Panoro Energy ASA

OSE:PEN

Earnings Call Transcript 2019-Q3

[Operator]

Hello, and welcome to the Panoro Energy Third Quarter Results for 2019 Webcast. My name is Rosie, and I'll be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions]I will now hand you over to your host, John Hamilton, CEO, to begin today's conference. Thank you.

[John Andrew Hamilton, Chief Executive Officer]

Thank you, Rosie, and welcome everybody to our third quarter 2019 results. For your reference, our announcement was released this morning. A copy of the press release and this webcast are on our website, www.panoroenergy.com.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.I would now like to take you through our webcast slides. And if we could move from the cover page quickly through Slide #2, the disclaimer.And then move please to the presenting team on the webcast, Slide #3. I'm John Hamilton. I'm the Chief Executive Officer of Panoro Energy. I'm joined today by Qazi Qadeer, our Chief Financial Officer; and also Richard Morton, Technical Director. There is some fake news here. Nigel McKim, our Projects Director, is unfortunately traveling today. He's unable to join the call, but he's very much with us in spirit.If we could please turn to Slide #4, which is Q3 2019 highlights. I won't go through these in a great level of detail because some of this will come up in the financial slides we have a little bit later and through the asset slides that we're going to discuss. If I could point out a few of the highlights that I think are worth noting here. Tortue Phase 2 in Dussafu in Gabon, the development drilling has started. This is well underway, and we've been very pleased with the results so far on that. That is going to be a big event for us in the first and the second quarter of next year as we bring those wells into production in Gabon. So we have a good visibility on production growth in Gabon coming through Tortue Phase 2. During the quarter, we also made the transformational Hibiscus Updip discovery, which has now been granted a 45.4 million barrels of gross 2P reserves by Netherland Sewell. Richard will take you a little bit more through this, but this is a truly excellent piece of news for Panoro and its shareholders. And it has a big impact on the next phase of Dussafu, which we'll probably take production capacity on the field beyond the current nameplate capacity on the FPSO. So this is absolutely stunning news for everybody concerned.In Tunisia, we're extremely busy with a number of workovers going, and we're targeting gross production of 5,000 barrels a day. And the new news this morning is that we have a rig contract with -- signed with CTF, which is the state-owned drilling company for the drilling of the Salloum West prospect in early 2020 and with lots of other things going on towards the spudding of that well. So this is making solid progress. Again, I will not go through all of the financial highlights here. I think Qazi will pick those up. And obviously, if there are any questions, we can come back to them. If I could now ask you to turn the slide to Slide #5, which is titled Looking Forward to 2022. We all get caught up in the quarterly results and the news releases and all that, but this slide is meant to really kind of take a step back and say, what is the journey that Panoro is on at the moment. And we're quite excited by it. And this slide tries to capture some of the things that we and our shareholders can look forward to over the coming 2 years.If I look at 2019, we're approximately a 2,400, 2,500 barrel a day producer. Our revenue for the full year should be $55 million, $60 million. Our EBITDA should be around $30 million. So this is an incredible transformation from where we've come from, but the good news is yet to come. What's going to happen over the next 2 years is that we're going to have Phase 2 when Dussafu come on stream. We're going to have Phase 3 on Dussafu come onstream towards the end of 2021. We're targeting the increase in production in Tunisia that we've talked about. And we're going to, hopefully, have a per barrel unit basis, OpEx coming down.Now counterbalancing that, we have a couple of things that will lower the production revenue numbers. Those are the Tullow back-in at Dussafu where Tullow have the back-in right, reduce us to 7.5%, as most people who follow us know. And also, upon completion of our Nigerian sale, that will reduce some of the headline numbers, particularly the revenue side from our business unit. So that will negatively impact the revenue line. But taking all those things together, if you look to 2022, late 2021, on an annualized basis, using $60 Brent, using current assumptions, we could be -- should be about a 5,000 barrel a day producer. We should have well over $100 million of revenue, $75 million of EBITDA. And if I could guide your eye down to the red boxes there at the bottom, there are some comments that go with that. We hope to pay our very first dividend, which will be in the form of PetroNor shares, subject to completion of that transaction. That is hopefully a 2020 event. And then we're quite excited to be able to return those shares to shareholders in a very interesting transaction, which I'll touch on. During this period, we'll be repaying debt. We don't have very large debt as a company, but nonetheless, we'll be repaying those during 2020 and 2021. In terms of operating cash flow, so taking after tax, so EBITA, (sic) [ EBITDA ] E-B-I-D-A, we should be $40 million to $50 million operating cash flow company when all this is said and done, which is an enormous cash-generating machine. And of course, there's of course upside to this. We're trying to be a little bit modest in terms of these numbers, but there is upside in the assets beyond this. So again, hopefully, that gives a picture of where we see the company going.If I can turn to the next slide now, which is Slide 6, 2020 News Flow. You don't have to wait 2 years for all this to transpire. We have plenty going on in this company in the coming 12 months. On the exploration side, we will be drilling Salloum West in Tunisia, which is an exciting well, which is close to our existing infrastructure. We're going to be drilling another exploration well in Dussafu. We have -- those who follow us know that we have 2 optional slots for additional wells in Dussafu, which we're hoping that we exercise those options.On the production side, we're going to have 2 new wells coming in, in the first quarter in Dussafu, 2 more coming in, in the second quarter, so that will take our production to, at the initial production rate, probably circa 25,000 barrels a day gross. In Tunisia, we're obviously also trying to ramp up to the 5,000 barrels a day, and we have lots of other production activities going on in Tunisia as well.On the corporate side, we're continuing to look at exploration and M&A transactions that will happen during the whole year. We hope to be able to announce some things. We've hinted that we are looking at some exploration assets, and we hope to be able to update the market on that in due course. Hopefully, we'll have the sale of Aje OML 113 completed, subject to governmental approvals during the course of the year. And that's a very first dividend that I referred to as well. So again, 2020 is going to be quite a busy year for the company and plenty of news flow to get stuck into. If I could now turn the slide to Slide #7, which is the proposed sale of our Nigerian interests. We made a press release about a month ago on this. There's no particular new news on this one. We, as people know, we have conditionally agreed to sell our holding companies that hold our interest in Nigeria, which are the OML 113, the Aje field to PetroNor, which is listed on the Oslo Axess Børs.And the structure of this transaction has been very much to be a win-win to hand over Aje to a company that has grand ambitions for the asset. Panoro shareholders are able to then benefit in the future of Aje and, indeed, in the future of PetroNor itself, which is a company which has existing production assets in the form of the shares that we will receive as consideration. It's our intention to distribute those shares to our shareholders in the form of a dividend. There's also some contingent consideration in due course of up to $25 million. The conditions that apply to this transaction are ministerial consent in Nigeria for this transaction and a bigger transaction that they're working on together with the operator, YFP. Completion of transactions in Nigeria can often take time. We expect to see a 2020 event, perhaps the middle of the year. If I could now pass on to Qazi and have the slide passed to Slide #9, which are the financial highlights, Q3 2019 highlights. Qazi, can you take us through the numbers here, please?

[Qazi Qadeer, Chief Financial Officer]

Thank you, John, and good morning, everyone. We announced our third quarter report this morning, which is available on our website at panoroenergy.com and contains detailed analysis of our quarter-on-quarter and year-to-date movements. Therefore, I'm only going to discuss key financial highlights this morning, which are summarized in this slide. To begin with, revenue and other income for the quarter was $10.2 million. In the second quarter, it was $10.7 million, decreasing slightly. Please note that other income also includes the tax gross-up of Dussafu in the revenue line, which we basically include for consistency in reporting purposes. A breakdown of revenue and other income is available in our 3Q report. The decline in oil sales revenue is due to lower realized prices despite the higher number of sold barrels in comparison to the second quarter. EBITDA for the third quarter was $5.3 million compared to $5.1 million for the second quarter. This is high despite lower sales and driven by lower operating costs for the barrels sold in this quarter from Tunisia and Gabon. Net profit is lower at $0.5 million in 3Q versus $8.1 million in the second quarter. The higher second quarter profit is due to $8.2 million worth of reversal for impairment of Dussafu.We also report our results on an underlying basis using non-GAAP measures. After excluding items of nonrecurring and nonperforming nature, like impairment and effects of commodity hedges, we end up with pretax income of $2.3 million in 3Q compared to $1 million in the second quarter.Last item I would really like to point out is the cash balance, which has moved from $25.5 million in the second quarter to $20 million in the third quarter. This is due to net cash flow payments mainly for Dussafu and our strength in the working capital cycle. Following the quarter end, we have raised $16 million through equity private placement, which has further strengthened our cash position.On the commercial side, we are very pleased to report that we have signed the offtake agreement for lifting of Dussafu crude with BP, who are going to lift the barrels for the next financial year.

[John Andrew Hamilton, Chief Executive Officer]

Thank you, Qazi. I would just add one more thing to that, which is in line with the guidance we provided in the second quarter, we saw a second half of this year being 6 liftings. We've had 2 in the third quarter. We will have 4 liftings based on current estimates in the fourth quarter. So again, getting back to some of the points around revenue recognition and some of the volatility in quarterly results, fourth quarter should be a particularly strong one from a liftings and a revenue recognition perspective.If we could now turn to Gabon slide at Slide #10. I'd like to turn over to Richard Morton, our Technical Director, to take you through Gabon, and he will also take you through Tunisia. After which, I will follow up.

[Richard Morton, Technical Director]

Thank you, John, and good morning to everybody. As a reminder, in Gabon, we have a 8.33% interest in the Dussafu permit, and operator is BW Energy and the partner is Gabon Oil Company. If we move on to the next slide, Slide #11, this is titled The Tortue Field. We have Tortue Phase 1 on production currently from 2 wells, a fast-track project. That continues on production in the quarter, and total production estimate for 2019 is between 4.1 million and 4.4 million barrels. That continues to produce from those 2 wells at about 11,000 barrels per day.Phase 2 is sanctioned and underway with the first of the 4 production wells currently completing. We expect the first production to come on stream in Q1 2020. And we're targeting an average of 20,000 barrels a day for 2020 for the Tortue field with a peak of around 25,000 barrels per day in midyear.To move on to the next slide, Slide #12, which is titled Transformational Hibiscus Updip Discovery. So on the exploration side, we drilled and appraised the Hibiscus Updip discovery earlier this year. We had a very good discovery in the Gamba reservoir with excellent reservoir properties. The main wellbore found a 33-meter column, 21 meters of net pay. We sidetracked about 1 kilometer to the northwest to appraise a field and found a common contact and a similar oil column with 26 meters of net pay, so an excellent result in terms of our exploration drilling activity.The gross 2P reserves now assigned by NSAI are 45.4 million barrels of oil, and that compares with our pre-drill estimate of 12 million, so a very good result in terms of the reserves in the ground. We've now progressed a plan to bring that oil into production as soon as possible, and I'll talk about that in a moment. And that's the Phase 3 part of the Dussafu development. We've also identified certain other prospects, and we'll talk about exploration drilling later on in 2020 in following slides. Let's move on to the next slide, Slide 13, the NSAI 2P reserves position. This graphic shows the development of our reserves position at Dussafu in the last 2 years or so. And you can see that things have progressed very strongly from 23.5 million barrels up to the current 113 million barrels, which is a 4x increase. So Tortue has moved from 23.5 million to 42 million. We've seen much better production than we had initially experienced. And then we've added Ruche and Ruche North East into the 2P position. And of course, Hibiscus Updip discovery gets us up to the 113 million barrel 2P reserves. We move on to the next slide, Slide 14, and this describes Phase 3, which is also called Ruche Phase 1. So here, we've done a fast-track development plan for -- to bring the Hibiscus reserves into the FPSO, which is shown on the graphic on the right-hand side. We've relocated the platform, which was originally between Ruche and Ruche North East, to the position shown there between Hibiscus and Ruche. This will bring oil from development wells drilled on Ruche and Hibiscus in the Gamba via a subsea pipeline to the Adolo FPSO located at Tortue.So we expect an FID for this project later this year. We've already approved this project internally, and we are expecting first oil in the end of 2021. There'll be 6 Gamba wells initially drilled in Hibiscus and Ruche. And we have a gross CapEx of $445 million for the project. The additional production will, of course, reduce our OpEx per barrel down to about $10, excluding royalties. And we see further expansion of this project in 3D, which will allow additional drilling in Ruche North East where we have capacity for up to 7 additional wells. Move on to the next slide, Slide 15, and talk about the exploration activities on the license. On the right-hand side, you can see that we have a map of our Ruche exploitation (sic) [ exploration ] area, showing in green the discovered fields and in the other colors, the various prospects and leads that we've identified. So in total, we have 9 current drillable exploration prospects. Adding up the prospective resources of those gets us to about 160 million barrels. Some of these are Gamba and some in Dentale.We've been busy looking at the seismic data, which covers a block and reprocessing that to enable us to use that data set to validate and identify new prospects. We've been focusing, given our success in Hibiscus on analogs for that discovery, broad flat structures with the Gamba potential. And we're hoping to make some decisions in the coming months about which of these prospects to drill in the 2020 drilling campaign. We move on to the next slide titled Tunisia. Here, we have 2 assets: first of all, the Sfax Offshore Exploration Permit, where we have 52%; and the TPS assets, which is a production asset where we have 29.4%, both partnered with ETAP. Move on to the next slide, Slide #17. As John mentioned, we are very busy in TPS, the production asset. The picture shows the satellite view of the fields onshore. And the well activities are underway and have been completed and are planned for the near future. So at El Ain, we've been progressing the workover on ELAIN-03. We have an additional workover on ELAIN-01, which is coming at the end of the year.On Guebiba, which is one of the main producing fields in the asset, we've been busy with 3 workovers. And additional workovers will come on early next year with a contingent well called Guebiba-10 in the southwest of the field. So we see potential here. There's lots of activity ongoing, and we're looking to bring production up to that 5,000 barrel per day target. Move on to the next slide, Slide 18, entitled Enhancing TPS Production Levels. So this shows historical production in the assets over time and the variation of that production according to different activities in the field. So we see that there are 2 main elements on the production profile going forward. First of all is maintaining the existing production with replacement of ESPs and workovers integrity management. And then we're busy working on plans for the -- enhancing the production levels where we think we can get up to and above the 5,000 barrel per day target. This includes new wells, sidetracks and recompletions on new reservoir intervals in the existing wells. Move on to the next slide, Slide 19, this is entitled Tunisia: Salloum West Well. And here, I'm describing activities on our exploration permit. So we've made significant progress towards the well spud. The picture on the left-hand side shows the rig we have contracted. That's currently being mobilized to Sfax, and the site is being prepared. So we have contractors on the site currently doing piling operations and civil works, and we anticipate spudding the well in Q1 2020.So as a reminder, this is going to be drilled as a deviated well from an onshore location, and it's targeting the Bireno formation, which was tested in the structure by British Gas with the SAM-1 well in 1991, and that well tested at 1,800 barrels a day. So we see good potential to confirm that oil resource and bring that into production quite quickly. The nice thing about this well is it can be tied in very easily and quickly into our existing production facility at Rhemoura, which is part of the TPS assets. We have a mid-case of 5 million barrels for this and the remaining $8 million net to Panoro for CapEx for the well. With that, I will hand over to John to talk about our exploration strategy and outlook going forward.

[John Andrew Hamilton, Chief Executive Officer]

Thanks, Richard. Slide 20, please, Exploration Strategy. In some of our recent press releases, we've discussed our desire as now as we're having a production company that we would like to ensure the longer- and the medium-term future of the company by also having exposure beyond our exploration potential that resides within our Tunisian and Gabonese assets, which in itself is very interesting, of course, but to supplement that by taking some smaller exposure to material oilfields, so smaller percentages, things that won't break the bank, things that won't expose the company to undue risk. But nonetheless, it helped expand the portfolio.So we are very busy looking at a number of opportunities using our regional knowledge, Richard's and the team's regional knowledge and particularly in the pre-salt areas out in Gabon and looking principally at West Africa and North Africa, and again, where we can come in using our experience, our data, our knowledge and team up with reputable oil companies. So we're not doing this on our own. We're doing it with companies that are also equally as reputable and sometimes quite a bit bigger than we are to team up with them to pursue some opportunities. So we hope, again, during the course of 2020, we will have some news to tell you on our exploration strategy, but we are focusing a little bit more time on broadening the portfolio on the exploration front. So I'd like to finish up with Slide #21, Outlook. This is largely a repeat of what we've already said, but it serves to, again, underline what's going on in this busy company. In the next 12 months, we're going to be having high levels of operational activity. We're going to have between 2 and 4 exploration wells in Dussafu and Tunisia. So lots of news flow there. We're going to have 4 development -- new development wells at Tortue, which we hope to continue to update the market on as those come online.We're working, as Richard has stated, very hard on production enhancements in Tunisia to bring that very solid operation even higher. We're doing so in what we believe to be an ethical and a safety-conscious way. It's important, and we have the license to operate in the markets that we do, and we take this very seriously. And as a company, as a growth company, we continue to look at business development opportunities, exploration or further inorganic growth. We continue to evaluate transactions and only transactions really that makes sense for shareholders.So with that, Rosie, I've finished the slide pack, and I'm happy to open up to any questions that there may be.

[Operator]

[Operator Instructions] So the first question on the phone line comes from Teodor Nilsen from SB Global Markets.

[Teodor Sveen-Nilsen]

I have 3 questions, actually. The first one is on -- by the way, we're very happy that you will give [ back ] the Tullow shares. So in terms of cash dividends, should we expect you to pay any cash dividends when Tortue next phases have come on stream? And second question is on CapEx 2020. Can you just give us a reminder of how much you will spend on TPS assets and also for Dussafu for next year?And third question is just a minor thing in the third quarter financials, where you have very low lifting costs, both on an absolute basis and also relative to lifting in third quarter compared to second quarter. Can you just briefly explain that?

[John Andrew Hamilton, Chief Executive Officer]

Sure. I'm sorry, Teodor, can you just repeat the third question so we understand that properly?

[Teodor Sveen-Nilsen]

The third question, reason for very low lifting costs in third quarter compared to second quarter.

[John Andrew Hamilton, Chief Executive Officer]

Okay. Right. Okay. So on your first question on dividends, well, we -- as the slide, this looking forward to 2022 slide states, we're on a -- we're currently in an investment phase. We are dedicating CapEx to Dussafu Phase 2, Dussafu Phase 3. We have activities in Tunisia as well, including the Salloum exploration well. So we're very much focused on the investments required to lift that production to a level where, again, in that slide, you can see us, if you kind of scroll forward, if you can imagine a couple of years from now when we should be producing a very big wall of post-tax operating cash flow.So we're trying to show the way towards what we see the company looking like as it currently is constituted today a couple of years from now, and that would be in a very, very strong cash flow position. We are, in the interim, of course, intending to pay the PetroNor dividend, PetroNor share dividend. That deal needs to complete. But assuming that it does, we have every intention of distributing those shares in the form of a dividend. In respect of CapEx, the CapEx in Tunisia, we'll spend roughly about $8 million on the Salloum West well during the course of next year. There could be some smaller CapEx in the TPS assets. The -- a lot of the workover activity that Richard has discussed is more of an OpEx line item than a CapEx one. These don't tend to be very expensive operations to restore production, to increase production. There is one contingent well in there. The Guebiba sidetrack that we've mentioned, which is a slightly higher CapEx line item, could be $1 million or $2 million net to Panoro. During the course of 2020, that is still a contingent line item. Dussafu, it's kind of hard to give exact guidance because what happens -- or happening is we approve CapEx together with BWO. And some of that money gets spent straddling years, and sometimes the cash cost don't match exactly the perfect calendar year. But as we stated before, Phase 2 is about $240 million gross project, which we're well into the middle of that, but there is still CapEx to come. But it's hard to give exact guidance on that at the moment, but we can maybe seek to refine that with you offline for your next note.And on the lifting cost, Qazi, do you want to touch on that?

[Qazi Qadeer, Chief Financial Officer]

Yes. So we basically, obviously, have different licenses. We're lifting from different per barrel operating costs. In this quarter, we had liftings both from -- one lifting is from Gabon and Tunisia, but no lifting from Aje. So obviously for Aje, the lifting costs are a little bit higher on a per-barrel basis than the rest of the portfolio we have. And as such, it's reflected in the OpEx cost for the quarter.

[John Andrew Hamilton, Chief Executive Officer]

Yes. And Teodor, I guess it gets back to this whole issue around revenue recognition and the lumpiness of the quarters. We prefer to really look at more like half yearly trends to kind of give an accurate impression of the various P&L line items.

[Operator]

[Operator Instructions] We have a question now from the line of Jørgen Torstensen from Fearnley Securities.

[Jørgen Torstensen, Analyst]

Congratulations on a good quarter. Just one for me on the Salloum West well. You say that the net CapEx to you guys remaining in 2020 is $8 million. But on the specific well cost, which is I estimate to be lower than the Dussafu wells, would sort of $12 million, $13 million be a fair estimate on the well cost there?

[John Andrew Hamilton, Chief Executive Officer]

Yes, I think that's a fair estimate. The situation is obviously different. The Dussafu ones are offshore wells. They are straight vertical wells, which are obviously designed to be P&A-ed once we hopefully make the discoveries. This is a deviated well being drilled from onshore. So it's a different animal, but your estimates are roughly correct, yes.

[Operator]

We have no further questions coming through on the phone lines at this time. So I'll now hand back to John to go through any possible webcast questions.

[John Andrew Hamilton, Chief Executive Officer]

Great. Well, I appreciate everybody dialing in. And again, hopefully, enjoying reading about our journey. We are, of course, available offline as well through the info e-mail address we have at Panoro, or for those who would like to speak directly could send us an e-mail and we can set up a call.Again, I thank you very, very much. Thank you very much, Rosie, to you as well, and goodbye.

[Operator]

Thank you, everyone, for joining today's conference. You may now disconnect your lines. Hosts, please stay connected and await further instruction. Thank you.