Petronor E&P ASA

OSE:PNOR

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

[Audio Gap] in the coming year. Moving to our exploration portfolio on the Atlantic margin here, it's important to mention Guinea Bissau. Although we are no longer in that license, we farmed down 100% of it. We're still exposed to a successful outcome here for the item 1x well, which we understand will be drilled in, spudded in September this year, so only a few weeks from this well being spudded. We have a defined outcome in a success case based on milestones that could total $60 million based on an approved field development plan and established establishment of continuous production. So it's some years out in the future, but nonetheless, it would be good to see that project progressing well. The other reason why that's important to us is because it sits -- the well sits on an identical play type to the play that we have in the game in our A4 license. And so a success in this margin on trend will help augment the -- our views of the prospectivity of the A4 license, which sits between the Sangomar field and AMX. So I think we're well positioned for a successful outcome here, and we look forward to seeing how we can incorporate that in our understanding of the prospectivity.

We extended the license with agreement from the government of the Gambia from June 2024. So we have 18 months of a technical work program mainly looking at the rock physics of the wells that have been drilled in the area that we've not had full access to before. with a view to incorporating that information in our understanding of the prospectivity. So that work is progressing well. In parallel, we have a farm-out data room, and we are maintaining a discussion with potential third parties under NDAs for future partnership. And we are looking to see if we can do a farm down in the Gambia much as we did in Guinea-Bissau.

So moving on to the investigation and the news on the 13th of May, which we announced was that we've seen contagion from the investigation, which has been into allegations of corruption by individuals for associated with the company to the company itself and that the company and a subsidiary held Africa Holding has been named as suspects in these investigations. So the grounds for suspicion include allegations corruption as well as misleading investors through statements that were made in our prospectus, both during the reverse takeover of African Petroleum and since. So -- this means that we're now in a new and different relationship with the investigating authorities here. We've always been a cooperating company, but it's been more of a passive involvement now. We have reasons for a more active conversation with them and while maintaining a commitment to full cooperation. And we believe that's the very best and responsible strategy for the company in this situation. That means that we need to be mindful of moving funds from our Congo subsidiary while we're having those conversations. So we need -- we're relying on the liquidity from the Congo to support a shareholder distribution.

And it remains -- it's still our plan and very much the Board's commitment to executing on our dividend policy that was announced in the May AGM. And -- but the timing of the first distribution needs to be sensitive to the conversations we're having with the authorities. And so we're working to resolve that situation. and we would hope to be able to update the market in due course. So we're hoping that certainly, in the coming couple of months, we will have a position that we can announce. The company has responded to the investigation and the Board has adopted a strategy focused on the current portfolio in Congo, Nigeria in the Gamba with a tactical suspension of new business development efforts. We've, in the past, had quite a significant amount of effort on on new opportunities. We're curtailing that for the time being and focusing on maximizing the value of our existing portfolio. The organization has been realigned with the objectives we've got now. So there's been a significant reduction in the staff numbers.

My team has shrunk significantly. And we are also looking at other cost-saving measures during the second half of this year. So the primary focus is to preserve cash. In the near term, priority is obviously to maintain the governance and compliance program that we have that's part of our listing and the reporting obligations we have as well as the policies that we've adopted for all of our business conduct in Africa. We're maximizing the value of the existing assets through the technical work that we're doing and the studies we're doing and the reinvestment in the Congo, as I've already alluded to. -- and focusing on cash generation, the relationship with ADNOC and other traders in terms of maintaining the lifting program we have from the Congo and building up the cash position so that we have that ready for shareholder distribution as soon as possible. And then finally, of course, is the management of any potential corporate legal liabilities here. This is -- this is a significant effort and we've assembled, I think, an outstanding team of legal advisers that are giving us advice both in the U.S. and Norway on this with a couple of different work fronts.

And as I mentioned before, we anticipate that there's going to be a different kind of level of engagement now that we are named as a suspect in the Ecotrin process -- and this allows us to engage in a way that perhaps we haven't been invited to up to now. -- to summarize here, I think we see continued strong development from the Congo assets, good delivery of production -- we still think it can improve, but it's a very respectable production delivery, and that's underpinned by regular liftings. And so we're selling our oil inventory and we're generating cash flow. Nigeria and the Gambia represent, I think, very valuable options and we can progress them at modest cost in the near term. We're building a significant cash position with $114 million at the entry into Q3, and there's an opportunity to add to that before the end of the year that we'll be working on. We are -- with this cash position, our focus is to return excess cash to shareholders in accordance with our dividend policy. But the full cooperation that we're doing with our investigating authorities here means that we need to delay that first distribution, and we're not sure when it will happen. But we're committed to doing this as soon as possible.

And so we're expecting to have meetings during 3Q with Okokrim and the DOJ that will provide more light on this, and we will be able to update the market in the future. So that's what I planned to say, and I'd be very happy to take any any questions that you have and answer what I can.

[Operator]

Thank you, Jens. We do have a few questions coming in here. The first one, the dividend payment has been delayed -- does that mean that you are saving up cash for a possible fine.

[Jens Pace, executive]

No, that's not the case. We are we've had no discussions about fines with the authorities. Now clearly, if the company is eventually charged, and that hasn't happened yet, and that's important to note, then it's in the range of potential outcomes -- but we've made no provision for this, and we would have to if we expect it to be fine, we would have to make a provision, and we have not done that. So it's -- the delay is not related to trying to keep money back for fines.

[Operator]

Thank you. You have decided to postpone dividend to shareholders. Was that a voluntary decision or did Okokrim instruct you.

[Jens Pace, executive]

We've had no instructions. We've done this based on advice from our legal team. And we think it's a prudent decision, a responsible decision in the context of conversations that we're having with the authorities, but we have not been instructed to do this now.

[Operator]

And on the same topic, is it Congolese or Norwegian authorities that hinders you from withdrawing money from Congo? This is related to our conversations with the DOJ and with Okokrim, -- this is not a Congolese issue now. Employees can get bonuses will shareholders have to wait for dividends. How is that possible? And where is the logic?

[Jens Pace, executive]

Well, I think the operational performance of the company, which is largely what the employees are accountable for has -- is something that needs to be recognized and rewarded. -- the transactions we have done, like the Guinea Basal deal and the continued management of our production and that sort of thing. I'd make no apologies for rewarding employees who have worked extremely hard to deliver all that -- it remains our position that excess cash will be provided to shareholders via either a stock buyback repayment of paid-in capital or a straightforward dividend -- and we plan to do that as soon as possible. We were just waiting on the right situation in relation to the conversations that I've already told you about.

[Operator]

Is this any risk that the company must deliver back to the Congo assets?

[Jens Pace, executive]

We don't see that as a potential outcome. Our legal analysis as long as we maintain the obligations that we have for the license that it is ours for for the license term. And so we don't see that as a potential outcome.

[Operator]

With the updated strategy to not pursue any new business, will the dividend policy still be 30% of net income? Or will the percentage increase?

[Jens Pace, executive]

Well, we've put a policy out there. We're happy with that for the time being. But as I've said, we are -- our strategy is to preserve cash. We are reducing the kind of running costs of the company with that in mind. So the Board could always review that in the future, but I'm not proposing we do that immediately. I think our focus is on getting that first distribution done, and then we can talk about how the policy may be adapted going forward.

[Operator]

Moving on to another topic. When do you expect next lifting?

[Jens Pace, executive]

So as I said, if there's always a problem with small companies in that you have production that gives you a lumpy lifting schedule that means that you have to really pull with others to try and get any predictability on it. The parcel size of a cargo from the Congo is over 900,000 barrels. So if we wait until the company has completely filled that from its own entitlement production, we'll be waiting for the best part of the year. So we've been managing our lifting schedule by pooling with others. And that means that we've been able to lift half that amount, 400,000 to 500,000 barrels with in parallel with the contribution from other producers. We'll continue to have those conversations to see what is possible and work with ADNOC in the first instance to see whether that is something that they can accommodate in the schedule. So we're hoping for a lifting in the fourth quarter, but it does mean that we need to to have a pooling arrangement to make that possible. Your recovery factor in Congo Brazil seems quite low given the field's life why hasn't the oil in place been more aggressively developed in the past.

Well, I think it's a good observation that there is a huge potential for the field in front of us. And I think that any field goes for the easy targets first. And then the -- there is a tail requiring reinvestment as we have been doing with new platforms and new well stock. And so we're in the less easy to produce part of the field life, and that's entirely normal. But what we are demonstrating, I think, is that there are good opportunities within that and we've been able to increase production, and we plan to continue in the same vein. We're looking forward to the infill program on the Cando field. This is an area of particularly low production to date, a low recovery factor to date and we see a big opportunity there in that reservoir, and that's why we have 6 wells planned in 2025 on that. It's fair to say that it is less attractive reservoir than some of those that have been produced from and are being produced from now.

But we see a fantastic potential with new drilling technology and low angle wells through that reservoir to exploit it, and that's what we plan to do. Will Petronor build and own the LPG plant? Well, any plant or equipment will be owned by the partnership group, not just petrol and our plans for development to include us buying an LPG plant. We have costed out the facilities. And so we have some understanding of what would be involved in installing that. But that's the current plan. We have also been in discussion with third parties that might be interesting in in getting involved in that business. And so it's fair to say that exactly how that ends up has not been finalized yet. So it could be something that is done in partnership with a downstream provider.

Thank you. There are no further questions. So I will now give the floor back to you, Jens, for your final remarks. Thank you for those questions. And just in closing here, just reiterate a few points. So strong production, good cash flow and regular liftings I think, has given us a fantastic cash position. The Board is committed to distributing that's to shareholders as soon as possible, and we await the right conditions to do that with the conversations we're having with the authorities. So hope to update the market on that in the coming months. Thank you very much.