Var Energi ASA

OSE:VAR

Earnings Call Analysis

Strong Performance Amid Volatility

Var Energi reported solid financial results for Q3 2024, generating over $1.8 billion in revenues. Although revenues declined from the previous quarter due to lower liftings and prices, they increased compared to Q3 2023 driven by higher volumes. The realized price for natural gas was around $76 per barrel, a premium of $8 above the spot market, significantly contributing to an additional revenue of $322 million year-to-date. The oil price realization stood at $81 per barrel, in line with Brent prices.

Cash Flow and Capital Expenditure

The company generated $1.3 billion in cash flow from operations in Q3 post-tax, an improvement attributed to lower tax payments and strong operational performance. Capital expenditures amounted to $718 million, primarily invested in key projects like Balder X and Johan Castberg, which are expected to drive production growth. Var Energi maintains a strong liquidity position with $2.1 billion available and a low leverage ratio of 0.7x net debt to EBITDAX.

Sustained Dividends and Shareholder Returns

Var Energi confirmed a third-quarter dividend of $270 million, equivalent to $0.11 per share, with an identical amount expected for Q4 2024. The company maintains a dividend policy targeting distributions between 20% to 30% of cash flow from operations after tax, with 2024 likely being at the upper end of this range at approximately 30%. Over the past year, Var Energi has returned around $3 billion in dividends.

Guidance for Future Growth

Looking towards 2025, Var Energi has set an ambitious production target of approximately 400,000 barrels of oil equivalent per day, ramping up from a narrowed forecast of 280,000 to 290,000 barrels per day for 2024. Significant projects, including Johan Castberg and Balder X, are key drivers of this growth. The company aims to achieve a production cost below $13 per barrel for 2024, decreasing to around $10 per barrel by the end of 2025.

Strategic Focus on Exploration and Resources

Var Energi emphasizes a robust exploration strategy, planning to drill 60 wells over the next four years, with approximately 20 wells targeted for 2025. The company has made significant discoveries in 2024 and continues to develop its extensive resource base, with 2P reserves estimated at 1.2 billion barrels and a contingent resource of 750 million barrels. This exploration effort is crucial for maintaining production levels and capitalizing on future opportunities.

Operational Efficiency and ESG Commitment

The company reported a production cost of $12.6 per barrel for the first nine months of 2024, benefiting from the integration of Neptune assets. Var Energi is focused on improving operational efficiencies and aims for net-zero operational emissions by 2030 through electrification and sustainable practices. This commitment to environmental, social, and governance (ESG) principles is reflected in its top-quartile industry performance, enhancing the company's long-term investability.

Earnings Call Transcript 2024-Q3

[Operator]

Hi, everyone, and welcome to Var Energi's Third Quarter Presentation of 2024. Today's call is being recorded. [Operator Instructions] I would like to introduce Head of Investor Relations, Ida Fjellheim. Ida, you may now begin.

[Ida Fjellheim, executive]

Thank you, and good morning, everyone. A warm welcome to Var Energi's Third Quarter 2024 Results. The presentation today will be given by our CEO, Nick Walker; and our CFO, Stefano Pujatti. Nick and Stefano will present the results, and 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 a warm welcome to our third quarter 2024 results presentation. As we announced last week, Stefano Pujatti is stepping down as CFO effective 1st of December to pursue a new opportunity within Eni. .

I would like to take this opportunity to recognize Stefano for his tremendous contribution to the growth of Var Energi since its inception 5 years ago. He's played a leading role in steering the company through three defining acquisitions, delivering the third biggest ever IPO in Norway and building Var Energi into the third largest Norwegian oil and gas company. But after 5 years, in the role, it's quite natural for Stefano to move on to something new and bigger. And on a personal note, he will be missed, and we wish him every success in the future.

I'm also excited to welcome Carlo Santopadre as the new CFO and a member of Var Energi's executive team. His extensive experience and proven track record will be invaluable as we continue to drive growth and value creation, and we'll be creating opportunities for Carlo to meet you all during the coming months.

And so now on to our Q3 results. I'm really pleased to report another quarter of solid delivery, with resilient operational and financial results in line with guidance, and the company is poised for significant production growth over the next 3 quarters. As a result, we continue to provide attractive and predictable dividend distributions.

So now let us look at the highlights for the quarter. We delivered operational performance in line with expectations, with production of 281,000 barrels of oil equivalent per day in the first 9 months, which is in line with expectations for the period. This is driven by continued strong operational performance on our operated assets. You'll see that production in the third quarter was impacted by a high level of planned maintenance shutdowns, these have now successfully been completed and everything is now back producing normally.

On the back of this continued solid operational performance, we continue to deliver strong financial results. You can see CFFO post tax in the quarter of $1.3 billion. Our gas sales strategy continues to realize above-market prices, and we're showing strong cost discipline, lowering capital spend and production cost guidance for the year as we enter a more volatile price environment.

And Var Energi is one of the fastest-growing E&Ps, and we're on track to deliver on our 2025 growth target and unlock future value. Over the next 3 quarters, we will add around 150,000 barrels of oil equivalent per day of new production. At Johan Castberg, the FPSO is now successfully anchored at the field location, and the project is on track to start up towards the end of this year.

And as we announced in August, the Balder X project target start-up is moved to Q2 2025, and we're on track to meet this revised schedule. And our exploration strategy continues to deliver results with 2 discoveries in the quarter, making us the most successful explorer in Norway so far this year.

And lastly, we continue to deliver attractive and predictable shareholder distributions. We confirm a dividend for the third quarter of USD 0.11 per share, in line with guidance, which is to be distributed in November. And we're providing Q4 2024 dividend guidance of $270 million, the same as for Q3 and reconfirming our full year dividend and distribution guidance of approximately 30% of CFFO after tax.

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

We completed the Neptune Energy Norge transaction in January and already we fully integrated the business into Var Energi. And we're making great progress on delivering on the targeted synergies from the transaction of approximately $500 million post tax over time, with over 50% of this target already on track for delivery.

And turning now to production. The first 9 months of the year came in at 281,000 barrels of oil equivalent per day, which is in line with expectations for the period. Production in the third quarter, as you can see, was 256,000 barrels per day and is down compared to the second quarter due to planned maintenance activities at Åsgard, Njord and Sleipner areas and associated fields. These maintenance shutdowns are all now complete and everything is back online and producing as normal.

We also saw strong production efficiency from our operated assets, as you can see, averaging 92% year-to-date. And looking forward to the fourth quarter, the planned shutdowns are all behind us, and we expect the Johan Castberg will start up towards the end of the year. And given where we're at, we have narrowed the guidance range for the full year 2024 to between 280,000 to 290,000 barrels of oil equivalent per day with the upside dependent upon the timing of the start-up of Johan Castberg. So we had a good performance year-to-date, and we're poised for significant production growth, starting with Johan Castberg before the end of the year.

Looking now at our longer-term growth outlook. We're set for significant production growth, as you can see from today's level of around 300,000 barrels per day. Five projects in development with the main ones being Balder X, Johan Castberg and Halten East will add around 150,000 barrels per day of new production over the next 3 quarters. This means we'll grow to around 400,000 barrels a day by the end of 2025, which we're firmly on track to deliver.

And with our quality portfolio that has significant upside, we can then organically sustain production of 350,000 to 400,000 barrels per day towards 2030. We will achieve this through, firstly, maximizing recovery and infill drilling and our high-quality assets adding around 45,000 barrels per day over the period.

Secondly, by moving forward at pace our portfolio of over 20 early phase projects towards sanction, and also drilling out our exciting near field and high-impact exploration program. This will deliver sustainable production towards 2030. Responsible operations are key to our license to operate and our ambition is to be the safest operator. I think overall, we've had good safety and environmental trend, which is generally getting better.

However, we continue to have too many low-level incidents, which is a strong focus in the organization. In the third quarter, we had a good outcome with zero material safety or environmental incidents. This performance speaks strong focus every day. And our belief is that it's important to position the company for the energy transition to maintain relevance in investability long term, and we're doing just that and being recognized for it.

We continue to make good progress on emissions reduction. And today, we're in the top quartile of the industry performance. And we have a clear path to over 50% operational emissions reduction from our portfolio by 2030 with the main lever of this being further electrification of assets, which we're making progress on.

Already around 30% of our net production is produced with power from shore and we're involved in 5 electrification projects. So by 2030, our aim is that around 70% of our production will be electrified. And it is my ambition to be net zero in operations by 2030, which we will achieve by direct investment in offset projects, which comes at a relatively low cost and we'll expand on how we're going to do this soon. And as you can see, our ESG ratings are listed here, which are industry-leading. This is leveraging to how the company is perceived.

And now on production costs. We beat guidance with $12.6 per barrel in the first 9 months of 2024 compared to our full year guidance of $13.5 to $14.5 per barrel. We're currently running about $1.5 per barrel below the 2023 levels, where 2 factors are the main contributors. One is the lower cost of the Neptune assets, which is bringing the overall company cost down as expected and the rest is the increase in production compared to 2023 levels.

Also, our improvement initiatives are delivering results. So as a result, we're lowering our full year 2024 production cost guidance to below $13 per barrel. And looking forward, I think we have a good trend. Our target is to reduce unit OpEx to around $10 per barrel by the end of 2025, and with the main levers of this being, firstly, the new projects coming on stream, which have average OpEx of around $4 a barrel. Secondly, high-grading the portfolio, which we've taken some actions on and thirdly, delivering cost synergies and improvements, which we're also making progress on.

So now moving on to how we're going to deliver long-term growth and value creation. I continue to use this slide, which shows what an amazing portfolio Var Energi has with lots of optionality and growth opportunities. Our 2P reserves, as you can see, stand at 1.2 billion barrels. We have 7 projects in development that this underpins our growth trajectory to around 400,000 barrels of oil equivalent per day by the end of 2025. But as a company, we're much more than that.

Our contingent resources, as you can see, are 750 million barrels, where we've already identified over 20 early phase projects to turn approximately 60% of this into value. And you should start to -- you should expect to see up to 8 new project sanctions coming by the end of 2025 with the first being the sanction of Balder Phase 5, which we announced today.

And during the next year, the most significant project sanctions being Fram Sør, Gjøa area development and Balder Phase 6, and there are others. And we also have an exciting exploration portfolio of over 1 billion barrels of net risk resources where we will drill around 60 wells over the next 4 years. And this program, as we'll see later, is already adding value. Putting all this together, we have over 3 billion barrels of resource potential in the portfolio and it is that which will organically sustain our production long term. It's just down to us to deliver what is in our hands.

And so now looking at our quality project portfolio, which underpins our growth, we have 7 remaining projects in execution, which unlock more than 400 million barrels of net reserves. We are well into execution with 4 of the 7 projects more than 80% complete. So I would say the risks are mostly behind us. This project portfolio, as you can see, create significant value with breakevens of around $35 a barrel and rates of return over 25%.

And turning now to our 3 largest projects, which together add around 150,000 barrels per day of new production over the next 3 quarters. Firstly, Balder X. This project unlocks gross 2P reserves of around 150 million barrels with peak production of 80,000 barrels per day. And as you can see, low operating costs of around $5 a barrel.

As we communicated in August, the target production start-up has been moved to the second quarter 2025. Revised plan has limited impact on the company's 2024 production and no material impact on guided capital costs. And the status of the project is all development wells have been drilled and completed, and all subsea facilities are installed and all that remains is to move and connect up the Jotun FPSO. And the FPSO is nearing completion and the additional time will allow us to fully complete the vessel insure before installing in the spring next year, which will enable a fast and an efficient startup.

For the first time, I see contingency in the schedule. The Jotun FPSO is also a key enabler to unlock over 100 million barrels of additional contingent resources in the Balder area. Today, we've announced a sanction of the Balder Phase 5 project. This involves the drilling of up to 6 production wells to utilize the remaining subsea template well slots to capture 2P reserves, gross reserves of 33 million barrels. This is a highly valuable project with breakeven price of $30 per barrel and a rate of return of around 50%.

Already, we're working on a Balder Phase 5 project to add new subsea facilities and wells with sanction targeted in 2025. And we're advancing development studies on the Ringhorne North Discovery we made earlier this year. So we see significant upside in the Balder area in many years of value creation ahead.

And at Johan Castberg, the project is progressing according to schedule and is on track for targeted start-up towards the end of this year. The FPSO is now securely anchored at the field in the Barents Sea, as you can see in this photo. All subsea installations are completed and are now being hooked up to the FPSO followed by final commissioning before startup. And drilling activities are going to schedule with 14 wells already completed, which are enough to reach plateau production levels.

There are a total of 30 development wells planned with drilling activities continuing into 2026. And Johan Castberg is a key catalyst for Var Energi's growth profile with our net share of production being over 60,000 barrels per day when plateau production levels are reached, which is expected to take 3 to 4 months from start-up. These are high-value barrels with OpEx around $4 per barrel and with breakeven economics of around $35 per barrel.

And we see further value upside from extending the plateau through infill drilling and area tiebacks, 8 infill wells and further phases of development are planned being clusters 1 and cluster 2 and we'll also drill a series of exploration wells over the next few years. And so we anticipate this will double the plateau period to 4 to 5 years and perhaps beyond.

And so after years of investment, we see a bright future at Johan Castberg with significant upsides on long-term value creation ahead. And to the Halten East project in the Norwegian Sea, which is now anticipated to come onstream earlier than planned in the first quarter of 2025. Halten East is the development of several smaller fields tied back to the Åsgard facilities with 5 subsea templates.

You can see initially the projects developing 100 million barrels of gross reserves and achieving gross peak production of 80,000 barrels per day, with significant additional unrisked upside in the area of 100 million to 200 million barrels. Var Energi's net share of the peak production level is just under 20,000 barrels of oil equivalent per day. And I think Halten East is a great example of leveraging the value of existing infrastructure to provide high-value barrels with low carbon emissions.

And now focusing on our exciting exploration program. We've had a great return for the 9 exploration wells we've drilled so far this year, with the program yielding for discovery. So a 44% success rate to date. Adding, as you can see, net recoverable resources in the range of 29 million to 57 million barrels of oil equivalent. And 3 of these discoveries, Ringhorne North, Cerisa and Lavrans, which you can see noted on the map there are commercial to develop through existing infrastructure and development and thinking is already being progressed.

And the Haydn result in the Norwegian sea is possibly the most significant as it's a play opener where we see multiple additional prospects and the partnership are already assessing follow-on drilling plans. And we have 6 remaining wells to be drilled before the end of this year, covering some important prospects with 4 of these wells currently drilling.

So I think it's going to be exciting to see these results come in. And looking forward, we're already well advanced on defining our exploration program for 2025, which will be more ambitious than this year's program with about 20 wells being planned.

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

[Stefano Pujatti, executive]

Good morning, and thank you, Nick, for the kind words at the introduction. I'm excited to present my last quarter before stepping down as CFO from December 1.

Now let's deep dive into the third quarter key financials. We generated solid revenues and operating cash flow after tax of $1.3 billion in Q3 on the back of strong operational performance, unit cost below guidance and good realized prices. Our balance sheet remains solid with a leverage ratio at 0.7x net debt to EBITDAX and $2.1 billion in available liquidity.

We confirmed the third quarter dividend of $270 million and plan to pay another $270 million for the fourth quarter of 2024. During the Capital Markets update in March, we presented an upward revised target of about $500 million identified synergies from the Neptune deal.

I'm pleased to say that at the end of third quarter, we are well on track to deliver above 50% of the identified synergies potential. Some concrete examples are realizing onshore tax benefits and a more competitive Var Energi insurance package, eliminating external centralized services by managing them in-house. Other examples are acceleration of discoveries and project developments and integrating the Neptune gas volumes in our gas sales strategy. This demonstrates the scale, diversity and robustness the transaction adds making us an even stronger pure-play E&P.

I will now go into more details of our second quarter -- third quarter financial performance. We generated more than $1.8 billion of revenues down from the previous quarter due to lower liftings and prices. We are up from Q3 2023, mainly due to higher volumes. We also continue to deliver good price realizations and, in particular, realized natural gas price, where we had a price realization of around $76 per barrel, which represents a premium of $8 per barrel compared to spot, realizing above spot pricing has given us an additional gas revenues of $322 million year-to-date. The realized price for oil in the quarter was $81 per barrel, in line with Brent.

Taking a closer look at the gas sales in Q3, around 50% of the sales were on a day-ahead basis at $66 per barrel, around 32% was sold on a month-ahead basis at $64 per barrel, the remaining 18% were delivered under contracts with fixed pricing, realizing an average of $135 per barrel.

Going forward, we will maintain a robust sales portfolio with access to several markets, and we will have flexibility in the contract to adjust the split between months ahead, day ahead, quarter ahead and fixed contracts. Gas has traded below oil parity during the year with the recent fall in oil prices and increasing gas prices, the gas market is trading close to oil parity.

Var Energi realized gas prices has been less volatile as a result of having sold a significant share of its gas linked to gassier ahead indexation as well as fixed price transactions. We see strong fundamentals in the gas market and current spot price has increased by 20% since the end of June due to increased geopolitical risk and robust Asian LNG demand. The market has also started to reflect in the pricing. The increased likelihood that the Russian gas flow through Ukraine will stop from year-end.

Looking in the longer term, we expect a tight, but volatile price environment with gas price trading at close to parity with oil until 2027 when new LNG capacity is expected to come to the market. Taking this into consideration, we have decided to reduce our fixed price exposure to around 5%, starting from the fourth quarter, increasing our exposure to the spot and month ahead pricing.

By keeping our position open, we can, when time is right, use instruments like fixed price or quarter ahead to catch window of opportunities should they arise with target to keep maintaining robust pricing for our volumes also for 2025.

I would also like to mention that our oil production is fully hedged on a post-tax basis for Q4 2024, including the Neptune volumes with monthly put options at a strike price of $50 Brent. And we plan to continue the program going forward also in 2025, where actually, we have already covered 100% of post-tax production until end of Q3 2025.

On the back of strong realized prices, we have high cash flow generation in the quarter. Cash flow from operations in the quarter was $1.3 billion, an increase from the previous quarters, mainly due to lower tax payments. For the first 9 months of the year, we generated more than $3 billion of cash flow from operations after tax.

Our CapEx, including exploration for the quarter was $718 million, where Balder X and Johan Castberg remained the largest contributors of the total spend, and will be the main contributors to reach 400,000 barrels a day by end of 2025.

Year-to-date CapEx spend, excluding exploration, is just below $2 billion, and we expect to end up at year-end at around $2.6 billion in total, lower than initial guidance due to weakening of the NOK and the sale of assets, Norne in particular, which reduces the associated CapEx in the second half of the year.

Our resilient and strong liquidity position improved in the quarter. Here, we see the development in our cash position from Q2 to the end of the third quarter. We generated $1.5 billion before tax and working capital movements aligned with previous quarter. Working capital contributed positively with more than $160 million as a result of a decrease in trade receivables and increase in other current liabilities at the end of the quarter.

Tax payments amounted to $325 million, down from almost $1 billion in the previous quarter. We further had a cash outflow of $699 million in investments in our high-value growth projects. We also distributed as planned $270 million in dividend to our shareholders. In summary, we are left with a strong cash balance at the end of the quarter of $790 million, leaving us with available liquidity of above $2 billion. The leverage ratio, net interest-bearing debt on EBITDAX ended at 0.7x at the end of the quarter. This is an improvement from previous quarter and continue to be well below our over-the-cycle target of 1.3.

In the quarter, we have successfully extended the revolving credit facilities with 1 year from 2026 to 2027. Our debt portfolio is strong and diversified with a weighted average time to maturity of 5 years when excluding the 60-year hybrid, this is supporting the execution of our growth strategy towards end of 2025 and beyond.

We are maintaining our Baa3 rating from Moody's and our BBB rating from S&P, both with a stable outlook, and we are committed to maintain our investment-grade rating. The strong financial position lays a solid foundation for continued material shareholder distribution and growth, and this is a unique investment proposition that Var Energi offers.

Now let's look at the tax guidance for the 2024 estimated profits where 50% will be paid this year and 50% next year. In the fourth quarter, we expect to pay around NOK 8 billion through 2 installments. This is down from the around NOK 10 billion that was presented in the second quarter due to lower price environment. We have included a tax sensitivity for the first half of 2025, which is giving the cash tax estimates at different price scenarios where the middle case is giving around $1 billion in total payments, while the sensitivity is between $0.6 billion, $1.4 billion according to the indicated price ranges.

Var Energi has a strong track record of delivering attractive and predictable dividends. And since the IPO, we have returned around $3 billion in dividends, and we have paid a stable dividend over the last 11 quarters. We confirmed $270 million in dividend for the third quarter, which is equal to $0.11 per share to be paid on November 5. The dividend guidance for the fourth quarter is $270 million, showing the commitment and resilience of the company to attractive shareholder distribution. And we maintain our dividend policy of -- in a range between 20% to 30% of the CFFO after tax going forward, but with 2024 being in the higher range at approximately 30% of the CFFO post tax.

Finally, let me summarize our key 2024 and long-term guidance. For 2024, we have narrowed our production guidance to 280,000 to 290,000 barrels a day, which will increase to 400,000 barrels a day by end of 2025. Further, we have a tangible plan to sustain 350,000, 400,000 barrels a day until 2030.

Production cost guidance has been reduced to below $13 per barrel due to early completion of Neptune, which has a lower cost per barrel compared to Var stand-alone, NOK devaluation and cost reductions. And this brings us well on track towards our long-term target to bring it down towards $10 per barrel by end of 2025.

We have also reduced our CapEx guidance to around $2.6 billion in 2024. And from 2025 onwards, we expect the CapEx to reduce to around $1.5 billion and $2.5 billion. Exploration CapEx guidance is expected to come in around $350 million. We will continue to have high exploration activity in the years to come, and we can expect to be in the upper end of the guided range from 2025 onwards. But we will revert with more precise guiding at the next capital market update.

We are expecting cash tax payments of approximately $800 million in the fourth quarter. We will pay dividends of $270 million relating to Q3, and we guide for $270 million also for Q4, bringing the total dividend of 2024, in line with the communicated guidance to pay out approximately 30% of CFFO after tax.

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

[Nicholas Walker, executive]

Well, thank you, Stefano. And I have just one final slide to summarize the third quarter results. I think we're delivering on our strategy for growth and value creation, and we have delivered resilient operational and financial performance in the quarter, in line with guidance. This is supported by strong cost discipline as we enter a more volatile price environment.

As one of the world's fastest-growing E&Ps, we're poised for significant production increases, we bring -- keep development projects online. This adds around 150,000 barrels of oil equivalent per day of new production over the next 3 quarters and setting us on our path to around 400,000 barrels per day by the end of 2025.

We're doing all of this with industry-leading ESG performance, which we're getting recognized for. And lastly, we continue to provide attractive and predictable shareholder returns. These are our third quarter 2024 results and other reasons to be invested in Var Energi.

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

[Operator]

[Operator Instructions] Our first question comes from the line of Sasikanth Chilukuru from Morgan Stanley.

[Sasikanth Chilukuru, analyst]

I had 2, please. The first was on the FIDs. It's good to see the FID on Balder Phase 5 unlocking 33 million BOE of resources, and you've highlighted this is one of the 8 FIDs expected by the end of 2025. Just wondering, in aggregate, how much of resource would be put in play due to these FIDs? If it is -- also if you could talk about the key ones that excite you, you highlighted Balder Phase 6 and Fram Sør, but wondering if you could talk about any other ones as well that we should be looking for?

The second one was on the production guidance, 280,000 to 290,000, 10,000 barrels of oil equivalent per day variance for full year implies a much wider range for 4Q. I was wondering if you could explain where this variance is coming from assumptions between the bottom and the top end of that range, you did highlight on Castberg, but anything else that is kind of playing into this guidance as well?

[Nicholas Walker, executive]

Okay. Good questions. And just to follow up. So what we've highlighted is the key to sustaining production is that we have around 750 million barrels of contingent resources. And we've identified over 20 early phase projects that we're moving forward towards development. They account for around 400 million barrels of the 750 million barrels. So of course, we're working to try and figure out how to develop the rest of it as well.

And what we're working to do is to bring forward projects as quickly as we can and at the pace. And what I said is that we will expect to sanction up to 8 projects between now and the end of next year. The first one being Balder Phase 5, which is a great project with great economics.

I think if we just focus on a few of them in the Balder area, for example, we have a Balder Phase 6, which we're working on. And then we made a Discovery Ringhorne North in that area earlier this year. That's also something we're working on. And so there's a couple of important projects. I mean the key thing is to feed the FPSO with the volumes over time.

In the Gjoa area, we now made 4 discoveries there with Gjoa North, Ofelia with another discovery Kyrre next to it and then also earlier this year, Cerisa and we're going to aim to move that whole -- those 4 discoveries forward as one project tied into the Gjoa facility. And that's another important project we're aimed to sanction towards the end of next year.

On a nonoperated basis, one of the bigger ones we've got is the Fram Sør project, which is expected to operate by Equinor expected to sanction next year and there are others. And so I say up to 8, it could be a little bit less, it could be up to 8. But I think in terms of volumes, we haven't guided, but the overall volumes we have guided, which is to try and bring 20 projects forward of 400 million barrels.

And then on to your question about the production guidance. So we've narrowed it as to where we've got to. And I think the way to look at this is there's quite a bit of uncertainty about -- or still uncertainty about the timing of when we will start up Johan Castberg and of course, the rate of pace of that ramp-up, and that's really what reflects the upside range here.

I think without Johan Castberg, we'd be in the middle of that range. So you can get a sense of the range of outcomes there. So hopefully, that answers the question.

[Operator]

Our next question comes from the line of Matthew Smith from Bank of America.

[Matthew Smith, analyst]

I had a couple as well. I mean the first one was on Balder X, if I could. Note in your comments that perhaps you see contingency in that time line for the first time. Obviously, encouraging to hear. I just wanted to sort of -- and the last thing you're going to do is change the first oil guidance once again or hint that, but I just wanted to talk through the scenario analysis there, given the restriction of weather windows. What could be the implication if things are running ahead of schedule? Could that be a slightly earlier first oil date? Or is this more about ramp-ups? Or is it rather just sort of derisking that time line, but the way the windows might still hold you to the existing guidance. So that would be the first one around Balder X?

And then the second one, if I could, is really a sort of a broader question around the dividend and the dividend policy, noting the CFFO payout ratio that you have through the cycle, 20% to 30%, a decent-sized range, but you've been comfortable using the 30% so far? And I guess I just wanted to touch on what's given you the confidence to go towards that 30%. And perhaps that can give us a bit of an indication of how you might use that policy into next year? And I guess in terms of thinking scenario, analysis once again that a lot of investors are at least thinking about the risk of lower oil prices into next year. I suppose my question really is whether you envisage using the range sort of procyclically or whether you're structurally quite comfortable hugging the upper end, please?

[Nicholas Walker, executive]

So Matt, good questions. And I'll take the first one and maybe Stefano can answer the second one maybe with some follow-up from me. So in terms of Balder X, I mean, where we're at, it's just the completion of the FPSO, which is the thing to get the project done. And we're in the commissioning phase and we're expecting to get this thing fully complete inshore, so we carry no uncomplete work offshore. That's going to mean a fast and efficient start-up when we get there. And in fact, the scope of work for the offshore hookup is not very significant.

So if we can get everything done onshore, which we expect to, and that's where I see the contingency, we should be done before we come to the installation period. So I think we're in good shape for that. And in terms of installation, we get into a March period of time before we get to a period where the weather starts to come down. And of course, it depends on when the weather period comes to us, and we'll be ready to go as soon as possible. So we might get the opportunity to get it installed earlier if the weather is good in the early part of March or it might take a bit later in March. But I think we're pretty confident of being able to get it in that time frame.

And then it's the speed at which we hook up and what we're saying, we believe we can get to first oil within Q2 next year. And as I said, I think there's a bit of contingency in that schedule both in the timing to get it done, finished onshore, but also when we go offshore, we have a big floatel, which has lots of beds, way more than we should need. And that gives us also a contingency to try and speed things up. So we're feeling good about that.

So with that, I'll hand to Stefano to cover the dividend question you had.

[Stefano Pujatti, executive]

Yes. And thank you, Matthew, for your questions. I think on the dividend, we are confirming the policy, which was set since the IPO, which is actually to pay a dividend in the range you mentioned between 20% to 30% of the CFFO. I think this policy has served us well until now, where you saw that we, let's say, managing the upper level range of the level this year, we somehow were able to maintain the dividend at 1.1 like the previous year, despite lower gas prices.

And this, I should say, should give a strong signal of predictability and sustainability of the dividend in Var Energi. Said so, next year is going to be a year, an important year for Var because we are entering a cycle with high production and declining investments, which provides a further additional headroom for CFFO growth.

And let me say, where we will land in terms of range, I think, is something that will be -- we will be communicating when we will be doing the -- in February next year, the capital market update. But let me say, the dividend level is assessed quarterly. This is based on commodity environment, company performance. So it's an holistic view. But I think February capital market update will be more precise on that.

[Operator]

The next question comes from Teodor Nilsen from SB1 Markets.

[Teodor Nilsen, analyst]

Two questions from me. First, on M&A, you have recently divested some assets in Norway. I just wonder if you could high level discuss what you see on the M&A side and also how you compare the Danish continental shelf and U.K. Continental shelf versus Denmark and whether you are looking into those at all?

Second question that is on gas pricing. Stefano, you said that you're not doing any gas hedging at the current prices. Just wonder what do you need to see to actually start putting in place gas hedging again?

[Nicholas Walker, executive]

I'll take the first one and Stefano can cover the second. In terms of M&A, we've -- we said we would dispose of some noncore, nonstrategic assets. We've done some of that. We disposed of a couple of assets and -- through the year. And what we saw is we saw a lot of interest actually in the assets. And so we've got multiple offers, and we were able to sell for attractive prices in our view.

So I think there's a -- for the right -- there is a market for assets and a decent assets. From our perspective, in terms of strategic things for us, we have clearly the capacity to do things. We've grown the company by doing multiple big transactions. And if we can find things that are strategic and we can do it at a price, we can create value, then we've clearly got the capacity and capability to do them. The key is to find things that we can and want to do, and we have to be opportunistic about that.

Quite frankly, I haven't studied what the opportunities are in Denmark. We have -- we're a pure play Norwegian company. I think there's enough running room for us here, and that's what we're focused on. So hopefully, that answers your question there. I think on gas prices, maybe Stefano can take this question.

[Stefano Pujatti, executive]

Yes, sure. I think as we mentioned in the presentation, if you see, we go down to 5% of let's say, fixed pricing element. And I think that is an advantage because locking prices that are not particularly interesting is not something we want to do. Now what we have and what we retain is going forward, the flexibility to use fixed pricing or quarter ahead indexations to lock in gas prices when -- if and when window of opportunities will come.

Now the question you make is what is the -- what are the levels that you find interesting to lock in. And this is a difficult answer because there is a lot of volatility. Gas prices are -- there are a lot of also uncertainties related to geopolitical risks. There is a winter that is coming -- this winter would be a cold one or a mild one, who knows, but that is exactly what we will need to be doing to monitor as we go.

The volatility and the price -- gas price dynamics and then decide at that point in time whether the window of opportunity is there and to which extent to start building positions.

[Nicholas Walker, executive]

And if I might add, Teodor, we're trying to be cautious here. What we want to do is to achieve the opportunity to achieve above spot prices, but not put ourselves in a place where we put the risk of being below spot because we've locked in at a price that's not very attractive.

So I think we have under Stefano, a fantastic team driving this. I mean, they do a good job and have a good understanding, and I think we have a good sense of the market, given the scale of our business in gas. And so in the last 6 quarters, we've been able to achieve significantly above spot pricing.

And I think they were cautious, and we made the decision not to lock in very much for this quarter or this year ahead, but I think we have mechanisms to do that. And I think we've been proved right on that. But it's about taking a cautious approach and trying to achieve some upside rather than put ourselves in a risk of downside.

[Teodor Nilsen, analyst]

That is clear. So just to be sure I understood the answer correctly, at the current forward gas price $12 to $13 per MMBtu over the next couple of years or at least the next year, you don't see any very good risk or order locking in those prices. Is that correct?

[Nicholas Walker, executive]

Well, I would rather prefer to say that we will be waiting a bit going -- a bit more towards the winter to assess how the forward curve will move.

[Operator]

Next up is Kate Somerville from JPMorgan.

[Katherine Somerville, analyst]

I have 2, please. The first one is a bit high level. At your Investor Day, you outlined the long-term CapEx outlook. And I think like beyond 2025, you have a lot of flexibility because it remains uncommitted. Since then, we've obviously had a lot of geopolitical macro volatility that you talked about.

I'm just wondering how -- what is your sort of internal process for making that uncommitted CapEx committed? Should we be looking at like where spot prices are, what are your different considerations for the long term?

And then second question is just on your OpEx guidance. I understand a lot of it due to Neptune and your new assets, but I believe that was probably known before. Just wondering what was different versus your expectations earlier in the year?

[Nicholas Walker, executive]

Yes. good questions. In terms of -- as we look forward in terms of committed, uncommitted CapEx, I mean, the key thing here is the uncommitted CapEx that we had were opportunities and project opportunities that we have not solidified and moved forward and sanctioned. And so the key thing for us now in terms of sustaining production is to start moving these 20 early phase projects forward to start moving our exploration program forward and infill drilling programs forward. That's what's going to sustain our production long term.

And as these up to 8 projects that we want to sanction over the next year and a bit, those are going to start turning -- once we sanction a project, it's going to turn that sort of uncommitted capital into committed. And we want to convert a lot of that into committed capital because it means we've got good projects that make $30 breakeven prices and 25% rate of return, which creates a lot of value long term.

Of course, we're going to be sensible about this. I mean depending on -- there's a lot of variables that drive when we can sanction a project. We need to bring -- do the work. We need to get to a place we're ready to go. We need to put in place all of the contracts to do it. We need to bring our partners with us.

And so all that takes time. But also, we have to look at the macro environment out there. And of course, if the prices are high, then we might move quicker and if prices are lower, then we have the opportunities to slow down and take a slower pace. So I think all of those factors will bear on how quickly we move projects forward and how we start to solidify that capital. But I think the way to look at this, though, is the big infrastructure-led projects that we've done, Johan Castberg and Balder, they're almost behind us.

And going forward, the type of projects we're doing a much shorter cycle time, much more predictable, they're all tieback type developments. And the capital efficiency of those is higher. So I think you should expect we can live within the sort of capital frame that we provided at the Capital Markets Day.

And then on OpEx guidance within this year, this is driven -- we've been doing well basically on production. We've been doing well on overall spend. And then of course, the weak Norwegian krone with much of our cost -- operating cost in Norwegian krone. All those 3 factors drive to us seeing reduced operating costs this year. And I think we'll see the benefit as we move forward. So hopefully, that answers your question.

[Stefano Pujatti, executive]

And maybe just to add a point building on Nick, you're right. Yes, the Neptune was known, but we were able to close earlier the deal. So we were announcing Q1 and then we were able to complete by end of January. So earlier inclusion provided an additional benefit because Neptune is bringing overall an improvement of $1 per barrel versus the stand-alone basis of $4.So that also is an element.

[Operator]

The next question comes from [indiscernible] from Barclays.

[Unknown Analyst]

You mentioned that more than 50% of the $500 million Neptune synergies are on track to be delivered. I wondered if you could explain what you mean by that in terms of timing and also where you are with the 50%? And then second question on exploration, which are kind of the most significant of the 6 remaining wells this year. And you said that you're buying 20 wells next year. Can you comment on the total size of resource that's been targeted and maybe on the size of the largest prospects being targeted next year?

[Nicholas Walker, executive]

Yes, Stefano, do you want to get the first one?

[Stefano Pujatti, executive]

Yes, sure. The -- yes, we realized -- we are on track to realize those. And some examples are the -- as we mentioned already earlier, is the effect of having done some, let's say, some savings on insurance, some tax synergies and we have eliminated some external costs where, for example, Neptune had a big head office providing services overall to the group and to Norway, and we were able to have those in-house.

So in terms of timing, it's clear that these that I just mentioned, where we were able to capture them already this year. So just to give you a rule of thumb, more or less in terms of cash flow impact more or less 10% of this 500 was already realized in terms of cash flow this year.

Of course, the rest is then coming also in the coming years. The value we're giving is an NPV and this is mainly then related to the discoveries, the exploration discoveries we did and also related to actions that would be connected with the synergy related to the field, to the operations, synergies related to contracts to -- for example, we have established a combined continuous rig line.

So we have reduced start and stop cost, improving operational efficiency. So this will be coming a bit beyond '25. Another important piece, I think, is the gas sales commercialization because those we were able to include the gas from Neptune, from, let's say, from October this year. So that will also be using our flexibility, our flexible contracts and our gas sale strategy, we envisage also to get some synergies in that area as well.

[Nicholas Walker, executive]

Good. And then just on your exploration question. We got 6 exploration wells left to drill this year, actually 4 were currently ongoing. We've got to -- 4 of those wells are in the North Sea area. These are all tieback type opportunities into existing infrastructure. And then we've got a couple of wells we're drilling in the Barents sea . Some of the sort of more notable ones here, we're drilling an appraisal well on Countach. If you recall, this is a discovery we made new to Goliat.

And actually, we've committed to drill 4 wells on that trend over the next 6 to 9 months. And this is the first of them. So that's going to be very important as we start to look at volumes -- future volumes coming into Goliat. Up in the Barents, we're also drilling a high-impact well called Elgol. We have a strategy there to drill out the gas prospectivity jointly with our partners up there, and Elgol is a big prospect, and we're going to drill that towards the end of this year. So those are the types of things we're doing.

In terms of next year, I want to give you a sense that we are having a big program. In fact, we've got a lot of activity. And so we said, including this year, we drilled 60 wells over a 4-year period. This year it's going to be I think, 15 and next year, I think, a little bit over 20. It's a bit early for us to say which ones we're going to do next year, but we'll outline that in detail when we have our capital markets update in mid-February once we've got everything and all the approvals in place.

But I'm quite confident that we're going to have a program that sits over 20 wells next year, and there's some -- clearly, it's a mixture of things. It's -- our strategy is to have around 15% of our well stock as higher reward, higher risk opportunities. And then and with the rest of the program being tie-ins to existing infrastructure. And I think that's how you'll see it when it comes forward. So hopefully, that answers your question.

[Operator]

Next up is Anders Rosenlund from SEB.

[Anders Rosenlund, analyst]

I had the impression after the CMD that you intended to sanction quite a handful of projects within year-end 2024. And from the announcement today and the comments you made previously in this call, it seems to me that the sanctioning will be done during 2025. And I appreciate that these processes may take longer time than initially envisioned. But I was just curious if you could share some color on if my interpretation is right, what's the reason for these processes taking longer? And yes.

[Nicholas Walker, executive]

Yes, I think we didn't give any time frame actually at our capital markets update. And what we said is we're working to move this forward as quickly as possible, and that's what we're doing. I think -- we have over 20 projects. We're moving these forward at pace. I think we're going to find there's going to be quite a few more than 20 projects, and the time frame that we're looking at sanctioning next year is in line with broadly how we saw it at capital markets update. So I apologize if there's any confusion, but that's how we see it.

[Anders Rosenlund, analyst]

And if I may, so we shouldn't expect any additional sanctioning within year-end. This is mostly a 2025 event?

[Nicholas Walker, executive]

Yes, and beyond. I mean it's -- we'll see some in '25 and then we'll see more coming in the future as well.

[Operator]

Our next question comes from Victoria McCulloch from RBC.

[Victoria McCulloch, analyst]

Firstly, on tax. Could you give us some help as to what assumptions do you have in the first half '25 tax guidance in terms of production in order to what could -- based on our own assumptions what the proxy could be for the second half of the year, obviously, with production increasing materially as it would suggest that tax payments will also increase materially, but some guidance on where the assumptions sit in your guidance would be helpful. Is that possible?

And secondly, can you talk about maybe big picture once again, similar to some of the other questions on the call today. Big picture gas versus oil preference in terms of this project, the development projects you're sanctioning from your resource base. Do -- is there a ranking system on gas versus oil, particularly given [Technical Difficulty] comments about gas heading into 2027 and beyond with LNG coming in more materially?

[Nicholas Walker, executive]

Maybe, Stefano, you'll take the tax question, and I'll cover off the gas sort of oil mix?

[Stefano Pujatti, executive]

Yes, sure. Thanks Victoria, for your question. Actually, the tax guidance or sensitivities that we have provided in the presentation, which are related to first half of 2025 related to the 50% taxes that will be paid on the 2024 estimated profits, right? Because the 2024 profits in terms of taxes, what we will do -- we will be doing is paying roughly 50% by, let's say, in the second half of this year, and the remaining 50% in the first half of next year.

So the production assumptions related to 2025 are not really relevant for this. Then 2025 taxes will be paid, let's say, half in the second half of 2025 and then the remaining part in the first half of 2026. So there is a bit of shift in the mechanism how you pay taxes. I would say overall, if I can give you guidance -- an overall guidance in terms of tax, I would suggest to use the 78% tax rate guidance that we have in Norway to assess the taxes overall for the year.

[Victoria McCulloch, analyst]

Sorry. I was just meaning production from -- really from Castberg is included for the end of 2024 and your 2025 tax assumptions, sorry, if that wasn't clear.

[Stefano Pujatti, executive]

Yes. No. It's -- in the end, it's not really flipping the coin. We have an assumption that Castberg is starting in, let's say, in Q4. But I can tell you it's not really material given the numbers. But yes, is included.

[Nicholas Walker, executive]

Good. And Victoria, the second question about gas oil mix. I think as a company, just strategically, we're about 30%, 35% gas mix and then the rest oil. I think that's a benefit to us in terms of mix of commodity prices when we look at risk and volatility longer term.

I think in terms of where we look out, do we target gas? Do we target oil? Actually, I don't think we have that luxury. We find what we find and we develop what we've got. And so of course, we've got a lot of discoveries on our hands, and we're trying to move these forward at pace. And I don't think -- we don't really have the luxury to choose which ones to do. We're just trying to do everything as we can as quickly as we can. And to feed the profile long term.

And -- but if I look at this, I mean I think it's good to maintain the mix actually at roughly this level. I think it's good long term. Our view on gas prices long term are perhaps not as negative as others. I think we'll see -- we see quite strong supply-demand balance tightness over the next few years. And then the view is that -- the market view is that we're going to see a lot of LNG hit the market in '27 onwards. I have a feeling that some of those projects might be late.

I also believe that the world needs a lot of gas. And I think those volumes will be absorbed very quickly. And I think gas is an important transition fuel for the long term. So I think we would like to be able to maintain a good portion of gas in our production mix long term. And -- but the reality is we can only develop what we find. And we -- we'll see what that mix is going to be over time. It's down to...

[Operator]

The next question comes from the line of Mark Wilson from Jefferies.

[Mark Wilson, analyst]

Two questions. The first for Nick, a bigger picture. It was interesting to see you asked on Danish assets, and you said you haven't studied those and the Var should be considered a pure-play Norwegian business. You're clearly delivering benefits from the Neptune deal and have a longer-term plan for production and exploration in Norway. But I do get M&A -- international M&A questions from the market occasionally, including Var, should we shut down such questions, Nick? That's my first point.

Second one, Stefano. We did notice a cost basis increase, a $200 million increase on Johan Castberg. We knew about the Balder X one, but just checking if the Castberg one is new and if that's already through the P&L.

[Nicholas Walker, executive]

Mark, in terms of -- I think strategically, we're positioned as a company that's pure play Norway. I think we get a lot of benefits from that. I think I've been quite sort of vocal about this externally. I think Norway is one of the best places in the world to invest in oil and gas. It's got stable framework conditions, which means that the Norway is open for business and supports investment into this industry. It's -- despite being an offshore region, it's low cost because there's been a long-term vision focused on the industry. And as a consequence, it's a low cost per barrel industry.

It's low carbon, in fact, it leads the world in that. And also, there's still a lot of resource left to find. So we're only -- the numbers indicate that whilst we're 50 years in, we're only 50% of the way through the resource base and still a lot left to find, and that's what we see. So we think there's still a lot of running room here. And I think in terms of an investment proposition, it's very simple with pure play Norway. I think people see that and I don't think people want to wake up and find that tomorrow, we bought something in some other parts of the world that has a different risk profile. And I think that's the way to look at this.

And then Stefano, you pick up the second question on cash per cost.

[Stefano Pujatti, executive]

Yes, no, your cash per cost increase, as you said, is NOK 600 million since last year and this is net to Var. The cost increase is due to a longer stay at the yard in-stored and also general cost increase. The CapEx increase does not change the 2024 forecast mainly due to rephasing for drilling cost. We have a sublease of a rig to [indiscernible], but this will increase -- let's say, the increase will affect mainly 2025 and 2026 budgets.

[Nicholas Walker, executive]

Okay. Does that cover the questions, Mark?

[Mark Wilson, analyst]

It was actually more to this. So that -- you're saying that's additional costs. It was more that you did pass something through on Balder X in this quarter. So I'm just wondering whether the Castberg will be treated the same way.

[Nicholas Walker, executive]

Sorry. Yes, sorry, I couldn't hear well. Can you repeat, Mark? Sorry.

[Mark Wilson, analyst]

We'll take it off-line. It's fine. I'll hand it over.

[Operator]

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

[Ida Fjellheim, executive]

We only have 2 questions here from John Olaisen at ABG. Could you please remind us of the plateau level of Balder X? Also, could you elaborate a bit on when we should expect it going off plateau? .

Secondly, on Balder Phase 6, when should we expect the PDO to be handed in? What is the 2P reserve estimate and the production contribution of this?

[Nicholas Walker, executive]

Two good questions. In terms of Balder X, it's going to come online in Q2 next year, and I would anticipate 3 to 4 months to get to peak production and to remind the capacity of the FPSO is 80,000 barrels a day, and we have 90% of that. So we just have a bit over 70,000 barrels a day net to us.

The reality of the reservoir is it's quite a peaky profile, and that's why we need to continue to invest into it. And that's why we're doing Balder Phase 5. And so you'll start to see some of those wells come in before the end of next year with the 6 wells to come. So we have 14 wells in the current phase. We're going to drill 6 more in Phase 5, and these are multilateral. So they're very good recoveries and productivity from them.

And so they will feed into the profile starting in -- later in next year and into 2026. And then we would expect to bring more phases forward over time. And so Phase 6, we haven't fully defined it yet, so it's too early for me to say exactly what it is. There's quite a wide range of different designs for that project from a smaller expansion to a broader expansion and in fact, looking bigger picture.

So as I say, we have over 100 million barrels of opportunity to develop, and we're working forward to move that in the most efficient way forward. I think you'll see -- the way to look at this is a series of phases of development into the facilities, and that's what you'll see looking forward.

[Ida Fjellheim, executive]

Thank you very much. That concludes the Q3 2024 results presentation. Thank you all very much for dialing in. We wish you a good rest of your day.