Tethys Oil AB

STO:TETY

Earnings Call Transcript 2022-Q1

[Operator]

Welcome to the Tethys Oil First Quarter 2022 Earnings Report. [Operator Instructions] And afterwards, there will be a question-and-answer session. Today, I am pleased to present Magnus Nordin, Managing Director; and Petter Hjertstedt, CFO. Please begin the meeting.

[Magnus Nordin, executive]

Thank you very much. Good morning, everyone, and welcome to Tethys Oil's first quarter 2022. It's been a rather interesting quarter for us, and I would say the one with the most operated exploration appraisal focus we've had for the better part of more than 10 years and so far also rather successfully and I'm talking, of course, of Block 56.

But let's first try and summarize the quarter, and we can do that in 3 numbers really, and the numbers being 80, 10,500 and 700. $80, of course, is the oil price which has reached levels that we have not seen since 2014, which, of course, impacts the entire business quite positively. 10,500, or to be precise, 10,475, is the average production from Blocks 3&4 that we have achieved for the quarter. It's a little bit less than we expected. It's down from 11,000-plus that we had in the fourth quarter and is primarily due to 1 of the most recently discovered fields, the Anan field, having underperformed. And that also leads to a downgrade of the production forecast for the year. And maybe most importantly for the future, the flow rate of 700 barrels of oil per day from the Al Jumd-2 horizontal well in Block 56. Of course, we'll get to all the details further down, but let me also remind you that income was a sturdy at $34.6 million with an EBITDA over $20 million for the quarter. Oil price, $80.4, achieved price for the quarter. And with our 2-month lagging price structure, we already now know, of course, that we're going to have a better price for the second quarter, and we are looking at an official OSP for the second quarter of above $100 per barrel. Investments increased rather dramatically, $24.6 million for the quarter, spent both in Blocks 3 and 4, but primarily also in Block 56 as the exploration appraisal campaign is seriously gearing up.

So let's turn slide and take a look at this Block 56. It's our second most recent addition, where we have bought stakes since 2019. We assumed operatorship during the pandemic last year, and we started serious operations this quarter. The block has known oil discoveries for more than 20 years ago. It's adjacent to the Karim small fields area in Block 6, and we divide it in 2 main areas: the Al Jumd area in the Northeast and the Central area. Al Jumd is a collection of smaller structures, several of which we have now shown to be oil-bearing. And we are looking to a testing and appraisal campaign in that area for the rest of the year. We did 3 wells during the first quarter: Al Jumd-2, the first horizontal well into the Al Jumd structure, tested at flows of 700 barrels of oil per day. The Sahab-1 and Sarha-3 exploration appraisal wells had shows in all target formations. They are going to be tested later this month and in June; and we are preparing for a long-term production test of Al Jumd to commence around the end of the second quarter.

The Central area is an area with about a dozen leads identified from vintage 2D seismic. First stop there is to do more than 3D seismic, and we completed a 2,000 square kilometer seismic survey this quarter. Processing has started. Interpretation will take the better part of 2022. And provided we get some of these leads into drillable prospect status, we can do exploration drilling in this area starting in the first quarter next year.

Let's look a little bit more in detail at the Al Jumd, which is quickly moving from a prospect to a potential oil field. The structure was drilled and discovered well drilled in 2008 by previous operator, Oilex, then not much happened. And the operator, just before we took over operatorship, MEDCO completed well and retested the Al Jumd-1 in February 2020. we were then partners, and happily reached 100 barrels of oil per day from that vertical hole. Shortly thereafter, Tethys took over operatorship. It got to be delayed by the corona pandemic. But we're ready to drill the first serious appraisal well during the first quarter. So Al Jumd-1 drilled close to the top of the crest, identified oil flow to surface. We believe the best way to produce these rather [indiscernible] formed prospects is by horizontal wells. And we would, of course, expect considerably better flow rates from the horizontals. So we started Al Jumd-2 at the Southern end of this structure and drilled more or less through the entire structure, reaching a total measured depth of more than 2 kilometers and reaching the bottom part of the reservoir at 1,800 meters. We completed a 430-meter horizontal section in the primary sand, the Al Khalata-2 sand. And when we tested it, we got very good flow rates of 700 barrels of oil per day from a 25 API gravity. So here we held up, the horizontal well performed considerably better than the original vertical well. Now the well Al Jumd-2 is now shut in for buildup. We plan to open it to gain towards the end of this quarter, and we will by that time also have a long-term testing facility and an early production system in place. So that we plan to test Al Jumd-2 and also Al Jumd-1 for the better part of 6 months. The wells will be hooked up to the early production system, and then the oil will be trucked to PDO facilities in Block 6.

In parallel, based on the success of Al Jumd-2 and also the very favorable oil price environment, we're also planning to fast track 2 additional horizontal wells into the Al Jumd structure, both to get a better understanding of the true potential of the structure, but also, of course, to enable early production to increase from 2 additional wells. We are in the final stages of our planning, and we would hope to start Al Jumd-3 horizontal towards the end of this quarter. And Al Jumd is certainly not the only success so far in Block 56. We also did the Sahab-1 exploration well. This is in the, should we say, very southern part of the Al Jumd area. It's a small structure that has not been drilled before, and it, in particular, gives a lot of interesting information about both the Al Jumd area, but also the potential presence of oil in the Central area. And we're happy to report that we had oil shows in 3 separate layers, the Al Khalata, the Karim and the Ara. And this is actually a first for this section of Anan, that all 3 of these layers have encountered oil. Testing program will happen later in May, and in June, and then we would be in a much better position to say about what kind of volumes we talk in Sahab, but also what this will mean for further appraisal of that particular structure.

Same situation will -- with Sarha-3. This was actually known oil discovery from a previous operator, but we deepened the well to 1,200 meters and found oil shows not only in the Al Khalata but also in the Karim layers. So a total of 5 separate layers in 2 separate structures encountered oil. And testing of the Sarha well will also happen later this quarter. So far, very encouraging results, that our expectations for the Al Jumd area is actually going to bear fruit.

Other exploration activities. Of course, in Block 3&4, our main producing area, we continue with exploration in the near-field areas, we did one well so far this year. If we did not encounter any oil, another 2 to 4 exploration wells are scheduled, and we still believe that certain parts of the Blocks 3&4 hold significant potential. Block 58 is another block that's operated by ourselves. We have a number of leads in that area, and we have completed a 3D seismic study over parts of a cluster of leads in that block. We are quite well underway with reprocessing and reinterpreting old seismic and could very well be in a position to drill a first exploration well there before the end of this year.

Block 49, where we drilled 1 well now over a year ago. It is being evaluated. We have commissioned 2 outside studies to better understand the reservoir properties of the Thameen well. And we are about to conclude these studies and draw our technical conclusions over the next couple of weeks. The first exploration phase extension expires in June this year. By that time, we have to make up our minds whether we want to enter into the second exploration phase for Block 49 or whether we want to relinquish that license and concentrate on our other licenses. But we are nearing the full compilation of technical data for 49, and we'll be in a position to make a decision within the prerequisite time.

Turning so from exploration to production. And it's worth remembering that all production comes from Blocks 3&4 at the moment. We would hopefully have early production also from Block 56 starting early third quarter, but that would be test production that will not be part of any guidance or of any long-term decision-making at this stage. Blocks 3&4, production has been a bit sluggish throughout the corona situation. We started the first quarter 2020 with production way above 13,000 barrels of oil per day. We then had to shut in a number of wells as the OPEC+ quotas affected us. And as restrictions were eased, production came back. But in 2022, we have had problems meeting our targets.

The main reason -- we had 2 main reasons. One was that there was an element of catch-up in investments that have had to be done in -- from the corona shut-ins. Most of those actions have been successfully completed in the first quarter, and we would have expected the fields now to perform according to plan. And then we got a surprise in the Anan field, discovered in 2020, came on stream in 2021, where we had a water breakthrough during the first quarter which lowered the production. We're not talking major amounts, but sufficiently so that while the course of the Anan field underperformance is under investigation, we elect to lower our guidance for the year to 10,500 to 11,000 barrels of oil per day, down by 500 barrels of oil per day for the full year.

Anan is being investigated, and of course, the drilling program to bring new wells on production continues. And given the oil price environment, we are also speeding up drilling for the year by -- The operator has proposed to bring in the fourth rig which, of course, we welcome and see us a good addition to continue production in North exploration drilling on Blocks 3&4.

On that note, I think we'll reach the financials. And for that, I think our Chief Financial Officer is better placed than myself. Petter, please.

[Petter Hjertstedt, executive]

Thank you, Magnus. Looking at the financials for the first quarter '22, we can see that it's been strong financial performance, continuing the trend that we have seen for several quarters now of sequentially increasing revenues and other income and EBITDA. This is very much an effect of the increased oil price environment, but also, of course, a big part is the production and cost situation, while production has been somewhat disappointing in recent quarters, this has been more than offset by the combination of higher oil prices and cost discipline. Worth noting in this quarter also, of course, is the significant investments impacting free cash flow to a negative, but still ending the quarter with a net cash position of $54.7 million, gross cash of over $55 million.

Oil sales in recent quarters have been quite stable. The volumes we're selling are -- have been around 0.5 million barrels a quarter. But of course, the value of those barrels has increased, successfully driving the revenues in the courses. And it's worth remembering that as oil prices improve, fewer barrels will be required to recover the cost that are eligible for cost recovery. So we increased oil price, all else being equal, will have a slight negative effect on the actual volumes, but not on the revenues that they generate. And in particular, it increases the value of the profit oil component, which is essentially the free cash. So any improvement in oil price will particularly drive free cash more than perhaps top line revenues, which is worth remembering. And free cash is a key metric that we like to look at.

Coming back to the oil price. The official selling price in the quarter was on average, $79. Our achieved oil price was somewhat higher than that, and that's a result of the mix of liftings in the quarter, where it's tilted towards the high-priced months of January and March. I mean, we had -- resulting in an achieved price of $80.4. Looking into the second quarter, we have an average OSP, that is unweighted, of $101.8 with a very strong price in May. This is reflecting the market price for the period of February through April of this year. So that's the 2-month lag that we have in the official selling prices the Anan plant and hence, seeing the effects of the spike in oil price from February coming in, in the second quarter.

OpEx per barrel in the quarter was slightly higher than we've seen in recent quarters. That's mainly an effect of 2 things: that's the lower production than the preceding quarters, meaning we're getting higher OpEx per barrel, but also the sort of seasonal effect that we quite often see in the first quarter of operated G&A, of some annual seasonal costs coming through in the numbers. But we also see an increase in activity driving some of the underlying costs. However, we do believe that full year OpEx will be in the communicated range of $12 per barrel, plus/minus 0.5 a barrel, as lower production will be mitigated by cost discipline in some areas.

CapEx is a core metric to follow when looking at [ expenses ] these days because that's where you can see the -- particularly the increased activity in exploration. And this was particularly clear in the first quarter as we saw the uptick from $17 million to almost $25 million in Q1 versus Q4. More than half of the CapEx this quarter was from Block 56, the drilling of the 3 wells and the seismic being acquired. Some of that, you will recall, was carryover from 2021. So we do see a lot of CapEx that was originally intended to be spent over a longer period of time coming in, in the first quarter. But this is clearly a sign of the uptick in activities that we're engaging in on Block 56, which is of great interest and the results of which Magnus has discussed.

The full year guidance for CapEx remains $91 million. We -- most of which of the exploration CapEx, in particular, 56 is being spent in the first half of the year on the basis of that guidance. It's worth noting, though, that the encouraging results on Block 56, as we said, will inevitably lead to more activity in the coming year. But as that is firmed up, we will communicate the financial impact of that in due course and it will also lead to some reprioritization of our other spending in the budget inevitably. However, in Q1, we did see some negative free cash flow of $13 million, which is essentially the spending on Block 56, underlying we're having strong cash flows. We had some working capital effects from a big lifting in March, impacting the 3 and 4 cash flow, but that is something that will reverse in the coming quarters. Otherwise, we are very confident in the cash flow generation of our producing assets, and are happy to see the spending going into some exciting projects like Block 56, where we expect more spending in Q2, but not on the levels of Q1.

Looking at the total cash balance bridge. We started the quarter at $68.5 million, partly because of the spending of 56 that was carried over into 2022, which meant we had ended on a slightly higher cash balance than we might have expected. However, that spending was catching up in the first quarter. And we also have that $9 million negative working capital effect, ending the quarter on a gross cash of $55.4 million, which is a solid cash position, leaving us well funded to execute the rest of our program for the year and also the distribution to shareholders here in the second quarter.

And lastly from me, on the production guidance and the work program. As has been mentioned by Magnus, we have revised our full year average production outlook to 10,500 to 11,000, down from the previous 11,000 to 11,500 reflecting the unexpected continued underperformance on Anan. We will see the effect of that -- the immediate effect of that in the near term as well, but we -- as the work program progresses during the year, we expect some uptick. We still expect the operating expenditures to remain in the previously communicated range. And likewise, we stick to our CapEx outlook of $91 million, and we'll update you as any firm plans are decided upon the potential effect of that in due course. All of these investments will be able to be covered by the cash on hand and the cash flow generated by the company. So we feel well positioned to accelerate and benefit from the high oil prices by investing in some really interesting exploration assets.

With that, I hand it back to you, Magnus.

[Magnus Nordin, executive]

Thank you, Petter. So a quick summary. The far most interesting development in the first quarter was what happened to Al Jumd. We expect continued interesting activity in Block 56. In particular, we are looking forward to testing the Sarha and Sabah wells and also to continue the planning of the additional horizontal& wells into Al Jumd. On 3&4, we do not expect any major surprises for the near term. We expect production to be still affected by the announced situation for the -- at the beginning of the second quarter. And we would have -- expect production to come back a bit to meet our guidance between 10,500, 11,000 for the year. We would look at some additional exploration activity continually in the Blocks 3&4 over the year also. And then, of course, financials continue to be quite strong, and we would expect them to remain strong given the current oil price environment.

So with that, thank you for listening, and we would now happily take your questions.

[Operator]

[Operator Instructions] The first question comes from Stephane Foucaud from Auctus Advisers.

[Stephane Guy Foucaud, analyst]

I really got 2. The first one is around Al Jumd. So we are talking of potentially 3 wells. I'm talking about in the discovered area where you had the good result from the horizontal well. So would you expect from that discovery with the 2 additional wells that could be put in production later on, those wells would potentially deliver the same sort of rate as Al Jumd-2? In other words, in a bull case, are we talking of potentially 2,000 barrels per day additional growth? So that would be my first question.

And my second question on Anan, could you remind me how much the field is producing, just Anan? And how much reserves are associated to Anan?

[Magnus Nordin, executive]

Thank you, Stephane. Your first question, we don't typically break out reserves for the fields. But the production from Anan is quite small. And given that we have seen a loss of production there, which is now included in our guidance for the year, without maybe breaking out the details, of course, you can conclude that it is a fairly minor adjustment to the full production from the other fields, the Farha, the Shahd, the Ulfa, Erfan fields in Blocks 3&4. So it's an annoyance and it's never -- you're never happy when you have to downgrade your production. But it is an isolated phenomenon that is attributed only to this rather small field. And we will not expect it to have any major impact, as we have said in our guidance, for the other fields in the book.

That said, get into your question on Al Jumd, yes, we are, of course, quite encouraged by the good flow rate from Al Jumd-2. Now without speculating too much on what we could get, it will be a long-term production test. So it will be a combination of optimizing, of course, to get as much oil out as possible to sell during the test. But it's also, of course, going to be an optimized to get testing to understand the optimal long-term production potential of Al Jumd. But -- so I don't really want to give a forecast of what we could do. But clearly, 3, 4 wells in production -- into an early production facility would, for the testing period, give a meaningful boost to our overall production for the year.

[Stephane Guy Foucaud, analyst]

And perhaps then -- slight different way to ask the question. Given where the 2 new wells will be positioned, would you expect reservoir and well performance similar to the first one? Or just because the way they are located, they will be different?

[Magnus Nordin, executive]

It is an appraisal situation. So they could be better, they could be similar or they could be worse. We don't know. What we know so far is that the structure seems reasonably homogeneous. But that is, of course, what we have to find out. The wells will be planned and drilled in such a way as to give maximum information about the structure. And at least the Al Jumd-3 will not be primarily drilled to optimize production. It will be drilled to optimize data. But of course, we expect -- would hope for good flow rates from both additional wells once they're drilled.

[Operator]

[Operator Instructions] There are no further questions. Dear speakers, back to you.

[Magnus Nordin, executive]

In that case, thank you for listening. And I hope you will tune in again in August for our second quarter call. And between then and now, keep an eye out for our press releases and announcements, both on production from 3&4, but of course, also as the exploration appraisal campaign in Block 56 continues. Thank you.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.