche North East, when combined with those at Ruche, which is a field we discovered in 2011, form a significant accumulation in the center of the license area. So the JV is now conceptualizing development of the greater Ruche area to tie back these resources, the Ruche and Ruche North East fields, to the FPSO at Tortue.Meanwhile, in Nigeria, the Aje field produced an average of 386 barrels of oil per day net to Panoro during the quarter. This compares to 295 barrels of oil per day net in Q2 2018. So the production is very stable currently.We're producing from Aje-4 and Aje-5 wells. Aje-4 is producing from the Cenomanian, and Aje-5 is producing from the oil rim of the Turonian reservoir. Crude lifting was carried out in August and the next lifting is scheduled for November.Proceeds from crude sales are still being applied by the joint venture towards operating expenses and the reduction of historical payables. The JV partners are continuing to discuss the next phase of activity at the field based around the submitted Turonian gas field development plan and possible exploitation of the Turonian oil rim, which we're producing from Aje-5 already.The operator has received ministerial consent for the license renewal for an additional 20 years, and that's subject to the satisfactory fulfillment of customary financial conditions and a commitment to exploit the Turonian gas potential.In Tunisia, in the Sfax permit, Panoro has signed a Heads of Terms with CTF, which is the Tunisian state-owned drilling contractor, for the provision of a offshore -- on-shore rig for the drilling of the Salloum West-1 well. The spud date for this well is anticipated to be in the first half of 2019 and is subject to entry into a third renewal period of the Sfax permit for a period of 3 years, one with a subsequent approval of the final drilling program and budget by ETAP, which is the state oil company. We're in advanced discussions for the renewal with the Tunisian authorities.The primary objective of this well is what's called the Bireno formation, the main producer in the TPS assets nearby, and that's approximately 3,200 meters vertical depth. And we've identified, based on the existing 2D and 3D seismic, what we believe to be an extension of the Salloum structure to the west.The well will target an independent fault compartment up-dip from the Salloum well, which was drilled by British Gas in 1992 and which tested the Bireno formation at a rate of 1,846 barrels of oil per day. The objective of the well is to provide additional resources in the vicinity of the Salloum-1 well and fast track the development of this field through a tie-in into the existing TPS assets.The decision to drill the well is supported by the availability of the rig. We already have a considerable amount of equipment, which we've inherited with the DNO transaction in our warehouse at Sfax and we'll make use of a lot of that equipment. We have the good-quality 2D and 3D seismic covering the location, and of course, close proximity of the discovery well, Salloum-1, and the ability to tie into the TPS export facilities quite quickly.Meanwhile, the Hammamet Offshore Exploration Permit expired in September 2018 and is in the process of being formally relinquished as we have previously indicated.So that concludes this quarter's operational update. And I'll now hand over to Qazi, our CFO, to take you through our financial update. Qazi?

[Qazi Qadeer, Chief Financial Officer]

Thank you, Richard, and good morning, everyone. In our results announced this morning, we have as usual included a detailed narrative on line-by-line analysis comparing the previous quarter. Therefore, on this call today, I'm only going to cover the key highlights of the third quarter 2018 results. It is also customary to note here that the results published this morning and discussed on this call are unaudited.To start with, EBITDA for the current quarter was negative $2 million, compared to a positive $0.5 million in the previous quarter. That decline was a combination of various things, first one being lower revenue entitlement from Aje, mainly due to lower lifting volumes. The second thing is the higher exploration-related costs of $457,000 that were incurred in Tunisia mainly on planning of Salloum West-1 well. Number three is the higher G&A and nonrecurring costs, including from $1 million in 2Q to $2 million in 3Q. The higher exploration costs and G&A is mainly due to addition of post-acquisition results of DNO Tunisia, which contributed a negative $0.8 million in total.In addition, nonrecurring costs of $0.5 million have contributed to negative EBITDA, which resonated from legal advisory and transition costs related to the DNO and OMV transactions. We don't expect these costs to continue in foreseeable future.The net loss for the quarter was $3 million from continuing operations, which has increased from a loss of $0.3 million in the second quarter 2018. As explained earlier, the current quarter loss includes higher negative EBITDA and the depreciation for the current quarter.On the balance sheet side, cash and cash equivalents stood at $19.4 million at September 30, 2018, increasing from $5.5 million in the previous quarter. The increase is due to $8.6 million of cash acquired through DNO Tunisia acquisition and the respective equity issue and allotment of treasury shares ended in $8.1 million in net proceeds. This was offset by overhead payments and Dussafu cash calls during the quarter. No other cash flows were paid during the quarter out of Panoro's own cash. On an overall basis, total assets of the company have increased to $61.7 million from $39.7 million in June 2018.Higher net equity reflects increase in share capital and premium due to issue of shares and offset by loss in the third quarter.Overall liabilities of the group have increased compared to previous quarter, principally due to acquisition of DNO Tunisia AS, which added unfulfilled work obligations of $10 million. These obligations are recognized as accounting adjustment to recognize work commitments to balance the [ nil ] consideration we paid versus the value of the assets acquired. These liabilities are under review and will be revisited for remeasurement once renewal of Salloum offshore exploration permit is achieved.The decommissioning liability has also increased by $1.5 million on recognition of Dussafu-related obligations after we commenced production in September 2018.Non-recourse loan from BWE was fully drawn down to $12.5 million as at 30th of September. And the loan, as we have stated several times, will be paid -- repaid from Panoro's entitlement of cost oil from Dussafu production after paying for royalties and operating costs. We will still, however, continue to see lower share of profit oil from the crude sales. These increases are slightly offset by reduction in Aje-related payments during the quarter, which is also a sign that, that is producing.This concludes my review of our financials. And I will now turn back the call to John for closing remarks and open up for questions.

[John Andrew Hamilton, Chief Executive Officer]

Thanks, Qazi. Thanks, Richard.So to briefly conclude, the transaction we recently announced last week has created a full-cycle company with a long-term foundation. We'll now have production assets in 3 different countries and across 18 different wells. We'll have near-term opportunities to exploit 3P reserves and contingent resources. We also have a lot of exciting exploration potential.Two months ago, we are producing a few hundred barrels a day at Aje, start of production in Dussafu has brought these multiples higher; and upon completion of this transaction in mid-December, we will be around 2,500 barrels a day net to Panoro.With Dussafu Phase 2 being planned and some drilling in Tunisia, we can easily see a trajectory of production growth from here over the next 18 months.So we hope you all share our excitement at these transformational transactions, and I'll now open up to questions.Emilia, if there are any questions, we would be happy to take them.

[Operator]

[Operator Instructions] Okay. We have the first question from the line of Teodor Nilsen from SB1 Market.

[Teodor Sveen-Nilsen]

First, a question on Dussafu. It's good to see that the production has ramped up nicely. But can you indicate where the current production level is as of today?

[John Andrew Hamilton, Chief Executive Officer]

Good morning, Teodor, how are you? Yes, so Dussafu, we've guided that the initial production rates look like they're firmly in the middle of that range which we're very, very happy about with the project having been on time, on budget, no incidents. And then, actually, the after-production we expected also is, we think, a top result. As we've mentioned in our report in our previous press release, the FPSO and the wells are still under a number of tests. So we're doing, for instance, at the very moment we're doing pressure build-up test, which involves isolating certain wells, trying them in different choke sizes and trying to really understand all the reservoir data as best we can. So it's a bit of a dynamic situation at the moment, but we stand by our guidance of where we think the initial stabilized production is. And I think that you'll see also, with upcoming press releases, we'll have a lifting soon in November. BW have their results. So I think we'll start telling a little bit more. But again, at the moment, we believe that, that's where the initial production is stabilized.

[Teodor Sveen-Nilsen]

Okay. Should we expect then a substantial growth in fourth quarter compared to what you reported for the third quarter?

[John Andrew Hamilton, Chief Executive Officer]

Sorry, substantial what? Growth?

[Teodor Sveen-Nilsen]

Growth in volume, so should we model like [ half barrels ] quarter-on-quarter.

[John Andrew Hamilton, Chief Executive Officer]

In terms of modeling actual production, I'd say we started the wells up in mid-September, we're now in mid-November. During that period, we've had -- we start up the wells a little bit slowly. We brought them up to where we think they're going to be. So you'll have to take a little bit of a view if you're just going to take 12,500 barrels a day and multiply it times 90 days, you might be a little bit off. But again, we're still optimizing the FPSO in the wells. But like I said, production looks pretty good.

[Teodor Sveen-Nilsen]

Okay, understood. And then just with regards to 2019 investments, of course, you'll -- after closing the OMV then you will some substantial cash flow. Could you share a few thoughts around how much you need or you want to invest in 2019?

[John Andrew Hamilton, Chief Executive Officer]

Yes, very good question. Thank you. Our priorities in terms of capital spend are as follows. Not necessarily in order of importance, but what comes to mind first is, obviously, Dussafu. We are busy with BW calibrating what we think is the optimal Dussafu Phase 2. That program we anticipate at the moment, although the final investment decision has not yet been taken, to commence operations on that in mid-2019. And that will comprise of a mixture of exploration and development wells to be defined in terms of the exact number. So we really have a priority to get after more exploration and more development, more production at Dussafu. And you will see that dominating probably our capital spend during 2019. At the Sfax offshore permit, which is what we got with the DNO transaction. As we've stated, we'd like to drill the Salloum West well, that is contingent on some regulatory processes. So with the good win and some good news there, we would hope to actually be drilling that well as well during the course of 2019. As Richard laid out, we've kind of got everything ready to go, the environmental impact assessment has been done, the equipment we largely already have in our warehouse, the Heads of Terms have been signed with a drilling contractor, we've tendered all the services. So what remains, simply, is the regulatory process, but we would hope to be doing that in 2019. And then last, but certainly not least, we now have a couple of thousand barrels a day or we will when we complete the transaction in the ex OMV assets. And those will, at least in the first half of the year, probably there's some smaller things we'd like to get after there, some workovers, maybe replacing some pumps, doing some smaller CapEx there. But it's not material in terms of the actual capital resources. But over the next 18 months or so, I think there's some other projects we'd like to get after there as well in terms of drilling some new wells and drilling some sidetracks that could end up boosting some productions. So we have a busy 18 months ahead of us, Theodore.

[Operator]

Your next question comes from the line of Anders Holte from Kepler Cheuvreux.

[Anders Torgrim Holte, Equity Research Analyst]

Just a quick question for me on the DNO transaction and the Sfax offshore permit. I mean, DNO, they tried and they didn't really seem to get it to work, at least the offshore portion. Just curious to know if you could elaborate a bit more on your view on the profitability of that license, if it's mostly connected to the stuff in West -- towards Salloum or if you see more upside in the deeper offshore parts towards Ras El Besh and Jawhara?

[Richard Morton, Technical Director]

Yes. So it's Richard here, I'll try and answer that one. So, yes, DNO were [ concentrating ] a bit deeper water than us. They had to go at the Jawhara development and Ras El Besh. That was disappointing for them. They didn't look so much towards the western side of the license where we're focusing now with Salloum, principally because of the, let's say, difficulty of tieing that back into the TPS infrastructure. Now we're involved in TPS, that difficulty gone, so it makes much easier for the 2 licenses to be developed together. We also see some significant potential just to the South of Salloum. We've identified a prospect there called Hbara, which requires some more seismic but can be easily tied back. So we've got a slightly different focus enabled by the TPS acquisition to try and bring discovered oil through that infrastructure and focusing on a couple of leads and prospects in the vicinity of that area. We haven't forgotten about the discovered resources at Ras El Besh and Jawhara, and we're reviving the development plans for those as well.

[John Andrew Hamilton, Chief Executive Officer]

Yes, Anders, I'll just add to that. We're obviously in a very prolific area of the TPS assets. The OMV assets themselves produced already 54 million barrels. That whole area that you can see on those maps has produced hundreds of millions of barrels. There's still lots and lots to go for there, including, as Richard said, the things that DNO had initially been concentrating on Jawhara and Ras El Besh. So we see a long period here of being able to exploit the resources in this combined area.

[Anders Torgrim Holte, Equity Research Analyst]

Okay. Just before I leave, just -- any indications on what sort of sizes are you hoping for? Are you able to elaborate on that or...

[John Andrew Hamilton, Chief Executive Officer]

Sorry, sir, could you repeat the question, Anders?

[Anders Torgrim Holte, Equity Research Analyst]

If you have any idea of the sizes on the stuff you're looking at, what kind of volumes are we -- are you looking at when you look at the Salloum and the other neighboring prospect?

[Richard Morton, Technical Director]

So Salloum was -- has been estimated by previous operators in the past to be about 5 million barrels, has potential for a bit more, maybe, if we see better quality reservoir than what's found in the Salloum-1 wells. So we're going to be drilling to the west of that, in it's separate full compartment, where there's potential for better reservoir development. So 5 million to 10 million barrels for that field, probably. Hbara is -- looks like a similar kind of size. So these fields are quite small, but the reservoir is good. The recovery rates, the IP rates for the wells are high, so there's potential to add a lot of value. And of course, the OpEx is very low if we tie them back in.

[Operator]

We have no further questions in the queue. [Operator Instructions] There are no more questions in the queue. So I hand you back to your host.

[John Andrew Hamilton, Chief Executive Officer]

Thank you, Emilia. Thank you, Anders, thank you, Teodor, for the questions. We can see there are a number of other people on the call. If anybody has a specific question, if you could perhaps e-mail us, we will try and get to all the e-mails that we do get. We're getting quite a few, but we're happy to try and, in due course, answer as many questions as we can.And I thank you very much for attending the call. Bye-bye.

[Operator]

Thank you for joining today's call. You may now disconnect your lines.