Maha Energy AB
STO:MAHA A
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Maha Energy AB
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[Foreign Language] Paulo and Guilherme, it's nice to have you here connected. Good afternoon, and please walk us through this eventful quarter and why this is the beginning of a new era for Maha. So with that, Paulo, I'll leave it over to you.
Good afternoon. Thank you very much. It's a pleasure here to be with you all to present the first quarter earnings. We can start here. We will walk through a little bit of the recent events of the quarter. and the main points that happened during this first part of the year, just I'm making here a quick introduction, myself, I'm the CEO of the company. And today, it's a pleasure here also to have Guilherme, the new CFO of the company. He's currently in Oman now. So welcome here, Guilherme, for our first quarter meeting. I think we can do...
My pleasure to be with you, Paulo.
Thank you very much, Guilherme.I think we can move to Slide 6, please. So during this quarter, lots of recent events happened. The first one was the conclusion of the JOA with Mafraq Energy, which we concluded in January, completing the assignment of 35% of the Omani assets to a local partner, which will bring not only local expertise, but a partner that will invest in the asset alongside with us. And in February, we had the new certification of reserves, we shifted this year to McDaniel. Also in February, we completed the acquisition of the sale of the Brazilian assets of Tie and Tartaruga to PetroReconcavo for a total consideration up to $187 million. which a substantial part of it has already been paid and the remaining part, a second installment shall happen in August. By March, Guilherme de Campos was appointed as the new CFO of the company. Also in March, we started the production test Block 70 in Oman, which we are today here very happy to present the preliminary results of the 4 wells we have already started testing. On March 29, we approved the DBO transaction in which we bring to Maha not only an asset with cash flow generation but an asset with almost 19 million barrels of 2P reserves, and we reestablished a production of almost 2,000 barrels to the company with a very solid capital structure.And finally, in April, the new certification of reserves for Peroa and Papa Terra were released. So basically, we start here a moment of the company with a production, assuming the closing of the assets of Peroa and Papa Terra with almost 2,300 barrels, which was almost the production of a year ago when we had Tie and Tartaruga, however, with a cash position of this quarter of $110 million and with the second installment of almost $160 million. So we reestablished the same production we had with a very solid capital structure. And here, the company is actively focusing in an M&A agenda with very cash flow-oriented company.I think we can move to Slide 8, please. So here, as we were saying, today, the company will have as assets. Oman, IB in U.S., Peroa and Papa Terra that are still subject to closing. As we said, the business combination with DBO was a very accretive transaction to shareholders. We strongly believe that not all of these assets provide a cash flow generation of oil and gas, but also brings relevant reserves at a very attractive transaction multiple of 0.23 price to NAV. We expect closing to happen very, very shortly within days. Regarding Oman, we started the production testing in March. We'll have a slide here in which we will detail alongside with the press release we issued this morning. The drilling campaign is expected to resume on the drilling commitments, we expect to finish it by the second quarter. In addition to that, we signed the LAK ranch divestment, the sale of part of the U.S. assets. And we expect closing to happen in the second quarter, remembering that this asset didn't have any reserves booked. So this was more a change of focus of the company to more cash flow-oriented acquisitions. When we look to the production profile for the first quarter, we reached, assuming closing happened, 1,600 barrels. And when we look to the reserves and resources, we are talking here of 22 million barrels of 2P reserves. Plus, if we add up the contingent resources on Peroa, we will reach a sum of 45 million barrels of oil equivalent of 2P reserves plus 2C contingent resources. I think we can move on slide, please.Making here a quick breakdown of our reserves and net asset values. The company today has assuming IB, Oman and DBO's assets, a total NPV of USD100 million to USD237 million from the 1P to 3P with a midpoint of $172 million. And if I'm assuming the cash position proceeds from sale of almost $203 million. When we add up, the company has today a gross asset value of USD303 million to USD440 million and a net asset value of USD240 million to USD336 million. Remembering that a substantial part of this net asset value is cash. In addition to that, this does not contemplate the contingent resources from Oman on part of the contingent resources of the Peroa asset that this could up a substantial amount of value. Of course, in the case of Oman, we could only be able to certify reserves as long as we have a development plan approved by not only the Sultanate of Oman, but also applicable third parties. So here, we see how the net asset values of the current assets of the company surpass considerably the current market capitalization of the company in almost depending on the 2PKs of almost 3x.We can move on slide, please, Guilherme. Talking a little bit about the production. As we see here, in April 2023, we reached a 2,200 to 2,300 barrels of oil equivalent when we add Peroa, Papa Terra and IB, we basically reestablished the production we had a year ago with Tie and Tartaruga. And remembering now with almost $160 million of cash that we will have by August, that excluding the earn-outs.Regarding Peroa, in the first quarter, the production was limited to 500,000 cubic meters. And we have a production in April of 490 barrels of oil equivalent per day. 3R Offshore, the operator of the company, is currently negotiating with third parties to use the facilities to treat the production that exceeds this 500,000 cubic meters. Talking a little bit about Papa Terra. During the first quarter, there was a maintenance integration program that halted the production for some weeks. However, they were resumed back in April with a total average production of 1,583 barrels of oil per day. Regarding IB, we had a production of almost 217 barrels of oil equivalent per day. And the company expects here to maintain this production with some drillings that shall happen along this year.I think we can move one slide, please, [ Guilherme ]. Talking here about Oman. We issued a press release today morning in which we presented the preliminary results of the 4 wells that Maha has already tested. So in the first moment, we opened well, Mafraq-9, which represented a rate of oil of 300 to 350 barrels of oil per day with a very low water cut below 5%, and then the company moved to Mafraq-7, which we encountered some start-up issues and the well was shut in for the moment. We expect to return to this well in a second moment. We expected the same behavior of Mafraq-7 of the other wells. So we expect to sort out this issue of Mafraq-7 when we return to the well. We moved to other wells to speed up the testing. So that's the reason why we didn't return to Mafraq-7 at this moment, but again, we expect to return it later. Then we had Mafraq-10. We reached a peak of 430 barrels of oil per day with a 10% water cut. And finally, Mafraq-8, that reached an estimated production of 600 barrels of oil per day with a water cut below 5%.The results here of oil rates and water cut rates, they are encouraging. We do see here a good initial preliminary results. We have, however, a certain aspect that this oil presented a high viscosity higher than previously expected. And we are now testing some thermal and chemical options to allow this production to be processed at the facilities that the oil will be sent. So we do expect to have this aspect solved hopefully, within the next weeks, we brought expertise from South America that is very specialized in heavy oils. So we are confident here that with this terminal on chemical treatments, we can reduce the viscosity to around or even below 1,000 centipoises so that the processing of the crude could be done in the facilities. Of course, this is something we didn't expect this high viscosity, but the oil and gas industry has lots of alternatives to sort out this issue with terminal and chemical treatments, which we hope we will be able to for now.With that said, we're very keen here on moving forward with the remaining 4 well tests in the [ Bravo pad and Altapad ] in the Omani asset. And with the conclusion of this test and production to have a final decision here of moving forward on the declaration of commerciality.With that, I will pass the word here to Guilherme, who will present here financial operating results of the quarter.
Thank you very much, Paulo. It's a pleasure to be here with you all. And I will quickly guide you through the implications of all those strategic movements that Maha has done in this quarter, trying to reflect what happened to our asset and liabilities, to our cash flow and to our financial results, and then as some of the implications and going forward. So if you bear with me for a few more minutes, we can cover everything. And it's a very typical quarter. It's a transition quarter. So it's going to be quite unique. Going forward, we will hopefully close the DBO transaction very soon and then our financial statements are going to be changing all over again.So let's see the highlights on the balance sheet. It's the most interesting part of this quarter. As Paulo mentioned, we managed to increase a lot the strength of our assets. Now on top of the potential operational assets to close really soon, we have $110 million in our bank accounts right now. It came from a slightly negative operational cash flow since we have very low production now coming only from the Illinois asset. And we have CapEx commitments and working capital to sustain the investments in Oman. So combined, the operational results, working capital and CapEx, it's a negative for the quarter. But we have the farm-out proceeds from the sale of 35% work interest in Oman and especially the first installment of the sales of the Brazilian asset. It all adds up to $110 million in cash. That is accounting for $46 million in contingent cash that we have in holding escrow to support our debt commitments.Our bank debt, speaking about it, is reduced for the quarter to $42 million, out of which only $21 million is short term, and we have more cash than that. So for the first time, the company has a net positive cash and we are all covered going forward. That new cash position also led us to reduce the interest expenses for the quarter and increase our financial revenue. So overall, we have a much stronger finance cash flow now and going forward. Our assets are now of $211 million, including all the cash, accounts receivable and our PP&E. And our shareholder equity has been increased for $166 million from $140 million, so an increase in the shareholders' equity for the quarter. As the capital expenditures, we basically concluding the drilling and testing campaign in Oman, our CapEx for the quarter was $5.1 million. It is below the budget for the quarter. Actually, we managed to postpone some of the investments and get good terms with our payments. So we spent less than anticipated, which is good news for the cash flow. And we will finish the drilling campaign in the second quarter. Actually, the rig was released today from the field. We ended the last well today, and we will still have some payments to do next quarter related to these wells. But for the following quarter, the CapEx is going to be lower as we finish the most expensive part. We managed to drill each of those wells, the production wells around $1.5 million per well, which is a very reasonable price to drill a new well in Oman with limited scale as we are in an exploration and appraisal phase. So good news on the balance sheet side.On the next slide, I'll cover the operational results, but that's not very relevant because we are accounting for only the remaining operations since we sold Brazil, and Oman is nonoperational now that's basically Illinois, and it will be like 10% of the combined DBO plus Maha assets. So it's not relevant going forward, but it's important to cover. So in the next slide, I'll have the key highlights for the quarter. So our production was [ 233 ] barrels per day on average for the quarter. That's down from Q4 last year. And it probably is going to go up as we conclude the investments in Illinois in the second half of the year. We still need to approve the CapEx commitment, but we will probably drill a few wells to restore production in the second half of the year. So this Q1 is a low point. We're probably going to go back to a higher level in the second quarter. And we will, of course, have the production coming out from Peroa and Papa Terra that is much more relevant than Illinois asset at this point.Our revenue, $1.4 million, also the same story. It's a smaller asset, and it has been declining as we don't drill new wells as we drill the next year campaign, it's going to be back up going forward. Our net income was minus $2.4 million, basically accounting for the big expenses that we have for overhead and all the cost structure that is prepared for a much bigger company going forward. And since we have just a small production in this quarter. As for EBITDA, we are in minus $300,000 [indiscernible], but it doesn't reflect the future of the company as well. So those are the key highlights on the income statement of the company. Of course, we were affected by a lower Brent WTI price in this quarter versus the previous calls as well, that does not help with the revenue.Our share price is fluctuating around SEK9 we are much lower than the peak as the oil was above $100, we all benefited for it for a short period of time. Now we think we are slightly undervalued. As Paulo mentioned, we have a lot of cash and contingent resources that could justify a probably a different share price. But we are taking our time to move on with the strategy that we will be appreciated by the market as we move forward. So we are not too concerned with the short term. Of course, we are doing everything we can to improve results even in this transition phase so that we can support the stock price and work in the best interest of the shareholders as usual.Finally, I'll talk a little bit on the key metrics, and then we finish my part of the presentation, and we can go for Q&A. Cash balance, as I highlighted, we are stronger than ever, $110 million coming from $23 million last quarter and even lower in Q3 of '22. We ended the year raising some capital that was good for enhancing our balance sheet. And now we are in a very good position going forward. As for production, we are in this trend down for the last 4 quarters as we drill the next campaign in Illinois, it's going to be back up. And as we integrated the BDO assets, it's going to be much higher than that, probably above 2,000 barrels per day before we even start Oman operations. So that's the key trends, at this point, as Paulo mentioned, we are finishing the drilling campaign on Oman. So CapEx is going to be reduced going forward. We are in the final stage of the drilling. Now we have a much better capital structure on top of the cash at the bank account, we have $55 million in second installment coming in August that doesn't rely on any metrics, just a fixed installment. And then we have up to $36 million in earn-outs that is subject to oil price and some other indicators. So this is at risk. We are not accounting for it yet.Going forward, just a few more metrics. Brent prices lower than in the last 4 quarters. We have our royalties per barrel coming down a little bit. This is mainly because of the Illinois operations. And just as is the expenses going a little bit up and the netback as a combination going a little bit down for the quarter, but it is not representative of the company going forward as we merge with DBO, their Brazilian assets got to be much more relevant than the Illinois. So with that, I finish the financial portion, and now we have more minutes to explain on the Q&A. Thank you very much.
Thank you very much, Guilherme. That said, we had a quarter that was very [ significative ] to Maha in which we basically sold the Brazilian asset that produced around 2,000 barrels for up to $186 million. And we've reestablished with the merger with DBO, the same production. However, we have this solid cash position for M&As that we're looking, and we expect here to conclude some M&As still in the next quarter. So with that said, I will pass here the word for question and answers. Thank you.
Thank you, Paulo, and thank you, Guilherme. I will start with a question here regarding Block 70. And the question is, will it be enough to take it in production. And if I recall your slide here, you were saying that the drilling campaign is expected to come to an end in late Q2. So does that equal production from that?
Let me start answering here. So basically, the regional drilling campaign was comprised of 8 producing wells plus some exploratory and appraisal wells. So this first commitment phase we conclude in the second quarter and all this testing production that we have initiated in March, we do expect to start selling as soon as we reach the oil specifications that are needed in terms of viscosity. So as soon as this hopefully is reached, the sale will start, still in a testing phase. And so we are eligible to sell this oil this testing phase. And by the end of the year, subject here to the conclusion of the testing phase, we shall submit a declaration of commerciality. And for sure, in this stage, there will be a much larger a drilling campaign with much more additional wells. I don't know if this answers a little bit the question.
Well, yes. I mean, basically, from the second quarter on, there will be production coming on. I'll take it. Also, if we look at the recent sale that strengthened your balance sheet and the cash position and given the statement that you will be able to pursue further opportunities but remain a company with a robust capital structure, how would you square that circle? And what kind of metrics would you like us to focus on when it comes to, well, the cash position balance sheet vis-a-vis acquisitions?
Okay. I think excellent question. I think here, for the next quarter, assuming closing happens very shortly, the cash flow generation from Papa Terra and Peroa will be embedded here in our results. So I think this is basically the first metric that will create here cash flow stream for the company. Again, the objective here is to create a platform of oil and gas with cash flow generation, diversification and net income that at the end it results as dividend. So maybe the first question here would be the cash flow generation from these 2 assets.The second point, I think, a very important element will be, for sure, the testing of Oman and how much can these assets generate of cash and production? We do expect here in the next 30 to 45 days to give a new update with the conclusion of testing. And finally, I think what we are here bringing as the most important agenda is using this cash to do very accretive transactions. So I would say that these are the 3 main elements to be seen here by the company, Papa Terra and Peroa, the conclusion of the Oman testing phase and the M&As that we do expect here to announce still within the next quarter.
So it will be fair to assume that you will focus on acquisitions rather than a dividend payment?
I think it's a combination of both, right? We want to focus on acquisitions that in this new context of the world where the equity needs to be very well remunerated, we want to have acquisition of assets that generate cash flow streams that provide a robust dividend for the shareholders. And we are very confident that this is available. And an excellent example here is Papa Terra and Peroa that we made an acquisition of almost $30 million. And if we consider the cash flow generation of this asset, it's very accretive here for the company. According to certification reserves, these assets could generate depending on oil prices from USD50 million to USD30 million of EBITDA. So we see here how the multiples are very attractive. And again, right, we reestablished the same production that we had a year ago with almost some hundreds of millions of dollars in cash.
Yes. And Paulo, I think we are prepared to do this M&A transactions, either spending cash or through share exchanges or even taking some liability depending on the deal structure, yes. So we can and we'll look very carefully at the balance sheet and our capital structure going forward, but we expect to spend a portion of the cash to acquire new assets.
I think, Guilherme, for sure. But the focus here, of course, there might be some transaction involving shares, but the first focus here of the company is to deploy this cash in a very accretive and higher R transactions. And I think this will lead the share to higher values. And with the share prices higher, we could be open here for additional share swap transactions.
Well, thank you for that. And we have some questions here about Block 70 in specific. And I will rephrase that. So Block 70, if I understood what you were saying here is developing according to plan, but what kind of milestones would we expect and when as far as production is concerned.
I think perfect. I think the main milestone we expect to have it within the next 30, 45 days in which we hopefully start selling the oil from the testing phase. So I think this is the main milestone we expect to have, again, with the conclusion of the 8 wells and having these 8 wells tested and being able to deliver this oil inside the specifications to the processing facility will be a very important milestone here for Oman. And regarding the results, they are encouraging, very encouraging. We have good oil rates, good water cut rates. If those rates remain, we are here as very confident to move forward with the project.
Thank you for that. And with the drop in the oil price during the spring, and you referred to that in the result here as well. Has Maha's position become better or worse considering that you are currently on the buy side of things. So you sell and you need a higher oil price. But if you're buying then Fortune favors the brave.
Yes. No, good question. I think the momentum of buying assets, let's forget a little bit the oil prices. I think the great advantage of having equity in the company today is that with the hike of the rates and the equity rate and the cost of equity I think this is the great momentum to have cash and buy assets at very high equity returns. Regarding the oil side, this level of 70 to 80, it's still a very good range. Remembering that if we look at any assets in the world, they should have a breakeven much below that, below 30, below 40. So having this this price range is still a very good price. Of course, we had a good momentum of selling the Tie and Tartaruga asset when the oil was almost in the 3 digits, almost $100. So we had a good timing of selling and we expect to do this good buying transactions, but not very linked to the oil price, but linked to the timing that the world is facing today with high equity rates, we are looking here for active return rates above 30%, above 40% in U.S. dollars.
Well, thank you for that. And before we close down here, just a quick question regarding inflation here, given that you are a production company, and you have some interest rates to pay. Has that, in any way, affected you?
Yes. I think as a whole, the inflation rates, specifically in Brazil, we saw these inflation costs going up. I think in Oman, we didn't see this inflation going up so much. I think it's a country that it's very stabilized in terms of inflation and rates. In Brazil, yes, we saw, however, the timing in the oil service industry, the oil service costs, they rise 6 months after the oil price rises. So I think it's part of the industry, having this oil increases. However, maybe a good point is that, for instance, in Peroa, all the O&M had already been hired time ago as well as Papa Terra. So I think, yes, there was an impact, but not in Oman. And in Brazil, yes, yes, we will feel that. On the other hand, the oil prices are also higher than when the O&M contracts were hired.
And for the financial expenses, it was not very significant in our debt. And since we are deleveraging the company, and we have net cash positive now and our funds are invested for interest, so the net impact is not significant. So that's not a concern for the company, not now and not even the last going forward.
So one could even argue for a net interest income here.
Yes, sure.
Well, thank you for that. I would just close off with one very late question here, which is also a financial one. And I would just quote since the net asset value is considerably lower than current valuation of the company, would buybacks be on the table with future cash flows from DBO and Oman. So I would assume that one would focus on DBO and Oman.
Sorry, could you repeat the question? I didn't... it cut a little bit for me, sorry.
Yes. Not to worry. Would you consider buybacks consider the future cash flows from DBO and Oman?
Yes. This is an aspect that yes, is being considered by the company when we look at the capital structure of the company. But of course, when we add up other assets that generate net income and profits.
Right. Fair enough. And with that, I think we should conclude. And the next timetable is what?
So we do here expect still within this next 30, 45 days to issue a new release on the Omani testing, which this will be a very important milestone for the company and as well the closing for the DBO's assets in which we expect it will happen very, very short term here.
So still hectic days ahead, one can conclude because you've been rather busy during the first quarter, I would say. Well, Guilherme and Paulo, thank you so much, very enlightening, and I think we should follow this space closely. And I will now switch to Swedish. [Foreign Language]