Var Energi ASA

OSE:VAR

Earnings Call Analysis

Var Energi's Strong Q3 Performance

Var Energi aims to double its production by end of 2025, targeting around 400,000 barrels daily, including gains from the Neptune acquisition set to close in Q1 2024. The company outperformed benchmarks with new projects like Tommeliten Alpha and Breidablikk, driving Q3 production over 230,000 BOEs a day at an efficient operating cost of $14 per barrel. High realized gas prices, 40% above market average, fueled a robust $975 million cash flow. Commitment to shareholder returns is evident with confirmed Q3 $270 million dividends, aligning with a projected full-year distribution of roughly $1.1 billion. Despite maintenance activities, the Q3 results showcased operational excellence and a focus on growth and value creation, maintaining a strong balance sheet with a net debt to EBITDAX ratio of 0.5x.

Introduction to Revenue and Growth Trajectory

The company has reported strong revenue generation, with more than $1.6 billion of revenues for the quarter, representing an increase of $184 million from the previous quarter. This is driven by higher volumes and oil prices, with a remarkable premium achieved over the spot oil price. They aim to continue their robust financial performance, supported by increased commodity prices and sales strategy.

Dividend Resilience and Policy

Despite a challenging commodity price environment, the company has maintained a consistent dividend payment, confirming $270 million for both the third and fourth quarters of 2023. This brings full-year dividends in alignment with the previous year. The dividends reflect not only the company's resilient financial state but also its commitment to shareholder returns.

Project Developments and Production Outlook

The company is progressing with significant projects such as Breidablikk, Jotun FPSO, and Johan Castberg, which are central to their growth strategy and exhibit highly competitive breakeven points. Breidablikk has begun producing, with an expected peak production for Var Energi at around 20,000 barrels a day. The Jotun FPSO project is over 85% complete with anticipated production at low operating costs. For Johan Castberg, first oil is planned for the fourth quarter of 2024, contributing approximately 55,000 barrels of oil equivalent per day to the company's net share. Tax guidance for the beginning of 2024 indicates payments of around $600 million. All these factors contribute to the company's target to reach an aggregate production of approximately 400,000 barrels of oil equivalent per day by end of 2025.

Hedging and Pricing Strategy

The company has prudently hedged its production, ensuring oil production remains economically viable even with oil price fluctuations. They have achieved a strong average price of $85 per barrel this quarter and have locked in significant portions of their gas sales at fixed prices above the spot market. Oil production is also fully hedged at $50 per barrel on a post-tax basis up to Q3 2024.

Capital Expenditure and Financial Strategy

Capital Expenditure (CapEx) for the quarter stood at $650 million, mainly attributed to projects like Balder X and Johan Castberg. The company foresees staying within the annual CapEx guidance of $2.4 billion to $2.7 billion. Additionally, they expect to end the year with a production range of 210,000 to 220,000 barrels per day, hoping to exceed this and exit at over 230,000 barrels per day.

Concluding Thoughts

The company's journey appears promising with a clear direction for growth, mitigated risks through hedging, and an emphasis on shareholder returns. While the broader commodity price environment poses a challenge, their strategy to capitalize on upcoming projects and maintain financial discipline speaks to a story of resilience and strategic agility.

Earnings Call Transcript 2023-Q3

[Ida Fjellheim, executive]

Good morning, everyone, and a warm welcome to Var Energi's Third Quarter 2023 Results Webcast. The presentation today will be given by our CEO, Nick Walker; and our CFO, Stefano Pujatti. Nick and Stefano will present the results and afterwards, we will open up for Q&A.I will now give the word to Nick.

[Nicholas Walker, executive]

Thank you, Ida, and good morning to you all, and welcome to our third quarter 2023 results presentation. This is my first quarter presenting as Var Energi's CEO. And for me, it's really great to be back involved in Norway. What has been created in Var Energi as one of the fastest-growing E&P companies in the world is extremely impressive. And what I see in Var is a team of exceptionally talented and motivated people who are passionate about our business. And for me, it's very exciting to be part of this tremendous team. I'm pleased to report a quarter with strong financial performance, continued material dividend distribution, and we're on plan to deliver high growth and value creation.First of all, the key highlights. We're set to double our production from today's levels, accelerating our growth target to around 400,000 barrels a day by the end of 2025, inclusive of the Neptune transaction. We're happy to announce that we've had 2 projects starting up in October, Tommeliten Alpha and Breidablikk, adding fresh barrels from this quarter onwards. Our remaining project portfolio is progressing according to schedule with 5 projects more than 50% complete. And the Neptune Energy Norge acquisition is expected to close in the first quarter of 2024. We're also delivering on production and improved OpEx with our new projects we're set to exit this year at over 230,000 BOEs per day. And production costs are on track to beat guidance with $14 per barrel in the quarter. Our gas sales strategy continues to realize above-market prices, resulting in strong financial performance. The realized gas price of $91 per BOE in the quarter was around 40% above market average. And this provides strong cash generation of $975 million cash flow from operations for the quarter, and we maintain a strong investment grade balance sheet.And lastly, we continue to deliver attractive and predictable shareholder distributions. We confirm a dividend of USD 0.11 per share to be distributed in November, and Q4 dividend guidance of $270 million, resulting in total dividends of approximately $1.1 billion for the full-year. Now focusing a little bit on the Neptune acquisition, which we announced in June and is progressing towards completion. This is a value-accretive deal that adds scale, diversification, and longevity to our portfolio. And as we like to say, it's a perfect fit. Neptune's portfolio consists of 12 high-quality NCS assets, which produced 66,000 barrels in the first half of this year and are located in our existing hub areas, as you can see on the map, making them highly complementary to our existing portfolio. Through the acquisition, we're increasing our operatorships and amplifying our position in the Barents Sea with access to the Snohvit field and the Melkoya LNG facility. The assets are cost-efficient with low emissions and with limited near-term CapEx, making the deal highly cash accretive and strengthening future dividend capacity. Also, the deal cements our position as a leading E&P independent with the third largest operator on the NCS, and we become the second largest producer of gas from Norway into Europe.And we're making good progress on closing the transaction, having obtained the necessary approvals from the Ministry of Petroleum and Energy and the Competition Authority here in Norway. And as I said earlier, we anticipate closing in the first quarter of next year. On completion, Neptune Norway will be merged into Var Energi and all Neptune Energy employees will become employees of Var Energi on consolidation of the 2 companies. And Neptune has a team of highly skilled and energized professionals, and we're looking forward to welcoming all our new colleagues into Var Energi to create one team.And now looking longer term to our growth outlook. From the current level of production of 210,000 to 220,000 BOEs per day, we're set to double production to around 400,000 BOEs per day by the end of 2025. This will come from delivery of our portfolio of high-quality projects, which in total deliver 170,000 barrels per day of new volumes. Closing the Neptune acquisition adds 65,000 to 70,000 BOEs per day, which is flat for some time. And as we said previously, we'll dispose off some non-core assets to high-grade the portfolio. For example, the Brage disposal we recently announced. And putting this together means we'll grow to around 400,000 barrels per day by the end of 2025. And beyond 2025, we'll sustain value creation through firstly, infill drilling and improved recovery from our core assets; secondly, maturing a high-value project portfolio to move our significant discovered resource base into production; and thirdly, drilling out our exciting exploration portfolio. And on top of that, we'll continue to look at further opportunistic M&A opportunities. And so I'd like to say we're on track to deliver significant production growth and create value.And now back to the Q3 results. Here's a summary of the key performance indicators for the quarter. We're delivering on production. Unit OpEx is below guidance despite a quarter with high maintenance and turnaround activity. Cash flow from operations was $975 million on the back of strong realized prices. We confirm a dividend of $270 million for the third quarter. At the same time, it's continued to invest in a high-value portfolio of growth projects with CapEx of $650 million in Q3. And we maintain a strong balance sheet with a leverage ratio of net debt to EBITDAX of 0.5x, slightly up on the previous quarter. So I think strong financial results for the quarter all round.Looking now at production. Q3 came in at 210,000 BOEs per day, an increase from Q2, mainly due to higher contribution from new fields. The Fenja, Hyme, and Bauge fields that started up earlier in the year are through their startup phase and now have good regularity. As we previously announced, we expect to exit the year at over 230,000 BOEs per day, which is driven by 2 things: that we have no major turnarounds in the fourth quarter, adding 10,000 barrels a day incremental over Q3. And of course, the Breidablikk and Tommeliten startups adding fresh new barrels. And so we're on track to meet our full-year production guidance of 210,000 to 220,000 BOEs per day.And now an update on our operated assets, which delivered solid performance in the quarter. At Goliat, we've had good success improving uptime and performance. I'm pleased to see the positive trend on production efficiency at 99% in the quarter. This has been the fourth consecutive quarter above 90%. We're actively working to unlock the significant potential around Goliat and also the Barents Sea gas prospectivity. And we have secured a rig for a significant exploration program starting middle of next year. And at Balder/Ringhorne, production efficiency of 79% in the quarter was impacted by the planned maintenance shutdown. And without that, it would have been at over 90%. And we're continuing to unlock upside potential at Ringhorne through infill drilling, where we also see good results.Now looking at production costs. You can see that we're on target to beat full-year OpEx guidance. The seasonal maintenance period impacted quarterly unit production costs. However, we delivered $14 per barrel, which is below the guidance range. And we reiterate our end 2025 target to reduce unit operating costs to approximately $8 per barrel. And the main drivers of this are fourfold. Firstly, new projects coming on stream, which have relatively lower unit operating costs to what we have today. Our active cost improvement program, the rationalization of our portfolio that I've talked about, and the Neptune assets, which improved the overall trend. 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. You can see that we have a clear path to 50% operational emissions reduction from our operated assets by 2030. And this is driven by a focus on investments in reducing emissions and electrification of our assets. And a similar path is being followed for our non-operated assets.Of course, safety performance is a top priority for us, and we have a good trend on improving our performance with 0 actual serious incidents in the quarter. And we're also getting recognition for our ESG leadership with rankings in the top 5% for Sustainalytics and an A+ rating for ESG100. I think this is leveraging to how the company is viewed.Now focusing a little bit on what's going to drive the growth. Our quality project portfolio is key to delivering our growth strategy, unlocking more than 500 million barrels of reserves and adding new production of around 170,000 barrels a day at peak. After the recent startups of Tommeliten and Breidablikk, we have 9 projects in execution with 12 -- 5 of those more than 50% complete. And let me remind you that most of these projects are subsea tiebacks. This means more standardized concepts and execution and thereby less complexity and more predictable delivery. This project portfolio drives our growth trajectory and creates significant value, which you can see with breakevens of around $30 per barrel.If we go to the -- so Balder, of course, is a core production hub for Var. And as you can see, over 500 million barrels has been produced to date from the area, which is over 4x the original PDO. But as you can see, we have the potential to produce as much again, and we're making good progress towards delivering on this ambition. Breidablikk has just come on stream. Balder X is scheduled to start up in Q3 next year, and I'll talk about both of those in my next slides. And we continue to explore and appraise the area. The Norma discovery was announced in the quarter and is currently being assessed. In Q4, we will drill the Magellan and Hubert wells to appraise the King & Prince discovery, Hopefully, this will set up another tieback development. Ringhorne North drilling is now pushed into early 2024 and the Svalin M Sor prospect will also be drilled in Q4 this year. This is a very prolific area and where we will be drilling for many years to come, with the potential to extend production from the Balder area towards 2045.It's also key to our decarbonization plans where we're working with Equinor to assess the electrification of the whole Balder, Ringhorne, and Grane area. And now I want to focus on our 3 major projects. Firstly, Breidablikk, which came on stream in October, 4 months ahead of schedule and within budget. Breidablikk, a subsea tieback to the Grane platform holds almost 200 million barrels of recoverable oil and is expected to pay back in less than 2 years. We will see higher initial production than expected as the number of wells available at startup has increased to 8 wells from the originally planned 5 wells. And of course, drilling is going to continue through to the end of 2025 with additional development wells to come on through that period. You can see peak production from the field is expected at up to 60,000 barrels a day gross with Var Energi's net share being around 20,000 barrels. The successful completion of Breidablikk is an important milestone for the company's strategy for growth and value creation.And if we go to the next slide, please. Thank you. So now to the Jotun FPSO. It's a key enabler to continue to deliver material future value in the Balder area. We're making good progress on the project and are maintaining start-up in Q3 2024. The Jotun FPSO, which you can see in this recent picture successfully met key milestones with the refloat and heavy lift installations completed on plan in the summer. And the FPSO is now over 85% complete, and the focus is on executing the remaining construction work and commissioning. Drilling and subsea activities are progressing according to schedule with 9 of 14 wells having been drilled. And all these wells -- all 14 wells will be available at start-up. And on the subsea, 3 of 5 subsea installation campaigns have been completed with the fourth ongoing just now. However, this has been a difficult project and to mitigate schedule risk and to improve construction productivity, we recently announced a capital -- CapEx increase. This -- you can see this project unlocks gross production of around 78,000 barrels a day with low operating costs of below $5 a barrel. So it's again an important contributor to our growth trajectory.And the third major project is Johan Castberg, which is on track to achieve first oil in the fourth quarter of 2024. Capital costs were recently increased to protect the schedule and recognizing current market pressures for services and equipment. The drilling and subsea aspects of the project are progressing to schedule, and completion of the FPSO is well advanced. Johan Castberg is a key catalyst for Var Energi's growth profile, and you can see the plateau production from the field is around 190,000 barrels a day gross with Var Energi's net share being around 55,000 BOEs per day. And these are high-value barrels with OpEx of around $4 per barrel and breakeven economics of $35. And we see further value upside from extending the plateau through area tieback opportunities, and I think there are quite a number of potential opportunities to come.And now I want to move on to our exploration. Our 2023 program continues to yield results. During the quarter, we made discoveries at Kim, Crino, and Norma, representing an 80% success rate with our program year-to-date. For the remainder of the year, we have 3 further wells, all in the Balder area, 2 appraisals at King & Prince, and the Svalin well that I talked about earlier. The Ringhorne North well is delayed from this year into early 2024. And looking forward, I'm really excited about the company's exploration portfolio, which has over 1 billion barrels of net risk resources.And coming into the company, I see a company that we have an amazing portfolio with lots of optionality and growth opportunities, and we're working to move this forward at pace.That rounds out my operational update, and I'll now hand over to Stefano to review the Q3 financials. Thank you.

[Stefano Pujatti, executive]

Thank you, Nick, and good morning, everybody. Let's go into some key financial highlights of the quarter and see why Var Energi is a unique combination of value creation, extraordinary growth, distribution capacity underpinned by an investment-grade balance sheet. We realized a strong average price of $85 in the quarter, driven by gas, where we continue to outperform the market. This lays the foundation for high cash flow generation. Our financial position stays strong with a leverage ratio at 0.5x and $3.1 billion in cash and undrawn facilities. We confirm the third quarter dividend of $270 million and plan to pay another $270 million for the fourth quarter.I will now go into more details of our third quarter financial performance. We generated more than $1.6 billion of revenues, up $184 million versus the previous quarter, mainly due to higher volumes and higher oil prices. The realized price for oil in the quarter was $87 per barrel, where we benefited from high liftings in September, where -- when prices were higher. We continue our strong gas price realization of $91 per barrel. Year-to-date, the average realized price is $124 per barrel, which represents a premium of $47 per barrel compared to spot. This amounts to more than $800 million in extra sales revenues in the first 9 months. Taking a closer look at the gas sales in Q3. Around 44% of the sales were on day-ahead basis at roughly $60, around 33% was sold on a month-ahead basis at $60 per barrel and both months ahead and day ahead were weighted toward the French and the German market. The remaining 23% was delivered under contracts with fixed pricing, realizing an average of $193 per barrel.Going forward, what can we expect? We continue to have a robust sales portfolio with access to several markets, and we will have flexibility in the contracts to decide the split between months ahead, day ahead, and fixed contracts. We will continue to have fixed price sales representing around 20% of the gas sales. Prices for these sales are $126 per barrel in Q4 2023 and $128 per barrel until the end of Q3 2024. I would also like to mention that our oil production is fully hedged on a post-tax basis up to Q3 2024 with monthly put options at a strike price of $50 per barrel. Cash flow generation from operations in the quarter was $975 million, higher than the second quarter due to less tax payments and higher production. For the first 9 months, we have generated almost $2.6 billion in cash flow from operations after tax. Our CapEx for the quarter is $650 million, where Balder X and Johan Castberg remains the largest contributor with 63% of the total spend. Strong operating cash flow covered the company CapEx with good margin, CFFO to CapEx coverage was 1.5x in the quarter.Year-to-date CapEx is $2 billion, and we expect to be within the guidance of $2.4 billion- $2.7 billion for the year. Tax payments for the third quarter ended at $260 million. For the fourth quarter, we expect to pay around $600 million. This has been revised since the second quarter up NOK 1 billion due to stronger commodity prices. We have included a tax sensitivity for the first half of 2024 related to 2023 results at different price scenarios, which we hope can provide some guidance on tax going forward. Important to state that this excludes any tax effect from the Neptune acquisition.Here, we see the development in our cash position from Q2 to the end of the third quarter. We generated $975 million in cash flow from operations after tax and working capital, significantly higher than last quarter due to lower tax payments, higher sold volumes, and higher oil prices. We further had cash outflow related to investments in our high-value growth projects, and we had net cash inflow of $426 million from financing activities. We also distributed as planned $270 million in dividends to our shareholders. In summary, the cash position at the end of the quarter stood at $595 million and our available liquidity was at $3.1 billion at the end of Q3, in line with previous quarter, meaning we are maintaining a strong liquidity position.We are committed to maintain our investment-grade rating. The leverage ratio, net interest-bearing debt on EBITDAX ended at 0.5x at the end of the quarter, slightly up from 0.4x at the end of Q2, but well below our over-the-cycle target of 1.3x. In September, the working capital revolving credit facility was extended from November 2024 to November 2026. The new facility has similar terms as the previous facility and is provided in equal proportions by 14 international banks. The facility will be used for general corporate purposes and working capital as well as providing a liquidity reserve. The refinancing is a testament to Var Energi access to attractive bank financing and supports a continued strong liquidity position. The average time to maturity of our debt portfolio is now almost 5 years, supporting the execution of our growth strategy towards end of 2025 and beyond. The strong financial position lays a solid foundation for continued material shareholder distribution and growth.Strong financial performance supports attractive and predictable dividends. We confirm $270 million in dividend for the third quarter, which is equal to $0.11 per share to be paid 16th of November. The dividend guidance for the fourth quarter is $270 million, which implies a full-year dividend expectation of $1.080 billion, in line with the total dividend paid in 2022 despite a lower commodity price environment, showing the commitment and resilience of the company to attractive shareholder distribution. Beyond 2023, we maintain our policy of 20% to 30% of the CFFO after tax and reiterate that the Neptune acquisition will be cash accretive and therefore, dividend accretive as well.Now a recap of our 2023 guidance. Production narrowed the range to 210,000 to 220,000 barrels per day. Production cost is expected to beat the guidance of $14.5 to $15.5 per barrel. CapEx guidance is maintained between $2.4 billion and $2.7 billion. Exploration and abandonment costs are expected at $250 million in total. Cash tax payments, approximately $600 million in the fourth quarter, and dividends of $270 million for Q4 of this year. That will bring the total dividend for the year and approximately 30% of the CFFO after tax.That concludes the financial section. I give the word back to Nick for some concluding remarks. Thank you.

[Nicholas Walker, executive]

Thank you, Stefano, and I think you can all see the strong financial results in the quarter.I've just one final slide to summarize. We're one of the fastest-growing E&P companies in the world, and we're delivering on our strategy for growth and value creation and I want to leave you with the following key messages to support this. Firstly, we're accelerating our growth target which including Neptune, sees us double production from current levels to around 400,000 BOEs per day by the end of 2025. Second, this year, we're delivering on production, and we are delivering improved OpEx. Third, we're continuing to achieve strong financial performance, as you've seen, supported by increased commodity prices and our flexible gas sales strategy. And lastly, we continue to provide attractive and predictable shareholder distributions.So those are our third quarter 2023 results. Thank you for your time. And we'd now like to open up for your questions.I'd also like to say that we have Torger Rod, our Chief Operating Officer on the line, who will participate in the Q&A. And I think at this point, I now hand over to our operator to take us through the process. So thank you very much.

[Operator]

[Operator Instructions] The first question will be from the line of Vidar Lyngvaer from Danske Bank.

[Vidar Lyngvær, analyst]

Congratulations on the quarter and congratulations on the quarter, and welcome to Nick. Good to have you here. You mentioned you're working on Equinor to look at the electrification of Balder/Ringhorne area. Could you shed some light on what kind of parameters you look at in such investments and what kind of payback one could expect on such a project?

[Nicholas Walker, executive]

Yes. Maybe I'll start, and then Torger can step in. But I mean we want these projects to make money. And first of all, of course, we -- electrification allows us to stop paying carbon taxes, both in Norway and the EU ETS, but of course, we get more gas to sell, and it improves maintenance, but of course, there's some capital investment there. So it's a bit early days to talk about this whole project. It's in the concept stage, but obviously, we want investments to make money in long-term, and I've experienced in the past, we have been able to achieve that. So I think we should be able to do that here. But maybe, Torger, do you want to add any more light on where the project is at?

[Torger Rod, executive]

Yes, I can add a little bit. First and foremost, we are making sanction on projects that is profitable. So that is also our clear expectation when it comes to the Balder/Ringhorne electrification. And as I also said that we are going to do this in collaboration with Equinor, which is also, of course, making it able to create synergies. So really, what's driving the business of this is, of course, reducing the CO2 and the CO2 taxes. It's more available gas to be sold to the market and it is as well the maintenance part. So -- but we are going to frame this. And as I said, we are sanctioning projects with profitability, and that will also be the case in this regard.

[Vidar Lyngvær, analyst]

And another one, if I may. Your OpEx guidance of $8 in real terms for 2025. Can you indicate what the inflation of just $8 per barrel is today or what kind of inflation you baked into the estimate for 2025? We're now halfway almost between '21 and '25. We're looking for -- what kind of inflation you expect? I realize it hasn't changed from before, but just looking for some color there.

[Nicholas Walker, executive]

Stefano, do you want to try?

[Stefano Pujatti, executive]

Yes. Sure. We are assuming 4% for 2024 and then 2% flat for the following years.

[Vidar Lyngvær, analyst]

I'll requeue for any further questions.

[Operator]

The next question will be from the line of Lydia Rainforth from Barclays. We can't seem to hear Lydia. So I'll just move on to the next one. The next one will be Teodor Sveen-Nilsen from SB1 Markets.

[Teodor Nilsen, analyst]

And welcome back to Norway, Nick. Three questions. First of all, on dividend for 2024. This year, you will pay a dividend which is slightly above 30% operating cash flow. How do you think about 2024? Should we expect you to pay dividends in the mid of the -- in the middle of the 20% to 30% operational cash flow range or should we expect you to stay in the high end or maybe above the high end? That's the first question. Second question is on Breidablikk. It's very good to see that that is ahead of the -- started ahead of the schedule, but what will be the production contribution for Q4 specifically? Third question, that is maybe more on a personal note to Nick. I just wonder what kind of experiences do you bring along from Lundin that you think you should apply in Var and making Var an even better company?

[Nicholas Walker, executive]

And maybe Stefano will take the first one on dividends.

[Stefano Pujatti, executive]

Yes. So dividend of 2024, I think the guidance still there is unchanged, and that is, let's say, to have a dividend, which will be in a range between 20% to 30% of the CFFO. Now let me say something. What you should be considering is the fact that in 2024, we will also have the Neptune deal, and that would be cash accretive from day 1. So that will add on CFFO and therefore will be adding on dividend. Yes. So I think that is a little bit the way to look at it, but we will provide more, let's say, color when we will give guidance on 2024 during the Q4 year-end presentation at the beginning of the year.

[Nicholas Walker, executive]

And then maybe I'll capture the Breidablikk question about what is the production rate for Q4 this year. Of course, it's just come online, Teodor, and it will ramp up. And it's going to take a little bit of time to do that. So -- and as I've put in my presentation, when we get to peak production, it's going to be about 20,000 barrels a day, but it's going to take some months to get there and some more wells to get there. So it's early days. But I'll step back to the guidance that we provided, which is we expect to exit this year at over 230,000 barrels a day, and that involves a component of Breidablikk in there as well as other things. So we're not going to guide short-term production on that. But what I'm saying is that longer term, this gets to a peak rate net to us of around 20,000 barrels a day. And then your third question on personal note.

[Teodor Nilsen, analyst]

[indiscernible].

[Nicholas Walker, executive]

Sorry?

[Teodor Nilsen, analyst]

Could I just follow up on that one? So then I interpret that you want to reach plateau by year-end this year on Breidablikk. We should expect that to occur sometime in first quarter next year?

[Nicholas Walker, executive]

I don't think I can -- I mean I'm not -- I don't think you can assume that, but I think it's going to depend on a number of factors on well performance and uptime. And so it's too early in the life of the field to say what that's going to be. But I think during next year, we would expect to get there. So on the base case, but things can go quicker sometimes. So we have some assumptions baked into the numbers we've given you. And as I said, it's only just started up a few days ago. So it's too early to really comment in detail about it. And in terms of -- on a personal note, I mean I think what I said is when I came in was that what I see is an amazing team of people in Var and a lot of passion, a lot of focus on the business. And I also see an amazing set of assets. I mean, it's an extraordinary position in Norway. And I was really pleased to see the quality of the exploration portfolio, and we also have a big contingent resource base. And it's those 2 things that go together. Nothing is delivered without people. And what was created in Var was driven by people and teamwork and coming into this, I believe firmly in teamwork and people driving the outcome.And what we -- what I would like to see happening in the company is us maximizing the value from this amazing portfolio. And we've got this tremendous growth trajectory to 400,000 barrels a day by the end of 2025. And then we need to bring more projects in and drive the exploration and hope I can bring some more energy to that and help that along. And -- but we have, as I say, an amazing team of people driving it. So I'm only one of many. So as I say, excited to be here, and I think as a team, we can create a lot of value for all stakeholders. Hopefully, that covers it Teodor.

[Operator]

Next, we'll try to see if we got any audio from Lydia from Barclays.

[Lydia Rainforth, analyst]

Hopefully, this works a little better this time. I've got 2 questions if I could. The first one just on the cost side and that's for that target of $8 per barrel. Nick, you mentioned I think 4 different levers to actually get there. What sort of relative importance are they in terms of is it all 25% each or is it a portfolio and of the other new projects? And are those really a bigger part of that? And then secondly, Nick, you talked just then about adding value in terms Barents focusing on value optimization. So what is there to actually do in that? So I'm not quite sure I understood what you meant by that.

[Nicholas Walker, executive]

Okay. On the cost side, I mean we're not going to guide the components that drive that up. And -- but as I listed 4 items that drive it, and they're all important and components about driving down our unit cost. And of course, new projects coming in with lower -- relatively lower unit operating costs improve the position. We continue to focus on driving costs down. And actually, when we bring Neptune in, it creates more synergies and opportunities for us to reduce costs. The Neptune assets themselves are also relatively lower unit costs. So all of those things contribute to driving the costs lower over time. And as I said, we're not going to guide the component elements of that. In terms of creating value and adding value, what I see in the company is we talk externally about the combined Neptune and Var having 1.3 billion barrels. But beyond that, there's -- we have a significant contingent resource base which we have no defined projects for in the large part. So we need to bring those opportunities forward to create value. And that's one of the things we're starting -- we're working on hard is turning the significant contingent resource base into projects and into value.And then the exploration portfolio. I mentioned that we have a portfolio of over 1 billion barrels of net risk resources. And again, we have an ambitious exploration program, a significant program in the Barents for the coming years and also around the Balder area, but also around our other areas of our business, which will largely lead to, I think, subsea tieback opportunities because that's the type of things that we're drilling, except for perhaps in the Barents. And so that creates a -- we expect that to create a number of other opportunities to create value. So the whole focus is how do we turn this significant resource base, both discovered and contingent resource base and exploration into value. And that's really what I'm talking about. Hopefully, Lydia, that covers your question.

[Operator]

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

[Nicholas Walker, executive]

I think we're not getting that, operator.

[Operator]

You can't hear what Sasikanth is saying or --

[Nicholas Walker, executive]

No.

[Operator]

Nothing at all? Okay.

[Nicholas Walker, executive]

No.

[Operator]

Then I'll just move on to the next one. Sasikanth, you can just try to re-enter the queue and we'll take you afterwards. The next question will be from the line of Matthew Smith from Bank of America.

[Matthew Smith, analyst]

I had a couple of questions, if I may. The first one would be around Balder X and Johan Castberg. So part of the CapEx increase there, you put down to mitigate schedule risk. I think you highlighted that again today. I was just wondering if you're able to add a bit of context around that really what that involves. And if you're able to add any confidence intervals around the first oil timelines. I appreciate they've both been maintained at the moment. And then the second question would be on the new 2025 production target net of disposals. So I was just wondering, I appreciate you probably won't talk to specific assets, but are you able to characterize for us the sort of assets that might be deemed non-core? So what are the key metrics or risks that you're looking to mitigate or improve through the actions of disposals from here?

[Nicholas Walker, executive]

Yes. So Torger, why don't you do the first one, and I'll -- Matt, I'll take the second one and nice to speak to you again, Matt.

[Torger Rod, executive]

Yes, I will. And it goes a bit for the same for both Johan Castberg and Balder. So I will, in a way, use Balder as the example here. Because as you know, these projects are schedule-driven and here, I'm talking about the FPSO. And as you said, we are maintaining the targets' startup for both Balder and Johan Castberg and that means for Balder, a start-up in Q3. And here, what we have -- the expenditure adjustment that we talked about just recently, there's really 3 items that is pinpointed. It is, one, it's related to the market and market adjustments. Two, it is related to productivity and to drive productivity and improve that. And three, it is related to schedule mitigations. And when it comes to specifics for Balder, what we are doing is that we are accelerating some of our activities on the schedule to -- and that means that you are installing it. Somewhat of the work, we are doing this year, somewhat, we will be doing early next year.That is, among others, installing the risers and removing work from the critical path as well as to add efficiency in the hook-up and offshore commissioning, we are also including a floatel, which will be used for the hook-up activities offshore. So really then, let's say, improving and adding resilience to the offshore schedule. Then lastly, also which goes to productivity. We are also I would say, adding and amplifying the supervision at the yard, really ensuring that we have not only the manpower but also the supervision that is required to drive both schedule and a timely completion of the work. So that is really how we are driving it. I will say this is also very similar to what is happening at Johan Castberg at the moment. The 3 buckets of cost adjustments is the same. And then also Equinor, which, of course, is better to talk to this than I am, are doing the same to really ensure that they are having a timely delivery of the Johan Castberg, FPSO and a sail away next summer and then a start-up in Q4, which is the date for Johan Castberg.So I think I'll stop there, Nick and Matt.

[Nicholas Walker, executive]

Thanks, Torger. And what I will -- to add a little bit on Balder is that when you look at the critical path runs through the FPSO completion and when you look at this, first of all, we're well advanced. We're over 85% complete. You can't take that away. So there's only 15% to go. And it's -- when you look at, the number of man hours, it's not that significant given the scale of the workforce that we have available to us and the supervision. You also look and you see that the engineering is complete and we have all the materials and equipment. So this is perfectly doable in the time frame that we have. It's all about just delivery of the work that we've got. And then as Torger said, we've increased the supervision and capability at the site to make it happen. So I think we have a degree of confidence around making this happen.Your second question, Matt, was around the disposal. So if you look at the trajectory of the company, it's 200 -- over 200 now. We add our projects and then we add the Neptune assets. So it will take us somewhere over 400,000 barrels a day by the end of 2025. And the reason we come back to approximately 400 is around this disposal package. And our intent is to dispose off assets that are sort of non-core to us. And what do I mean by that? Sort of late life, low perhaps working interest. Late life means high cost, high carbon emissions and perhaps not much remaining potential. So -- and maybe low-ish working interest. So -- and they don't fit strategically in the organization. And anyone can look through our portfolio and see different things that are in there, and we have a number of these assets. We're not going to guide which they are, but they're -- Brage, which we announced the disposal of recently is a sort of good example of the type of thing that probably is better in someone else's portfolio than ours. And there's an opportunity to high-grade. And as I say, when you look at the numbers, it's not a huge portfolio that we're looking at getting rid of because we want to settle around approximately 400,000 barrels a day at the end of 2025. Hopefully, that helps answer your question, Matt.

[Operator]

We'll try to give Sasikanth from Morgan Stanley a second go. They still can't hear Sasikanth --

[Nicholas Walker, executive]

We still can't hear -- No, we still can't hear him.

[Operator]

Yes. On that note, I will just hand it over to Ida for any written questions.

[Ida Fjellheim, executive]

Thank you. The next question is from Anders Rosenlund at SEB. Assuming the Neptune transaction has closed sometime during Q1 '24, from which date will the Neptune assets be reflected in the P&L? From the date of closing or some other date? Thank you.

[Nicholas Walker, executive]

Stefano is best qualified to answer that one.

[Stefano Pujatti, executive]

Yes, yes. So yes, let's -- the transaction has an effective date from 1st January 2023. So this means that what will happen is that we will be paying the consideration when we go to completion. Let's assume that is end of Q1 for sake of example, then all the cash flow until that point in time will be, let's say, deducted from the $2.3 billion consideration. Until that point in time, we will not be booking the production. So production, assuming for sake of example, a completion 1st of April, from that point in time, we will start, let's say, accounting for the barrels. And that will be from that point on, will we start consolidating the company in the Var Energi financial statements.

[Ida Fjellheim, executive]

I have now gotten the questions from Sasi at Morgan Stanley in writing. The first question is related to the ambition for long-term production post-2025. It was previously guided that the company intends to sustain production at end 2025 levels, which was 350,000 barrels a day. With the end '25 production target now raised to 400, does that mean the ambition for sustaining production level is raised to 400 or does the company's previous guidance still hold?

[Nicholas Walker, executive]

Ida, and Sasi, it's a good question. I mean what I'll say is that when we get to 400,000 barrels a day, our aim is to sustain value creation longer term. And I -- as I said, I see that coming from a number of areas. It's around infill drilling and improved recovery from our core assets, and there's still lots of opportunity to continue to do that. It's about continuing to mature new projects where we have a material contingent resource position, not just what Var had, but also what we will get through the acquisition of Neptune. And we need to turn that into value. So we want to create projects out of the -- high-quality projects and bring that through to production of value. And then we have, as I said, a very material, I think, exploration portfolio. We've got over 1 billion barrels of net risk resources in some exciting prospects over all of the basins that we're involved in and in all of the hub areas we're involved in, and that has a material opportunity to create a lot of value. And we want to drill that out and obviously bring that into production as quickly as possible. And we sit on -- we're involved in a lot of assets. So a lot of these things will be tiebacks and quick cycle projects into the things that we're already in.And so we think that has a portfolio opportunity to continue to create value for us. I think it's a little early for us to say how we see the longer-term outlook on top of this, and we will come back at Capital Markets Day and talk about that. But I think we have a significant opportunity. And I think when you look at the numbers, we have 600 million or 700 million barrels of contingent resource on top of our 2P. And we have -- there's about 1 billion barrels of net risk resource in the exploration portfolio, which is considerably more than the resource base that we have booked. So I think there's a lot of opportunity in the company to create value and longer term. And I think we need to come back and guide when we put the 2 companies together and tell you how we see this.

[Ida Fjellheim, executive]

Sasi has two more questions related to CapEx. Firstly, for 2023. The range is kept at $2.4 billion to $2.7 billion. As we now have 2.5 months left of the year, can you give us some more flavor on where we'll end up within that range? And then finally, the third question was related to CapEx for next year with a further CapEx increases highlighted at Balder X and Castberg, there was a question whether there's any guidance you can provide on the likelihood of 2024 CapEx levels.

[Nicholas Walker, executive]

Stefano, do you want to take these two?

[Stefano Pujatti, executive]

Sure. Yes, we are maintaining the guidance as between $2.4 billion and $2.7 billion. What you might be expecting is to be landing in the middle, let's say, side of the middle range for this year. As far as next year is concerned, at the Capital Market update, we guided in a range of $1.5 billion-$2.5 billion per year in 2024 and 2025 with 2024 being in the upper end of the range. Now even with the CapEx increase of Balder and Castberg, we do not envisage the previous guidance on 2024 to be materially changed. But of course, as you are aware, we are consolidating the R&D budget. We are preparing that. We are collecting the data. We are preparing the, let's say, the budget and the plans. So we will revert with an updated guidance for 2024 as part of our Q4 and the full-year results at the beginning of next year, where we will also be including Neptune.

[Ida Fjellheim, executive]

Next question from Johannessen at ABG. This is related to Balder X. Are there any near-term milestones for the alternate Johan Castberg FPSOs that we should look for?

[Nicholas Walker, executive]

I think the simple answer to that is that we need to get these completed onshore and taken offshore in the summer of next year for both projects. And those are the key milestones. I think both of them are in the place where it's about final completion, and it's leading up to taking both vessels offshore in the summer next year.

[Ida Fjellheim, executive]

Next question from Kate Somerville at JPMorgan. We've seen news reports speaking of deepwater rig exodus from Norway towards other regions. As global rig supply is already tight, should further work materialize in those regions? Is there a risk to execution on your current or upcoming projects or are you comfortable with your capacity?

[Nicholas Walker, executive]

I think the simple answer is we're comfortable. We've secured rig capacity and for us in the next few years, actually. So for the projects that we have out, we've got all the rig capacity that we need. And so for us, we're in a good place. But then of course, it's a worry for the industry, and we need to maintain an active rig fleet here in Norway to meet requirements longer term.

[Ida Fjellheim, executive]

Another question from Kate on the production outlook for 2025. Can you confirm that there is no change to your expectations for your portfolio, excluding Neptune? And would you consider additional portfolio optimization of Neptune's assets or already -- or have you already reviewed these?

[Nicholas Walker, executive]

Well, first of all, simple answer again, Kate, there is no change. And our portfolio optimization considers all of the portfolio when we put it together. So that's how we will consider this as one portfolio and the sort of targets and names that we set out previously for the 4 only assets hasn't changed from what we've said previously.

[Ida Fjellheim, executive]

And last two questions from Ruben at Jefferies. First of all, given the production target by end of 2024 of 400,000 barrels a day, including Neptune, can we assume that 2026 is your peak production year in your current portfolio? Second question is, I see your base production is roughly flat, low decline between '23 and end of 2025. What are some of the levers you are able to pull to maintain base portfolio production at these levels?

[Nicholas Walker, executive]

Yes, Ruben, and I'll try this. I mean, first of all, your question said 400,000 barrels a day by 2024. It's actually end 2025 just to clarify. And I don't think -- we're not guiding beyond that point. So it's -- and we're going to hold off guiding beyond that point until we come to our Capital Markets update next year. So -- but I think we can sustain at that level for a period of time after then given the assets. But of course, at some point, we have to add new things in, and we'll talk about that when we get to our Capital Markets update. In terms of the base assets, of course, we continue to invest in these and drill infill wells and opportunities and increase recovery. And we have a program to do that. So that will continue, and that's why we show a relatively low decline on many of our base assets. Hopefully, that answers the questions.

[Ida Fjellheim, executive]

Thank you. That wraps up the Q&A and Var Energi's third quarter results webcast. Thank you very much for dialing in, and we wish you a good day ahead. Thank you.