Petronor E&P ASA

OSE:PNOR

Earnings Call Transcript 2022-Q1

[Eyas Alhomouz, executive]

Hello and good morning, everyone. Welcome to this presentation of PetroNor's first quarter results. My name is Eyas Alhomouz. I'm the Chair of the Board. And with me today is our Interim CEO, Jens Pace.

This quarter, we mark the completion of the redomicile process to Norway and uplisted to the main market of the Oslo Stock Exchange. Today, I'm really pleased to present a strong quarterly performance with rising production outlook in a very positive price cycle. I will now leave the word to Jens who will give you more details about our financial and operational performance in the quarter, and the prospects of our assets going forward? Jens?

[Jens Pace, executive]

Thank you. Yes, and good morning, everybody. It's a pleasure to be here to present the first quarter results for 2022. And we put out a summary of that earlier this morning. So I'm going to show a few slides that put a little bit more color on some of the operational background to that.

Flick through the disclaimer. So here we are to a quarter of continued strong delivery building off Q4 last year. We made a great exit from 2021, with one of the best quarters in the company's financial history. And this year has carried on with that, we've produced a quarter -- first quarter EBITDA, which is a standardized performance measure of $22.8 million compared to $13.7 million in the same period in 2021.

And I think production has been pretty much the same over the -- over that 2 periods. And so most of that performance has been driven by the underlying price environment, which is clearly giving us a great addition to the balance sheet.

The Congo infill drilling program has continued. And it was started last year. And it started producing oil from the wells that were tied in just after the close of the quarter. So it didn't make an impact in quarter 1 production. But it started to have an impact now, as I'll show you later.

So the average Q1 production was 3,530 barrels of oil per day. But with the infill drilling program starting to bear fruit, we expect that to ramp up to over 5,000 barrels of oil per day in the course of this year.

We had an updated Competent Persons Report, which was done and confirmed a reserve production, a production replacement ratio of -- from 2021 production of 126%, which is another consecutive year of increase in reserves from our production asset. We've had a prepayment sales agreement signed with ADNOC and I have to kind of sound a note of caution here that ancillary agreements are necessary between ADNOC and a third party to make that fully operational. And we're expecting that to happen in the near future.

The government approval for the Aje transaction was received during the quarter and we are working on completion of that transaction. We announced some progress on that just last week with the signature of new agreements with YFP, the operator of OML 113 that we're acquiring. These agreements have sat on the shelf for a long time while we've been waiting for government approval, and while the scope of the deal has not changed and there are no substantial new negotiations, there are some details that need to be altered in the paperwork that we have. And in terms of the deal with Panoro, which we are working on now, we have to change the entities involved because -- since the deal was originally papered up, we have changed our topco to redomicile to Norway as has been reported. And so this has involved some redrafting that we're working with Panoro to do at the moment. So we anticipate that completion to happen before the end of June. And we're working on that with Panoro.

So just before I go through a few slides and a few more details on the first quarter results, just a refresh of portfolio that PetroNor has. You'll see on the map here it's all focused in West Africa and moving from south to north. In Congo Brazzaville is where we have the PNGF Sud interest in the PNGF Sud license, which is where our production comes from. It's high margin production operated by Perenco. And on a gross basis is producing about 21,000 barrels of oil per day.

Further north, offshore Nigeria, the Aje field in OML 113 is a field that was -- has ceased production recently, but we have a redevelopment plan, which we're excited about. And once we've completed the access to the partnership, we will be working with the partnership to bring about. The previous development of Aje was focused on liquids and gas was flared, we have a plan to use that gas and bring it to shore in a different type of development. And we'll -- I'll tell you a little bit more about that in a minute.

And then finally, as we go further north around Guinea Bissau and Gambia we have offshore acreage, which hosts our exploration potential. This is in a proven basin that has had some big discoveries and that are being developed at the moment. And we see huge potential along trend with that prospect activity.

The headlines here in terms of the numbers of the portfolio, over 20 million barrels of net 2P reserves, 2C reserves of 32 million barrels, and about 20 of that is associated with Aje, the rest with Congo, and current production of 3,700 barrels a day, which is starting to show the benefit of the infill drilling program.

So we'll have a look at the numbers then. And you'll see average production on a gross basis, nearly 21,000 barrels a day. volumes that were attributed to the ADNOC agreement of 234,000, which -- with an average selling price of $95 a barrel and you can see that compared to previous years, it's a huge supporting factor in the revenue that we've had. So total revenue of $36 million and gives us the EBITDA of $22.8 million that I quoted earlier.

And the summary of the financial position here, you'll see that noncurrent assets have been driven up by the CapEx spend that we're putting into the infill drilling program. And you know, looking at our net interest paying debt, we don't have much debt on the -- in the company, but we have a working capital facility, which we've been paying down, $10.6 million left on that, and we plan to bring that down, to repay that this year as it matures. And then either -- and we'll be looking to probably replace it with a refinance.

And the cash balance of $15.4 million reflects the fact that we're still waiting on the ADNOC prepayment agreement to become fully operational. But we anticipate that to be addressed very soon.

So just moving on to the assets in a little bit more detail here. And starting with PNGF Sud our production base. This is a cluster of about 5 different accumulations in shallow water offshore Congo Brazzaville. There's 2 billion barrels of oil in place here. And since it started production in the late 80s, it's produced about 468 million barrels. So that's a recovery factor of less than 25%. And if you put that into the context of other fields elsewhere, for instance, in Norway, we see you know, average of recovery factors of over 50% attained. And so it shows you that the legs that we have in our production here in the Congo, and this is why we are excited about the infill drilling program, which has been, you know, adding to the reserve base and sustaining the profile which we see going out to well beyond 2040. So a great opportunity to keep this asset going forward.

Here's the most recent production profile from the operator. And you'll see production has been pretty steady through the last year or so, a little bit of an interruption during COVID and some associated supply chain issues in the Congo. And then just post this quarter that we're talking about. You can see the wedge that's coming in from the infill drilling program, which is anticipated to grow gross field production to over 30,000 barrels a day, which would be a net of 5,000 for PetroNor.

And you know, just looking at the quality of some of these wells on the bottom left, you'll see the first well from Litanzi which has been brought online with a single well producing about 3,000 barrels a day stably. And it's with production rates like that from these producers at current oil prices, Litanzi infill program will pay out in less than a year. So fantastic economic opportunity for the company. And we anticipate that once these 17 wells have been drilled, that there will be future opportunities to do the same identified in some of the other assets.

Just a snapshot here. And really, I really want to point out the reserves situation. So if you look at the right hand side of the screen, you can see that when PetroNor got into this asset, we had reserves of 6.5 million barrels; over the course, to date, we've added nearly 11 million barrels in 2P reserves produced about 4.5 million barrels. And then last year, we deepened in the asset with an acquisition that -- we had a fundraise for, that gave us an additional 7.6 million barrels. So we're sitting here today at 20.6, which is an increase in net reserves of 3.2x over the course of the last few years, which shows the strength of this asset.

Just to touch on Aje again, and you can see the location of Aje is just offshore, a major population center in Nigeria, in Lagos, it also is located just along the route of the West African gas pipeline. So we see an opportunity to develop the gas condensate in a different way from where it was -- the way it was being done before, where a lot of gas was flared, in order to extract the liquids, we want to bring that gas to shore, where it will be -- it will displace diesel and petrol in the local fuel generate -- power generation. And so, it's a great transition fuel for Nigeria.

And that's the plan that we're going to work with the partnership group. And to do that we are forming a joint venture with an entity that's owned by the operator YFP, then we will hold a 52% interest in that joint venture, it'll be a Norwegian entity. And we're looking forward to engaging with the partnership group through that joint venture as a technical service company for the group. And so we see that the qualities of the project is something that will be attractive to banks that are looking to finance transition fuels in Africa, and it's ESG profile, I think, is very important in that respect.

And finally, the West African exploration portfolio in Gambia and Guinea Bissau, we've seen a resurgence of interest in exploration around the African margin in the recent months, and it's been brought about by, one, a change in the balance sheet as a result of rising price environment. And discretionary exploration spend is perhaps back on the agenda, but also the significant discoveries that have been made in Cote d'Ivoire and most recently offshore Namibia, that always make people want to have another look at similar features around the margin.

And so we're in a proven basin here with oil and gas around us. And we're excited about the prospect activity we see for Gambia and Guinea Bissau. We're in conversation with other companies, with a view to converting some of our high working interests in these assets into a carried program. And it's our plan to be able to drill wells here with -- at minimal cost to PetroNor but sharing the upside with incoming partners.

So my final slide here and really I just want to emphasize a few points here. I believe the company is well positioned for growth, we see rising production outlook with 5,000 barrels a day targeted before the end of the year and a very favorable price environment, which is clearly driving the bottom line with that production. The infill drilling program is showing very early promise and adds the long-term production growth and reserve growth for the production in Congo. The Aje transaction I think will give us access to a great opportunity for redevelopment and the redomicile and up listing on the Oslo bourse has provided us with long-term access to the capital market, which will be important going forward as we execute this organic growth strategy of opportunities, both in Congo and Nigeria, and look at transformational M&A opportunities around Africa. And we're in several of those conversations at the moment. And we hope to bring those forward in the coming months.

So thank you very much for that. And I will be happy to take any questions that you have. And address the quarterly results. Thank you.

[Unknown Executive]

What is the company's initiatives to reach the long term targets?

[Jens Pace, executive]

Well, I think that, as I pointed out, we have significant organic growth opportunities in the reinvestment into the Congo, which is growing production there. The Aje redevelopment gives us an opportunity to add significantly there. The gross production from Aje we anticipate could be another 25,000 barrels of oil equivalent today, and a lot of which is gas. But beyond that, we're in a number of discussions about acquisitions around the African margin. And we're hoping that these are matters that we can bring forward in the coming months.

[Unknown Executive]

See the oil prices remain strong? What are your price expectations going forward?

[Jens Pace, executive]

Well, it'd be unwise for anybody to stand in front of a camera and predict an oil price. I mean, we're clearly seeing a huge effect of the war in Ukraine, and the fact that that's put energy security back on the agenda around the world with the needs to resupply and from different sources and many countries. I think that's been a clear driver in the most recent months. But I think before that, we were already looking at the beginnings of what many were calling a supercycle in oil prices, I think, as the world has been looking to transition from fossil fuels, the demand has still remained high, while investment in the oil business and in gas has been has been very low. And you have to pedal quite hard to keep replacing reserves and meeting that demand. And so that lack of investment has meant that we're in a situation where the supply side is much more challenged than it has been perhaps in the past. And so while demand remains high, and energy security is on the agenda. I think we will see continued price support. And that's something that we anticipate will be played out over the course of the next few years here.

[Unknown Executive]

You say in the first quarter report that you expect the production to ramp up due to the infill drilling program in Congo. Could you give us a brief update on this program?

[Jens Pace, executive]

The program started at a little delay because of the issues to do with COVID and the impact on the supply chain. So it was somewhat delayed start. But since it has kicked off, we've seen success with the batch drilling approach that Perenco our operator has used. We've had a few problems with equipment, the top drive on the rig is needed to be repaired, but that has now been resolved, and we're back to drilling. So although a little bit behind schedule, the wells that have been completed are -- have been very successful, and we're seeing this addition coming through into production in the second quarter, and I expect that will grow through the year as we bring this on.

[Unknown Executive]

Given PetroNor's current share price and financial position, has cash only been considered for the Aje deal rather than new shares?

[Jens Pace, executive]

We're excited about inviting the Panoro shareholders on to our register. And our preference is to use our shares for this acquisition.

[Unknown Executive]

Is the market better -- is the market maker agreement with SpareBank 1 Markets active? Or do we need it? Has it been good for the shareholders?

[Jens Pace, executive]

It's active, and it's provided stability in the share price and liquidity that we think is important. We will review it as -- on a regular basis, but it's in place at the moment, and we believe it has been good for shareholders, yes.

[Unknown Executive]

There are some questions regarding the ongoing investigations by Okokrim. To what extent has the company been impacted by this?

[Jens Pace, executive]

Well, the fact that I'm standing here in front of the camera today is perhaps the first evidence of the impact in that we had to make a quick change in terms of the CEO role. Which was not something I was planning on, but I feel hugely privileged to be given the opportunity to do. I think the impact is being felt largely in the way that we conduct our business. We've been through our own processes and aligned our governance processes to the Norwegian model, as part of the redomicile. And we are looking at keeping that as a very strong focus for the company going forward.

I think the main issue here is that, as we look to the health of the underlying business, that's what is driving these results that you see in Q1, and we anticipate will continue through the rest of the year and into future years. So I think that that's the thing that we're focused on here in the management team and the company. And I think that you're seeing that this has been a difficult time for the company, but it has not affected the performance of it. And that's my determination that we continue to deliver on that performance and also to grow the company while this is happening to individuals outside of the company and it is not something that we want to see affect the performance of PetroNor at all.

[Unknown Executive]

We have a question regarding the management expenses. Someone commenting that $3 million is quite high. What do they include?

[Jens Pace, executive]

I'm not quite sure what is referred to there in terms of management expenses. So there's a lot of things that kind of fall into that category. We have a cost structure that is designed to support the company's growth ambitions. So we have a team here in Norway that is looking at new business development, as well as the team in Congo that is managing our production interest. And so the cost structure, I think, is perhaps a little higher than we would like as a result of that, but it's a result of the approach we're taking to growing the company.

[Unknown Executive]

What is the reason for the delay of Board members?

[Jens Pace, executive]

We're a Norwegian company, and there are a number of steps that we have to go through to nominate a composition of the Board that complies with Norwegian standards in terms of residency and gender diversity. And so it takes a little bit of time to get that resolved. And so that's the only reason for the delay.

[Unknown Executive]

Quarterly accounts reporting to market is almost 2 months after end of period. Have you considered to report earlier to improve shareholder service?

[Jens Pace, executive]

I think that our reporting cycle is pretty typical of most companies. It takes time to resolve the books in any one quarter. So I don't anticipate we'll make a change to that cycle.

[Unknown Executive]

Thank you, Jens. That concludes today's presentation, and thank you for watching, and have a nice day.

[Jens Pace, executive]

Thank you very much.