Var Energi ASA

OSE:VAR

Earnings Call Transcript 2022-Q3

[Operator]

Hello, and welcome to the Var Energi Third Quarter 2022 Results Call. My name is Lauren, and I will be coordinating your call today. [Operator Instructions]

I will now hand you over to your host, Ida Fjellheim, Head of Investor Relations to begin. Ida, please go ahead.

[Ida Fjellheim, executive]

Thank you very much. It is my pleasure to welcome you to Var Energi's Third Quarter 2022 Results Webcast and Conference Call. Joining us today is, as usual, our CEO, Torger Rod; and our CFO, Stefano Pujatti. Torger and Stefano will present the results. And afterwards, we will have a Q&A session. I will now give the word to Torger.

[Torger Rod, executive]

Thank you, Ida, and good morning to everyone listening in on the call today. I want to start today's presentation by saying that we have extraordinary times for the NCS and the European energy landscape in general.

The leakage, which occurred in the Nord Stream gas pipeline in the end of September are a stark reminder of the importance of energy reliability and energy security. Following the situation, there is overall a heightened security level on NCS, including onshore facilities, logistics basis and increased awareness and attention on all office facilities.

The Norwegian authorities have the main responsibility for the security of the infrastructure and facilities, and we're working in close collaboration with all relevant authorities and partners in general. Given such a special situation, our main focus is on safe and secure operations to maintain a reliable supply of oil and gas to Europe and U.K.

Turning to the third quarter, we delivered another quarter with strong cash flow generation and a continued supportive market environment. We have maintained safe and reliable supply of oil and gas with Q3 production up 2% from the previous quarter to 215,000 barrels per day on the back of reduced turnaround and maintenance activity, including a material gas share of 37% in the quarter. As communicated in the production update earlier this month, various operational issues at partner operated and operated fields have led to a revised guidance for the full year, now expected to come in at between 220,000 and 225,000 barrels a day.

All operations continued to deliver strong cash generation. The realized price was on average $139 per barrel in the quarter. This provides a cash flow from operations at the same level as previous quarter, amounting to $1.5 billion. We can also confirm the 2022 CapEx guiding at the level between $2.3 billion and $2.6 billion. And our dividend guidance is increased to $300 million for the fourth quarter.

The strong cash flow generation has further improved the financial position. Now standing at nearly $5.1 billion in available liquidity, including undrawn facilities and the leverage ratio, net interest-bearing debt on EBITDAX is further reduced to 0.2.

Our production target of more than 350,000 barrels in production by end 2025 remains firm. Our cornerstone project, Balder X, saw a revised schedule and cost estimate in September, leading to an impairment of $573 million with an after-tax impact of $308 million reflected in net income. For the remaining product portfolio, we see that it is progressing according to plan. Combined with high exploration activity towards year-end, we're set to deliver a long-term production growth.

Here, you see a summary of key performance indicators in the quarter. We maintained a sharp focus on the safety of our employees and Q3 saw no serious incidents. Our target is always 0 serious incidents and injuries, and our ambition is to be the safest operator on the NCS. Estimated emission intensity of 10.4 kilo per barrel for operator fields reflects our planned turnaround on Balder/Ringhorne, while production cost per barrel is down from the previous quarter due to higher production following completed turnarounds and maintenance in the second quarter. We delivered another quarter with strong cash flow generation, and we'll distribute $290 million in dividends for the quarter as communicated in Q2.

Then we move on to an operational review of the quarter. Safety is about people. Var Energi's highest priority is to operate without causing harm to the people and the environment. The company's strong focus on implementation of our safety initiative continues through the third quarter. And for first half of 2022, an overall positive trend on the serious incident frequency, SIF, has been observed.

The 12-month rolling average for total recordable injury frequency, TRIF, was 3.7 in the third quarter, an increase compared to 2.7 in the second quarter. None of the incidents had a high potential consequence. The trend is primarily driven by incidents related to yard activities in the ongoing development projects. Initiatives have been implemented and learnings are shared to turn the negative trend.

As mentioned on previous slide, the estimated emission intensity of 10.4 kilo per barrel for operator fields are reflecting the planned turnaround. We are committed to continuously reduce emissions. And in the quarter, we joined the global joint industry aiming for Zero Methane Emissions Initiative, headed up by the oil and gas climate initiative, OGCI. By taking individual and collective actions, the OGCI members will accelerate energy transition to deep reductions in greenhouse gas emissions.

The production of 215,000 barrels is up 2% from previous quarter, mainly due to less turnaround activity in the third quarter. We maintained a high gas share of 37%. To enhance value, the company continued to reduce NGL recovery to increase gas volumes and gas sales due to favorable market conditions. This led to a net production decrease of 2,000 barrels per day in the quarter. But as said, higher value realization for the company.

We had planned maintenance on Balder/Ringhorne in the quarter, which was executed successfully according to plan, cost and with a high safety standard. As communicated, we have revised our production guidance for the full year to 220,000 to 225,000 barrels per day. And this is due to various operational issues at partner-operated fields, including the continued compressor failure at Sleipner, which is expected to last until November. But also Snorre, Statfjord and Grane including extended turnarounds on some of them have a significant impact.

We have also seen challenging well operations on our operated assets. This includes low performance on the new Ringhorne wells as well as riser issues at Balder, which has continued into quarter 3. Also, on average, we have a 10% natural decline in the portfolio.

Now on to our operated assets. Goliat was back to full production after a successful turnaround in Q2. And we have seen a strong operational performance in the quarter. The production efficiency in the quarter was 88%, impacted by shutting wells. Walk on restoring production is ongoing.

At Balder/Ringhorne, the previous mentioned turnaround combined with well challenges at Ringhorne impacted production and production efficiency. We are continuously working to optimize well performance to improve efficiency and arrest the natural decline. Ringhorne and well performance and Balder riser and flower integrity issues, including the flower line incent in Q1 is impacting our volume outlook for 2022.

Turning to unit production cost. It was a reduction from $14.7 to $13.4 per barrel in the quarter. The improvement is driven by less turnaround and maintenance activities and the ForEx effects. For the first 9 months of 2022, we stand at $13.30 per barrel, which is in line with our full-year guidance. And Stefano will come back to more details on production costs later in the presentation.

As earlier communicated, the Balder X project is a challenging project for us and has not developed as well as we would like. Current market conditions with supply chain disturbances arising from the pandemic and the war in Ukraine have led to tighter markets and resource constraints. This has, like other projects in our industry influenced the progress of the project.

In addition, the highly complex refurbishment of the Jotun FPSO has experienced growth in scope and needed more engineering and construction hours than expected. Following a comprehensive base interview in the third quarter, the project has a revised cost estimate by an increase of USD 1.2 billion and an adjusted schedule. Key focus is to ensure cost control and progress to meet targeted first oil in Q3 2024. These adjustments has led to the impairment charge, as mentioned earlier.

When the FPSO is installed at the Balder field in 2024, more production wells will be ready at start of compared to previous plan, which means a relative faster ramp-up of production. It is important to be clear. Balder X remains a valuable project for us and is set to extend the great value creation from the Balder hub for more than 20 years.

From a Balder field, which has already produced more than 500 million barrels since the startup in 1999. We have a long-term growth strategy and are actively pursuing further development of the Balder hub, such as the adjacent licenses acquired in August. Next year, 2023, we plan to drill up to 3 exploration and appraisal wells in the area. Furthermore, with Balder X on stream in 2024, it will enable tins of the King and Prince discoveries. And we work to realize our potential to produce another 500 million barrels towards 2024 and beyond.

In addition to Balder X, we have our robust development portfolio of 15 projects well into execution, which are generally progressing according to plan. However, as mentioned before, we see inflationary pressure and increased CapEx on some projects and to achieve planned productivity going forward will be key. These developments support our high-value growth towards the production target of more than 350,000 barrels per day by end 2025.

Going more into detail Johan Castberg is progressing according to schedule with some CapEx increase as communicated by the operator. An important milestone was reached in August with the completion of the heavy lift campaign at Akastor. Furthermore, the Subsea and marine campaign is substantially complete.

For Breidablikk, a subsea tieback to Grane is progressing according to plan with the 2022 subsea and marine campaign completed and drilling operations ahead of schedule. The project targets start up in Q1 2024. In the short term, we expect the Bauge subsea payback project to come on stream once the new yard host is fully operational followed by the Fenja subsea development. And in total, these 2 projects are expected to contribute with above 10,000 barrels per day in early 2023.

In third quarter, exploration activity has been low as planned. Going forward, we continue to target high-margin barrels. In the fourth quarter, the activity will be high with 5 planned wells all located close to our key hubs in line with our hub strategy. 2 of these wells will be Var Energi operated and will be spread in mid-November, which brings a lot of excitement towards the end of the year.

And by this, I will round off the operation update and hand over the word to Stefano, who will dive deeper into the financial performance in the quarter. Thanks a lot.

[Stefano Pujatti, executive]

Thank you, Torger, and good morning, everybody. Let's go straight into some of the key financials for the third quarter. We achieved strong revenue and cash flow generation on the back of continued high oil and gas prices. EBIT and profit before taxes are at high levels, but reduced from the previous quarter due to an impairment of $573 million related to the Balder X project revision and an unrealized ForEx loss of $287 million as the dollar has further strengthened compared to NOK.

With operating cash flow before tax at more than $2 billion, we have reduced leverage ratio to 0.2% from 0.4% in the previous quarter. Due to the significant cash build in the quarter, our financial position is further improved, and we stand on a very strong position of $5.1 billion of cash and undrawn facilities available at the end of Q3. Production cost is at $13.40 per barrel compared to $14.7 in the previous quarter.

I will now go into more detail of our third quarter financial performance. In terms of revenues, we generated record high $2.5 billion for the quarter, representing more than 50% growth from the same quarter last year. Compared to the previous quarter, revenues was up $97 million driven by higher gas prices, which accounted for a positive contribution of $269 million, whereas lower sold volumes negatively impacted by $172 million. For the first 9 months of the year, we are now at $7.4 billion of revenues, nearly twice as much as year-to-date 2021.

These strong figures are a result of continued favorable market conditions and our large and diversified portfolio with the material gas production, which for the third quarter represented 53% of the revenues. During the quarter, we continued to divert gas from injection and to minimize sales of methanol and ethane in order to maximize gas sales. The average realized gas price was $204 per barrel, a strong increase from $151 per barrel in the second quarter. This is equivalent to $34 Mbtu or EUR 116 megawatt hour.

I will soon cover our gas sales in more detail. Realized oil price was slightly down from the previous quarter to $108 per barrel. Altogether, average weighted realized price in the quarter was $139 per barrel, an increase of 12% from the previous quarter. Sold volumes were 18.1 million barrels, down by 1.4 million barrels from the second quarter, but produced volumes were 19.7 million barrels up from 19.1 million barrels of the previous quarter.

Going deeper into the gas sales in the quarter, the average price was, as mentioned, $204 per barrel. This consisted of around 34% of the sale sold on day-ahead basis at $250 per barrel. And around 38% was sold on a month ahead basis at roughly $235 per barrel. Both months ahead and day ahead were weighted toward the French and the German market. The remaining volumes were delivered under contracts with fixed pricing realizing an average of around $100 per barrel. This included a 1-year gas sales agreement that ended now in September as well as a forward sales agreement that was entered in January 2022.

Going forward, we have a robust sales portfolio with access to several markets with sales references to both TTF, THE, PEG and NBP. As you can see from the chart of indicated future gas sales, the month ahead and day ahead will be weighted toward the French and German market, and we'll have flexibility in the contracts to decide the split between months ahead and day ahead.

For Q4 '22 and Q1 2023, we will have fixed price sales representing 30%, 35% of the gas sales. The price for these sales are around $150 per barrel in Q4 '22 and around $255 per barrel in Q1 '23. For Q2 and Q3 '23, the fixed price is approximately $170 per barrel, representing roughly 20% of the sales in such quarter. We are also exploring the use of financial derivatives for hedging as an added instrument to manage risk in the current market situation.

Total production costs for sold volumes amounted to $114 million, a reduction of $264 million compared to the second quarter. The decrease is mainly driven by a significant reduction of overlift, summarizing to $165 million in the third quarter. In Q2, the adjustment was $82 million in the opposite direction. We thus end up with a change of $246 million compared to the previous quarter, as seen in the chart.

Over and under-lifting adjustments are done per field and are, therefore, impacted by allocation and timing of liftings, which can result in significant effects with volatile market prices. In addition, over life positions are valued at market prices, while under lift positions are valued at unit production cost per field. This give stronger effects in higher market prices, such as the market environment we are in now. Cost of operations were lower of $15 million versus Q2, mainly due to less maintenance and turnaround activities.

We had continued strong cash generation from operations in the quarter amounting to $1.5 billion. This is in line with the high level from Q2, driven by positive contribution from higher product prices, offset by working capital changes and higher taxes paid. For the first 9 months, we have now generated more than $5.2 billion in cash flow from operations, an increase of more than 40% from 2021.

CapEx increased to $599 million in the quarter, up from $573 million in Q2 due to phasing and higher activity, where CapEx on Balder and Johan Castberg remained the largest share accounting for 52%. CapEx for the quarter was well covered by generated cash with CapEx coverage of $2.5 million. Year-to-date CapEx amounts to nearly $1.8 billion, and projections for the fourth quarter are in line with the guidance for the full year at between $2.3 billion and $2.6 billion.

Tax payments for the third quarter ended at $524 million, up from $329 million in the previous quarter. For Q4, we have significant planned tax payments estimated to be around $1.8 billion, converted from approximately NOK 17 billion. This has been revised up since Q2 due to stronger commodity prices.

Here, we see the development in our cash position from the second to the end of the third quarter. As you see, the CFFO of $2.3 billion before taxes and changes to working capital has contributed to a significant cash build. We further had limited cash outflows from financing activities in the quarter and distributed as planned, $160 million in dividends to our shareholders.

Summarized, the cash position at the end of the third quarter stood at $1.5 billion, an increase of $607 million from end of Q2. Combined with undrawn credit facilities, our available liquidity increased from $4.5 billion to $5.1 billion. With the strong cash generation, we have further improved our financial position and the leverage ratio, net interest bearing debt on EBITDAX and which ended at 0.2 at the end of the quarter. We remain committed to maintaining our investment credit rating whilst we are heavily investing in development, continued strong shareholder distribution and strengthening our balance sheet. The strong financial position lays as a solid foundation for continued material shareholder distribution and growth.

Var Energi's material cash flow generation support attractive and resilient distributions. The dividend guidance for the fourth quarter is $300 million, which implies a full year expectation of $1.075 billion. We further confirmed $290 million in dividend for the third quarter, which is equal to $0.12 per share to be paid on the 9th of November. From 2023 and onwards, our dividend policy is to distribute between 20% to 30% of the cash flow from operations after tax.

Finally, I will round off the financial review with our forward-looking guidance for the remaining part of the year. I want to highlight the following: Production for the full year is expected to come in between 22,000 to 25,000 barrels a day as communicated in our production update earlier in October. Our long-term target of more than 350,000 barrels a day by end of 2025 remains firm.

OpEx is maintained at $12.5 to $13.50 per barrel, where the ambition is a reduction towards $8 as new projects come on stream, and we progress improvement programs. CapEx guidance is maintained at $2.3 billion, $2.6 billion for the full year. And worth to mention is that in the fourth quarter, we will also have the final payment to Axon of $340 million as part of the 2019 acquisition. And on the dividends, we proposed a Q4 dividend of $300 million.

That concludes the financial sections. And I will give the word to Torger for some concluding remarks. Thank you.

[Torger Rod, executive]

Thanks a lot, Stefano. In times influenced by our complex macro and security situation, Var Energi has maintained safe and reliable operations, supply in Europe with oil and gas. We continued to generate strong cash flow from operations on the back of high oil and gas prices, and we have an improved financial position. Finally, we are progressing towards our long-term production targets.

By that, I thank you all for listening in and give the word back to the operator. Thanks a lot.

[Operator]

[Operator Instructions] Our first question comes from James Hosie from Barclays.

[James Hosie, analyst]

Yes, just on operations, you mentioned that the wells have been shut in Goliat to ensure safe operations and also the Balder some flow line and riser integrity challenges. And could you just elaborate on what these issues are, the production impact, just the pathway to resolving them, please?

And then a second question just about your refinancing plans. You got the bridge facility maturing next November. But obviously you've got a lot of headroom, you're generating a lot of cash flow. So are you still looking at further bond issues? Or do you have alternative plans to deal with that debt maturity?

[Torger Rod, executive]

Thanks for your questions. And I think Stefano and I will split this in 2. I will answer the operational part and Stefano will take the refinancing question here. And to your question about the operational and the impacts and issues, as we talked about in our presentation. You're right. We have had some operational issues that are impacting our production and then also our guiding. And when it comes to -- that quickly about Balder first, here, we are working with the fixed. That is really to replace a riser. And as we're speaking that is work ongoing. So we are aiming to have that in place and fixed during November.

The same is a bit the situation on Goliat. Here you heard we talked about well integrity and there. And we are also there having a fix. We are working with it. We aim to have it in place by end year. So that means that these 2 items should be what we call one-offs that we fix them. And then we will have a stable production following after that. So that is the short status on this. And of course, this assumption is incorporated as part of establishing the new guidance.

So then Stefano, the refinancing and the question from James there.

[Stefano Pujatti, executive]

Yes. Thank you. So let me say, related to the recent market volatility and the refinancing, we are keeping all the options open. We have the possibility to issue notes offering in the U.S. capital market, but also euro. We have a quite supportive group of wealth banks, international banks. So refinancing of the bank debt is also an option. And a third option is also potentially a partial repayment from the significant cash flow that we are able to generate.

Let me also add the fact that we have utilized the extension of the bridge to bond. This has brought a limited financial impact on the rates, currency interest rates are around 3.7%. So overall, Var is an attractive credit. We have diversified production. We have high gas share -- so we have a robust cash flow. We are an investment-grade company, and we have a robust balance sheet. So overall, my comment is really we will adapt to the market situation, which we know is very volatile. We will listen to investors, and consider tenure, which we see are in demand and are aligned with the company financial requirements, we are not in a hurry. We are not lacking optionalities.

[Operator]

Our next question comes from Teodor Sveen-Nilsen from Sparebank 1 Markets.

[Teodor Nilsen, analyst]

Two questions for me. First on the outlook for 2023 production. I guess several investors are eager at this to know about 2022 production thus far. But I just wonder what should we expect for 2023? You are talking about 10% on the long lead time of current portfolio, while you also we'll have some new production from fields coming onstream towards the year and also early 2023. So should we expect higher production year-over-year or flattish?

Second question is just to confirm something you said on Slide 18, Stefano, is it correct that you have sold around 25% of the gas rolls in Q4 at prices corresponding to $150 per barrel, and the remaining 75% of the roles will be sold in the spot market?

[Torger Rod, executive]

Thanks a lot for your questions here, and we do as we continue splitting it, the gas and Stefano will. I start a bit on the outlook for '23, Teodor. I will not be very but specific on any numbers for 2023 at this point. What we are doing now is, of course, we are assessing our own portfolio. We are assessing the -- our partners portfolio and what we say, we are digesting all of this. And also, we have mentioned also, of course, you know about the Balder adjustment and so on. But just a few reflections from my side here.

Based on the question from James, I gave some reflections. We have had this year some what I call one-off situation. We talk about on Goliat, Balder. We have also seen that in the past operated specifically related to Sleipner and the compressor there and also turnarounds that are taking significant more time. These are things that we are, of course, taking learnings and experiences from. So we are working hard to avoid that kind of impact for '23. So that is important for us.

Then also, as you mentioned, there will be coming some fresh production from starting up fields. You know that specifically, it's Fenja, it's Bauge, it's also some Asgard-related projects and Frosk. So all in all, but this will be scattered during the year, as also you alluded to. And all in all, they will represent about 17,000 barrels.

In addition to that, we are also doing our infield activities in particularly the Goliat area. And of course, our partners are doing the same. So when all this is, let's say, matured and massaged into our work program, we are ready to be more specific on the guidance for 2023. So -- but these elements are what you're putting into that equation I just mentioned.

So then I think we move to the gas and the question to, it was very specific on Slide 18 and the distribution there Stefano, so...

[Stefano Pujatti, executive]

So let me clarify. You are absolutely correct, Teodor. For Q4 '22, we have -- let's say, we will be averaging $150 per barrel in terms of gas sales, and that is comprising fixed price and gas year ahead contracts. The remaining 75% is not only spot, but is actually a mix of day ahead and months ahead.

[Torger Rod, executive]

And if I could add one element to my answer, which I forgot Teodor. It's also the -- as part of that input I've talked about, we will also get the full overview on the turnarounds for the next year. So that will also, of course, be in, I would say, impacting the production. So then we will be ready to be very, let's say, specific on our guidance, stop there.

[Teodor Nilsen, analyst]

Just a follow-up on, you said 17,000 barrels, most are from Fenja, Bauge and Frosk. Or did that number include anything from Asgard?

[Torger Rod, executive]

That was also some Asgard-related projects that is coming, the Asgard subsea compression and Phase II and so on. So yes. All the specifics I'm sure we can follow up with the -- yes, it's all good.

[Operator]

Our next question comes from James Thompson from JPMorgan.

[James Thompson, analyst]

Just on the security situation in the North Sea. Could you maybe just talk to us a little bit there about a bit more detail around the cost? How long do you sort of expect to see things going for from that perspective just to understand some of the sort of cost implications there?

Secondly, I mean, there's obviously been a few questions in terms of production performance this year. Where do you think you should be aiming in terms of sort of production efficiency for the portfolio in terms of taking into account kind of asset maturity and things like that. It'd be useful to kind of get an indication about where you think it's kind of operating at your highest level?

[Torger Rod, executive]

Thank you, James. And starting on the security part. Here, I will really will say both say, I emphasize this is really a very good and close collaboration in Norway on the Norwegian Continental Shelf when it comes to security. And I sometimes I'd like to talk about the Norwegian alignment, which is the close collaboration partnership we have between both the regulators, the authorities and also the industry and operators. And that is also the case here. We are working very closely together to, let's say, enhance the security, both offshore and also onshore related here.

And that is the case. We are very aligned in what we are doing, the measures we're putting in place. And when it comes to the duration, it's I can't give any end date on this. Of course, we are monitoring the situation as we go. Cost impact, I don't really see a significant cost impact on this. I think you all see this as value protection there. And also our utmost focus is safe and secure delivery to Europe in a very reliable way. And I think both Norwegian Continental Shelf and I know we have been very successful on that so far. And that is our focus. We are going to provide as much energy as we can to Europe in this situation. So that is the focus, the high-value protection here.

And then a bit to the production efficiency as you talked to. And also here, a little bit, as I said, to Teodor. We are working continuously to improve our production efficiency. And we have set improvement agendas there. We talked quite a bit about that. I think it was in the Q2 presentation specifically about Goliat. We have seen a good uptime there. Of course, that has been impacted by the plant turnaround and also EBIT about the integrity items we talked about. But of course, for Goliat, we would like to be in the mid-90s and a little bit more even. And that was also what we achieved in Q1. And that goes also of course, when we get the Balder future imprison of that, we should be high up there.

Balder FPU is a little bit different there, and it requires some more and also more, let's say, maintenance and so on so. So that is there. But we should be highly competitive also on the production efficiency going forward, and we have a, let's say, a high focus and working hard to achieve that. And on that token, I'm very happy and pleased that we concluded the turnarounds, both on Goliat and on Balder FPU in accordance to the set plan and the set budget. So because that is very important. We saw that on some of the partner operator that when we are losing the -- having extension on the turnaround, then it's hard to have a higher production efficiency. So that is our focus going forward, James.

[James Thompson, analyst]

Maybe if I just change gears a little bit quickly. You flagged sort of some changes to your -- or thinking about changes to your hedging strategy going forward. It's interesting to know what you've learned about the current policy that you've had through the extreme price movement that we've seen in 3Q. What's your sort of takeaways about how robust that policy has been?

And secondly, Stefano, 4Q has obviously got some fairly big cash cost in terms of tax and the Axon sale, Axon payment as well. Can you just talk us through any cash coming back in?

[Torger Rod, executive]

I lost you on the last part of the question. I got you on the price policy, but I lost you on the second part question. Could you repeat that, please?

[James Thompson, analyst]

Yes, sure Torger. Just interested to know if there's any kind of cash tailwinds in the fourth quarter. Should we see a reversal in the working capital, for example, because obviously you've got some big cash out coming this quarter?

[Torger Rod, executive]

Yes. Good. I will start on the price policy. And also Stefano was talking to our let's say, policy is quite a bit in his presentation. So I'm sure he's keen to take. But in general, I think our pricing policy has worked very well. And then I'm specifically talking about the gas. I think we have our robust strategy when it comes to gas and you know how the pit is between 30% in the spot market, about 70% then in the -- based on long-term gas sales agreement, but then we have the indexes that we cannot just -- the timing of it and also the exit points.

I think all in all, I'm not talking necessarily day-to-day and quarter-to-quarter, but on a longer term, this is a clear, I would say strength for Var Energi combined with a significant gas sales we have. And that also I think we see and as Stefano explained a bit about that in his presentation. And when we look into also what is happening for Q4 and so far in October, where we see that these policies and this utilization of indexes and exit points have given us higher realized prices and also above what you've seen in the spot market. So I think we have a good foundation there.

Then Stefano.

[Stefano Pujatti, executive]

Yes. And let me maybe clarify also a little bit the point you were asking. So on the hedging strategy. So you see in the slide, we have shown -- we are showing how much of the gas sales of the volumes would be firm and target fixed price, which is comprising the gas year ahead and fixed price transactions, which currently these will be actually available and embedded in the current contract. So it would be based on physical quantities, right?

So on top of that, and that is a little bit the new thing that we are bringing here is the fact that we are exploring to use in addition, the use of financial derivatives for hedging up to 10% of the post-tax gas production from Q4 2022 until Q1 of 24, which basically is covered in the winter of 2023, using 0 cost collars. This will have no direct cost to Var. But as you know, we'll get the upside but also provide a floor and protect the downside.

So this will represent, let's say, an additional instrument to manage risk. In addition, as I was mentioning to the fixed price contracts for physical delivery. So overall, if the previous instrument is covering was covering up to roughly 30%, if then we will be adding this 10%, you will have roughly 40% of the gas, let's say, hedged with different instruments.

Now going on the cash tax, you are right. We have reviewed upwards compared to what we were estimating in Q2, the tax bill. Actually, it was made on the basis of the very, very strong gas prices. So that was really the trigger. And in October, in Norway, you have the possibility to actually revise upwards if needed, the tax payments.

So we actually reviewed it, and we will be paying NOK 5 billion of additional taxes compared to what was the previous guidance. So that is an increase of roughly $500 million. But that is, of course, on the back of the much better gas prices that we are seeing.

And then let me just also complement about the fact that the remaining tax bill, as you know, will be paid related to this year will be paid in the first semester of $23 million. So there is a possibility in February, if needed. That's the second option we have to revise the tax bill upwards or downwards according to where we will see price going.

[Operator]

[Operator Instructions] Our next question comes from Anders Rosenlund from SEB.

[Anders Rosenlund, analyst]

I'd like to revert to the 2023 production outlook, which I appreciate that you won't be detailed about. But you previously showed some indications on production growing in 2023. And from the presentation today, I picked up, you said 10% decline, which is around 20,000 barrels a day down in 17,000 barrels up on the 4 projects you mentioned or the 4 assets. So it seems like a risk of having production decline in 2023. Can we still expect production to increase in 2023? That was my first question.

My second question is, I appreciate that free float is not that significant here, but you're paying 15% dividend and which is quite generous. Have you made any contemplations on whether some of that distribution of liquidity to shareholders should be in the form of share buybacks and potentially structured share buybacks, allowing the largest -- 2 largest shareholders also to participate in such a transaction?

[Torger Rod, executive]

Yes, Anders, thanks a lot for your questions here. And back to production. My answer is quite similar to what I have already expressed to Teodor. As we are working constantly to maximize production and also based on what they said, the -- I think the decline that is nothing new. That has been there. That's been a topic that we have communicated always.

And then, of course, what's really new, it's not very much new compared in difference to what we said on Balder. And we know that some of the production will be, let's say, pushed out because we had our plan of Q4 2023 start up. And of course, now we know that, that will be coming later. Then as I said, the things that we have to be getting better insight and grip on is the activities we are doing to enhance the production efficiency, the infill drilling. And then, of course, also the turnaround on activities for the year for 2023.

So all this have to be put together before we can in give any clear guidance there. But when it ready we will, for sure, share it with you. And also, of course, the timing of the new code is coming, we'll have some contribution here. So as said, we are working hard to maximize and I would say accelerate what we can be accelerating and so on. But that is the current status there understand a bit on distribution to our shareholders.

And yes, we are contemplating. And this is a question we're getting great bit what should we do or should we do a buyback or a dividend. And as of now, we feel that it's a more -- dividend is a more efficient way. Also, as you alluded to it, given the free growth that to utilize that as our distribution to our shareholders. I'm not saying that, that will always be like that, but it is something that we think -- we also think that is the best way of doing it. So yes.

[Operator]

I will now hand over to Ida Fjellheim to take you through the webcast questions.

[Ida Fjellheim, executive]

Thank you. Two project related questions. What is the new and old NPV breakeven oil price for the Balder X project?

And the second one, is it possible to give some indications of the NPV breakeven oil price for the projects on Slide 13?

[Torger Rod, executive]

Yes. Thanks a lot, Ida. And really what I will say about Balder. I think it's important in a way to remind each other what Balder really is about. And of course, Balder is a very important and again, it's a -- it's also very -- we are proud of Balder. And as, you know, it is the PLC001 and really the beginning of the oil and gas history in Norway. And why it's so important also for war in the future is that in the Balder area, we see a significant upside. And that is -- so Balder -- and Halten is really more than Balder future.

So what you have seen, we have been producing 0.5 billion barrel of 500 million barrels there. And by extending the lifetime of Halten, Halten is really going to be the host for this area. And then also, we see significant, I would say, prospects in the area and of course, also the King and Prince. So really what has happened since we made the FID, yes, it is the update on the projects. But also we have done important discoveries that is just emphasizing amplifying the importance of Balder, the King and Prince discoveries, which we communicated last year, between 65 million and 135 million barrels. We also acquired 4 licenses in the area in August this year, which is adjacent to the prospects where we have done discoveries.

And also, we are planning to drill up to 3 exploration appraisal wells in that area next year in the Balder area. So really, what -- and that's really what Balder is all about. And it's going to -- and of course, looking into the crystal ball and talking what will look like beyond 20, 25, then we are also seeing a potential of maybe additional million barrels here. So that is what Balder is about. So it's much more than specific on Balder future. And I will not say go into the specific details on the breakeven and NPV for Balder.

But I will in use that to bridge to Slide 13, I have to -- I guess that is the project slide. I don't have that in front of me now, but Ida is nodding, so that is good. And then I'm also answering in a way on the Balder question. Because we -- in a we have -- we have a high threshold. We would like to sanction projects. Then we should see a breakeven or 30 or lower and our internal rate of 20% or above.

And that is also when we summarize entire portfolio, that is what we see rough numbers to be in that range. So that is also what we are pursuing going forward. And keeping that discipline also in times like this, so we are building margins into our portfolio.

[Ida Fjellheim, executive]

Thank you. Next question is also related to Balder. Can you elaborate how the delay on Balder X is affecting a potential development and tie-in of the King Prince discovery? In December 2021, you expected an FID in second half of 2022 and first oil in 2025. Thank you. You're muted.

[Torger Rod, executive]

Yes, I said thanks a lot and sorry for being muted, but here I am. You're right. As I said on my previous answer here is that, of course, King and Prince is one of the really exciting prospects that we have in the area. And we are now working to make sure that it's -- we are not planning an FID this year, but we are really looking into how we can mature and find the best possible solution. And as part of that is our potential appraisal well next year, as I also just talk to.

And then, of course, what our plan is to -- for the prospects this year in the area is really to build [ plateau ] on the Halten. So we are, in a way, maintaining our longest and highest possible plateau. So then that means that we will time that in. So we have about building a robust production profile and also long plateau. So that will also give the timing when King Prince is coming in to the Balder future. And of course, this is -- yes, so I think that is the reasoning we have there.

[Ida Fjellheim, executive]

Thank you. A question for Stefano on cash tax guidance. Could you please outline the commodity price assumptions embedded within the latest cash tax guidance?

[Stefano Pujatti, executive]

Yes. So on cash taxes, let me say that what we are actually -- or a good assumption to use is actually a cash tax rate of around 70%. That is something that can be used, let's say, which should help in projecting the total cash tax for the year. That is including the new changes in the tax legislation.

[Ida Fjellheim, executive]

Thank you. There is another question here on production costs. Your production cost guidance of USD 12.5 to USD 30.5 per barrel. What's that at an environment of a stronger NOK? With U.S. dollar now strengthening compared to the NOK, how would cost have been if the currency was at the level you had expected at the beginning of the year?

[Torger Rod, executive]

Yes. Thanks a lot for the question here. And I think Stefano is the ForEx expert here. And Stefano, have you assessed that what we do have been if we had a different strength in there or a different ratio between NOK and U.S. dollar?

[Stefano Pujatti, executive]

Yes. I think the impact is roughly -- it has been with the strengthening of the NOK. It has been -- sorry, with the weakening. It has been around $1 per barrel. And then we have -- yes, then -- that is more or less the range.

[Ida Fjellheim, executive]

And then a last question before we have to end the call. You mentioned that you see inflation and bottlenecks that could impact the project on Slide 13. Would it be possible to give some indication of if there are any projects in particular that are at risk in addition to Balder X? And how big the impact could potentially be in terms of NPV breakeven oil price?

[Torger Rod, executive]

Yes. Thanks for the question, and that is really a big one. I think just to be clear on that, we are in a good position with our public portfolio because they are sanctioned. The main contracts are awarded and the main assets are in place. And then I mean rigs. So also when it comes to instance Balder, if I use a few words on that first, there we are in a, I would say, in a good position when it comes to the exposure for inflation because we have done -- and we have placed the POs here and we have got the equipment at site. And so that is there.

And as I said, in general, we are ahead of the biggest wave when it comes to -- and well into execution of our projects. This is a safeguarding on this. So for me to be very clear what this can mean and lean a lead to when it comes to NPV and breakeven that is difficult. Though where I expect the biggest exposure is those projects that is closest to FID or just have been FID because it's more runway, so to speak, there.

But again, for us, we have done create work to, let's say, at least the impact that we can influence and that is, as I said, securing assets, securing contract awards. And also the way of working and then I'm thinking about our strategic collaboration and the long-term relation to suppliers that ensures predictability and ensures also priority. And that also goes towards what we also mentioned in our presentation, also that they are able to get the right productivity. That means that we are able to get good people and efficient people and then I would say we are able to do the work as planned.

[Ida Fjellheim, executive]

Thank you. That concludes the third quarter 2020 Results Call for Var Energi. We wish you a good day and thank you very much.