Tethys Oil AB

STO:TETY

Earnings Call Transcript 2018-Q4

[Operator]

Ladies and gentlemen, welcome to the Tethys Oil Q4 Earnings Report 2018. Today, I'm pleased to present Magnus Nordin, Managing Director. [Operator Instructions] Speakers, please begin.

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

Welcome to Tethys Oil this cold February morning where we address you from Stockholm. It's 12 February 2018. It's time for the Q4 -- 12 February 2019, sorry, in which we'll talk about what's happened in the last quarter of 2019 and not -- '18, sorry. And on the page, we actually see a photograph from the successful seismic campaign that we conducted during the fourth quarter 2018 in Block 49 onshore Oman. To turn the page to the Q4 '18 highlights. We are proud and delighted to present some very strong numbers in all categories with record income, record EBITDA and a record operating result. And actually, an EBITDA well in excess of $100 million for the full year 2018. Indeed, a very, very strong year from the financial side.Production from [ Blocks 3&4 ] recently scheduled, that's under 12,000 barrels a day. Average selling price, as you all know, fourth quarter saw a very -- saw the highest oil price since 2014, that's $77-plus per barrel for us. It came down a bit since then, but as it's evident from previous quarters during 2018, we make very good cash flow and money also with prices, say, at the current levels around $60 per barrel. We've continued appraisal -- appraising and [ exploration and ] production discoveries made in 2017. On the exploration side, it was primarily focused on seismic. And with the proposed seismic program for 2019, we've seen coverage of all the interesting parts of Blocks 3&4 in seismic -- in previous seismic. Maybe the most interesting number is the 2P reserve replacement ratio, 177%, with the combination of moving contingent resources but also advising upwards some of our previously producing and earlier producing fields, the Farha and Shahd, in particular. And year-end 2018 2P reserves of 25.4 million barrels, the highest 2P number we've ever recorded. And following the strong financials, we proposed a distribution to shareholders of an ordinary dividend, same as last year, of SEK 2 per share, but also an extraordinary distribution of SEK 6 per share, which is an addition of SEK 2 more than we did last year. So let's delve into some detail behind the numbers. On Page 3, we have a map of Oman, which, of course, is by far our core area. More than 99% of activities relate to Oman. And the work we've left in Lithuania is a small production from Gargzdai license onshore Lithuania. Production, of course, there is in Blocks 3&4 where we have our production; and in Block 49, where we have 100% increase that we operate and where we've just concluded the 3D and 2D seismic campaigns, and we'll be focusing on mapping and interpreting that seismic data in the first half of this year. More detail on the distribution. As you can see, the dividend yield, at announcement for 2019, a good 11%. And this is, of course, backed up by our extremely strong financials. But we are very happy to remind our investors that over the last 4 years, we have actually distributed more than $50 million to shareholders while increasing reserves and growing the company. And this year, we'll distribute $30 million while maintaining a healthy cash balance for growth -- for internal growth, but also to enable possible new projects if we should find any such that we would like to get involved in. Page 5. Reserves and resources. Pretty much on reserves, we closed the year at 25 million barrels of 2P, 35 million of 3P and 16 million of 1P, 16.7 million, all being record numbers in their respective cash groups. The additions and revisions of the 2P number, the 7.6 million barrels, relate partly about 4 million barrels to the appraisal of the 2017 discoveries, the Samah, Ulfa and open fields, but also close to 4 million barrels from revisions, Shahd and Erfan and Farha South. So there's certainly still a lot in our mature assets, and we have an additional 12 million barrels of 2C relating to the 2017 discoveries. And let me here just remind you that we saw some delays in the appraisal and development of the 2017 discoveries resulting in the Ulfa field early production system not being up and running until late December, which did affect the data we needed to measure more contingent resources into reserves. Obviously, that process is now continuing, and we have every reason to be optimistic about maturing more of those 12 million barrels of 2C into reserves in 2019. I should also point out that apart from seismic, we saw very little exploration drilling in 2018. Only one well, actually. And that was a [ contingent ] well, which we found with small [ contingent ] fields. And it is now hooked up as a satellite field to Shahd.Exploration drilling, otherwise, didn't really start until December. And we have gotten to 2 exploration wells ongoing where we expect the results in the first quarter of 2019. So the lack of increase in 2C for 2018 has [ little ] much to do with our reaction given prior. One well was per that canyon and in other wells, we have results pending in -- during the first quarter '19. Looking a little bit more at the big picture on Page 6, development of reserves. We here -- we can clearly here see the trends that was much as we produced. We have actually, between 2010 until -- and 2018, produced 22.9 million barrels of oil, and we still have 2P reserves more than that, let alone, 3P reserves will stand at 35.9 million in addition to 3C resources of 24.8 million. So we can certainly argue that we have strong growth potential both from existing production from new -- from discoveries in 2017 that are now fully fledged fields and from the exploration potential in -- within the blocks. And actually, in 2014, we had 25 million barrels of 2 -- 3C -- 3P reserves. That number has now turned into a 2P number with strong addition, of course. So we had to move resources in 3P into the 2P cash group.On the production, as you can see on Slide #7, it's been very stable, just below 12,000 barrels of oil per day. The -- we've guided, for 2019, the lower band of 12,000 up to 13,000 on average for the year. That has very much to do with the Ulfa early production system now being commissioned and ongoing. The production had been stable and -- at oil price. As we've seen over the last couple of years, that has given us a steady cash flow, both to distribute to shareholders and continue the investment programs in Block 49 and Blocks 3&4. On that basis, I'd like to turn page to Page #8 where I'd like to hand it over to our CFO, Jesper Alm, who will comment a little bit more detail on the numbers for the quarter. Jesper, please go ahead.

[Jesper Alm, CFO & Secretary]

Thank you, Magnus, and good morning, everyone. Production on Slide 8. Well, if the previous slide showed how stable the production has been, Slide 8 covers a longer time period. And we can show the same stability over the past 3 years on the left side of the slide and, obviously, also over the 5 quarters. The full year average production for '18 was 11,800 barrels of oil per day, and we have now guided for 2019 of a production between 12,000 and 13,000. Turning page to Page 9, which is the average price per barrel. We've seen an increasing trend over the past 5 quarters, with the fourth quarter coming in at very close to $78 per barrel. We know that based on our effective 2-month lag to spot prices and we know the spot market currently, we can expect a downturn in Q1 as a result of that, but we will be still within the -- with healthy selling prices. Moving on to Page 10, revenue and other income. We report the best quarter out of the past 5 with revenue and other income of $44 million and the full year of $157 million. The quarter is up 5% compared to Q3, and that's a result of increased production and increased oil prices. Continuing to Slide 11, expenses. We saw slightly higher OpEx during Q4, which was due to the commissioning of the Ulfa EPF, which has increased the staffing and equipment rental. And we see continued higher energy costs during the fourth quarter. Administrative expenses were slightly higher than Q3, and that is in part due to our work as operator on Block 49, which results in projects and staffing increases, but also that we are moving office in Muscat with certain one-off costs related to that. OpEx and netback on Slide 12. Q4 was our strongest netback during the 5-quarter period, with a netback of $29 per barrel. And we had OpEx per barrel of $11.01. EBITDA, Slide 13. Well, the full year, in excess of $100 million dollars; and Q4, very close to $31 million, which is up 2% compared to Q3. And we have an EBITDA margin of close to 70%. Moving over to balance sheet, Slide 14, and what has all these operations resulted in. Well, it has resulted in a net cash position at year-end of $73 million. We generated $13 million during the quarter, of that $3.7 million was distributed in the second tranche of the 2018 dividend. To put the cash position in relation to the proposed distribution, the distribution that is being proposed amounts to roughly $30 million for the year. So we will still have sufficient resources, as Magnus mentioned, for business development should we find something that we find attractive. On the investments, Slide 15. We saw a steady quarter on Blocks 3&4, but we carried out a seismic acquisition campaign on Block 49, which raised the investments to $16 million for the quarter. The full year investments 2018 was $56 million, and we're now guiding for investments during '19 of between $50 million and $55 million. So what did we get for those monies invested? We completed 6 wells -- I'm on Slide 16. We completed 6 wells, which is below the average for the year. But as we have said before, exploration wells normally take longer, and we spotted 2 exploration wells in Q4. So there is no change in our efforts and the spending in Q4, but we had a lower number of wells completed during the quarter, and we'll see the result of that in Q1. With that, I hand the microphone back to Magnus. Thank you.

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

Thank you very much, Jesper. Some strong and interesting numbers. So turning a little bit more into the work program and what we actually did with -- in more detail with the money in 2018.Let's put all your attention to Slide 17, the Erfan prospect, now the Erfan oilfield. Drilled in first quarter of 2017, started in December 2016, a nice discovery. As you can see from the slide here, it's a well-defined, full-controlled field. Carbonates, we are looking at [ that Buan Hoopai ], our main carbonate producers in Block 4. Appraisal has gone well, and we now have up to 4 wells put into the Erfan structure. It's been hooked up the Saiwan East field whereas the Saiwan East field, which has been in production since 2010, declines, the Erfan production is a welcome contribution to maintaining that facility in good order. We expect to, of course, see more production from Erfan, and we would continue to -- with the team development and also to further understand the fields. But it's now in production and contributing to the production we see in 2019.Turning to Page 18. We have the Ulfa structure, also well-defined. Not as faulty as some of the things you see in Blocks 3. Discovered in second quarter of 2017, we now have 5 wells and a 6th well in drilling in a very successful drilling campaign to appraise and develop the field. Too much oil to be able to handle through existing facilities and, thus, an Ulfa facility was put in place in 2018. And it took longer than expected. And here, we want to -- both to -- production remaining stable as it did foremost in 2018, but also affecting, of course, both the Ulfa and the Samah fields are beginning to have enough data to move more of the resource base into reserves. But now, up and running in the Ulfa EPF. And the same goes with #9 -- Slide 19, the Samah fields. Started smaller. Actually, very well-defined from seismic. Also, very homogenous. But it's not all replicates from carbonates, carbonate reservoir. Three wells in, appraisal and development continuing, but hooked up and contributing to the Ulfa EPF. Also here, we expect Oman data to offer us this opportunity to move some of the resources from '18 to Samah to introduce us especially during 2019. And on that note, let's turn to Slide 20, which is a mainstay of these presentations and which shows Blocks 3&4 within the orange boundaries. And typically, what you have been seeing over the years and months is the seismic coverage along the main fairways and trend lines increasing. And what you see in the dark blue is what we did in '17, '18. And we will continue to do seismic in 2019. And then assuming, we will have covered all of the interesting areas of the blocks. And we don't lack for opportunity. In '18, as I mentioned before, we did one exploration well only. But so far, we have more than 25 leads and prospects currently mapped. Several of those in the areas where we shot seismic in 2018. And 2 exploration wells currently drilling, 3 scheduled -- 3 additional -- at least 3 additional scheduled for 2019. We should see a lot more exploration drilling activity in 2019. Also, we should comment, the southeastern corner of Block 4 where we did the Luja-1 well, most stratigraphic well, where we wanted the information of what's actually down there. It looked quite good. And for a period here, we've got -- dived oil in some samples, but no flows. What we have shown conclusively is that there's this natural petroleum system also in the southern parts of Block 4, and there is no shortage of prospects. So the Luja-1 -- where we started the Luja-1 well would be very carefully analyzed. And of course, we hope to see more exploratory drilling in this part of Block 4 later on and beyond of the project. Turning to 21, just a little bit of a highlight on the 2 exploration wells that are currently in progress. One is about 10 kilometers northeast of Ulfa, and it's Ulfa/Samah analogy well. We should have results during the current quarter. And hopefully, of course, we'll see something interesting. And on the other side, the Farha South field. We are looking at a slightly different prospect and also an area where we hadn't actually drilled before and don't really have that much information. It's a high-risk well. But, of course, it could yield some interesting information also. And we should know what's within, within the next month -- sorry, during the quarter, we should have the results from these 2 wells. So from the exploration side, exploratory drilling has really started off on a high note so far this year. No results yet but at least we are drilling. So turning to Slide 22, Block 49. Our 100% owned and operated block, signed in November 2017. [ Absolution ] large block, 15,000 square kilometers. North of -- 2D seismic primarily. Nine wells gave us a fair amount of information and importantly, also, oil shows. We have fine-tuned this geological model. We have reprocessed seismic, and we have also conducted 2 seismic campaigns in the northern part of the block. And that's, of course, where we would focus our efforts for the next couple of months with the aim to process and interpret these areas. And hopefully, of course, we find some interesting -- drill other prospects. We'll know more within the next 4 or 5 months. And we will also prepare for exploratory drilling. And if we find something, of course, we'll be eager to drill as soon as we can. If we find that prospect worth drilling, that is.So to sum up, Slide 24, some record financial numbers. Extremely strong cash flow generation. Strong reserve replacement ratio with the highest reserve numbers ever in the company's history. Strong resource base. The increased focus on exploratory drilling in 2019 to increase, of course, both reserves and resources while we mature the known discoveries from resources into reserves. Interesting activity in Block 49. Production guided the 12,000 to 13,000 barrels. That would give us a proven cash flow at current oil prices. And investments in the $50 million to $55 million range. This is not too far off from what we have been doing over the last couple of years. And based on the strong financial performance, of course, we wish to distribute cash to our shareholders while given that we had $70-plus million in the bank at the end of December, we will still have a very healthy cash position that we can use for investment and prior investments, of course, but also to chase other opportunities should such materialize and should we have the opportunity to actually acquire them or join any other projects possibly in the [ capsized ] blocks. We'll see what happens. And we look forward to a very exciting 2019 based on a strong position. And we are now more than happy to take your questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Taro Kiley from FirstEnergy.

[Taro Tim Kiley, Associate]

Just a couple from me. What -- can you guide at all on the CapEx split between Blocks 3&4 and 49? Obviously, I expect the majority with 3&4. But any color on that would be helpful. And also, other than 2 wells that you're currently drilling, where do you expect the focus to be of -- potentially 3 more wells on top of that for exploration?

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

Jesper, you want to do the CapEx guidance?

[Jesper Alm, CFO & Secretary]

I can do that. By referring to the press release on the investment guidance, you can see that the work program described for Block 49 is primarily related to processing and interpreting the acquired seismic. So there is no seismic acquisition campaign, and we say that preparations for exploration drilling will be carried out. So based on that, you can expect the majority of the guidance to be related to Blocks 3&4.

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

Thanks, Jesper. And yes, and I always love to talk about the exploration potential of these magnificent blocks. Let me say that we are hoping to drill at least another 3 wells in an exploratory nature during the year. Where that will actually happen, I -- we -- depend on results, depend on the seismic, depend on the ongoing mapping of the seismic that we completed last year. But I think it's fair to say that we'd be looking at a mixture between near-field and far-field wells where we hope, of course, those 2 to clear up the near-field prospects of a low-risk nature, but also to do a few far-field ones to test, see how far that the -- that we're actually -- that it progresses, and also to see if we can come up with some additional concepts to what we're willing to showing -- to playing up. So I would say, a fairly mixed bag with hopefully some interesting results.

[Operator]

Our next question comes from the line of Karl Schjøtt-Pedersen from ABG Sundal Collier.

[Karl Fredrik Schjøtt-Pedersen]

Congratulations on a strong quarter and also the positive distribution of cash to the shareholders. Just a question on the production guidance. How would it look throughout the area? Is it going to be back-end loaded? Or the higher end of the guidance, is that a back-end loaded level? Or is it sufficient to assume 12,000 to 13,000 to be the average for all the quarters out there? Also, in terms of CapEx allocation, how would that phasing look like?

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

Okay. Thank you. Jesper, we -- and I think this is very much your area.

[Jesper Alm, CFO & Secretary]

Well, I'll start with the CapEx phasing over the year. Block 3&4 where the majority of the investments will be made, it is evenly distributed throughout the year, as our history would indicate as well. And on Block 49, we do not have any major investment drivers such as seismic acquisition or drilling, as described in the press release. So you couldn't assume that both projects will have a fairly even profile over the years.

[Karl Fredrik Schjøtt-Pedersen]

Okay. And in terms of the production mix?

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

Sorry, what was your question on the production?

[Karl Fredrik Schjøtt-Pedersen]

The question on the production is it's a slight step-up from current production levels. So the question is, is that something that we should see in the beginning of the year? Or is this is a ramp-up throughout the year? And how then the exit rate for 2019 look like?

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

Okay. So what we've guided is that we expect the average for the year to come in somewhere between 12,000 and 13,000. And we haven't really given that much detail as to how we see it will come about. But as you saw last year, we were quite -- on a quite even keel. And depending on how the year opens after, we should be able to give a more detailed balanced for how the year will play out later in the year. But for now, let's just focus on -- we expect to end the year or finish the year somewhere between 12,000 and 13,000 on average without giving more detail at this stage.

[Operator]

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

[Johan G. Spetz, Analyst]

Just two questions on my end. Firstly, a follow-up on the production guidance. Are you able to provide any indication on what the contribution is from the 2017 discoveries into that new guidance range for 2019?

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

I think the -- clearly, some of the fields that have been in production since 2010 and '11 are in decline and the new production from the '17 discoveries is certainly compensating for that. Exact numbers, I don't think we are in a position to give at this stage. We will, of course, continue our monthly production reports while you're able to follow how the production evolves. But at this stage, I don't think we are in a position to give detailed breakdown on respective fields more than the general comment.

[Johan G. Spetz, Analyst]

Okay. And then, of course, you had a potential acquisition lined up around the turn of the year here that unfortunately didn't go through. So I would be assuming that given your very strong financial position, you will be definitely screening for potential new acquisitions through June 2019. Should we think about those primarily being production assets that you're looking at? Or could you be looking at more sort of development projects as well?

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

You're quite right. I mean, we are slightly disappointed that we were not able to complete the proposed transaction. However, of course, we are flattered that there were others with similar ideas. And the -- as far as what we're looking at -- I mean, we, of course, will be looking at adding value, obviously. And I think we will be open to the full range from -- as long as we don't take too much risk on the money we spend, this is the mantra we have been running for years now. But typically, I mean, we could probably do some more exploration as long as there -- we don't have to spend too much money upfront. We could spend more money on development, and we could certainly also look at production of the leasing assets. We have a pretty open mind. We need just to try and make a -- as pretty easy as possible when and if one materializes. So the full spectrum is possible, bearing in mind that we want to limit the financial risk.

[Johan G. Spetz, Analyst]

Sure. Sure. No, that makes total sense. And in terms of geographies, I know, in the past, of course, you've been open to going outside of Oman as well. Of course, you have a very strong standing in Oman. How's your most recent thinking around that?

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

Little has changed there also. I mean, we -- of course, we like Oman very, very much. And after 10 years or more than 10 years in the country, we feel we have an element of a competitive advantage. We have seen, though, of course, that Oman has become more in focus of other oil companies over the last years. We have seen several strong entrants and the related speed ramps with respect to [ Katherine ], of course. But it could also create an element of competition. But we are carefully eyeing opportunities in Oman, and we are also looking at other -- in particular, within the MENA region. It's a -- it's of this region, it's a geology, it's a culture that we're comfortable with. And we'd like to capitalize on that.

[Operator]

And as we have no more questions registered, I now hand back to our speakers for any closing comments.

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

On that note, thank you so much for listening. I sincerely hope you will stay with us. And I hope we can present a very interesting report for the first quarter 2019. So please listen again on the 7th of May this year. Thank you very much.

[Operator]

This now concludes our conference. Thank you all for attending. You may now disconnect.