Tethys Oil AB

STO:TETY

Earnings Call Transcript 2018-Q3

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

Thank you very much. So ladies and gentlemen, welcome to the Q3 2008 (sic) [ 2018 ] report from Tethys Oil, presented this Tuesday, the 6th November, 2018.Let's turn straight to the highlight slides of the presentation. Indeed, the -- our third quarter of 2018 has been a quarter well worth highlighting. We are actually looking at one of the best quarters in the history of the company. With strong revenue of $42 million, strong EBITDA, $30 million of EBITDA for the quarter, that's more than $10 million a month for the third quarter and very strong operating results of $18.5 million.We are looking at a steady and slightly increasing production, and of course, we are looking at an increased oil price that explains a lot of what we are -- why this quarter has been as strong as it has been.Cash generation is terrific, and we are already above $68 million of cash as end of quarter -- of third quarter. And of course, we're looking at continued strong generation throughout the year. So the numbers are very, very strong and very robust, indeed.Operationally, also going very much according to plan. We are operating the discoveries made last year. We are working on bringing them all into production and expect to see that before the end of 2018. We are testing the Luja-1 exploration well in the southern part of Block 4, a potential opener of that entire area since little exploration work has been done in the southern part of Blocks 4. And we are continuing the seismic acquisition with yet another 2,750 square kilometers that has been completed so far this year. And of course, we are continuing to interpret and see what we can do on the exploration side in this new area.So turning page to Slide #3. Oman is and remains our main focus. And as you can see, today, we hold interest surface-wise, about 45,000 square kilometers, which actually is close to 10% of the entire land area of Oman. So we have a very strong acreage position. And we also believe, of course, that we have a strong technical position in Blocks 3&4 proven plays, Block 49 exploration stage, but we are making progress in bringing that down the line, at the exploration life cycle.So turning to Page 4. I do want to highlight that we are a dividend-paying company. And this year, we will distribute $19 million to our shareholders. And of course, looking at our cash generation for 2018, that bodes well for continued ability to distribute also in 2019. I should remind you that SEK 1 of ordinary dividend will actually be paid out in November. The last day to trade the stock to participate in the dividend is November 12, record date is the 14th, and the SEK 1 per share will be paid out on the 19th of November. So don't forget that, and then if you feel you need to add your position to participate, don't forget to do that before the 12th of November.All in all, strong cash generation is very much underscored by the fact that we actually have distributed more than $50 million to our shareholders since 2018. And the dividend yield for the year, well, I should say, the distribution yield for the year on announcement was actually a good 10%.Turning to Slide #5. We look at the -- what underpins the project, the balance sheet and our continued production, namely reserves and resources. As at December 31, 2017, we had 22 million barrels of 2P reserves. So far this year, we have produced about 3 million barrels. And of course, to counter the loss of spread reserves from the production, we are working hard maturing our 2C resources with 17.3 million barrels of 2C into the reserve category. And then that's what's the appraisal program for the year is designed to do, bring as much of the 2C resources into the reserve category, or I should say, the resource category into the reserve category.And then of course, the exploration program is aimed to increase both reserves and resources by year-end. So with the very active fourth quarter we are quite optimistic about having a lot of interesting activity for the remainder of the year. After all, the reserves are the most important number, one must say, we do have. Without reserves, of course, we are a declining asset and that we do not want to be, especially not with the prolific opportunities we still would believe we have in Blocks 3&4 and hopefully also in Block 49.Turning to Slide #6. We can look at the production development for 3&4. And as you can see, it's a reasonably flat staples. We have been running around 11,000, 12,000 barrels now for 5 consecutive quarters. We are quite happy, of course, to have this stable and predictable production, but even happier to know that with the additional production equipment that is being commissioned and finalized during -- we expect to see it finalize during November, we expect to see production for the remainder of 2018 to move closer to our -- to the top range of our guidance, which is approaching 13,000 barrels of oil per day for the remainder of the year.Work is in the final stages, and we will hopefully see that work translate into actual production numbers later in the fourth quarter. On that note, I would like to leave the floor to Jesper, to comment more in detail on the numbers for the third quarter. Jesper, please.

[Jesper Alm, CFO & Secretary]

Thank you, Magnus. Good day, everyone, online. I'm on Page 7, production. And just continuing on what Magnus mentioned on the previous page. The quarter daily production was an increase by around 1% over Q2 and approaching 12,000 barrels per day, hopefully, moving on in Q4 with continued increase.Price development on Slide 8. Well, the year has been very good so far, and this quarter has been the highest prices that we've seen so far. And with the effective 2-month lag to spot prices that we have, we expect to see continuation during Q4 as well. The quarter had selling -- oil sales prices 13% higher than Q2, and we're extremely happy with that.Moving on to revenue and other income. The quarter had revenue and other income of around $42 million, which is a 16% increase over the previous quarter. For the first 9 months, we're now at close to USD 113 million, which is pretty close to the full year 2017, and we've still got 1 quarter to go. The reason for the increase in revenue and in other income is obviously the increase in oil price and the slight increase in production.Moving forward to Slide 10, expenses. Operating expenses of $11.1 million, which is in line with the operating expenses for Q2, and this includes the higher cost of energy that we have seen throughout the year and also rental equipment.Moving forward to OpEx and netback. We've had a very healthy netback of $28.5 per barrel during the quarter, which is a 20% increase over the netback in Q2. And the OpEx per barrel fell to $10.1. And with an increased production in Q4, we expect that trend to continue.Moving forward to EBITDA on Slide 12. Very healthy quarter of $30 million in EBITDA. And for the first 9 months, we're now at $76 million, which is very close to the full year of 2017. And the EBITDA margin was 71% compared to 67% in Q2.Balance sheet on Slide 13. The main component here is the net cash position of $63.7 million at quarter end. We have generated net cash flow throughout the year of more than $40 million, of which $19 million so far have been distributed to shareholders. And the distribution that will occur now in November will pay out another $4 million to shareholders.On the investments, Slide 14. We continue investing around $12 million, $13 million in the quarter. And year-to-date, we're up to $40 million invested. The seismic campaign on Block 49 is currently being planned, and we hope to complete all or parts of that during Q4.And finally, wells drilled during the quarter. Basically what we have seen -- the activity we've seen for the investments made, a total of 12 wells have been drilled, of which 1 appraisal well on the discoveries from 2017, and a total of 11 wells on Farha South, both production and water injection wells.And with that, I hand back to Magnus.

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

Thank you, Jesper, and let's move on to the operations section. And to turn to Slide 16, where we have a nice slide of the Erfan field. Discovery made in 2017 to the -- from the one discovery well. It's a well-defined deep culture, reliant on the ore that you see on the eastern side of the structure. We have drilled a number of wells into Erfan this year. And so far, the -- what we expected to find has been there. The appraisal process has gone well, and we are seeing production from the Erfan field being processed through the Saiwan East field processing facilities, just 6 kilometers away from the Erfan discovery -- or Erfan field, I should say. This is a carbonate structure and this is fairly similar to the Shahd and Luja-1 fields that we have drilled before. And then so far, no major surprises and Erfan appraisal is going according to plan.Ulfa, also carbonate structure. This time, we are actually in the borderland between Blocks 3&4, close to the Farha South field. Carbonate, slightly more comprehensive project both when it comes to appraisal, but also for production potential. The -- and so we expect to get so much production out from it that we do -- we would do -- we do need to upgrade the production facilities, and that is a project that had been ongoing and have seen a bit of slippage. We were originally hoping to have it all done already in the third quarter, but we are now looking at the fourth quarter. And this will have an immediate impact, both actually on the actuation process of bringing resources into the reserve category, and that we are reliant on more dynamic data, more production data from the Erfan field, to bring that process forward, but of course, also looking forward to getting the production from the production wells now being shut-in are waiting the new infrastructure completion. But so far, the geological data in Ulfa have been quite in line with expectations and no major surprises actually, either positive or negative.Samah is similar situation to Ulfa. It's -- it will be produced through the Ulfa facility's production at the moment, but the -- as you can see from the slide here also, it's a homogeneous and not -- it's structured with a recent well understood already now and field development programming and the appraisal and production wells have come in nicely as expected. So all in all, in summary, the appraisal program and the development of the new discovery -- the 2017 discoveries has actually been quite good in 2018. And apart from the slight slippage on the Ulfa EPF, everything has gone very well according to plan.Which brings us to Slide 19. This is the summary slide of the Blocks 3&4. The light blue highlights the seismic -- 3D seismic that was collected between 2010 and 2017, and the dark blue is seismic that was added -- or was being added in 2018. The Farha, Shahd and Saiwan fields of course remain the bulk of our production. But the older wells, including the older 4 blocks and Farha are in fact all in decline. And of course, we are therefore, very much looking forward to getting the Ulfa, Samah and Erfan discoveries fully integrated into the production system.But more importantly, we are also seeing a number of additional exploration opportunities, both near-field and far-field. And I do like to remind us that, so far throughout the project, we have been able to replace more than 100% of our production. And of course, with the large inventory of prospects and leads that we see, both primarily now within the new seismic areas, we have reason to be quite optimistic about being able to do that also going forward.And on the -- and that's talking primarily on the near-field area, in the proven plays of the Barrick, the Hoopa and Burrus was the carbonates in Shahd, Erfan, Ulfa, Samah and Saiwan. But to top that off, we have some fairly exciting far-field exploration also, focused at the moment on the Luja well that was drilled during the first half of the year. It's, as you can see, fairly far away from any normal infrastructure on the blocks, and that's been a fair amount of work going into establishing the temporary camp down there to do a proper and quite comprehensive evaluation of Luja wells, which is ongoing and will continue probably for the better part of the fourth quarter this year.Though that is important in that it can give us a lot of information on the potential of the Eastern part of east -- sorry, for the southern of part of Block 4. As you see, we have a number of leads there, but they are, in fact, in a nonproven system. Previous operators have indicated, suggested that they have all felt, but Luja will add a lot to that knowledge. And obviously, we have to have the discovery, but that we don't know. We are currently evaluating to get as much information as possible to further the understanding of the potential of southern part of Block 4.We will have, if you turn to Slide #20, some near-field exploration coming up, more or less as we speak. 2 exploration wells are planned for the fourth quarter, 1 is northeast of the Ulfa discovery, it's actually a near analogy to the Ulfa, Samah fields. And of course, a recently low-risk exploration well within the proven coal mine system. And obviously, we have to have that hopefully completed before the end of the year, but at least, it has started before the end of the year.And then on the other side of the Farha trend, we are looking at a slightly riskier well where we are going to explore a deeper section of the block. So that will be aimed at sections of Block 3, where we do not know if the reservoirs are going to be good enough and if they are actually going to yield a trailing system. So a higher risk exploration, but could add some interesting knowledge, and of course, if it comes in, adds albeit another play to the ones we have already proven in these prolific Blocks 3&4.With that I would leave Blocks 3&4 and turn to Slide 21, and Block 49, a -- the newest addition to the Tethys family. Signed in about a year ago, we have had a successful, primarily the top year, where we have been able to integrate all of the previous data. We have looked at the 9 wells we drilled earlier, and we have reprocessed the most interesting lines of the 11,000 kilometers of legacy 2D seismic that we inherited from previous operators. And turning -- and we'd actually point out that the Block 49 is located in a different basin, it's the Rub'Al Khali basin, which is one of the perforated salt basins. So it's -- we are looking at different player systems from we -- what we have in 3&4. But with the old data that we have now, it's discovery, turn to Slide 22.We were quite encouraged by the reprocessing of early seismic in that it actually yielded a lot of the -- much more clarity, increased resolution and really above our expectations. It turns out that a lot of energy had gone into the old seismic lines and it was not -- and reprocessing and Nordin completed, power yielded a lot more than previous operators have been able to see. That coupled with a detailed analysis of the 9 wells drilled, makes it clear to us that there is no requirement system present here. And what we now need to understand is where is the best chance of actually finding a track -- the tracks under the Oriente we had been generating. We have a good idea from the reprocessed seismic, but we will need some new seismic to -- both into nature and more regional to further understand and enhance the pay contract that we have. And to do that, we're further understanding the seismic campaign that we hope to start -- well, it's probably set for this year, and hopefully, we'll be able to start it before the end of 2014 (sic) [ 2018 ]. And of course, based on those results, we will know much more about how to proceed with maturing the exploration potential of Block 49.So to close off, Slide 23. It has been a very good quarter, a very good quarter, indeed. And I think what may be the best indicator for what is a very, very strong free cash generation, while we continued to spend a fair amount of capital expenditure in further enhancing Blocks 3&4, and using some small portion so far of our free cash in enhancing the exploration potential of Block 49. And needless to say, we want to focus on the Ulfa EPF, and hope to see that commissioned as soon as possible, which should translate into an immediate increase in production. And of course, we are looking at the results of the Luja tests, which could open up an entirely new section of Block 4 to further exploration.Naturally, we are happy to have exploration well drilling as we accounted that. We want to increase our reserves. We want to mature our resources, but we also want to add to that reserve some resources from the ongoing work on Blocks 3&4. And of course, we are looking forward to learning more about 49 to essentially create all that to drill wells also on that block.On that note, I would leave -- like to open the floor for questions, please.

[Operator]

[Operator Instructions] The first question comes from the line of Teodor Nilsen from SB1 Markets.

[Teodor Sveen-Nilsen]

And first question on the projection in Oman. You say that you expect somewhat higher production in fourth quarter. And are then -- are we then looking for like a production above 13,000 barrels per day? And also, could you just give us an update on the status on the production restrictions? Are they being eased?

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

I can handle the question, Jesper, if that's okay. If I understand it, I didn't hear it all, Theodore. But I think -- so first, you raised the production restrictions, and I think we do not believe we have anything that would in fact interfere with our production plans for the remainder of the year. And two, we were looking at Ulfa field, so EPF is up and running. We would be expecting as that we have guided, our production to increase towards the higher end of the span, i.e., to approach 13,000 barrels of oil per day once the EPF is up and running. And would you like to...

[Teodor Sveen-Nilsen]

So -- and the last question is related to cost of energy. Jesper, you told us that the year-over-year increase in OpEx is, to some extent, then explained by cost of energy. How much exactly?

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

Jesper, do you want to comment on this?

[Jesper Alm, CFO & Secretary]

Well -- yes. Diesel is obviously a function of oil prices. And simultaneously, Oman has reduced the subsidies on diesel throughout the year. I don't have the exact number now, but it follows the oil price, plus a bit more due to subsidies being removed.

[Teodor Sveen-Nilsen]

Okay. And then it is fair to assume that the entire OpEx increase year-over-year is related to increased cost of energy?

[Jesper Alm, CFO & Secretary]

That -- it makes up the majority of the absolute majority of the OpEx increase, yes.

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

Okay.

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

And to add a little bit more color to that, as Jesper pointed out, previously, i.e., before this year, oilfield prices, including diesel, were used on the oilfields were subsidized and, in effect, capped. With that cap having been removed, there is now a complete correspondence between the higher oil prices, which is immediately translated into higher diesel costs. And then vice versa, as the oil prices fall, the diesel cost will come down. And this is a new feature for operating now.

[Jesper Alm, CFO & Secretary]

And that is the cost of the diesel units, but at the same time, with the mature production we have from the -- from Farha and Shahd, there is also a higher energy requirement due to increased pumping, so that adds to the energy bill, so to speak.

[Operator]

And the next question comes from the line of Johan Spetz from Pareto Securities.

[Johan G. Spetz, Analyst]

I wanted to follow up on the more mature assets, if you will, Farha South and Shahd, where you say that you're now seeing them plateauing and potentially going into a decline. Is there anything that you could quantify? I mean, what's the production for each of those at the moment? And where do you see them going as we enter 2019 and beyond? Any additional guidance you can provide on that would be great.

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

Of course -- Jesper, sorry, detail on the question taken. As you know, we have not historically split our production, and I don't think it would be appropriate to do it now. But we hear your question, we understand that it is of interest, and we'll see if we can give more details in our guidance for 2019, which we expect to come by -- to give later in connection with our Q4 report.

[Johan G. Spetz, Analyst]

All right, got it. No, I was just giving it a try. And then on the flip side to that, I guess, there you got some really encouraging comments there on Erfan, Samah and Ulfa, which was great to see. So of course, then the net result of the combination, I should say, would be increased production for several years, so I guess we can try to back out a split from that.

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

It's a challenge for you to try Johan, but as you rightly pointed out, it's probably possible.

[Operator]

And the next question comes from the line of Taro Kiley from GMP.

[Taro Tim Kiley, Associate]

I just want to get moving on the side of 4Q '18 CapEx. Leading on -- following up from the previous question, do Farha and Shahd -- am I right in understanding there's no more development wells to be drilled there now? And therefore, are you just drilling 6 wells for appraisal to exploration this quarter? And would you, therefore, expect CapEx to be lower than previous quarters when you've drilled about 12? That's my first question. And secondly, on Block 49, it might be hard to set the stage, but do you think exploration drilling in next year is a realistic target? Or what are your thoughts on that?

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

If I may take the 49 question, and then maybe Jesper, you would like to comment on the CapEx. Just to say, I mean, it's -- we are currently planning for the seismic. And if that's done in a timely manner, which we hope it will be done, and if the results are especially encouraging, then absolutely, we would be looking to the drilling activity in Block 49. And I'm sure we'll be able to get back to that question as soon as possible, but certainly, by Q4 -- by the Q4 report.

[Jesper Alm, CFO & Secretary]

Okay. And on the first question, well, as you know, we have 3 rigs on contract. And obviously, exploration wells may take a bit longer than development wells. We will not have any idle rigs for Q4, so it will be a combination of continued appraisal wells, exploration wells that may take a bit longer, plus we still have, in the ordinary work program, further wells to drill on the existing fields. So when it comes to CapEx on Blocks 3&4, it has been fairly steady throughout the quarters of this year, and we still have the same amount of rigs on contract during Q4.

[Operator]

[Operator Instructions] And the next question comes from the line of Karl Schjøtt-Pedersen from ABG.

[Karl Fredrik Schjøtt-Pedersen]

A few questions for me. First of all, I'm trying to look a little bit ahead on production. Do you have any indications on what level you would expect for the next year for 2019? And for your plans for growth, what would be the associated capital that should be required?

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

Jesper, you want to try on this one?

[Jesper Alm, CFO & Secretary]

Yes. On the production for 2019, we will get back with guidance on that in due course. We're in the middle of deciding work, program and budget, and that will come out of that. And the same goes for CapEx. That is work in progress for the time being.

[Karl Fredrik Schjøtt-Pedersen]

Okay. And in terms of capital in your balance sheet, allocation of your net cash position. So do you expect cash dividends, buybacks, how would the balance sheet be looking going forward? So as you previously stated that net 0 cash balance sheet, and it's materially cash-heavy.

[Jesper Alm, CFO & Secretary]

Yes. We're weighing in...

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

We're far away from net 0, yes.

[Jesper Alm, CFO & Secretary]

Magnus, please go ahead.

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

No, no, I was just saying, yes, it's a good observation. We are far away from the net 0, absolutely. Jesper, please.

[Jesper Alm, CFO & Secretary]

Yes. And we're weighing in the future investment possibilities that we have, both on existing blocks and outside of existing blocks. And the targets remains, which means that there is likely going to be a few dollars left over, and combine that with our history of dividends. That is as good as an indication as we can give now and we'll get back in Q4, which is the normal report for that. But we are aware that we have a very healthy USD 64 million on the balance sheet in cash.

[Operator]

[Operator Instructions] As there are no further questions, I'll hand back to the speaker.

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

Thank you very much. In that case, ladies and gentlemen, thank you very much for listening. Thank you very much for good questions. Do stay with us, we are looking forward to an interesting fourth quarter and of course, a very interesting 2019. So hope to hear from you again if not before, so in February, when we announce our results for Q4 of 2018. Until then, thank you very much.