Var Energi ASA

OSE:VAR

Earnings Call Analysis

Var Energi Shows Strong Performance and Strategic Progress

Var Energi reported robust Q2 2024 results, with $1.9 billion in revenue and operating cash flow of $711 million, fueled by high production efficiency and strong gas sales. The company targets increasing production from 300,000 barrels/day now to 400,000 barrels/day by 2025. Key projects like Johan Castberg and Balder X are on track, supporting this growth. They confirmed a $270 million dividend for Q2 and forecast the same for Q3 2024. Var Energi anticipates further synergies from the Neptune deal, already realizing 25% of expected benefits. The company stands resilient, focusing on shareholder returns and sustainable production growth into 2030.

Strong Operational and Financial Performance

In the second quarter of 2024, Var Energi showcased remarkable performance, achieving a production volume of 293,000 barrels of oil equivalent per day in the first half, at the upper end of the guidance range. This accomplishment was driven by high production efficiency and successful execution of maintenance programs. Financially, the company generated $1.9 billion in revenues, aligning with the previous quarter, primarily due to higher production volumes and favorable sales prices. Operating cash flow after tax stood at $711 million, demonstrating robust operational performance and solid financial stability .

Successful Exploration and Project Developments

Var Energi achieved significant exploration successes in the Gjoa and Balder areas. In Gjoa, the Cerisa discovery, combined with previous finds like Gjoa North, Ofelia, and Kyrre, is set to unlock up to 110 million barrels of gross recoverable resources. Similarly, the Ringhorne North discovery in the Balder area is expected to unlock 13 to 23 million barrels, further derisking other nearby prospects. The company's exploration strategy, focusing on high-value barrels near existing infrastructure, is paying off, enhancing future growth prospects significantly .

Strategic Synergies and Cost Management

Var Energi is realizing synergies from the Neptune Energy Norge transaction, with approximately $500 million in identified synergies, 25% of which have already been achieved. The company is focusing on accelerated project developments, harmonizing rig plans, and integrating Neptune gas volumes into their sales strategy. Cost management remains diligent, with production costs beating guidance at $12.4 per barrel, contributing to financial resilience and efficiency .

Dividend and Shareholder Returns

Var Energi continues to prioritize attractive and predictable shareholder returns. The company confirmed a second quarter dividend of $270 million, equivalent to $0.11 per share, with the same amount guided for the third quarter, reflecting a strong commitment to its dividend policy of distributing approximately 30% of cash flow from operations (CFFO) after tax. This policy underscores the company's robust financial health and its ability to generate substantial returns for investors .

Future Growth and Guidance

Var Energi is on track to meet its ambitious production targets, expecting to reach 400,000 barrels per day by the end of 2025. The company aims to sustain this production level until 2030, driven by new projects like Balder X and Johan Castberg, as well as ongoing infill drilling and exploration activities. The commitment to reducing unit operating costs to around $10 per barrel by 2025 indicates a strategic focus on enhancing profitability and operational efficiency. This forward-looking strategy positions Var Energi for sustained growth and value creation in the coming years .

Commitment to ESG and Sustainable Practices

Var Energi continues to excel in environmental, social, and governance (ESG) metrics, aiming for a 50% reduction in operational emissions by 2030. The company's initiatives, including the electrification of assets and robust energy management, have positioned it in the top quartile of industry performance. With around 35% of production already powered from shore and plans to increase this to 70% by 2030, Var Energi is committed to responsible and sustainable operations, enhancing its investability and relevance in the transition to a low-carbon future .

Earnings Call Transcript 2024-Q2

[Operator]

Hi, everyone, and welcome to the Var Energi's Q2 Presentation of 2024. Today's call is being recorded. [Operator Instructions] I would like to introduce Head of Investor Relations, Ida Fjellheim. Ida, please go ahead.

[Ida Fjellheim, executive]

Good morning, everyone, and a warm welcome to Var Energi's Second Quarter and First Half 2024 Results. The presentation today will be given by our CEO, Nick Walker; and our CFO, Stefano Pujatti. Nick and Stefano will present the results, and we will open up for questions afterwards. I will now give the word to Nick. Go ahead.

[Nicholas Walker, executive]

Well, thank you, Ida, and good morning to you all. I do hope you're all enjoying the summer period. A warm welcome to our second quarter and first half 2024 results presentation.

I'm really pleased to report another quarter of good delivery with strong operational and financial results in line or better than guidance. We're on track to deliver our 2025 growth target and unlock future value. And as a result, we continue to provide attractive and predictable dividend distributions.

So let us now look at the highlights for the quarter. We delivered strong operational performance, with production of 293,000 barrels of oil equivalent per day in the first half, which is at the upper end of the guidance range for the period. This is driven by good production efficiency across the portfolio, and we've successfully executed our maintenance programs in the quarter.

On the back of this strong operational performance, we continue to deliver good financial results with CFFO in the quarter of $711 million. Our gas sales strategy continues to realize above-market prices. Production cost beat guidance at $12.4 per barrel in the quarter.

And we extended 2 strategically important long-term gas sales agreement to mid- 2036. Var Energi is one of the fastest-growing E&Ps, and we're on track to deliver on our 2025 growth target and unlock future value. The Balder X project target start-up in Q4 remains with a sale away decision to be made towards the end of August.

At Johan Castberg, the FPSO has left the yard and the project is firmly on track to start up in the fourth quarter. And the Eldfisk North and Kristin South projects came online recently. Portfolio optimization continued with sales announced for our non-core Norne and boiler assets. And we announced close to infrastructure commercial exploration successes in the Balder and Gjoa areas.

And lastly, we continue to deliver attractive and predictable shareholder distributions. We confirm a dividend for the second quarter of USD 0.11 per share, in line with guidance. which is to be distributed in August. And we're providing Q3 2024 dividend guidance of $270 million, the same as for Q2 and reconfirming our full year dividend distribution guidance of approximately 30% of CFFO after tax.

So now stepping into some of the detail. We're one of the fastest-growing E&Ps, the third largest oil and gas producer in Norway and the second largest exporter of gas for Norway to Europe. A large diversified portfolio with interest in over 50% of all producing fields and of course, the associated infrastructure on the NCS provides lots of optionality and growth opportunities, which we're working to move forward at pace.

We completed the Neptune Energy Norge transaction in January, and already, we fully integrated the business into Var Energi. We've aligned the 2 teams. And from the first of May, we've been working as 1 team, pulling together to deliver on our strategy and goals. In the quarter, we completed the strategy merger of Neptune Energy Norge with Var Energi, thus simplifying our business structure. And we're making great progress on delivering on the targeted synergies from the transaction of approximately $500 million post tax over time, with about 25% of this target already realized.

Now turning to production. The first half of the year came in at 293,000 barrels of oil equivalent per day, which is in the upper end of the guidance range for the period. Production in the second quarter of 287,000 barrels a day is down compared to the first quarter. This is due to planned maintenance activities that were successfully completed. We also saw strong production efficiency from our operated assets averaging 93% in the quarter. As I already said, the Eldfisk North project started up in May and the Kristin South project in July, and both of these developments are producing strongly in line with expectations.

And you can see that turnarounds will significantly impact the third quarter, where we'll see our outages at most of our Norwegian Sea assets. And then you will see growth from our major projects, Johan Castberg and Balder X, both targeted start-up in the fourth quarter. We have 1 further project to start up during the year and also a significant portfolio of infill wells being completed. We also announced the sale of our non-core Norne and boiler assets. These deals will close in the second half of the year and have minimal production impact in the period.

We've had a great first half performance and are firmly on track to meet our full year guidance range of 280,000 to 300,000 barrels per day.

So now looking at our longer-term growth outlook. We are set for significant production growth from today's level of around 300,000 barrels per day. Five projects in development with the main ones, of course, being Balder X and Johan Castberg will add around 130,000 barrels per day of new production.

This means we'll grow to around 400,000 barrels per day by the end of 2025, which we're firmly on track to deliver. And with our quality portfolio that has significant upside, we can then organically sustain production at 350,000 to 400,000 barrels a day towards 2030.

And we will achieve this through, firstly, maximizing recovery and infill drilling in our high-quality assets. This adds up to 45,000 barrels a day over the period. Secondly, by moving forward, it pays our portfolio of over 20 early phase projects towards sanction and also drilling out our exciting near field and high-impact exploration program. This will deliver sustainable production towards 2030.

Of course, responsible operations are key to our license to operate and our ambition is to be the safest operator. Overall, we have a good safety and environmental trend, which is generally getting better. However, we're having too many small low-level incidents, which is a strong focus in the organization. And you can see in the second quarter, we had a good outturn with 0 material safety or environmental incidents. This performance takes strong focus every day.

And our belief is that it's important to position the company for the energy transition to maintain relevance and investability long term, and we're doing just that and are being recognized for it. We continue to make good progress on emissions reduction. And today, we're already in the top quartile of industry performance. We have a clear path to over 50% operational emissions reduction from our portfolio by 2030.

The 3 main levers to achieve this are electrification of our assets, energy management and portfolio optimization, and we're making progress on all of these. Already, around 35% of our production is produced with power from shore. And we're involved in 5 electrification projects. So by 2030, our aim is that around 70% of our production will be electrified.

And on methane emissions, we're doing really great with performance well below the near 0 classification. And so our performance on ESG is being recognized. With the leading ratings that you can see listed here, and our recent inclusion in the Oslo Stock Exchange Index, ESG Index as the only oil and gas company included in that index.

And so now on to production costs. We beat guidance with $12.2 per barrel in the first half of 2024 compared to our full year guidance of $13.5 to $14.5 per barrel. You can see we're currently running about $2 per barrel below 2023 levels, where 2 factors are the main contributors. One is the lower cost Neptune assets, which is bringing the overall company cost down as expected and the rest is the increase in production compared to 2023 levels.

Our improvement initiatives are also starting to deliver results. So as a result, for the full year 2024, we now expect the outturn to be at the bottom of the $13.5 to $14.5 per barrel guidance range. And looking forward, our target is to reduce unit OpEx to around $10 per barrel by the end of 2025, as you can see on the chart.

With the main levers of this being, firstly, the new projects coming on stream, which have average OpEx of around $4 per barrel. Secondly, high-grading the portfolio, which we're making progress on, and thirdly, delivering cost synergies and improvements, which is a strong focus across our organization.

And so now moving on to how we're going to deliver long-term growth and value creation. Var Energi has an amazing portfolio with lots of optionality and growth opportunities. You can see here that our 2P reserves stand at 1.24 billion barrels. Seven projects come on stream over the next few years, which underpins our growth trajectory. You can also see our contingent resources stand at 750 million barrels where we've already identified over 20 early phase projects to turn approximately 60% of this resource into value. And you should expect to see some project sanctions coming forward during 2025.

With the more significant projects being from [indiscernible], the Gjoa area development including Gjoa North, Ofelia, Kyrre and Cerisa and the Balder Phase 6 project and there are others. And on top of that, we have an exciting exploration portfolio of over 1 billion barrels of net risk resources where we will drill around 60 wells over the next 4 years. And as we'll see later, this program is already adding value.

And putting all this together, we have over 3 billion barrels of resource potential in the portfolio. And it is this which will organically sustain our production towards 2030.

And so now looking at our quality project portfolio, which is key to delivering our growth targets. After the recent startups of Eldfisk North and Kristin South, we have 7 remaining projects in execution, which unlock more than 400 million barrels of net reserves and we are well into execution with 5 of the 7 projects more than 75% complete, so the risks are mostly behind us. And you can see this project portfolio creates significant value with breakevens of around $35 per barrel.

And if we now then focus in a little bit on our 2 largest projects, I want to give an update on those. Firstly, Balder X, the Jotun FPSO is a key enabler to continue to deliver future value in the Balder area. This project unlocks gross production of 80,000 barrels a day and with low operating costs of around $5 per barrel. The status of the Jotun FPSO is that actions taken to increase the pace of the remaining construction and commissioning has yielded results and the FPSO is now nearing completion.

The FPSO mooring system has been redesigned, which reduces the weather constraints for installation, allowing installation into September and earlier in 2025, should installation not happen before the winter period.

So start-up in the fourth quarter of 2024 remains the target, and the decision on the installation this year will be made at the end of August. Our main consideration here is to ensure we do not carry too much work into the offshore hookup phase. And as previously communicated, risk, therefore, remains for the installation of the FPSO this year. In the scenario where installation slips to next year, the P90 start-up is by the end of Q2 2025.

And we've created flexibility with the FPSO installation arrangements, giving us full optionality on the timing of making the decision on when to install. If we look at the other elements of the project, they are largely complete. All subsea facilities are installed and all now that remains is to connect up the FPSO. All 14 planned production wells have been drilled and completed with results in line with expectations.

And the final well of water injector is just completing and the drilling will demobilize very shortly. If first oil moves to 2025, it will have limited impact on the company's 2024 production. And as the project is nearing completion, this is principally a schedule issue and does not have a material impact on overall company guided costs.

It would also not have -- have no impact on delivering the company's growth target of around 400,000 barrels a day by the end of 2025. So completion of the Balder project is in sight, and all our efforts are focused on achieving first oil as soon as possible. Importantly, though, in a safe manner and with high quality. And we will communicate an update on the project at the end of August once we have made the decision on the timing of installation of the FPSO.

But this project is more than that. The FPSO also unlocks future growth opportunities. The Balder phase [ pride ] project is being progressed. This involves the drilling of 6 production wells to utilize the remaining subsea template well slots to capture gross 2P reserves of over 30 million barrels. And the drilling of these wells will commence in the first half of 2025 and be completed in 2026.

And Balder Phase VI is being assessed to add new subsea facilities and wells with sanction of a project targeted in the first half of 2025. So Balder X -- the Balder X project is nearing completion, and we can now look forward to many years of value creation ahead.

And our other major project is Johan Castberg, which is progressing according to schedule and is firmly on track for targeting start up in the fourth quarter. The FPSO is complete and has left the stock yard for an inshore location for final testing, as you can see in the photo on this slide. And in August, the FPSO is expected to be towed to the Johan Castberg field location.

All subsea installations are complete and the drilling activities are going to schedule with 12 wells already completed. Total of 30 development wells are planned with drilling activities continuing into 2026.

And Johan Castberg is a key catalyst for our growth profile. The production capacity of the FPSO has been updated to 220,000 barrels per day gross compared to the original PDO capacity of 190,000 barrels per day, with Var Energi's net share of the updated capacity being 66,000 barrels per day.

And these are high-value barrels with OpEx of around $4 per barrel and with breakeven economics of $35 per barrel. And we see further upside from extending the plateau through both infill drilling and area tiebacks, where 8 infill wells, 5 producers and 3 injectors are being planned. And further phases of development are also being planned being clusters 1 and cluster 2.

And on top of that, a series of exploration wells will be drilled over the next few years. We see that this will double the plateau period to 4 to 5 years and perhaps beyond. So after years of investment, the true Johan Castberg adventure starts at the end of the year and we see a bright future with significant upside and long-term value creation ahead.

And so now I'd like to focus a little bit on our exciting exploration program. And to remind you, this year, we're planning 6 new exploration wells, targeting net risk resources of around 150 million barrels. As you can see, these wells are spread through our 4 hub areas, and all but 3 wells are close to infrastructure targets. And so far this year, we've had a good return from the 6 wells drilled with 2 commercial successes at Cerisa in the Gjoa area and at Ringhorne North in the Balder area.

So a 33% success rate to date. Due to these successful results, multiple sidetrack wells were drilled to appraise the 2 discoveries, resulting in increasing exploration spend for the year to around $350 million pretax from the $300 million previously guided. We're ramping up activity with 7 wells planned to be completed in the third quarter, and it's going to be exciting to see these results come in. And we're also well advanced on defining our exploration program for 2025, which I expect will be even more ambitious than this year's program.

So I want to now focus on the 2 commercial successes at Cerisa and Ringhorne North. You can see the location of the Cerisa discovery, only 5 kilometers from the Duva subsea template that is tied into Var Energi's operated Gjoa platform. Cerisa contains gross recoverable resources in the range of 18 million to 39 million barrels. And we drilled 3 sidetrack wells to fully appraise the discovery.

So we're ready to move quickly to development studies. This discovery is the fourth in a row in the Gjoa Hub area with the others being Gjoa North, Ofelia and Kyrre. Combined, these discoveries have estimated gross recovery resources of up to 110 million barrels.

And the Gjoa area development, including Gjoa North, Ofelia, Kyrre and Cerisa is commercial as a tieback to Gjoa, where importantly, there's spare capacity and we're already progressing this on a fast-track basis for a sanction of a project in 2025.

Then moving now to the Ringhorne North discovery, which you can see is close to all the Balder area infrastructure. Ringhorne North contains gross recoverable resources in the range of 13 million to 23 million barrels. We drilled 2 sidetrack wells to appraise the discovery, again, so we're ready to move quickly to development.

In addition to unlocking new resources, improving the northern extension of the Ringhorne field, the Ringhorne North discovery also derisked more drillable prospects in the area. For example, Ghost and Prince Up-Dip which are candidates for drilling in 2025 and opens up potential development synergies with other nearby Var Energi operated discoveries, such as King & Prince and Iving.

Here, there's potential to unlock around 100 million barrels of gross resources in this area, and we're progressing this opportunity on a fast-track basis. So the Balder area is much more than just the Balder X project. And these 2 exploration successes I've talked about are a demonstration of our consistent and successful exploration strategy, targeting high-value barrels close to existing infrastructure.

So that now rounds off my operational update, and I'll now hand over to Stefano to review the financials. Thank you.

[Stefano Pujatti, executive]

Thank you, Nick, and good morning, everyone. Now let's deep dive into the key financials for the second quarter and see why Var Energi is a unique combination of value creation, growth, predictable and attractive shareholder distribution, underpinned by an investment-grade balance sheet.

We generated solid revenues and operating cash flow after tax of $711 million in Q2 on the back of strong operational performance, unit cost below guidance and good realized prices. Our balance sheet remains solid with a leverage ratio at 0.8x net debt to EBITDAX and $1.8 billion in available liquidity. We confirmed the second quarter dividend of $270 million and plan to pay another $270 million for the third quarter of 2024.

During the capital markets update in March, we presented an upward revised target of about $500 million identified synergies from the Neptune deal. I'm pleased to say that we have already realized around 25% of this only 5 months after closing of the transaction. Some concrete examples of this is the accelerated recovery on Gjoa using Var Energi contracted vessel.

We have been realizing onshore tax benefits and also incorporating Neptune assets in the more competitive Var Energi insurance package with lower rates due to increased size of the portfolio.

And another example is eliminating external centralized services from the holding in the U.K. and manage them in-house. For the remainder of 2024, we expect to continue realizing further synergies, mainly in the areas of accelerating project developments, harmonizing rig line plans and integrating Neptune gas volumes in our gas sales strategy. This demonstrates the scale, diversity and robustness the transaction adds making us an even stronger pure-play E&P.

I will now go into more details of our second quarter financial performance. We generated more than $1.9 billion of revenues in line with previous quarter. We are up from Q2 of 2023, mainly due to higher volumes. We also continue to deliver good price realizations and, in particular, realized natural gas price, where we had a price realization of around $70 per barrel which represent a premium of $10 per barrel compared to spot. Realizing above spot pricing has given us additional gas revenues of around $250 million year-to-date. The realized price for oil in the quarter was $85 per barrel, in line with Brent.

Taking a closer look at the gas sales in Q2. Around 52% of the sales were on a day-ahead basis at $60 per barrel. Around 28% was sold on a month ahead basis at $52 per barrel. Remaining 20% were delivered under contracts with fixed pricing, realizing an average of $127 per barrel. Going forward, we will continue to have a robust sale portfolio with access to several markets, and we will have the flexibility in the contracts to decide the split between month ahead, day ahead, quarter ahead and fixed contracts.

For the third quarter, we will continue to have fixed price sales representing around 19% of the gas sales for around $132 per barrel. Starting from the fourth quarter, the fixed price exposure will decrease to around 5%. This is because upon time of nomination for the gas year ahead, we assessed the forward curve to be undervalued. We have, therefore, chosen to keep our position open and plan to, when time is right, to use other instruments like fixed price or quarter ahead to catch window of opportunities when they arise. We target to keep maintaining robust pricing for our volumes also for the coming year.

From Q4 going forward, we will also be able to include the Neptune gas in our short and long-term contracts, which will offer increased flexibility and opportunities to realize additional value. I would also like to mention that our oil production is fully hedged on a post-tax basis for 2024, including Neptune volumes, with monthly put options at a strike price of $50 brand and we plan to continue the program going forward also in 2025, where actually, we have already covered 100% of post-tax production until end of Q2 2025.

Cash flow from operations in the quarter was $711 million, a decrease from the previous quarter, mainly due to the 2 tax payments we made in April and June compared to only 1 in the first quarter. For the first half of the year, we generated more than $1.7 billion of cash flow from operations after tax. Our CapEx, including exploration for the quarter was $773 million, where Balder and Johan Castberg remained the largest contributor of the total spend and will be the main contributors to reach 400,000 barrels a day by end of 2025.

Year-to-date, CapEx spend, including exploration, is roughly $1.3 billion and we expect to be within the lower end of guidance for the full year of $2.7 billion to $2.9 billion. Main reason being the weakening of the NOK and also the sale of assets, Norne, in particular, which reduces the associated CapEx in the second half of the year.

Our resilient and strong liquidity position continued in the quarter. Here, we see the development in our cash position from Q1 to the end of the second quarter. We generated $1.5 billion before tax and working capital movements aligned with previous quarter.

Working capital contributed positively with more than $100 million as a result of a favorable lift in distribution in the quarter, which allowed a substantial reduction of the trade receivable at the end of the quarter. Tax payments were almost $1 billion, doubled versus the previous quarter due to the 2 tax payments.

We further had a cash outflow of $784 million in investment in our high-value growth projects. And we also distributed as planned $270 million in dividends to our shareholders.

In summary, despite paying in just this quarter $2 billion in tax, dividends and investments, the cash position at the end of the quarter stood at $315 million, and our available liquidity was at $1.8 billion at the end of Q2 compared to $2.3 billion in the previous quarter. The leverage ratio, net interest-bearing debt on EBITDAX ended at 0.8x at the end of the quarter. This is up 0.1x from previous quarter, but we are expecting Q2 to represent a peak in terms of leverage ratio level in the year, assuming current market conditions and still well below our over-the-cycle target of 1.3x.

Our debt portfolio is strong and diversified with a weighted average time to maturity at 5.2 years when excluding the 60-year hybrid and this is supporting the execution of our growth strategy towards end of 2025 and beyond. We are maintaining our Baa3 rating from Moody's and our BBB rating from S&P, both with a stable outlook, and we are committed to maintain our investment-grade rating. The strong financial position lays a solid foundation for continued material shareholder distribution and growth, and this is a unique investment proposition that Var Energi offers.

Now let's look at the tax guidance for the 2024 estimated profits where 50% will be paid this year and 50% next year. For the second half of 2024 we expect to pay around NOK 14 billion, 1 installment in the third quarter and 2 in the fourth quarter. We have included a tax sensitivity for the first half of 2025 which is giving the cash tax estimates at different price scenarios where the middle case is giving around NOK 13 billion in total payments.

Var Energi has a strong record of delivering attractive and predictable dividends. And since the IPO, we have returned around $2.5 billion in dividend, and we have paid a stable dividend over the last 9 quarters. We confirmed $270 million in dividend for the second quarter, which is equal to $0.11 per share to be paid at the sixth of August.

And the dividend guidance for the third quarter is $270 million, showing the commitment and resilience of the company to attractive shareholder distribution. And we maintain our dividend policy between 20% to 30% of the CFFO after tax going forward, but with 2024 being in the higher range at approximately 30% of the CFFO post tax.

To sum up, we are well positioned to deliver on our growth and sustained value creation, and we will continue to pay attractive and predictable dividends in the years to come. Finally, I would like to summarize our key 2024 and long-term guidance. For 2024, we are on track to meet our production guidance of 280,000, 300,000 barrels a day, which will increase to 400,000 barrels a day by end of 2025.

Further, we have a tangible plan to sustain 350,000 to 400,000 barrels a day until 2030. Production cost between $13.5 and $14.5 per barrel, and we expect to come in at the bottom of the guided range this year as a result of earlier completion of Neptune, which has a lower cost per barrel compared to Var stand-alone, NOK devaluation and cost reductions. And this brings us well on track towards our long-term target to bring it down towards $10 by end of 2025.

We expect to be in the lower end of our CapEx guidance of $2.7 billion, $2.9 billion in 2024. And from 2025 onwards, we expect the CapEx to reduce to around $1.5 billion and $2.5 billion. Exploration CapEx guidance is revised upward to around $350 million due to the successful discoveries and additional sidetracks on Ringhorne and Cerisa.

We will continue to have high exploration activity in the years to come, and we can expect to be in the upper end of the guided range from 2025 onwards. But we will revert with more precise guiding once the drill schedule is finalized for next year.

We are expecting cash tax payments of approximately $1.3 billion in the second half of this year, and we will pay dividend of $270 million relating to Q2, and we guide for $270 million also for Q3. And for the year, we expect to pay out approximately 30% of the CFFO after tax in dividends.

And with that, I hand it back to Nick for concluding remarks.

[Nicholas Walker, executive]

Well, thank you, Stefano. I've just got 1 final slide to summarize. I think the key point is we're delivering on our strategy for growth and value creation. In the first half of 2024, we've continued to deliver strong operational performance in line with or better than guidance. And on the back of this operational performance and supported by strong realized prices, we continue to deliver good financial results.

We're also delivering on our growth targets to around 400,000 barrels a day by the end of 2025. And we should be there well before then as our key projects are nearing completion. And on top of that, we're also unlocking future value with our high-quality portfolio with significant growth opportunities.

We have a pipeline of early phase projects which we're moving forward now at pace. And our exploration program is already delivering results, and this will allow us to sustain production of 350,000 to 400,000 barrels a day towards 2030. We're doing all of this with industry-leading ESG performance, which we're getting recognized for. And lastly, we continue to provide attractive and predictable shareholder returns. So these are our second quarter results and are the reasons to be invested in Var Energi.

I'd like to thank you for your time, and we'd now like to open up the call for your questions.

[Operator]

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

[Matthew Smith, analyst]

Couple of questions from me, if I could. The first 1 was on Balder X. It sounds like sort of some good progress there. Just looking to really understand sort of how the confidence intervals have changed since the last quarter, please? Because I think sort of the last quarter, some improvements to the schedule have been made, but ultimately, your comment at the time was that you were tracking behind the schedule. So I just want to be clear in terms of has there been any improvement on where you're tracking compared to the prior quarter. So that would be the first on Balder X.

And then the second question on the dividend, if I could. And it's really around, could you remind us, you've got the 20% to 30% range of CFFO for the dividend. Could you perhaps just remind us sort of what has given you the confidence of going towards the 30%, the higher end of that range this year? And I suppose the question really is, is there any reasons that you would caution sort of expect a similar outturn in 2025, of course, when your absolute quantum of cash flows should also be higher as a result of the production ramp? So I'll leave it there.

[Nicholas Walker, executive]

Thanks, Matt. Nick here. I'll take the first one and maybe Stefano will do the second one, and good to have you online with good questions. I think Balder X, I mean we put a huge effort into -- this is a difficult project. We put a huge effort into moving it forward and getting the remaining construction and commissioning done. And we've been -- we've created some results out of that.

And we're now nearing completion on the FPSO. And we also created some flexibility for ourselves by redesigning the mooring system, which just means that we can install it a bit later in towards the winter period and a bit earlier in the spring, if it goes to next year. So that's also a good thing to have done and create some optionality.

And on top of that, we've put flexibility in all the installation arrangements, vessels and things so that we can choose to do when we want to. So we've got the complete flexibility. And our target is firmly to get it done this year. And we're going to make a decision as late as possible at the end of August.

And the key consideration here is to ensure that we don't carry too much work into the offshore [indiscernible] phase. And as previously communicated, of course, then therefore, there's some risk that we choose to put it into next year. And I think we're going to leave that decision as late as possible, and we'll make the decision at the end of August.

Now if it does go into next year, I think we're very confident of getting this done, it gets installed in the early part of the spring or maybe in early March, and we'll see first oil at the end of Q2. So as I say, we're getting there. I mean, the key focus is to just get the remaining work done.

And what we're not willing to do is obviously compromise on quality and compromise on getting it complete because what we don't want to do is to take a lot of work offshore. So those are the considerations. And as I said, we're going to make the decision as late as we possibly can at the end of August.

And then maybe Stefano you want to cover the dividend question?

[Stefano Pujatti, executive]

Yes, sure. And on the dividend, Var Energi capital allocation priorities, I think, provide quite an attractive combination of resilience, growth and shareholder distribution. And maybe this year, the 30% is a sign of resilience. We are still in quite a CapEx peak phase, where we are funding especially for the major part of the year.

Castberg and Balder, which are due to start up in Q4, but then we have -- we are entering a new cycle in 2025 with high production and declining investments, which provides headroom for CFFO growth and for dividend being the dividend a function of the CFFO.

I think the framework we have allows for a balanced approach to capital allocation, there is a holistic approach when we need to prioritize. And overall, I think the strength that you can see in Var is exactly the fact that we have been able in the past and also now, and we will do so also in the future to really combine funding the investments, paying dividends in accordance with the policy and deleveraging at the same time.

[Operator]

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

[Teodor Nilsen, analyst]

Three questions from me. First, following up on the Balder question. It looks like you've changed the wording slightly since the first quarter report around how you talk about the project and now talk more about second quarter 2025 than fourth quarter 2024. Just one more on the past quarter, have your conviction on first oil in Q4 changed anything? That's the first question.

Second question is on the divestment program, you recently announced. You have divested Norne in the past quarter. I just wonder, are you now done with the divestment program?

Third question is on Slide 4 on the production in the case we give the others. Just wonder on -- in the upper range you show for Q4, how much production have you included from Balder and cost that in that scenario?

[Nicholas Walker, executive]

So good morning, Teodor and good questions. I think our messaging obviously evolves a little bit from Q1 now for Q2 around Balder X but not materially. I mean the key focus here is to get the FPSO complete. I'm pretty confident we're going to have it mechanically complete very soon and the question for us is, do we get enough of the commissioning done and what we're not prepared to do is to take a vessel offshore incomplete.

And so that's what the considerations are. We've created more flexibility for ourselves to make the decision later and if it does go into next year to get it installed earlier. So all of that is good.

And we're just going to make that decision as late as possible so that we make the right decision. And that's really where it stands. And as I say, this is not -- this is a schedule issue, not really a cost issue because we're almost complete on the project, and it also doesn't impact us long-term guidance for the company, as I said. So that's sort of how we see Balder X.

On the divestment program, you'll know that in the quarter, we divested the boiler and Norne assets, and we continue to look at opportunities to do further things and -- of course, we'll let the market know when -- if we do something else, we have some other assets perhaps in the portfolio that we might look at divesting in time. But we'll advise when we get to that point, if we do, and we'll do it at the right time.

In terms of production outlook for this year, we have not guided the details around what's in the range for Q4. I mean where we are today, year-to-date is we're 293,000 barrels a day to the end of -- for the first half. We're in the upper end of the range that we sort of set out for that period.

We see strong underlying production from our assets, and we have a range of outcomes in here for different amounts of production for Johan Castberg and for Balder in the outlook. And as both projects come in towards the end of the year, they don't actually have a huge impact on the overall outcome for the year. It's really how do we look into next year. And so there is a component for those in the outlook.

And from the way I see this is that we're firmly on track to deliver our 280,000 to 300,000 barrels a day for this year and even if we see little contribution from the 2 big projects. Hopefully, that covers your questions.

[Teodor Nilsen, analyst]

Yes. So just on a follow-up on the last question there. So should we interpret the small increase in production from Q3 to Q4? Or that is more an issue of less [indiscernible] maintenance then it's an issue of adding barrels from Balder and Castberg? Is that correct?

[Nicholas Walker, executive]

Well, we have shown you a range there. So -- and we show an upside and the downside. And of course, when we get into Q4, we're through all of the turnaround season, so we should have good production. We have -- of course, the benefit of the infill wells that we've completed during the year. We brought on -- will have brought on 3 new projects by that stage.

So we'll be getting the contribution from those. And then we've got what level of contribution do we get from Castberg and Balder X. So they represent the range of outcomes that we show. And I feel we've got strong performance actually in our underlying assets. So I think we're really in good shape to deliver on our guidance for the year, depending -- regardless of where the project is coming, I think.

[Operator]

The next question will be from the line of Victoria McCulloch from RBC.

[Victoria McCulloch, analyst]

A few questions from me. So could you provide us with a reminder of the Johan Castberg ramp-up expectations? Not like for this year as the last question alluded to. But looking into next year, and where we should see it [indiscernible] you increase capacity sort of levels?

Secondly, in terms of sanctioning the next phase of projects, it was interesting to hear that we should put -- possibly expect some of these in 2025. What are the biggest challenges in accelerating these projects from where they have been previously?

And then finally, hopefully, not too stupid a question. What is the implication of taking the Balder X vessel offshore before commissioning is complete to the level that you're trying to get it to? Would that be a cost implication or an operational risk?

[Nicholas Walker, executive]

Victoria, good questions. On Johan Castberg, I don't think we have specifically provided guidance on the ramp-up. But the project is firmly on track to start up in Q4 this year, and that's what we expect. And of course, there's a range of outcomes. And then it takes some time to start up all the wells and clean them up and then get the stability in the facility. And these things normally take a number of months. So I think you can expect some time in the 3 to 6 months, you will see a level of stability in the facility, perhaps earlier.

And we, of course, have a range of outcomes in the way we look at our production outlook. So that's sort of how we see that. And -- but the facilities are of a high degree of completion, it's very well designed, and I think all being well, you'd expect a pretty quick ramp up. But obviously, we're cautious around that.

Regarding the new projects, it's about just getting them going actually. I mean none of these are complicated. They're all tiebacks into facilities we have. The project activities are ongoing, and it's really about just getting moving and getting these projects sanctioned and all the ones I talked about, I think there's a good opportunity to make them happen and sanction them in the time frame.

And there's a lot of predictability around doing subsea tiebacks and the industry here in Norway has got a lot of capability to do them on time, on cost. And I think we just have to get it done.

And then in the Balder question about the level of commissioning, what we do or not want to do is to take a lot of work offshore. Obviously, completing work offshore is more costly and takes more time and it's more difficult.

We have -- today, we have about 1,300 people working on the vessel. And I can't -- we can't put near that number to work offshore. So -- and then every person offshore costs a lot more money. And then you get weather downtime.

So what we don't want to do is to take a material amount of work offshore. And that's the criteria, which will make as far as make a decision of the end of August. I mean we're basically mechanically complete or very close to mechanically complete now, and the question is how much extra work do we -- can we get done between now and the end of August. And that's what the criteria will be for making a decision. So hopefully, that covers your questions, Victoria.

[Operator]

The next question will be from the line of Sasikanth Chilukuru from Morgan Stanley.

[Sasikanth Chilukuru, analyst]

I had 3, please. The first one on gas sales. Of course, the proportion of gas sales in fixed prices is falling in 4Q and now these low levels are extended into 2Q '25. You've highlighted that the forward price at that time are nonselective. I was just wondering if you could touch upon the -- your outlook for the [ European ]natural gas market over the next 12 months in terms of -- and kind of related to that -- to this decision that you have taken on fixed -- on fixed price sales, that would be useful.

The second one was on the development CapEx, you will be coming at the lower end of that range. Just wondering if you could clarify how much FX kind of contributed to this if there are any CapEx differs or is this related to the optimization that you've been highlighting about as well.

Finally, I'm afraid the last one is also a clarification on Balder X. The sale over decision at the end of August, previously, you kind of talked about weather conditions being one of the key factors. I was just wondering if that is still the primary reason? Or is it the FPSO getting for that installation or getting ready for that installation is a key factor now, if that has kind of changed in terms of how you're kind of looking for this uncertainty?

[Nicholas Walker, executive]

Okay. Thanks. Maybe, Stefano, do you want to take the first two? And after that, I can talk about Balder.

[Stefano Pujatti, executive]

Sure. Yes, absolutely. The -- in terms of gas, we are seeing the gas is trading to around EUR 35-megawatt for the summer and is increasing to EUR 40-megawatt for the winter, and there is a tightening in general of the global LNG markets with higher spreads between Asia and TTF . There are concerns about cash from stopping deliveries to OMV in Austria due to legal dispute and there are also supply outages, such as maintenance and operational issues at the NCS and the LNG supply and also in the U.S. So what we are seeing is definitely -- and mostly a new winter will arrive, would be a mild winter would be a cold winter.

So going forward towards the winter, there is a lot of uncertainty and for sure, a lot of volatility. So as you correctly said, we didn't opt to lock in at that point in time, fixed price in gas year ahead or fixed pricing for Q4, and that -- that's the reason why the percentage is 5%, as we showed in the presentation.

But this doesn't mean that don't have the right instruments to address this volatility because as a matter of fact, we can still opt to nominate quarter ahead or fixed pricing, if we see that there are interesting level that will come that we will judge at that point in time, that are attractive to lock in.

So to some extent, I think we have hopefully done the right thing, not to lock in interest that were not looking particularly interesting and be ready if the window of opportunity comes to lock in if we see those opportunities coming to the market. And hopefully, this will help us to also have a robust gas sales pricing in '25.

In terms of development CapEx, I think you're right. We are guiding -- we are guiding on the low range. I would say the weakening of the NOK is the major reason. Let me say, we used an assumption of NOK 10 per dollar. Today, we are at NOK 11. So that is quite an impact. And also, I think it's important to state that our CapEx are 70% NOK based and 30% dollar based. So you can appreciate that this weakening of the NOK is definitely contributing.

Then I would say the rest is like the asset sale of Norne in the second half of the year, you won't have CapEx associated to that one, but I think is contributing, but indefinitely a lower portion of the total.

[Nicholas Walker, executive]

And then maybe I'll just capture the Balder projects. I mean what we've done is, one of the things we did is we invested some money to redesign the mooring system and the way it's hooked up. And what that does is it moves work inshore and we had to spend some money on the mooring system offshore which we've done. And what it does is it means that previously, we were able to install towards the end of August and the winter, the weather period sort of ramps up quite quickly.

And we needed quite a long period to install the vessel of flat calm weather. And what this redesign means is that we need less of a flat calm weather period. So we create the opportunity to do it later and earlier in spring.

So we can now install in September as opposed to in -- like the sort of end stop being in August. Of course, you can get periods in the winter where you get flat calm long enough, but the frequency and chance of that is very low. And so we invested that money, and we get the opportunity that, that offers. And the other criteria is do we believe we're complete enough to not take a lot of risk offshore on the vessel. And those are the two criteria that sort of drive this. So that's how I look at this. Hopefully, that answers your question.

[Operator]

The next question will be from the line of Lydia Rainforth from Barclays.

[Lydia Rainforth, analyst]

Thanks for the presentation. A couple of questions actually. On the safety stats the TRIF had increased very slightly. I'm just wondering if you can just talk about that and then possibly link that a little bit what you're seeing in terms of the Neptune culture and structure when you brought those people and assets in?

And then I'm actually going to be very boring and come back to Balder X. If it doesn't go, what are we actually looking at in terms of store, because you said it can be done quickly and then early in the summer window. But when are we actually looking at always the next option when to go onstream. Again, it feels like the ramp-up of this internal timing is minimal. But then linked to that is other incentive payments for the workforce when you get it done and fail away in kind of early September?

[Nicholas Walker, executive]

Lydia, good questions. On the safety statistics, what you'll see from the chart is that we had -- I mean, first of all, 0 material safety or environmental incidents in Q2 and in fact, when you look back, you can see a very good strong trend on serious incident performance over time. And actually, we're below sort of industry average, somewhat below there.

What you see on the TRIF, which is smaller recordable injuries, these are slips, trips and falls, people cutting fingers or things in eyes and that type of thing that we record. And of course, we would record all of these things. And we're having too many of these and you can see an uptick in that.

And I -- there's no specific thing to point out, and we are focused on it hard to try and reduce it. And -- but this is the nature -- we've got quite a lot of activity going on and things like construction activity shutdowns and things. So I think this is where it comes from. It's not good enough.

We're working to improve it. But having said that, we're about an industry average, actually, in this measure. But for us, it doesn't feel good enough. So we're working on that.

And then you asked a question about culture. I have to say what I see from the Neptune organization is an extremely strong safety culture and we have that in our own organization. And -- but today, we're working as one organization. We've got everyone together in one place. We've mixed the teams up the new leadership teams in place. And from first of May, we were working on that. And I think it feels good already.

I think the culture feels good. There's a lot of strong support in the organization for it. And actually, if you look at it from a people perspective, there's lots more opportunities in a bigger company for doing different things, and we've got lots of exciting work to do. I feel a lot of energy and focus on delivery.

And I think actually, you see that in the results from the company. I mean we again delivered strong results. Everything's either in line or better than what we've guided. And as we sit here, just past the middle of the year, I feel really good for the delivery that we've set out. So I think the culture is very strong.

And then on Balder X, what we're saying here is that we're nearing completion. We are not going to take the vessel offshore if there's still quite a lot of work to do and the rest offshore and what I'm saying is that we're nearing mechanical completion and it's really going to be about how much of the commissioning that we have completed, and we'll make a judgment as late as we possibly can on that.

And we've got, as I said, a lot of people working to get this done. We have definitely incentivized everyone around this and not just the individuals but also the contractors to get this done. And hopefully, that will help.

And if we make the decision that we have to move it to next year, I think we will come out at the end of August and clarify what that looks like. But I think you can expect us to be able to install this around the beginning of March, I don't know whether it possibly could be done earlier. And what I'm saying is the P90 start-up by the end of Q2 next year.

The reality is if we end up going to next year, we can guarantee 100% of the work is complete. So we don't carry anything offshore. And that should mean that we end up with a quicker completion when we get there. So those are the considerations. And as I said, we will come out at the end of August and give some color on how we look at this.

[Operator]

The next question will be from the line of John Olaisen from ABG.

[John Olaisen, analyst]

Most of my questions have been answered. But maybe just for curiosity, what in rough terms are the changes you have made to the mooring system, please? And then I have one more follow-up, please. Answer that first, please.

[Nicholas Walker, executive]

Yes. So what we've done, when the original design -- because this is an FPSO that have been installed. So if you were to build it today, you would build it in a slightly different way and it would have less weather impact on installation design to move forward. So we have what we have. And -- but what we've done is we've changed the mooring system so that we have to do less offshore.

And actually, we move all of the diving work that's required into the in-shore period. And so we've invested into some tensioners on the anchor system. So we can tension the anchor systems offshore and do the diving work inshore, while it's in the field.

So what this does is it reduces the period of time we need flat calm offshore to a much smaller period and then obviously, and we had to spend, it's a relatively small amount of money, but we have to spend some money on the tensioning system on the anchor systems offshore. But that's all installed and hopefully, that's clear, simply.

[John Olaisen, analyst]

Yes, perhaps. And a follow-up on that is, if you can remind us of the Balder X CapEx guidance, and if it's confirmed that it's only changed either with all the extra efforts now in the latter part of the development and also, if you can confirm that Balder X CapEx guidance is unchanged even if start up is delayed to Q2 next year, please?

[Nicholas Walker, executive]

Yes. I don't have in my mind the exact guidance that we've given. So -- but maybe Stefano has that as we talk. And -- but what I will say is that, look, we're getting to the end and so this isn't really a cost issue. It's a schedule issue. And it does not going to have a material impact on guided costs on the overall project.

And I think if we do go to next year, there's possibly a little bit of extra cost, but it's not material in the overall scheme of the project is the way I see this. And again, we will update on this at the end of August when we come out with the status on the project.

[John Olaisen, analyst]

Stefano, do you remember the guidance, the latest guidance, please?

[Stefano Pujatti, executive]

Not that important at this time, but...

[Nicholas Walker, executive]

Stefano, do you have the total number?

[Ida Fjellheim, executive]

We have not given specific guidance per project as such.

[Operator]

The next question will be from the line of Ruben Dewa from Jefferies.

[Ruben Dewa, analyst]

I think most of them have been answered. So I hope you can give me just two quick ones. Just a question on your leverage on the dividend. Last few quarters, you see a bit of a pickup in the leverage while you've been able to keep your dividends flat in and towards a 30% post tax at the payout. I was wondering with the great contemplation there for the -- you are happy to maintain the flat divi?

And leverage to pick up where as long as it's below your long-term net debt to EBITDAX target of 1.3x? And then the second one was on the Balder VI. I think you mentioned that it could sanction in 2025. I was wondering if you could give any color on the impact of those projects in terms of potentially extending platforms or additional production?

[Nicholas Walker, executive]

So Stefano, do you want to try the first one?

[Stefano Pujatti, executive]

Yes. Probably it goes a little bit to what we said earlier and about the fact of having -- currently, we have a leverage, which is at 0.8x and is expected to be a bit -- the, let's say, the highest point given the current market conditions within the year. And this specifically was due to the tax payment installments.

Now the dividend level is assessed on quarterly based on quarterly basis, also taking into consideration the commodity environment, the company performance. So is a factor that flow -- that comes into the equation, of course, an important one. But I think -- what is really important for us when we look at the leverage is that we are able to maintain 1.3x over the cycle.

This means that in a specific year, we might be well below like it happened. We were at 0.3x not long ago, we might be above. But for us, what is really -- the important thing is that then we maintain this 1.3x over the cycle. I don't know if this -- hopefully, this answers to your question.

[Nicholas Walker, executive]

Good, and then Balder Phase VI. So we're in the sort of concept select phase for this project. And where we're at on the Balder -- Phase V, which I talked about, is 6 wells, which we'll start drilling in the first half of next year. That will utilize all of the remaining subsea slots, template slots.

So any future developments, what we need to do is install some more subsea infrastructure, so a template and some connections into the facility. And we're at this stage, we have a lot of subsurface opportunity here, and we're in the stage of defining what Phase 6 looks like as a project.

So is it how many wells, how many subsea templates. I envisage that we will have multiple phases of development here, and we'll be rolling over template -- new templates over a period of time while we continue to exploit the subsurface opportunity. So it's actually perhaps a bit early to talk about what this looks like. And when we've defined the project more, I think we'll be able to talk about it. So -- and as I say, our aim is to come forward with a sanction during next year.

[Operator]

As no one else has lined up for questions in this call, I will now hand it over to Ida.

[Ida Fjellheim, executive]

Thank you very much. We've now run out of time and Investor Relations will follow up with the questions that have come in, in writing by e-mail. And that concludes the Q2 results presentation. Thank you all for listening in. And we would like to take the opportunity to wish everyone a good summer. Thank you very much.