Tethys Oil AB

STO:TETY

Earnings Call Transcript 2019-Q1

[Magnus Nordin, Founder, CEO, MD & Director]

Good morning, and welcome to Tethys Oil. It's May, it's a beautiful May day in Stockholm, and we are here to present and discuss Tethys Oil's First Quarter Report for 2019, a report that undoubtedly has been a little bit mixed at least at first glance. So let's dive into it right away and start looking at the Q1 '19 highlights. A set of numbers, a few standouts. Selling price down dramatically almost from the Q4 '18 and way below the full year achieved in 2018. At 61.60, of course the oil price is impacting the result for the quarter. Another number that stands out is the EBITDA which is down partly following the oil price, but also a surge in OpEx especially in OpEx per barrel of 13.30 compared to the average for the year of 10.70. And this number we believe to be a little bit inflated and not representative what we're going to see for the remainder of the year. Jesper will comment in more detail as to the OpEx, but the 13.30 is not a number we expect to be representative for the continuation of the year.Production -- a little bit softer than we have guided and hoped for. However, better than we saw for the full year of 2018, and also better actually than we had in the fourth quarter of 2018.A number of elements have impacted production which we will also discuss in more detail going forward. Otherwise, we do see that, if we turn to the next page, that we actually maintain our production guidance, 12,000 to 13,000 barrels of oil per day. We have had a weak first quarter but the main reason is that we have seen lower-than expected production from the Ulfa field, described in 2017, brought onstream in 2018, with an EPF up and running in December. However, it turned out that we needed additional gas paneling capacity at setup EPF. This was clear fairly early in January and rectified by mid-March.And after the installation of an additional separator, a number of wells that had to be shut in for the first quarter have been opened up, and of course, followingly, we should expect production to increase. And therefore we are quite confident still that there is no change to our guidance. We expect 2019 production to come in between 12,000 and 13,000 barrels of oil per day on average for the year.We had 1 exploration well success, midsized for Blocks 3&4 oil discovery. The Masarrah-1 well, it's an analogue to Khufai and Buah [ who are ] producers. It was considered a low-risk exploration well and we can happily conclude that it came in, maintaining a very, very good record, 4 discoveries in the Buah and Khufai reservoir sections within our near field exploration area.The Ulfa appraisal continues, another well drilled and came in successfully. This of course is important for moving our contingent resources into the reserve category. And Block 49, our Omani exploration block, continues according to plan. We completed new seismic in December of 2018. We have received -- we processed the processed data and we are currently interpreting and mapping the area.And quite important -- free cash generation remains strong. We actually end the quarter at a record high cash position of $82.7 million, that's up 13%. So even with mixed results for the quarter and oil prices considerably lower than we saw in the fourth quarter last year, we still continue to generate substantial amounts of cash.So turning to Slide #4, we are happy to remind you all that distribution to shareholders therefore is up. And for the current year, the Board of Directors has proposed to the AGM to be held next week here in Stockholm on May 15, an ordinary dividend of SEK 2 per share and extraordinary distribution of SEK 6 per share, a total of 8%, which at announcement [ stood the ] dividend yields of 11%. And I think that is actually close to where we are today also based on today's share price.This is a distribution of actually just under $30 million to shareholders. Since we started with dividends, we have distributed more than $50 million up to this year and the $30 million of course is a substantial amount, a yield of 11% but still leaving us with a very solid cash position even after this distribution. And just to remind you, if this is a mixed quarter, we still covered almost 1/3 of the distribution for the year in this rather weak quarter. So the robustness of the Oman core project is certainly not in doubt.So turning to the asset base, we have -- almost all our production and cash generation from the Sultanate of Oman, bordering the Indian Ocean, Saudi Arabia and United Arab Emirates in the Middle East. We have 2 blocks: 49, where we have 100% and we are the operators and exploration block in the Southeastern portion of the Sultanate; and our 30% share in our star asset Blocks 3&4 operated by CC Energy and partnered with Mitsui. And we have 30% there. Both -- all 3 blocks are quite large, and actually as you can see from the map, Tethys has licenses in Oman covering a very large part of the Sultanate's surface.That's it. I would like to hand the floor to our CFO, Jesper, to comment in more detail on the numbers for the quarter.

[Jesper Alm, CFO & Secretary]

Thank you, Magnus. Good morning, everyone. I am on Slide 6, and production from Blocks 3&4. The quarter saw production of 11,900 barrels to -- net to Tethys, which is very much in line with the production of Q4. It should be noted that we're well above the average production during 2018, and this was during a quarter that was negatively impacted by constraints in the gas handling. And I'd like to remind that those -- that constraint is now handled by additional gas operation capacity having been installed. So we'll see what happens going forward.Moving on to slide, the next slide, Slide 7. As Magnus addressed previously, we saw dramatic fall in our received oil prices during Q1, down from close to 78 in Q4 to 61 in Q1. And this is obviously a consequence of the world market prices. And we also know that those have rebounded during Q1. And with our effective 2 month lag in receiving spot prices, we are pretty certain that we can experience an improved oil price during Q2.Moving forward to Slide 8, revenue and other income, and this is obviously impacted by the drop in our received oil price. We report revenue and other income of $32.7 million for the quarter which is down 26% compared to Q4 '18. Two variables affecting the revenue during the quarter, the most significant one is oil prices obviously and the other one being our export reporting error that we reported early in 2017 that affected Q4 2016. That export reporting error has now been finally agreed and there was an additional amount of $1 million affecting our revenue for Q1 negatively. We should remember that additional $1 million in Tethys terms means an undiscounted net cash effect that goes from $1.4 million that we previously reported to $1.6 million. So $0.2 million is the consequence. And that is a result of cost for reinstatement where this amount will be cost recovered and that is within short. So the undiscounted net cash effect is very, very minor.Moving on to expenses, and as Magnus also addressed, we saw a hike in Q1 OpEx. And that is partly a result of a carryover from 2018 of $0.6 million. We also saw high activity on well workovers during the first quarter, which amounted to $1.4 million compared to $0.9 million in Q4.The average OpEx per barrel during 2019 is expected to be higher than the average of 2018 where we saw $10.7 per barrel, but considerably lower than the $13.3 that we saw in Q1. And this will be a consequence of higher production in the coming quarters and OpEx being more reasonable. So we will expect OpEx per barrel to come down. Moving onto Slide 10, OpEx and netback, obviously, the most important factor influencing the netback per barrel is the oil price, and that we expect to return upwards during Q2. We also expect OpEx per barrel to come down. The actual netback per barrel during the quarter was 18.8 compared to 29.4 in Q4, so improvements to be seen when it comes to netback per barrel.EBITDA, Slide 11. Consequence of the lower oil prices and higher OpEx for the quarter, we see EBITDA of $17.2 million for the quarter which still represents a healthy EBITDA margin of 52%.Onwards to balance sheet, Slide 12. Net cash increased during the quarter by approximately $10 million to a total of close to $83 million. The board has proposed to the AGM a total distribution of close to $30 million for the year.The added cash during Q1, the mixed quarter of $10 million, represents roughly 1/3 of the dividend amount. So the cash generation capacity of Blocks 3&4 is clearly visible, looking at the cash added during the quarter. Still no interest-bearing debt and a healthy cash position of $83 million.Investments, Slide 13. We have total investments in our oil assets of $11.6 million. The majority of that went into Blocks 3&4, $11.3 million; and fairly low amount, $0.3 million, went into Block 49. And Block 49 will obviously pick up speed once we get flat out with interpreting the seismic that is now coming in. The investment guidance is for $50 million to $55 million throughout 2019 and 11.6 is obviously a bit less than 1/4 of that. So we can expect somewhat higher investments per quarter going forward during '19.So what did we get for those investments? Slide 14. we drilled a total of 12 new wells during Q1. Majority of those were appraisal and production wells. Some water injection wells and significantly we also drilled -- completed the drilling of 2 exploration wells and there are more to come during 2019.And with that, I hand back over to Magnus.

[Magnus Nordin, Founder, CEO, MD & Director]

Thank you very much, Jesper. And I will comment on the operations, starting with Blocks 3&4. A few highlights that I would like to remind everyone. We acquired the license in 2007. We are about 1/3 through its license life, valid until 2040. During these years, we have produced on block more than 80 million barrels of oil. That's close to 25 million barrels of oil net to Tethys, which has generated $50 million worth of distribution to our shareholders over these years. Our reserves stand at about the same number, around 25 million barrels, similar to what we have produced already. And as you can see, there is still ample growth left in the blocks. So between now and 2040, we expect to extract a lot of value from 3&4 but also to see growth.Block 49 is almost the opposite. It's an exploration block. We have 100%. We are looking to find oil. So far, no commercial discovery. But hopefully substantial potential.Turning to the next slide, Slide #16, just a quick summary of 49. It's a large block, 15,000 square kilometers. A number of previous operators have held the block, 9 wells drilled, several with oilfields. Seismic data both 2D and 3D that we have reprocessed and we got off -- we are doing our own exploration-focused work in fourth quarter last year, where we -- we had a reasonably clear idea, obviously, of where we would like to focus at least for the first exploration period -- which is 3 years. And that is the top corner where you see we did additional seismic, both 2D and 3D. The data was of good quality. We have just received the data set and are currently interpreting. And obviously, what we are doing is enhancing our overall understanding of the block but focusing on finding drillable targets within, in particular, these seismic areas. And as I said, we have a pretty clear geological idea of what we can expect from this part of the block. Let's hope that idea survives -- survives actually meeting the new seismic data and that we can later in the year present something that offers a good risk-reward to be tested with the drill bit. But that work is ongoing and we will see how far we can take it.Turning to 17, obviously, net production development Blocks 3&4, this is where we come again from nowhere in 2010, 2011 to the reasonably steady 11,000 to 12,000 barrels a day that we have been doing for the last couple of quarters. We've had a surprisingly steady production and we expect production to increase for the year. Note that we were below our guidance in the first quarter so clearly we have to make that up, and we have to get back into the guidance between 12,000 and 13,000 barrels. So we would expect 3&4 to deliver better than they did in the first quarter. We hope to see this from stemming the decline in the older fields with enhanced workover and other remedial activity. And then of course from the new fields that were put onstream last year and in particular the Ulfa and Samah fields where the additional separated capacity should see for the opening up of shut in wells. So bear with us for a couple of months that we expect to be back within the production guidance window quite shortly.Turning to what is actually even more important in the long run than production, that is the reserves. And at December 31, 2018, we stood at 25 million barrels of 2P, pretty close to what we actually produced on block so far since we started production in 2010. And in addition, 2C resources of 12.5 and these 2C resources are attributable only to 3 fields, the Ulfa, Samah and Erfan fields that were discovered in '17; appraised and developed in '18, partially put onstream in '18 but the additional appraisal work and also production work is ongoing. And obviously, part of the work program for the current year is to move as much of that, of the Cs, into the P categories. And that will stem from infrastructure, from appraisal drilling and a better understanding of the reservoirs and the completion of the [ FTPs ] for the various fields as they move from early production into more permanent production.Turning to Slide 19, where you see here a bit of a hopscotch of what we have and what we had done. These are Blocks 3&4. Important, the light blue shaded areas which is the 3D seismic that was completed before 2017, it holds the Farha field, one of our mainstay fields that's produced from the Barik sandstone and have been in production since 2010. The Shahd field and the Saiwan East field, all early discoveries from 2010 and 2012. Responsible for the 80 million barrels that we have produced but still going strong and with a better and better understanding, water injection being implemented also in Shahd, we expect them to deliver good production for many years to come.We have a number of prospects and leads. They have been identified over the years, both from within the 3D seismic area but also outside the original 3D seismic area from seismic collected by previous operators. So in 2017 and '18, the dark blue areas, we expanded the seismic coverage quite substantially and we have firmed up a number of leads into prospects. And we actually have started drilling our exploration wells already.Turning to the next slide, Slide 20. Let me comment a little bit more in detail on what we're actually doing. Farha produces from a Barik sandstone at approximately a depth of about 1,800 meters. The Shahd field is carbonate at 2,300 meters as is the Saiwan East. What we've been trying to do for the last couple of years has been trying to understand the carbonates and how they are dispersed over the blocks. And we have then concluded that they actually also exist near or under the Farha South field. And the Ulfa and Samah discoveries, now new fields, actually are proof that, that work has been fruitful and that it does make sense.So current exploration efforts are in that region where we looked at the Ulfa and Buah and see if we can extend that play Northwards. And the Masarrah-1 well that was completed during the current quarter is an excellent example of that. It's exactly a look-alike to Ulfa. It's within the Farha seismic area and it came in nicely exactly where expected in the Khufai carbonate. We have a number of additional prospects there that we are maturing and hope to drill later this year or possibly next year.On the other side of the Farha field, we did more of a step out. The Mahamid well, which was drilled to test a deep target, a very nice structure. But in an uncharted territory -- charge, the presence of oil was the main risk. And we didn't actually find any oil in the very nice structure. But surprisingly, or maybe I shouldn't say all that surprisingly, but we didn't expect any oil in the Khufai. No wells have been drilled here, no wells have proven the existence of oil in the Khufai. But on the way down to test the deeper target in Mahamid, we actually encountered oil in the Khufai. We did some initial tests. We sidetracked a bit. No oil to surface but liquid samples have been obtained. And given the location, it could prove out to be very, very interesting for this entire part of Block 3 where possibly a new Khufai play is being matured. Jury is still out on this, but so far it looks encouraging and could be very interesting.So let me reiterate that we do expect to extract a lot of value from the known fields in Blocks 3&4 but we also have substantial exploration potential.And I would like to illustrate that by Slide #21 where we have our 2P reserve replacement ratio for these blocks. And do note that never, since we started production, have we found less oil than we have produced. And frequently, in most years, we have been above 150%. And in 2018, we were above and we were up at 177%.So the starting position for 2019 from a growth perspective is good. We have 12 million barrels of contingent resources in our producing fields to be moved into reserve category. And we have already 1 exploration success for the year. We have a potential exploration success in Mahamid and we have at least 3 exploration wells to be drilled for the year.So turning to our final slide. And for as much as we have had a mixed result and a mixed bag of the results for the first quarter, we do not expect those to be -- to be the normal for Tethys Oil for 2019. And as we return to normality, we will see OpEx per barrel come down as actual OpEx stabilizes and production increases. We know that oil prices is up compared to what we saw in the first quarter. And on top of that, we have considerable exploration potential and growth opportunities. A very active program, at least 3 additional wells to be drilled. And we have already had 1 success. Block 49 is continuing according to plan where the seismic interpretation is in progress.We expect production, we expect oil price. So as we return to normality, we expect to see Blocks 3&4 really further underscore what great value generators they are, but also how much growth that is still in them. And again, let me reiterate. This was a bad quarter and we generated $10 million of cash, actually almost 1/3 of the substantial distribution to shareholders that we do -- that we hope the AGM will approve next week. Then I must say, it would be very interesting to see what a good quarter would look like.Questions?

[Operator]

[Operator Instructions] And our first question comes from the line of Johan Spetz from Pareto Securities.

[Johan G. Spetz, Analyst]

Just wanted to go back to the near field discovery that you announced here at Masarrah. Any additional info you can provide on the flow rates there? You say good flow rates. Any indication of what that might mean? And also, when this might be tied back to actually produce into, I guess, either into Farha or into Ulfa at this point in time?

[Magnus Nordin, Founder, CEO, MD & Director]

Certainly, Johan. Thanks for the question. We don't usually give details on flow rates. But obviously, since we haven't given any specific information, you can assume that the flow rates are in line with what we usually get from these carbonates. And the well is being hooked up for a long-term production test and will actually be hooked up to the system in the near term. And we've run a long-term production test both to see what sustainable flow rates are like and get the usual pressure data to do a proper appraisal. And of course, it will be included in the reserve resource category for year-end. And then we'll have a good 6 months of production data to put into that equation. So we are in fact inspired -- we are quite encouraged by what we've seen so far. And as I say, it was a lookalike to the Ulfa and Samah. It came in just as expected and we have a number more of these to drill.

[Johan G. Spetz, Analyst]

Right. And in relation to the production guidance for the full year which you now keep intact or you're reiterating, would you say this Masarrah well would have some upside to that range or is Masarrah sort of included in you reiterating that [ ahead? ]

[Magnus Nordin, Founder, CEO, MD & Director]

Let me state the factual situation. The guidance is based on where -- the forecast for 2019 based on the production in January, February, and does not include any possible exploration success for the year. But obviously, I mean depending on how long the long-term test goes on, it could impact production. But so far, we have seen no reason to change our guidance. So the guidance, 12,000 to 13,000 barrels of oil per day on average for the year, stands.

[Johan G. Spetz, Analyst]

Okay. Sounds good. And just finally on my end, a question you usually get in these quarterly calls. Any updates on the M&A side of things?

[Magnus Nordin, Founder, CEO, MD & Director]

We are very interested in doing M&A, we would -- or getting new projects. We can certainly see that there is opportunity to grow in Oman. As we mentioned in the report and as you know, we tried to acquire 2% of the Mukhaizna field in Oman earlier this year, but preemption rights were exercised and we could not close that transaction. But we are certainly looking at other opportunities. And we are not foreign to doing something outside of Oman, I would say preferably in the MENA region. And the more we learn, the more we look at, hopefully, the closer we get to a transaction. But all I can say is we are eagerly looking and we would be more than happy to close something that we like.

[Operator]

Our next question comes from the line of Taro Kiley from GMP FirstEnergy.

[Taro Tim Kiley, Associate]

Just a couple of questions for me. Can you give any indications of the size of the discovery and the chance of development? It sounds pretty much near 100%. So just want confirmation of that. And on the appraisal well, how much 2C you might expect to move to 2P on the back of that well? And finally, just any details you can give on the 2 exploration wells you plan to drill this year in terms of timing and where they might be and what you're targeting?

[Magnus Nordin, Founder, CEO, MD & Director]

Okay. Thanks, Taro. First question on Masarrah. We had guided here it'll be midsized for Blocks 3&4. So assume simply that it's not the largest deal we discovered, but neither is it the smallest. So I would say that based on what you see in the reserve table, put it somewhere in the middle of field size and you'll have a pretty good idea of what we expect now. I should say, however, the appraisal program is ongoing. And as far as development scenario, that's obviously something that we are eagerly collecting data on from and also will do from the long-term production test. So we will certainly get back to you on that one as we gather more data on the year. But -- an actual resource or reserve number, we would not really be prepared to give until we have the year-end numbers. But as you rightly noticed, it is close to existing infrastructure, it is right in the middle of what we are already producing. And clearly, it shouldn't be too difficult. But you never know until you've actually done your appraisal. So I wish -- what's your second question, Taro?

[Taro Tim Kiley, Associate]

The details on the -- the second one was how much 2C would migrate...

[Magnus Nordin, Founder, CEO, MD & Director]

Yes, okay, okay. Clearly with [ 2 million ] 2C, we are eager to move as much as possible. We haven't actually given any guidance on that and I would just say that we would -- we have to move as much as possible of course. But it's dependent on the data collection, it's dependent on the reservoir understanding. And all -- everything that started appraisal and then field development plan -- field development plan formation. So I can't give a number, but it's a high priority for the year. And exploration, we would certainly look to have a nice mix of near fields. As I mentioned, we have a number of leads and prospects in the near field area that we will certainly target. But also, I hope to be a little bit more adventurous and go for some of the far field areas where, for example, what we have seen in Masarrah where we may be looking at a new play. Of course, it will be highly interesting to learn more about that and maybe also do some additional exploratory drilling there to see if we can expand the current play base that we have. We are quite confident that we have enough in the known plays, but unknown -- knowns -- and known unknowns are also quite interesting to chase.

[Taro Tim Kiley, Associate]

Okay. And just looking when you say midsized, I'm essentially getting average of the other fields. Are you talking about all 6 fields? I.e. including Farha, Shahd and Saiwan East or are you more talking about the new discoveries, Erfan, Samah and Ulfa?

[Magnus Nordin, Founder, CEO, MD & Director]

I think the Farha consists of a number of the separate 4 blocks. Shahd, also has a number of separate structures. So I think looking at the newer fields, this is probably a better guide.

[Operator]

[Operator Instructions] And as we have no more audio questions registered, I'll now hand back to our speakers.

[Magnus Nordin, Founder, CEO, MD & Director]

Well, thank you very much for listening. Thank you for good questions. Hope to see you again or talk to you again in August for our Q2 report. And let's hope we can offer a slightly different mix in August than we did today. Thank you very much.