Panoro Energy ASA

OSE:PEN

Earnings Call Transcript 2021-Q3

[John Andrew Hamilton, Chief Executive Officer]

Good morning, everyone. John Hamilton here, Chief Executive of Panoro. On this call this morning, I'm also joined by Nigel McKim, our Projects Director; Richard Morton, our Technical Director; Qazi Qadeer, our CFO, here to talk to you today about our trading and financial update as of the end of the third quarter. 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 we believe are appropriate under the circumstances. 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.[Operator Instructions] We will take questions at the end, and you can either raise your hand in which case we will unmute you and you can ask your question live or you can type in a question, which we'll try and address as well.Next slide, please. Great. So just as a reminder, I want to talk a little bit about our value creation model, our strategy as a company because I think it's very relevant in this time. We have the energy transition going on. We have higher oil prices. We ourselves believe that we are into a long cycle of potentially volatile, but certainly higher oil prices as oil demand continues to be present as we migrate towards the energy transition.And we are entirely focused our strategy on how to maximize the position over the coming number of years that we believe oil will continue to be an important commodity and one that's going to be high demand. We've seen obviously a significant underinvestment in oil and gas capital expenditure globally over the past few years, which we believe will continue to support high oil prices.So positioning ourselves, we are looking from a capital allocation strategy towards a brownfield incremental production. So we're looking to grow our production base, which those of you who follow us know what we're doing. We have a huge contingent resource base, 33 million barrels, which we hope to bring into the proven and probable reserve category in due course. So we have a very, very good inventory of proven barrels, but also contingent resources, which to produce over the number of years coming forward.We're also looking at just opportunistic acquisitions. We've done a couple, OMV and Tullow, and we've positioned ourselves to be one of a very few credible buyers in the market for what we believe will continue to be opportunities as larger oil companies dispose of oil assets.Exploration, we're not an exploration company. However, exploration does have its part in terms of making sure that you continue to replace the barrels you produce by finding new ones. We are focused -- where we do exploration we're focused on things that are very, very short cycle back into production, preferably near where we are already producing.So again, looking at infrastructure-led exploration, short-cycle exploration, which can be brought into production, not frontier exploration type of opportunities. And what that all means is that we have a plan to develop a shareholder returns policy. We have -- we've made a number of statements today that the Board has decided on, where we're looking at the feasibility of bringing forward our very first cash dividend.We'd indicated at the time of the Tullow acquisitions that we were looking at mid-2023, at Y 2023, that was when the Hibiscus/Ruche development would come online. We would have derisked that. And at that point, we were prepared to start with a dividend payment, cash dividend. We're seeing higher oil prices now. And so the Board has very much discussed what our dividend policy should be, and that dividend policy is very much about returning a significant portion of free cash flow back to shareholders. We'll be reinvesting some of that money back into the business, clearly, but a lot of it will be going back to shareholders.The timing of that first dividend is dependent still on a few things. We're looking at capital expenditure, we're looking at oil prices that they've dropped off a little bit recently, but not too badly, operational performance of the assets and critically, the timing of our liftings. The liftings is really what drives when we get our cash in the door and when we can pay that back out to shareholders.So hopefully, the message has come through loud and clear today that we are looking potentially materially of bringing forward that first dividend date, and we will be communicating that in the next couple of months where we see that evolving.Next slide, please. So if you take our thesis as true, which is that oil prices will continue to be strong, perhaps even get stronger, we are exceptionally well positioned to take advantage of that. We have, as at the end of the third quarter, 3.5x more production than we had last year at the same time. At the moment, we're producing close to 8,500 barrels a day, which is 4x higher. And we're on track through committed and agreed work programs to get in excess of 12,000 barrels a day during the course of 2023 over the next 18 months.So we really -- we're hoping to continue to ride the commodity cycle and delivering that organic production growth through our existing portfolio. So I think we're exceptionally well positioned. Next slide, please. So some numbers. I won't go through these in great detail. They're in the report. We're showing a few things here on a pro forma basis. Again, we completed the transactions with Tullow in March and May, respectively, although we have the economic benefit of those from the 1st of January. So when I say pro forma, it means assume that we -- assuming that we legally owned them from the 1st of January.So you can see revenues of $107 million. Net cash from operations $42 million. That's against a realized oil price of $67 a barrel. Now we didn't have any liftings in the third quarter. That was well flagged. We have 4 liftings, however, in the fourth quarter. We have over 1 million barrels being sold in the fourth quarter. We've already lifted 130,000 barrels in Gabon. We have another Gabonese lifting, we have a very large Equatorial Guinea lifting in early December, and we have a Tunisian lifting towards the end of this month.So what you're going to see is fourth quarter is going to be very, very different in some ways, maybe almost equivalent to not quite perhaps to the 9 months leading up to that point. That really emphasizes the point around lifting. Sometimes we have lifting, sometimes we don't. So you really need to judge us, I think, on a longer period of time other than quarterly.Next slide, please. Again, this is a lot of detail. I'm not going to go through it, but it's trying to reconcile the IFRS reporting versus the pro forma basis. This is something we continue to do this year post the acquisitions because a lot of things were moving around on the P&L and on the balance sheet as a result of those transactions we did that, I think, confused the financial pick for a little bit. So in this slide, we simply try to break out exactly what's happening on an IFRS versus pro forma basis and trying to explain some of the larger movements.I don't propose to go into those because these have been well flagged. And there's nothing new here in this particular slide that I think anybody will find surprising. But nonetheless, for full transparency, we'll continue with this presentation all the way through the fourth quarter of this year. For next year's financials, it will just be IFRS. Next slide, please. And again, just to provide as much transparency to our business as possible. We will continue to show a reconciliation of cash flow. This is the cash flow from the start of the period in the beginning of January, all the way through the year. So everybody can see how cash ends up where cash from operations is, which is obviously for us the key aspect here. Again, this is a chart that we'll continue to show to provide full transparency to our business. Next slide, please. CapEx. Again, CapEx guidance is about $23 million left to spend in the fourth quarter. As everybody knows, we had active campaigns in EG and in Gabon, some smaller things happening in Tunisia as well. The Hibiscus/Ruche Phase 1 is developing on schedule and within budget so far. And the Gazania well in South Africa, we'll touch on a little bit, that's been deferred to 2023. So this is our CapEx guidance for the remainder of the year.Next slide, please. So an operations update. In Equatorial Guinea, we drilled our first new infill well since 2015 at Okume Complex. We had excellent quality oil-saturated sands. That well is now on stream. It's performing way ahead of expectation. So that's very, very good news. The second infill way is underway, and we expect that to be on stream probably in Q4, probably in the next few weeks to a month.We have a new gas lift distribution unit installed in the Ceiba field. The partners are now very actively focused on further production growth activities in 2022 and beyond then, comprising additional workover activity and potential development drilling.So Equatorial Guinea is going extremely well, perhaps a little bit slower in terms of that production growth than we expected. But that is now starting to come online in November and December, and we're very, very pleased with what's happening there.In Gabon, the final 2 production wells were drilled as part of the Tortue Phase 2. Those were the final wells for Tortue. Those are now on stream. Production at the moment is being optimized with the previously communicated shortage of gas lift capacity affecting the abilities for all the wells to simultaneously produce at their potential. So BW is very, very much focused on trying to get these wells to hit their full stride at the moment, and they're working hard on that. Hibiscus/Ruche Phase 1 development, as I previously mentioned, remains on schedule and within budget, first oil anticipated in Q4 2022. So within a year from now, we should have the first of the new wells, 6 new wells, the first of those coming online in the fourth quarter of next year. Hibiscus North was a discovery in the quarter that will be incorporated into future development planning.In Tunisia -- Tunisia has been rock solid. We have a number of well operating activities going on, upgrades at various facilities. We've had some really good success with some workovers there showing the stimulation of the wells in conjunction with the use of ESP replacements and really boost production material in well. So we're looking at our entire well inventory now to see where else we might be able to apply this stimulation technology. And we're looking at a lot of different things together with our partner on subsurface remodeling. One of the things about this slide that I like is that whereas perhaps a year ago or 2 years ago, we might have had 1 or 2 assets in which to talk about. And then we're fully seeing the benefits here of a diversified portfolio, diversified by country, by operator. And that's really providing for us a really good stability, I think, and it's exactly where we want to be is having a very, very diversified production portfolio, and that's showing its strength right now. Next slide, please. We announced in the quarter as well a provisional license award in Gabon. So getting back to our exploration strategy, we are not frontier explorers. That's not our strategy. Our strategy is to continue to try and find oil that is near existing infrastructure, again, to try and tie back short-cycle exploration where if you make a discovery, you can tie it back into infrastructure not in 10 years from now, but in a couple of years from now.And with that in mind, we have been spending 2 years now working on these exploration blocks, which is around the Dussafu acreage and nearby to the Etame complex, which is operated by VAALCO. We were able to bring in BW and able to bring in VAALCO to join our group. And we, between the 3 of us, effectively know this area better than anybody else.And we have a provisional award. That doesn't mean it's awarded. We still have some negotiations with the government to do. But this is exactly the kind of thing you would like to see us do -- we would like to see us do on the exploration portfolio is doing smart things in and around places where we know that if we make a discovery, we can produce the oil pretty quickly.Next slide, please. So I'll just finalize before questions. So we have a very, very busy Q4. We have about 1 million barrels, over 1 million barrels being lifted against the current strong oil price environment. We have new wells on stream in EG and Gabon. We're moving towards, let's say, 8,500, perhaps can get a little bit higher than that by the end of the year, but let's see.But it's a good strong production. It's a good 10%, 15% higher than the year-to-date average. So we're very, very pleased with that. We've expanded our footprint in Gabon, hopefully, provisionally, which is consistent with our strategy. Strong financial position, $45 million cash in the bank at the end of the quarter and net debt of approximately $52 million.It's our intention to pay a sustainable quarterly dividend payout and return a significant portion of free cash flow to shareholders with buybacks as a complementary mechanism. And we are assessing the feasibility of bringing forward that [maintenance] cash dividend to bring that forward as soon as possible. Our growth prospects remain strong.So with that, I'll flip to the next slide, just to remind you how to ask a question, and we will open up question. [Operator Instructions] My colleague Qazi, is going to flag up any questions to me, and I will allocate -- I'll either answer them myself or allocate them to the team.

[Qazi Qadeer, Chief Financial Officer]

Thank you, John. Good morning, everyone. We have the first question from [ Sigurd Scartzin ]. So I'm going to open your line. You may speak now, please. Once again, [ Sigurd ], if you are listening, please ask your question. I think there's some technology issues. I will move on to the next one. Next question we have is from Stephane Foucaud from Auctus.

[Stephane Guy Patrick Foucaud, Head of Research]

A few questions for me. The first one I saw that the production guidance at the end of the year has been adjusted a bit, I was wondering which moving parts have changed. On the CapEx side, you talked about EG and I think likewise, the budget for 2021, there is more allocated to EG. And again, in quite, I think, material way, I think was wondering what's -- again, [ what our activity ] behind the change?And lastly, if you could talk perhaps -- you talk about the dividend quite a bit. Do you have some sort of framework in mind, I think you're talking about free cash flow, but will it be -- are we talking in terms of forming of some sort of share of earnings, share of cash flow, share of free cash flow? What sort of generally idea do you have?

[John Andrew Hamilton, Chief Executive Officer]

Sure. So Stephane, your first question, yes, we've trimmed our sort of year-end number a bit. That is principally down -- EG is doing fine. The first well is coming online well. Some of the other smaller activities are also now starting to harvest. So I think there's just a bit of conservatism being communicated here in terms of that year-end number.It's principally down really, I think Dussafu, we just brought those 2 new wells online. On paper, they add production immediately. I think the reality is we're still trying to optimize how those cluster 6 different wells, how they interface with each other, the use of the facilities on board including the gas lift compressor.So BW are busy trying to optimize at the moment. So you're just finding a little bit of conservatism baked into our revised guidance, which I think is sensible. Nothing has really changed at the end of the day, we continue to be on a growth trajectory. It's just that year-end number has just been shaved a little bit. And that's principally down to some conservatism on the Dussafu peak number in the quarter.EG CapEx is up slightly. I think we have an excellent first well. Really, it's probably producing, I'd say, almost double what we expect it to. It's early days still, but it looks really good -– really good well. There were some increased costs in the drilling of that well. There was also a couple smaller unplanned activities with the rig and a little bit of flat time on the drilling. So that's resulted in a small increase in CapEx in EG. With respect to the dividend, I think the model is very much going to be based around free cash flow. I think the Board is -- what they want to do is they want to start trying to articulate this more and more. So rather than come out with a precise formula now, which on paper that dividend is 1.5 years away. So it's a little early for that.What we're obviously communicating is we think that under certain circumstances, we can bring that materially forward. But it's likely to be something around free cash flow rather than earnings or something down the P&L.And I think that, that -- I think that, that is really based on -- sometimes the P&L for an E&P company can be -– there's a lot of stuff happening below the line, which -- and in fact, what you're really concentrating on here is cash flow generation, post CapEx and the allocation of that free cash flow towards shareholder dividends, towards new CapEx, which hopefully maintains or increases production and obviously, towards just debt service, which is normal. So it's likely to be something around free cash flow.

[Qazi Qadeer, Chief Financial Officer]

Thank you very much. My next question is from Teodor Nilsen.

[Teodor Sveen-Nilsen]

Three questions for me, if I may. Firstly, just on the Gazania well, that is obviously now postponed until 2022. So I just wonder if you could provide some more color on when in 2022 you expect that well to be drilled.Second question is on hedging strategy for 2022. Of course, you hedged some of the volumes this year? Or how do you think around 2022 and the current prices and your hedging?And my third and final question is on the lifting you had this far in Q4. Could you indicate what kind of realized oil prices you have on that one?

[John Andrew Hamilton, Chief Executive Officer]

Sure. So Gazania -- Africa Energy in their third quarter results, they reported that the operator, Azinam, they've been evaluating rig availability and really looking to maximize or, I should say, minimize the mobilization and demobilization cost of the rig. So ideally for a rig in a location like that, you want to try and get a rig that's in the area. And unfortunately, they couldn't get one that was going to drill by the end of this year.So Africa Energy had reported that the license expires at the end of 2022 and that we hope to drill before then. So they haven't provided any additional guidance to that. What they have pointed out is that they're expecting Azinam to honor the terms of their farm-in agreement by the end of this year.So we may well see some progress there by the end of the year, not the actual spudding of the well, but the sort of contractual arrangements around the identification of the rig. So it's a little early for us, certainly as non-operator, to provide any additional guidance on that. And your third question was around hedging. Second question was around the liftings, right? Teodor?

[Teodor Sveen-Nilsen]

Yes, that's correct. Hedging and liftings were the 2 last questions.

[John Andrew Hamilton, Chief Executive Officer]

Yes. Yes. So liftings. We lifted about 130,000 barrels net to us a couple weeks ago, that prices on a month average for November. So whatever the average dated Brent is for the month, which I suspect will be around $80 a barrel. It depends on what happens in the last week of the month.But obviously, we enjoyed oil prices that were higher than $80 for most of the month. They dropped off a little bit as everybody has seen over the past week or 2 -– or the past week really. So we probably expect around $80 a barrel for that one.We are lifting in Tunisia in about a week's time. That will price on in and around the oil price at the time of the lifting. So if oil is at $78, it will be $78 less -- that trades at a $1 or $2 discount to Brent, that crude. We're then lifting early December in Equatorial Guinea, where that also prices in and around the lifting timing. So hopefully, oil will be nice and strong in about 10 days' time, which is when we lift.And then we have another Gabonese lifting towards the back end of December. And that one will price on the month average for December. So each of the contracts are slightly different. But you get some averaging effect in Gabon. The others are usually priced in and around the time of the lifting.In terms of hedging, we are largely unhedged in 2022. We historically have some hedges in -- linked to our Tunisian crude, which is linked back to the loan facility we originally agreed at the time where we've hedged approximately 700 barrels a day to Panoro. So we're probably -- that's -- those are the only hedges we have, 700 barrels a day in 2022. For the rest, we're nicely exposed to the higher oil price.Our hedging strategy will probably be to try to manage hedging in and around our lifting. So once we have some clarity on the lifting frequency, remember, we lift our own barrels. So once we identify when we think we're lifting, we will seek to try and hedge a certain amount of production, maybe 30%, 40% of production in and around the timing of those liftings, just to make sure we take some of the -- any drama out of the actual pricing, which is exactly what we've done in the fourth quarter of this year as well.We did a little hedging, as previously disclosed in and around this EG lifting. So we will continue to, I think, operationally hedge. We don't have any longer-term hedges in place.

[Qazi Qadeer, Chief Financial Officer]

Thank you, Teodor. We have another question from [ Nicholas Stefano ].

[Unknown Analyst]

Can you hear me?

[John Andrew Hamilton, Chief Executive Officer]

Yes.

[Unknown Analyst]

Just a couple of points on EG and then a corporate one. Just for 2022, because [indiscernible] is already there I presume. So in terms of like the logistics and in terms of like additional drilling, the time window must be quite short. So what's the thinking about that because [ I presume you can open up ] a case where the rig will bleed and then come back again. If you can just touch on that.And then on the [indiscernible], I think [indiscernible] what they're trying to do is reduce the flaring gain in EG quite a bit. And I would expect to -– that to include the [ gas ] injection. Any kind of like updates from that? You could give us some color?And then on M&A, are you kind of like done for, say, now or maybe the next couple of years? Or do you still think there's quite a bit of opportunity in West Africa and you are still like on the lookout for further stuff?

[John Andrew Hamilton, Chief Executive Officer]

Let me answer your second one first, and then I might ask my colleague, Nigel, or colleagues, Nigel and Richard, to chip in on the gas and EG. The way we look at acquisitions is very opportunistic. I mean we think that the picture looks very good.We have large oil companies needing to sell for strategic reasons. Energy transition. We're seeing we believe fewer and fewer competition for assets in the region. Access to capital has been difficult for many. So we do see a lot of opportunity, and we need to keep a very active eye open for those opportunities. We think we're a very, very credible buyer. We've demonstrated that a couple of times now that we've been able to do accretive transactions for our shareholders. However, we're not in a rush, and we know that we have a good thing going with our organic production growth. We are absolutely committed to being a dividend payer as soon as we possibly can. So we won't do anything that kind of disrupts that trajectory that we have.So we look because that's our job. We have to continue to look at opportunities, and we think there are going to be a lot of them. But we're not going to be over eager. We're not in a rush to do anything, but there's certainly going to be -- I believe, over the next 1 to 3 years, there's going to be a lot of opportunity to do more. In respect to EG, yes, the rig was there for a period of time. It has another commitment after that. So it needs to go. There are a number of other activities that are being identified by the operator in EG for 2022, which I think are going to be quite positive. We'll be able to give an update in January when we come with our guidance for the year, in terms of what we think that actually looks like for us.But we're very, very pleased with the progress the operator is making in terms of identifying not just drilling new wells because those are always exciting, of course. But there's so many other things that can be done on those operations to maintain and boost production. I don't know, Nigel, do you want to comment at all on any of those initiatives?

[Nigel Bruce McKim, Projects Director]

Certainly, John, Nicholas. I guess you specifically asked about the gas flaring at EG, and that's very much a topic of conversation within the partnership at present and work that the operator is actively engaged with just now. We're not able to provide you any details just yet. It's very much work in progress. But there is a longer-term need and strategy to reduce flaring and to improve the management of gas across the assets.So it's realized that we can better apply the gas that's being flared to lift gas usage on both Okume and Ceiba. And there are a series of activities that are being looked at to do just that, to distribute the gas better and to manage the gas that the asset is generating.

[Unknown Analyst]

Okay. Understood. And a quick follow-up on EG. In my mind the infill well program was going to be 3 wells at Okume, right? Is that still the plan?

[John Andrew Hamilton, Chief Executive Officer]

So Nick, in our report, you may not have had a chance to read it in detail. So we have drilled and completed one well, which is going extremely well beyond expectations. The second one is just completing as we speak. The third, the top hole section was drilled, but we ran out a little bit of time. So that well will be deferred until -- well, probably into 2022 when we get the rig back, assuming the rig will come back.So we've kind of drilled 2.5, if I can put it that way. But the third well will be brought online at a later time. Now what Kosmos has also communicated all of this as well is that the -- I think the sort of outperformance of the first well kind of made that decision a little bit easier as it were. We timed that a little bit on the rig.

[Qazi Qadeer, Chief Financial Officer]

Thank you, Nicholas. We have one question on the website, which basically is about the situation on Sfax Offshore Permit, if we can give some more detail on that?

[John Andrew Hamilton, Chief Executive Officer]

Sure. We're making progress on that one. It's been slow going. As those of you who follow us know, we have a number of conversations with the government in Tunisia about sort of breaking this impasse that we have. We've put a paragraph in our third quarter report in respect of that.The solution is still evolving, but it looks like it's going to be a renewal of the exploration period on that block. So that's a very, very positive development. So we secure the block for quite a bit more time.They will return part of the bank guarantee to us and draw a part of it reflecting what they think is DNO's nonfulfillment. So if you remember, DNO left $8 million behind for us to deal with this issue.So it's just a question around how much of that $8 million we need to give to the government, how much we keep of the original DNO deposit. So I think it's moving in the right direction. We still have some work to do on it. I don't think there's any real near-term activity on Sfax Offshore, but I think it's moving in the right direction.

[Qazi Qadeer, Chief Financial Officer]

Thank you, John. We have another question on the line from [ Sigurd Scartzin ]. [ Sigurd ], we can't hear you still. I think we have no more questions either on the web or on the phone call.

[John Andrew Hamilton, Chief Executive Officer]

Thank you. With that said, [ Sigurd ], if you can hear us is that drop us an e-mail, if you like, we'll try and answer your question bilaterally as it were. I thank everybody for attending. Thank you very much, and keep paying attention to us. I think we've got a lot of good stuff coming. Thank you.