Var Energi ASA

OSE:VAR

Earnings Call Transcript 2023-Q2

[Operator]

[Operator Instructions] This call is being recorded. I will now turn the call over to the speakers. Please begin.

[Ida Fjellheim, executive]

Good morning, everyone, and a warm welcome to Vår Energi's Second Quarter 2023 Results Webcast. The presentation today is, as usual, given by our CEO, Torger Rod; and our CFO, Stefano Pujatti. Torger and Stefano will present the results. And afterwards, we will open up for Q&A. I will now give the word over to Torger.

[Torger Rod, executive]

Thank you, Ida, and good morning all. I am pleased to report a quarter of strong safety performance, high uptime on operated assets, solid price realization and good progress on our development projects. Q2 production was 202,000 barrels driven by solid performance on operated assets but with impact from seasonal maintenance. Our operated fields have delivered a solid production efficiency in the quarter, and we also see a strong development within our drilling and well performance, seeing results from our enhanced improvement agenda. We were, for the quarter, affected by some partner-operated turnarounds, which extended beyond plan, as well as irregular production from our new fields, Fenja, Bauge and Hyme, mainly due to issues at the Njord host.

Our gas sales strategy continued to realize strong prices. The realized gas price of $98 per barrel was well above market average. This provides strong cash generation, although reduced from the previous quarter due to lower revenues and higher tax payments. We also maintained a low leverage and have strengthened our balance sheet through issuance of EUR 600 million in senior notes in April. And Stefano will cover this later in the financial review.

The strong balance sheet supports attractive distributions, and we confirm the Q2 dividends of $270 million. Further, our plan is to distribute a dividend of $270 million also for Q3. The main development projects are progressing per schedule. This includes the Balder X with the Jotun FPSO was refloated out of dry dock in June, followed by installation of the turret. And you can see the refloat on the picture with the water flowing into the dry dock, an important milestone achieved for the project.

Overall, the project portfolio development supports our production growth of more than 50% by end 2025. And this target is excluding the acquisition of Neptune Energy, Norwegian oil and gas assets, which we announced in June. We are delivering on our strategy, and the transaction will accelerate growth and value creation for the company. By adding scale, robustness, diversification and longevity to our portfolio, we underpin our production growth and strengthen future dividend capacity. Neptune Norge is a perfect strategic fit for Vår Energi. So bottom line, we maintain our overall guidance for 2023.

And just let me reiterate why Neptune Norge is a great transaction for Vår Energi. It is value, cash performance and capability accretive. We are acquiring Neptune's oil and gas activities on the NCS for cash consideration on an enterprise value of $2.275 billion. Neptune's portfolio consists of 12 high-quality NCS assets, which produced 67,000 barrels in Q1 and are located in our existing hub areas, as you see on the map. This makes them highly complementary and being the perfect fit to our portfolio.

Through the acquisition, we are increasing our operatorships and amplifying the position in the Barents Sea with access to the Snøhvit and Melkøya LNG facility. These assets are cost efficient with low emission and with limited near-term CapEx, making them highly cash accretive. The closing of the transaction is now pending customary regulatory approvals. And until expected completion in Q1, we will remain as 2 separate companies. We will come back to the targets and outlook for the combined company at a later stage. But I can reassure you, we will be a bigger and more profitable company. We will strengthen our cash flow and our future dividend capacity.

And then back to the Q2 results. Here is a summary of the key performance indicators in the quarter. Safe operations is our license to operate, and we experienced no actual serious incidents for Q2. This is also the case for the last year of operations. Our target is always 0 incidents and injuries, and our ambition is to be the safest operator on the NCS.

Estimated emission intensity of 11.5 kilo per barrel for operated field is a reduction from previous quarter. Production cost per barrel has increased from previous quarter, mainly due to turnarounds and seasonal maintenance. Cash flow from operations of $231 million reflects higher tax payments, and we confirm our distribution of $270 million in dividend for the second quarter.

Let us then go to the operational performance of the quarter. We start, as always, with safety and emission intensity. Vår Energi's highest priority is to operate without causing harm to people and environment. We have a strong focus on implementation of safety initiatives, and this continued through the second quarter with a particular drive to improve the trend for serious incident frequencies by preventing dropped objects. The 12-month rolling average SIF rate was stable at 0.6 in the quarter and 0.4 for the first half of 2023. In the first 6 months of the year, we have recorded 0 active serious incidents, meaning all recorded SIF incidents were related to potential incidents.

This means we see a positive trend, which reflects significant improvements related to dropped objects compared to 2022. We are also experiencing a positive trend on the total recordable injury frequency with up 2.8 for the quarter compared to 3.8 for Q1. Improvements driven by consistent proactive safety work related to yard activities and on operated assets.

On CO2 emission intensity, this improved to 11.5 per barrel -- kilo per barrel driven by effects from emission improvement initiatives and lower exploration activity in the quarter. As part of the oil and gas climate initiative aiming for 0 methane emissions, the company has, in the first half of 2023, also reduced its methane emission with 50% compared to last year. The reduction is achieved by actions through reduced [indiscernible] and increased uptime of our gas compressors at Ringhorne.

So in June, Vår Energi also achieved an updated ESG risk rating from Sustainalytics, placing the company in the lowest risk group in the industry, representing the top 5 percentile and ranking Vår Energi as 12th of the 300 rated oil and gas producers. We feel that this is really confirming our ambition of becoming an ESG leader.

Then an update on our operated assets, which has delivered solid performance in the quarter. On Goliat, we have actively worked over time to improve uptime and performance. We are pleased to see a very positive trend with production efficiency at 93% in the quarter, this being the third consecutive quarter above 90%. For Balder/Ringhorne, we restarted the previous shut-in riser in May ahead of plan. This riser was temporarily out of operations in the first quarter and will be permanently replaced during the planned turnaround and ongoing high activity period at Balder FPU in the third quarter. This also includes key maintenance and upgrades for the future production resilience at Balder FPU. Overall, production efficiency was 83% for Balder/Ringhorne, up from 80% in Q1, including planned maintenance.

We see a strong development within our drilling performance, particular in the Balder area. This proves the results from our relentless focus on improving our activities and strive for operational excellence.

The seasonal maintenance further impacted quarterly unit production cost, which ended at $15.5 per barrel. For the first half of the year, we are at $14.3 per barrel, and we maintained the full year guidance of $14.5 to $15.5 per barrel. We also reiterate our end 2025 ambition of reducing OpEx to approximately $8 per barrel. The main drivers are the high-value growth projects with lower unit costs coming on stream and effects from the improvement program.

Turning to our development projects and more specifically to the Balder X. We are continuing to progress this complex project. The upgrade of the Jotun FPSO is ongoing with high construction and commissioning activity at the Rosenberg yard, and the project met key milestone as planned in the second quarter. This includes the refloat of the FPSO as planned in June. So after almost 3 years in the dry dock for refurbishment, the Jotun FPSO was floating again. And also, it includes the installation of the turret, as you see on the picture. The turret weighs about 1,000 tonnes and has less than 25 millimeters of total clearance to be installed.

And I have to say that I'm very pleased that the complex heavy lift and installation was completed safely and with no technical issues. Drilling is also progressing well with 7 out of 15 wells completed. The last drilled well at the Balder future -- or Balder X project is actually the longest [ vessel ] of our section drilled in the Balder area ever, with a total [ vessel ] length of above 1.1 kilometer or 1,100 meters. The SPS and SURF activities are substantially complete, and the installation campaign for this season are progressing according to plan.

We are as well front-loading activities to 2023 to optimize the project schedule and safeguard the start-up. We are maintaining planned start-up in Q3 2024. But still, overall, the Jotun FPSO is on a critical path, and our key focus areas are to execute the remaining construction and commission scope to optimize schedule towards planned sail away in Q2 2024 and then ultimately, the production start-up in Q3 2024. We are here working very close -- in close collaboration and integration with the contractors to achieve good productivity and progress for the final phase of the project.

Then [ zooming out ]. And as you know, we have a robust development portfolio of projects well into execution, which overall are progressing according to schedule. These projects will unlock more than 500 million barrels and support our high-value growth to more than 350,000 barrels by end 2025. With a portfolio average breakeven of around $30 per barrel, they are very robust and resilient. Let me also remind you that most of the projects are subsea tieback. This means more standardized execution, including standard concepts and building blocks and thereby, less complex.

On progress of the specific projects, we are pleased that Åsgard low wellhead project post Bauge, Hyme and Fenja developments started up in Q1 and Q2, respectively, providing approximately 12,000 barrels for 2023. For the Equinor operated Breidablikk and Johan Castberg, these are reaching milestones towards planned start-up. Breidablikk, the tieback to Grane platform is progressing per plan. The high activity period on Grane topside has been completed and d flotel demobilized. Drilling remains ahead of plan, and planned start-up is Q1 2024.

Johan Castberg, construction and commissioning activities are progressing at Aker Stord with planned start-up in Q4 2024. And then for Hywind Tampen, the first production of power to Snorre was achieved in May with a gradual phasing to fulfill available capacity expected in Q3.

As you can see, the activity level is high in Vår Energi, and the same is true for the NCS overall. We see that supply chain is moving towards full capacity utilization driven by the many PDOs submitted during 2022. This is driving increased prices and rates for certain products and services across the industry. We also see this as a risk for future capacity constraints and potentially reduced productivity. This may lead to additional cost pressure for ongoing and future projects.

However, I think it's important to stress this. Vår Energi's portfolio is well progressed with 5 projects recently started production, and 7 of the remaining projects are more than 50% complete. And actually, we have a total of 10 projects with planned start-up before end 2024, meaning that we have a very well advanced and mature project portfolio. This reduces the risk of material impact on supply chain constraints, resource constraints and inflation.

So to summarize, we are on track to our unprecedented high-value growth to about 350,000 barrels per day by end 2025, and we are confirming our CapEx guidance for 2023 of USD 2.4 billion to USD 2.7 billion.

In Vår Energi, we have a strong exploration capability and an active exploration campaign for 2023. There have been some updates to our campaign for the year since Q1. And you see here the updated exploration campaign for 2023 and some events to highlight. The Aker BP operated Rondeslottet well was spudded in June. But due to technical challenges, the well has been temporarily suspended and has therefore been plugged and abandoned. Drilling will commence at a later stage. Vår Energi support the decision and refers to the operator for further information.

Equinor has also spudded the Crino, and results here is expected in Q3. And in Q4, we look forward to drilling the 2 exploration wells related to the King and Prince discoveries from 2021. During Q2, we also acquired stakes in the [indiscernible] well, which will be drilled in 2024. Following the drilling sequence and rig utilization, the operator Venus well in the Barents Sea and the Ringhorne North in the Balder area have both been shifted into 2024.

Overall, we are active in exploration and target high-value barrels in existing hub areas to maximize value creation. I will then run off my operational review, and I will pass on the word to Stefano, which will cover the financials for the quarter. Thank you so far. And Stefano, your turn.

[Stefano Pujatti, executive]

Thank you, Torger, and good morning, everyone. Let's start with a high-level view of some key financials for the quarter. We achieved solid revenue, EBIT and cash flow generation on the back of strong realized prices in the quarter although impacted by lower commodity prices, higher tax payments and lower sold volumes in the quarter. In addition, profit before taxes is also reduced from the previous quarter due to a net foreign exchange loss of approximately $47 million as the NOK has continued to weaken compared to the dollar. With operating cash flow before tax at nearly $1.3 billion, we have maintained a solid leverage ratio of 0.4, slightly up from the previous quarter. At the end of June, our available liquidity stands slightly above $3.1 billion.

Production cost is at $15.5 per barrel compared to $13.1 in the previous quarter driven by lower volumes and high maintenance activity in the quarter. I will now go into more detail of our second quarter financial performance.

We generated more than $1.4 billion of revenues for the quarter. Compared to the previous quarter, revenues were down $657 million, mainly due to lower volumes and lower prices. The spot prices on gas came significantly down in Q2 due to reduced demand from industries and high availability of LNG. However, gas continued to be a strong contributor to revenues, accounting for 41% of revenues and 36% of total production. The average weighted realized price in the quarter was $82 a barrel. We continue our strong gas price realization of $98 per barrel, which was significantly above the average of the different trading hubs for the quarter. In fact, comparing our realized gas price to the average spot price for TTF during Q2, we have realized $180 million in extra revenues.

Taking a closer look at the gas sales in Q2, around 42% of the sales were on day-ahead basis at $67 per barrel. Around 36% was sold on a month-ahead basis at $74 per barrel, and both month ahead and day ahead were weighted toward the French and German markets. The remaining 22% were delivered under contracts with fixed pricing, realizing an average of $193 per barrel. Overall, strong results from our gas sales strategy for 2 consecutive quarters in a row.

Going forward, we continue to have a robust sale portfolio with access to several markets, and we will have the flexibility in the contract to decide the split between month ahead, day ahead and fixed contracts. We will continue to have fixed price sales representing around 20% of the gas sales. The prices for these sales are approximately $189 per barrel in Q3, while the pricing for Q4 and Q1 2024 is not fully known before the beginning of October. However, current estimates indicate a price of $130 per barrel. I would also like to mention that our oil production is fully hedged on a post-tax basis, including Q2 of 2024 with put options at a strike price of $50 per barrel.

Cash generation from operations in the quarter amounted to $231 million, a decrease from the previous quarter, mainly due to high cash tax payments we made in April and June. For the first half of the year, we have generated nearly $1.6 billion of cash flow from operations after tax. CapEx for the quarter stood at $687 million, up from $642 million in the previous quarter. The 3 largest development projects, Balder X, Johan Castberg and Breidablikk, represented around 70% of investments in the quarter.

Year-to-date, CapEx spend is at roughly $1.3 billion. And as Torger mentioned, we expect to be within the guidance for the full year at between $2.4 billion and $2.7 billion. Tax payments for the second quarter were around $1 billion, up from $577 million in the previous quarter due to the 2 tax installments paid in Q2. These payments relates to the very strong 2022 results.

For Q3, we have one planned tax payment estimated to be around $250 million and 2 additional planned payments for Q4 at roughly $500 million, bringing the total cash tax payment estimate for second half of this year to just below $800 million.

Here, we see the development in our cash position from Q1 to the end of the second quarter. As you see, we have generated nearly $1.1 billion in cash flow from operations before taxes and working capital. This is largely the same amount as we have paid in taxes in the quarter. We further had cash outflow related to investment in our high-value growth project, and we had net cash inflow of $73 million from financing activities as we completed in April the refinancing of the dollar bridge to bond, which I will soon come back to. We have distributed as planned $270 million in dividends to our shareholders.

In summary, the cash position at the end of the quarter stood at $111 million, and our available liquidity was at $3.1 billion at the end of Q2, meaning we are maintaining a strong liquidity position. We are also maintaining a strong financial position. The leverage ratio net interest-bearing debt on EBITDAX ended at 0.4 at the end of the quarter, slightly up from 0.3 at the end of Q1, but well below our over-the-cycle target of 1.3.

As earlier mentioned, we have further optimized the capital structure in the quarter with the successful issuance of EUR 600 million senior notes in April. This was issued under the recently established euro medium-term note program and marks our debut access in the euro bond market. The proceeds were used to fully complete the refinancing of the short-term debt, that being to repay the remaining $500 million of the bridge-to-bond. This means we have a solid debt financing structure with diversification of maturities, instruments, currencies and debt providers. And the average time to maturity for our bond portfolio is now 6 years, supporting the execution of our growth strategy towards end of 2025.

We remain committed to maintaining our investment-grade credit rating. Whilst we are heavily investing in developments, which are fueling our growth, continue strong shareholder distribution and optimizing our balance sheet.

Now on dividends. Vår Energi, strong cash flow generation supports attractive and resilient distributions. In the last 4 quarters, we have distributed more than $1.1 billion. We confirm $270 million in dividend for the second quarter, which is equal to $0.11 per share to be paid on 14th of August. For the third quarter, the dividend guidance is $270 million, maintained on the same level as Q2 and Q1. For the full year, we confirm our dividend policy with an expected dividend of approximately 30% of the cash flow from operations after tax.

Lastly, let me revisit our full year 2023 guidance, which is unchanged. We maintain our production guidance in the range of 210,000 to 230,000 barrels per day. Production cost is expected to come in, in a range between $14.5 and $15.5 per barrel; CapEx between $2.4 billion, $2.7 billion, excluding exploration and abandonment costs, which are expected at $250 million in total. Cash tax payments, approximately $800 million in the second half of 2023. Dividends of $270 million for Q3 of 2023, and the plan is to distribute approximately 30% of the CFFO after tax for this year.

That concludes the financial section, and I give the word back to Torger for some concluding remarks. Thank you.

[Torger Rod, executive]

Thanks a lot, Stefano. And to summarize, Vår Energi saw solid performance on operated assets in the quarter. We continued realizing strong prices on the back of our gas sales strategy. And our main development projects are progressing according to schedule, confirming an unprecedented 50% high-value growth by end 2025. We are walking the talk through the Neptune acquisition, a perfect strategic fit, which will accelerate growth and value creation for the company. So by that, I thank you all for listening in and give the word back to the operator for the Q&A. Thanks.

[Operator]

[Operator Instructions] The first question will be from the line of Matthew Smith from Bank of America.

[Matthew Smith, analyst]

I'm sorry, hopefully, you can hear me now. Just wanted to focus on the dividend really. I think last quarter, you said the ambition was to maintain the $270 million quarterly dividend, subject to any surprises on the commodity side and whatever else you've stated. Good to that word this quarter. And I guess sort of my question is could we think about the fourth quarter through the same lens or through the 30% CFFO policy. Perhaps I'll come back on the second one.

[Torger Rod, executive]

Yes. Matthew, and thanks for your question. I think, let's say, quickly answered. Given that the commodity market and performance stays as is, I think you can expect quite a similar policy also for Q4 going forward.

[Matthew Smith, analyst]

Okay. And perhaps just -- sorry, following up on the same topic, my second and final question was really then how important the stability and the resilience of the dividend sort of is to the company? Because I suppose it's apparent in the recent history, 3 quarters now over $270 million. And if we look at the totality of last year's dividend and this year's dividend, about the same amount actually, just over USD 1 billion in total. I guess that's sort of focus of my follow-on, sort of where -- what priority do you put on the stability of the current dividend levels versus the policy of 20% to 30% CFFO, which arguably leave quite a wide range of outcomes? Your philosophy around that sort of policy, that communication would also be useful.

[Torger Rod, executive]

Yes. I will start there, and I'm sure Stefano might fill me in as well on this. But we have a solid track record in Vår Energi when it comes to distribution to our shareholders. And that is something we'll continue with. And we have a clear dividend policy. And we are saying that through the cycle, we are going to have our 20% to 30% distribution of the cash flow from operation post tax. And what we are doing when we are -- and that will continue. And having a good distribution to our shareholders is important for Vår Energi. That is part our, let's say, DNA and value proposition here.

And how we are doing this? We are assessing it on a quarterly basis and then through the cycle. And given where we are, both on the liquidity side, on the leverage side, that is really the assessments we are doing when we are deciding the distribution. And then, of course, our focus is, of course, to ensure good production then to fuel our high-value growth with our projects and then to reduce debt and share with our -- and distribute to our shareholders. And I think if you are reflecting a little bit on last year, we -- as we said, we had $2.5 billion in investment. We reduced our debt by $2 billion, and we had a good distribution of about $1.1 billion to our shareholders. So that is really the policy also going forward here. So that is important. And of course, all this combined with our investment-grade balance sheet. So Stefano, anything to add here?

[Stefano Pujatti, executive]

Yes. Maybe just to confirm along the lines you were confirming, Torger. The capital allocation from a company perspective is unchanged. So let's say, investing for our growth and sustaining the future production and being, let's say, a company that then can, let's say, share the cash flow between operational investments and debt reduction. And let's say, dividend is really what we are looking after. And we successfully did so, as Torger mentioned, the last year. And to some extent, this goes really to why Vår Energi is a unique investment proposition. We can combine big growth and big cash flow generation.

[Operator]

The next question will be from the line of Teodor Nilsen from SB1 Markets.

[Teodor Nilsen, analyst]

A couple of questions from me. You repeated your 2025 additional 250,000 barrels per day. I just wonder, following the Neptune acquisition, what should we expect that new number to be? Second question is also on the Neptune acquisition. I expect you will go through the portfolio and maybe identify some noncore assets. Could you please just discuss around what kind of characteristics you're looking for, for the assets that you potentially will divest?

[Torger Rod, executive]

Teodor, and thanks for your question. Yes, we are confirming or above [ 350 ] by end 2025. And that is, as we also expressed, excluding the Neptune acquisition. And here, the answer is a little bit the same as we gave when we announced the deal. We will come back to the combined numbers, but we'll do that at a later stage. And that will really be post closing because now you know that we are now going through the, let's say, application process and approval processes, and we are expecting a closing in Q1. And that will be the prudent time also to, let's say, present the updated numbers. But as I said in my presentation, Teodor, is that we are going to be a bigger and more profitable company. That is clear. And also -- and that takes me to your second question.

We've also been saying that we are going to be not only a bigger, but we're also going to be a -- we see this as an opportunity also to be a fitter company. So as part of that, we might do portfolio optimization. And what are we then looking at is, of course, as we said, the Neptune deal is really also ticking all the boxes. It's value accretive. It's cash accretive, and it's performance accretive. But of course, the combined portfolio may give some assets that is, I would say, not that important or not fitting that well with the strategy that we might then assess.

And of course, that might be both when it comes to the size, the longevity, also in accordance to our ESG strategy. Also, it might -- we will assess the total equity in the various assets and so on. So that will be the assumption that we will be doing very much in accordance to our, let's say, strategic priorities. And then there might be some assets that we would like to either dispose or just the equity stake in. So -- but that also we will come back to later because this is, of course, will be a work in progress going forward. But of course, again, we are working to close -- do the closing as described. But again, just to reiterate how pleased we are with the Neptune deal. As I said, it is a perfect fit.

[Teodor Nilsen, analyst]

Okay. And just one final question for me on your comments around the supply chain and the tightness you saw there. How does that impact your additional $8 OpEx per barrel in the long term?

[Torger Rod, executive]

Yes. We feel that where activity level is today and heading, I think we -- it is in a very good position given the maturity of our product portfolio. Then when it comes to the OpEx and the production cost, which is $8 in 2021 terms, I think we said, here, Teodor, our focus is really to focus on what we can impact and influence. And that is -- the big building block is to bring these very competitive barrels on stream, as we talked about, then further to optimize and streamline our operations.

And here, we are working to really improve the cost basis through economy of scale, through new technology, digitalization and so on. So that is really our focus and to bring that on. And of course, then we also have to assess what's the inflation in the market is doing with it. But we still believe that we -- and of course, also here, when the net asset is being incorporated, that will also contribute to bring this number down towards the $8 we have set as a target. So we are relentlessly working towards that going forward.

[Operator]

The next question will be from the line of James Hosie from Barclays.

[James Hosie, analyst]

A couple of questions. I guess just firstly, you kept production guidance 210, 230 for the year, but you've averaged us below that during H1 and you mentioned some planned maintenance, about 12,000, 13,000 barrel a day impact in Q3. Just could you outline or put any color of where the production growth can come from during H2 that could get you to the upper end of that range?

And then my second question is just on the gas sales portfolio, the Slide 17, that portfolio mix for H2. It looks like you're shifting volumes to France, particularly maybe a little bit to the U.K., away from Germany and the Netherlands. So is that due to contractual requirements? Or are there physical constraints where you can make deliveries in the second half of the year?

[Torger Rod, executive]

Yes. Let's start on the production side. Yes, we are maintaining our guidance. And if we first start on the turnarounds and the maintenance, you're right. We are expecting more or less the same turnaround and maintenance activity in Q3 as we had in Q2, but no maintenance activities in Q4. And what we really expect for the second half of this year is strong production, strong performance. And really, one of the big building blocks there is that as we mentioned in our presentation, we have started up 5 projects. There is 2 more to come during the second half. And the first half, in particular, second quarter was, let's say, heavily impacted by, let's say, start-up issues and irregularity. And then particularly, this is related to the Hyme, Bauge and Fenja. So -- and this, of course, have been worked and rectified to a significant degree. So here, we see our big contribution coming.

And then we are talking about a 15,000-plus level. Then also, there will be -- we have been increasing their production potential to 2 wells. I mentioned the good well performance we have had for operated, but also this is happening on the nonoperated. And -- so that means that we will get more infill wells coming on stream. So this is in combination that, let's say, gives the basis for maintained guidance and higher production in the second half than we see or what we experienced and saw in the first half. And in particular, of course, in the Q4 where we do not have any planned maintenance and turnaround activities.

Then to the gas sales strategy, and there really -- I think when it comes to shifting, what we predominantly did was to shift volumes away from U.K. So we delivered our main portion of gas to Continental Europe and then also towards France, the PEG index. So that, I will say, was the predominant deliveries for Q1. And Stefano, maybe you would like to elaborate on this topic?

[Stefano Pujatti, executive]

Yes. Maybe just to add that the flexibility depends very much also on the periods. In winter periods, there is a limited room to move volumes between the hubs. During the period of maintenance, there is more opportunities. Overall, just to remind that in 2022, in the full year 2022, we realized $100 million in additional sales revenues that were obtained through the exit point arbitration. So it was quite a successful outcome. Of course, it's always a challenge to achieve these good results. But that is also, of course, what we will try to achieve this year as well.

[Operator]

[Operator Instructions] The next question will be from the line of Sasikanth Chilukuru from Morgan Stanley.

[Sasikanth Chilukuru, analyst]

Most of them have been answered. I was just wondering on the Rondeslottet exploration well. A couple of weeks back, the operator highlighted that the drilling was ongoing and we should expect a result by the end of this month or early next month. You have highlighted today that it's plugged and abandoned. Just wondering if the decision to do this was taken more recently, if you could confirm that. And also, if possible, provide any details as to what happened here.

The second one was slightly related to exploration as well. We highlighted a couple of wells going into Q1, but you kind of maintained the exploration CapEx guidance unchanged. I was just wondering if you could comment on what was going on there as well.

[Torger Rod, executive]

Thanks for your questions. Yes, talking first about Rondeslottet, you are right. This is a pretty recent decision that was made. So -- and that means -- let's say, last week, so to speak. So I'm sure this was not on the -- we didn't know about this before that. So there -- and really, of course, the right person or the right company to answer more detailed questions about Rondeslottet, of course, Aker BP being the operator. So now, of course, the operators together with their partners are doing assessments to understand the technical issues and hope to proceed. So I'm sure when the time is right, Aker BP will update more about the schedule and the way to proceed there.

Then when it comes to the exploration guidance, as you also -- 2 main comments there. One is, as you also see that we have also been adding some exploration activities for this year. So that is one. And two, also given the recent update on Rondeslottet, following the assessment that will be done, we also will then have a better understanding what will be, let's say, the next step there. So it is too early at this stage to do any changes to the guidance for the exploration as such. So Stefano, anything to add?

[Stefano Pujatti, executive]

Yes. Maybe just also the Countach. It is important to mention the Countach well because that was due to the fact that it was successful, it had a bit of carryover cost and some activities that were brought forward in Q1 of this year. So that added to the, let's say, to the cost. And as Torger mentioned, yes, there are 2 wells that potentially might fall out, but there is Crino and Kim that are new entries. So overall, we are maintaining the 8 wells for the year. But of course, the guidance is something that we are monitoring, and we will revert at a later stage if a revision of the guidance is necessary.

[Operator]

The next question will be from the line of Anders Rosenlund from SEB.

[Anders Rosenlund, analyst]

First, on debt. How much debt do you think you can take on before your credit rating is affected?

[Torger Rod, executive]

Yes, I feel that is going in your direction, Stefano. So maybe you will answer Anders on that.

[Anders Rosenlund, analyst]

Yes. Sorry, I just lost a piece of it.

[Stefano Pujatti, executive]

How much debt you can take before?

[Anders Rosenlund, analyst]

How much debt you could add before it impacts your credit rating? Do you think you could add up to 1.3x EBITDAX before it has any impact on your credit rating?

[Stefano Pujatti, executive]

Yes, no. It's a good question. Thanks for your question. Actually, of course, we're meeting the rating agencies periodically. So far, what has been also confirmed in their report is the fact that they see the company quite comfortably, let's say, in the current investment grade. Moody's has also stated -- once we did the Neptune deal, has also stated that the Neptune deal is credit-accretive, let's say, from their perspective. So now even with the deal of Neptune, let's say, we don't envisage to go above the 1.3 target. So we will stay -- our expectation is to stay within that target. But let me also add, if we should go above that target, that target is still something that will be looked at over the cycle. So this means that if we go above, but as it is the case, we have the perspective of a fast deleveraging.

And as you know, and as Torger was mentioning before, the deal -- the Neptune deal will be cash flow accretive and production accretive since day 1, then this fast deleveraging will also be seen positively from the credit rating agencies. And it's written in their reports, if a big M&A will occur, if a fast deleveraging is envisaged, then this would be defined in their view. So yes, so not concerned on that front for now.

[Anders Rosenlund, analyst]

Okay. I have another question as well and that goes to the assets which you said would be brought on stream in the second half. Which 2 assets are you referring to when you made that comment?

[Torger Rod, executive]

Yes. I'm referring specifically to the Statfjord IOR project and then the Åsgard subsea compression project that is coming on in Q3 and Q4. So those are the specific asset I was referring to.

[Anders Rosenlund, analyst]

And how much will those projects add?

[Torger Rod, executive]

Åsgard area, we might see our -- compared to this first half, we see a potential of 5,000 barrel-ish for the second half here. So -- and what I did mention when I was asked that question earlier is also, of course, that we -- that I think it was James asking from Barclays, is that we also, of course, see a good operational performance on operated fields, which is also part of the basis for higher production in the second half.

[Operator]

As there are no further questions from the telephone conference, I'll hand it back to the speakers to handle any written questions.

[Ida Fjellheim, executive]

Thank you very much. I've got another question from Teodor at Sparebank 1. Assuming that CFFO declined for second half of the year, for example, due to lower prices, how much above 30% of CFFO are you willing to pay as a dividend, 35%, 40%?

[Torger Rod, executive]

Well, I think somewhat above 30% -- is still approximately 30% in our mind. And as we also said earlier today, we are doing an assessment, yes, on a quarterly basis, but also over the cycle. And of course, as Stefano mentioned it, we see, of course, a big increase in production. And that also means both through our organic growth projects and also following the cash accretive, Neptune. So of course, that means that we also through the cycle will see a significant cash flow from operations going forward. So these 2 things will be, let's say, put into consideration when we are deciding the dividend both for the next quarter and -- for Q4 and going forward. So Stefano. I'm sure you will add some here. Please?

[Stefano Pujatti, executive]

Yes, no, maybe just to add on the fact that on top of the additional production -- significant additional production that will also be coming next year, we have $3.1 billion of liquidity reserves at 0.4 leverage. So -- and also Neptune that is expected to come in, in 2024 and that will be CFFO and cash flow accretive since the very start. So all these elements are exactly bringing us to what Torger is saying. You need to look at it a bit more in a wider perspective. So I know finance people is quite precise, but we won't be that deterministic in the percentage. That is what I can say.

[Torger Rod, executive]

Yes. So we see robustness in our distribution. That is what we are saying.

[Ida Fjellheim, executive]

Thank you. Next question from Ruben at Jefferies. You mentioned the Neptune Norge acquisition is pending approvals. Do you have a time line of when the different regulatory approvals will be roughly achieved? It requires approvals in both the jurisdictions concerned on the Vår side and the United side. Could you please comment?

[Torger Rod, executive]

Yes, I can't. It will be -- it won't be very much more than I have already said, so to speak. One, we -- as we stated also on the 23rd of June, this is to, let's say, there is a dependency between these deals. That means that we are doing, I would say, a mutual closing. So -- and as also Ruben was stating, it's various jurisdictions. And of course, with various time lines, how this will be done and closed. So really what we are working on is, of course, on our time line towards the Norwegian authorities. And what we see is that we maintained the closing for the entire deal Q1 2024. So not much more updates to be given on that topic here at this stage. If things changes, we will come back to it, but we don't expect that necessarily to happen.

[Ida Fjellheim, executive]

Thank you. A question on fixed price gas contracts. Could you give some more color on who is on the other side of those transactions? And if there is any risk to these entities, do you try to negotiate or break these contracts at any point?

[Torger Rod, executive]

Yes, I can start here and maybe, Stefano, fill me in if I forgot something. I think, first and foremost, I think it's important to understand the relation Vår Energi have with our gas sales, let's say, purchases. Now we have long-term gas sales agreements. Some of these clients have been with us for 30 years, in December this year, 30 years. And that is also important to say that this is very, let's say, very solid companies. All of them have solid investment-grade ratings. And really, what is important for them is predictability. And that means that they are getting a secure and reliable delivery with, let's say, a predictable price index. And so I don't see any big risk here or I see a very limited risk that these, I would say, contracts entered into with the various price indexes will be, let's say, changed or not concur to such.

So because this is really building on long-term relations and, let's say, a tight knowledge and a good collaboration between the parties have. So yes, so I -- so we will continue this. And as well, we will create value, as also Stefano mentioned in his part of the presentation.

[Ida Fjellheim, executive]

Thank you. Then the final question from Steffen Evjen at DNB related to your comments on the NCS supply chain constraints. Could you emphasize what subsegments within services you are seeing the highest cost pressures and productivity risk?

[Torger Rod, executive]

Yes. Thanks for the question. And as I said also a little bit to Teodor's question, one, where our portfolio stands, I think Vår Energi is in a good position because we are so well matured. And the main purchase -- all the main purchases are done, assets are secured, and we are also well progressed in both the construction and commissioning activities for most of our orders. So that is a decent -- a good position to be in, reflecting where the current activity level and where the activity level is heading then. And that is a very good thing.

There is a high activity level in Norway now. And maybe we see this is shifting to the value chain. And what do I mean by that is that we see that not related to both engineering and yard activities, construction and so on. We see that it started to be a resource constraint, which we have experienced earlier. That might impact the cost level and the productivity.

So it is more related to the physical activities. And then also, we have experienced. That also goes for, say, offshore installations and also some increase in the offshore installation vessel rates, as such. So those are the segments that we, let's say, we are monitoring the closest and working to mitigate the risk related to. But again, given that where we are, I think we are in a decently good position. But we are not, let's say, derisked but not risk-free as we have said before. And of course, we are not immune to this kind of impact either.

[Ida Fjellheim, executive]

Thank you very much, Torger and Stefano, and thank you to those dialing in. That concludes the Vår Energi's Q2 2023 Presentation and Q&A. I'll hand it back to the operator to close the call. Thank you.

[Operator]

Thank you. This now concludes the conference call. You may now disconnect your lines.