Tethys Oil AB

STO:TETY

Earnings Call Transcript 2019-Q4

[Operator]

Hello, everyone, and welcome to the Tethys Oil Year Earnings Report 2019. [Operator Instructions] Today, I am pleased to present Magnus Nordin, Managing Director; and Petter Hjertstedt, Acting CFO. Please begin.

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

Thank you very much. So ladies and gentlemen, most welcome to the Q4 2019 Tethys Oil webcast, and we'll go straight to the interesting parts and go for slide -- financial highlights. So all in all, it was quite a good quarter yet again for Tethys with one very interesting milestone in that for the first time in the history of the Blocks 3&4 project, we dropped below 52% oil entitlement.Saying that all historic costs invested into the projects has now been repaid, and we are into a profit oil plus immediate repayment of costs, still going on, both the OpEx and the CapEx. Obviously, this is a moving target, and it's dependent on future production, and it's dependent on oil price and it's depending on levels of investment.We again discuss this in some detail, but it is a very important milestone for any oil company and any oil project. And we are actually proud and happy that we have reached that far.Looking at more details. We had a perfectly healthy income of $36 million, with an EBITDA of $21 million. Operating result is affected -- considerably lower than Q3, and it's affected primarily by the write-down of a few exploration wells. And to say that does not mean that they were unsuccessfully drilled or that the results were not of interest, but we have deemed them to be not economically feasible to return the costs, at least in the near term. And thus, we have expensed them in the current quarter. Otherwise, a very healthy cash flow from operations.Oil prices just above $60 per barrel, a price, which we have been quite comfortable with. And we -- of course, we are quite comfortable with, if you look at the results that we see from that oil price level.OpEx increased a bit from the third quarter, and they are approaching the full year '19 $11 per barrel, whereas production was at a record high. It's the best quarter we have ever seen, and we do see that the effects of the infrastructure development, and in particular, the fine-tuning of the Ulfa field production facilities has really paid off in the fourth quarter, as has the infill drilling on the Saiwan East -- on the Shahd fields and Saiwan East fields.So turning to next year, we have issued the financial guidances for 2020, where we expect production to be in the range of 12,600 to 13,400 barrels of oil per day. It's a reasonably broad range and of course, we can conclude that the full year 2019 number is in the lower part of the ranges, whereas the production for December is in the higher ranges. We will see where we end up, but we are confident we are going to have a, on a year-to-year basis, quite stable production for 2020.We expect also to have investments broadly in line with previous years. We are guiding for $64 million to $71 million, the bulk still being in Blocks 3& 4, and of course, now immediately cost recover, at least for $60 oil and an additional $10 million or so to be put into our new blocks, Block 49, where we have expected really well and Block 56, our new acquisition, where testing of a number of wells is now ongoing.We guide for a slightly higher OpEx of $11.50 per barrel, and we will discuss that in some detail during this call. And we guide for net entitlement at $60 oil, and based on the assumption in this guidance, we expect to be between 51% and 52% which is broadly in line with the 2019 entitlement number.So turning to reserves which continue to be a very pleasant topic for us. For the eighth year in a row, we have a better than 100% reserve replacement, i.e., we added more reserves than we produced. This year, our 2P reserve replacement number stands at 116%. So we ended the year with record reserves, 17.3 million barrels of 1P, 26.1 million barrels of 2P and 36.9 million, almost 37 million barrels of 3P reserves. And in addition, we still maintain a large pool of contingent resources attributable to the producing fields, most of them to the Erfan, Ulfa, and Samha fields, where we did a lot of development in the current year. And where we still have scope and upside to increase the -- to further development, drill further wells and continue to move reserves from contingent resources -- so to move contingent resources into reserves.Turning to the development of our reserves. The one important staple to look at, of course, is the one in blue, where we see that for every year since we started production and since 2012 when we started having regular audited reserve numbers, the reserves have increased, and we stand now at the highest reserve number we've ever had, as I say, with the top line figure of 3P of 36.9. 2P number of 26.5. We should -- 26.1, I'm sorry. We should point out that since 2010 and until 31st December, we produced 28 million barrels from Blocks 3&4. So we actually have reserves that were almost as high as the number of oil -- as the number we have produced and still considerable exploration upside.So the Blocks 3&4 project remains quite robust. Another interesting fact from this development of reserves slide is the somewhat cyclical nature of the reserve replacement number. If you see, we seem to be -- we have a stronger reserve replacement in 1 year and weaker in the year after. So '19, 116%; 2018 177%; 2017, 114%; 171% the year before; 113% the year before; and 193% the year before that. And there is actually an insight to be had here in that allocation of resources goes from exploration and then development. And during the years, we book the reserves, and then we bring them fully on production the year -- in year 3, historically.And we are about to have to enter a similar cycle for 2020, where we now focus increasingly on exploration and appraisal to find more oil, and we dedicated a full rig year only to finding more oil. But with the stated aim, of course, to increase our reserve replacement ratio for 2020 above the one we had in 2019. This is, of course, dependent on exploration success. But history suggests that it is a strategy and an allocation of resources that have worked well for us in the past. Let's see if we continue to make it work well in the future.Reserves, cash flow and another very important indicator and important area for Tethys is the distribution to shareholders. And we are delighted to present a proposal to the AGM to be held on 13th of May, of maintaining the ordinary dividend of SEK 2 per share and also continue the extraordinary distribution of SEK 6 per share, which is 100% in line with what we did in 2019.So with a total distribution -- cash distribution to shareholders of SEK 8 per share, which on -- at announcement is similar to a yield of 11%, exactly what we had in 2019 when we announced the NOK 8 per share that year.And we should point out that we have actually now distributed more than $80 million to shareholders between -- since we started with regular dividends in 2015. And in addition, we have repurchased shares to a value of close to $14 million.So the Blocks 3&4 project has turned out to be extremely robust from a cash flow generating perspective, giving us a strong possibility to distribute cash to shareholders, while maintaining growth potential and still have a strong exploration upside in those blocks. Indeed, an excellent assets par excellence.But it's not our only asset. So we turn to a summary of our main assets. Oman is, by far, our focus country, 99% of the balance sheet. Blocks 3&4, where we have a 30% interest partners with CC Energy, who are the operator and Mitsui. With the addition of Block 49, where we have 100%, Tethys is the operator, and where we are getting up to drill our first exploration well on that block later this year.And a new addition, Block 56, which we announced in -- during the fourth quarter. It's subject to final government approval, but we are part of the project, and we are delighted to see that the operator Medco is progressing well with the work program of testing a number of previously drilled wells. So we are hopeful that we will be able to get back to the progress on Block 56 as 2020 moves on.On that note, I would like to hand the floor to our acting CFO, Petter Hjertstedt, who will go through the numbers in more detail. Petter, please.

[Petter Hjertstedt, Acting Chief Financial Officer]

Thank you, Magnus, and good morning, everyone. On the Blocks 3&4, the average daily production in the fourth quarter hit record levels of almost 13,500 barrels per day, which was up 3% from the third quarter, and left the full year number -- average number on just over 12,800 barrels per day, which is also that -- a record number for the company. And the increase in production in the fourth quarter was mainly the result of debottlenecking and additional capacity on the Ulfa EPF as well as production from the new Shahd wells coming on stream at the end of the last quarter and during this quarter.And looking forward, the production guidance for 2020, we expect the annual average to be in the range of 12,600 to 13,400 barrels per day.Moving to the oil price. Our achieved selling price in the quarter was $61.4 per barrel, down $4 versus the third quarter. And the full year price was $64 per barrel, down from $70 a year ago. So quite a significant downturn year-on-year. The -- and it's worth remembering that the selling price that we get has a effective 2-month lag to the spot price, which means that the current oil price decline that we've seen from the start of the year due to the concerns -- the growth concerns relating to, not least, the coronavirus outbreak, the effects of these current prices will be seen with a 2-month lag during the year.And it's also worth noting that the Oman Blend, which is the benchmark price that we used for selling our oil has been trading at a small premium to the Brent price since October of last year, which is significantly better than the historic average.Moving on to revenue. Revenue in the fourth quarter was $36.2 million, which is down 11% compared to the third quarter, where higher production was offset by lower oil price and the lower net entitlement.On a full year basis, the revenue was $150.8 million, down 4% year-on-year, which brings us to entitlement, which is a big issue to discuss in this report.As we disclosed in the third quarter report, the cost pool was fully recovered in that quarter and means that the net entitlement that is the share of oil production that we are entitled to sell, will be determined by cost incurred in the period, the oil price and the actual production of oil.And it's worth noting that while our net entitlement decreased in the fourth quarter to 48% versus 52% in the third quarter, the actual entitlement terms and the terms of the EPSA remain unchanged. And in fact, the effect that we've seen is what is prescribed by the EPSA once the cost pool is recovered.And since 2017 the cost oil has been exceeding the costs incurred, which explains the drawdown on the cost pool, which is illustrated on the graph to the right, you can see a significant difference between the cost of oil and cost incurred, which has boosted our free cash flow, together with the profit oil component under the EPSA.This means, going forward, the cost oil will be determined by the cost incurred, and that they will neutralize each other and result in 0 net cash flow, that is assuming that the costs do not exceed the cost recovery cap.And in fact, that free cash flow will be determined by the profit oil. So going forward, the partnership will need to balance costs incurred to ensure sufficient investments in future growth, while also trying to maximize profit oil to generate free cash flow.And well, for 2020, given the production, OpEx and investment guidance with a price assumption of $60 per barrel, we expect net entitlement to be in the region of 51% to 52% of production, which brings us on to expenses. In Q4, OpEx was $13.2 million, up 9% versus the third quarter. And per barrel that is also slightly up despite increased production, and the increase is mainly due to maintenance costs, which in part drove the production increase, but also third-party services.And in addition to the OpEx and admin costs, which we have every quarter, this quarter, we recorded an exploration cost of $8 million relating to the aforementioned exploration wells that Magnus noted at the start of the call.These are wells that were drilled during 2018 and 2019 that all encountered oil, but after a period of testing and stimulation failed to flow oil and were deemed to be uneconomic and we therefore opted to expense these on the profit and loss statement.It's worth noting that in the quarter, only $1.5 million of these $8 million were in -- had a cash flow impact as the others had been capitalized in earlier periods. And it has no impact on the cost recovery in the EPSA, which brings us on to OpEx and netback per barrel.Netback is down 22% in Q4 compared to Q3. And again, it's the lower oil price, the higher OpEx per barrel and the lower entitlement share compared to the previous quarter.And for 2020, we expect the average OpEx per barrel to be at USD 11.5 per barrel produced, which can be compared to the full year number of $11. And the increase in OpEx per barrel is mainly reflecting the increased proportion -- or the transition to an increased proportion of local staff in Oman.EBITDA. EBITDA in the quarter was $21.3 million, down 20% compared to Q3, which reflects the aforementioned effects of entitlement and increased OpEx and lower oil price, offset somewhat by the increased production.In Q4, we achieved a margin of 59% compared to 65% in the previous quarter. Year-on-year, you can see that EBITDA was almost $93 million, a decrease from $106 million a year ago, which brings us to cash flow, one of our favorite subjects.This year was another strong year in cash generation. We had cash from operations of $96 million with significant investments during the year, including the acquisition of 20% of Block 56, we still managed to generate a free cash flow of $31 million, the bulk of which was returned to shareholders in the combined dividend distribution and share repurchases. And yet at the end of the year, we had a cash position of USD 75 million. And as you can see from the next slide, the operating cash flow was only down by about $10 million year-on-year and remained strong throughout the end of the year for 2019, which brings us to the balance sheet, which has continued strong, with a net cash position of $75.1 million, which is an increase versus the end of last quarter of almost $72 million. And in the interim, we paid out the last installment of the dividend, the SEK 1 per share of the 2019 dividend, leaving us at the end of the year, with about NOK 20 per share in net cash.Oil and gas investments in the year were significantly higher than the year before, mainly reflecting the investment in Block 56, which was the -- which impacted the fourth quarter.And smaller investments on Block 49 during the year. So looking forward, we expect Blocks 3&4 investments to be in the range of $55 million to $62 million, whereas Block 49 and 56 are together expected to -- we are expected to invest $9 million.And a big part of these investments are, of course, the wells we drill on Blocks 3&4. And during the quarter, we completed a total of 8 wells. And for the year, 32 wells were drilled. And you can see that in the table below the split of these wells, the number of production, but also water injection wells and 2 exploration wells, which were included under the 2019 program.Now the decrease in number of wells 2019 versus 2018 from 44 to 32 last year reflects the change in mix of the types of wells being drilled, where the number of wells drilled are slightly deeper and take slightly longer to drill and fewer of the Farha South wells, which traditionally have been quicker and shallower wells, which have boosted the numbers historically. And with that, I will hand back the mic to Magnus.

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

Thank you very much, Petter. So we'll turn slides and focus a little bit on the operations. I must disappoint you immediately, it's not a crystal ball slide. This is not the operations what will happen in 2020. This is the Q4 2019. And what did happen? Well, we have our 3&4 blocks. We have our 49 blocks, and we have our 56 blocks. 3&4 are main, stayed, 49 nice possible addition to growth and 56 equally so with a block that is actually very well placed to -- for us to use our geological knowledge from 3&4 into the trend that partly continues into 56 with additions.But turning immediately to Block 49. This is a 15,439 square kilometer block, it's quite a large one. It's in a different sedimentary basin than 3&4. This is the Rub'Al Khali basin, which -- most of which actually lies in Saudi Arabia and the United Arab Emirates, and flank comes into the Sultanate of Oman. So our block boundary coincides with the boundary between Saudi Arabia and Oman.We've had the block for just over 2 years. And we were rather excited when we first got it of the fact that it is in the Rub'Al Khali Basin where a lot of oil has been found on the Saudi side in the central parts of the basin.We set out to look at old seismic, we did some new seismic of our own. And to our delight, we were able to prove up a drillable prospects in the Northwestern part of the block from the seismic that we completed about a year ago. And this is quite -- both interesting and significant to this point is that we actually have a very nice structure. Hopefully, it will contain hydrocarbons that we didn't know until we built a hole into it.But the fact that it is there has surprised number of our peers in that of the 11 wells drilled on the block previously, none have -- all have encountered some kind of hydrocarbons, but no good structural closures.And what we set out to do was to look a little bit deeper and see what could have happened earlier on in geological history. And at a depth below 3,000 meters, we did actually find a prospect.So that's why we are now planning to drill well down to close to 4,000 meters through vertical depth. We are ready to go. The site surveys, everything is ready to go. We are waiting for a rig. We've been -- finding source rigs at the moment. The rig market is quite tight in that Oman has seen a major upturn in activity -- in the exploration activity over the last couple of years, where several both smaller and larger players have either gotten new licenses or increased activity on old licenses.And this is partly actually due to the success on Blocks 3&4, which indicated that conventional wisdom that oil was only in the central part of Oman turned out to be wrong.So interest in the flanks have picked up. Anyway, given the demand, a number of rig companies have flagged that they will bring rigs into Oman. When that's going to happen, we don't know. There are rigs in country, and we are currently searching avidly to find a rig as quickly as possible.As soon as we have one, we will be ready to spud our first exploration well on blocks -- on Block 49. So do stay tuned, while that is happening.And while we wait for the rig, we are continuing our seismic interpretation, both on the regional side, to further understand, in particular, the eastern -- sorry, the western part, the -- that area, which is closest to Saudi Arabia and the central, the Rub'Al Khali basin.And also the area where we showed 3D in the very northern part of the block, where we hope to find some interesting matters also, to continue work also after we drill the first well. 49, stay tuned.3&4, more of the same really, we have a number of leads and prospects. We drilled 3 exploration wells in 2019. All encountered oil, all targeting carbonates. And the -- all with difficult reservoirs.First, I should comment a little bit on the southern part of Block 4, where we drilled a well called Luja now over a year ago which we did some fracking operations and testing on in this -- in 2019.Again, a well that encountered oil, but we did not get it to flow, and there is considerable interest in understanding the reservoir properties and also the regional depositional environment in the southern part.Well, thus, as you can see, there are a number of leads and prospects in that part of the block. So we are very eager to learn more and the Luja well has contributed some very interesting data that is now being processed to enhance our understanding of that part of the block.Otherwise, turning to a more detailed look of the exploration wells. This slide shows our main fields. The green blocks, Farha, Shahd, Saiwan, Erfan and Ulfa, Samha. We are right at the border between Blocks 3&4. And Farha, our mainstay producer, our backbone, which continues to increase as we continue to produce -- the reserves as we continue to produce from it, surrounded now by a whole universe of carbonate prospects, where the carbonates remain quite fickle. Lot of oil has obviously been generated and passed through this area because we have oil shares in virtually all of them. But reservoir characteristics vary tremendously.From the best well in the Saiwan East field, which tested at levels of more than 10,000 barrels a day to the worst ones in the Shahd field, which came in at 300, 400 barrels a day for the producers.We drilled the Maather, Mahamid and Yusr wells this year. We've learned a lot from them. The balance here is to understand much more about the workings of the carbonate reservoir, in particular, the Khufai carbonates both how they are distributed from a porosity and permeability point of view, but also the best way to make them produce. So again, some valuable insights learned, economic value of the actual well costs written down. And with a strong focus with a full rig year dedicated to exploration appraisal, finding more oil, we look forward to having -- putting what we've learned from this year's exploration surveys, including, of course, all the new seismic we've done to put to work in 2020, to attack the carbonates again. And this time, we hope to find them not only oil bearing but also to be good producers. We'll see if we succeed.And turning finally to the newest addition of the Tethys Oil family in Oman Block 56. In the southern parts of the country, on trend with Blocks 3&4 and the Blocks 3&4 carbonates are present in the block, as is also the petroleum system that is actively producing from the Karim heavy oilfield within Block 6. It's a -- the Karim field is operated by Medco, but within PDO's Block 6. And of course, we are hopeful that a look alike to the Karim field will be present in 56 .We are also looking at synergies between what we've learned from 3&4 and the carbonates in Block 56. And in addition, we also have a tertiary basin towards the sea in Block 56 that could offer a completely different play.There's some data on the block. It's a fair amount of seismic, 11 legacy wells. And currently, several of those wells are being reentered and production tested. And of course, we hope to learn a lot from the various reservoirs in Block 56 from this test program, and we'll see how far we can take them from a production point of view.But Tethys program is ongoing and stay tuned for updates on this as 2020 progresses.So to sum up, we are looking at high exploration activity in 2020, higher than we had in 2019, in particular, focused on more wells to be drilled, whereas 2019 was more of a seismic year. We will continue the development drilling and upgrade of production facilities. And we continue the seismic surveys complemented with a lot of drilling.And this work, we expect to give us a production within the range we've guided for at 12,600 to 13,400 barrels of oil on average for the year 2020.On Block 49, the Thameen prospect is ready to go as soon as we have a drilling rig. And on Block 56, the test program is ongoing according to plan.So ladies and gentlemen, on that note, we'd like to conclude our presentation, and we happily invite questions.

[Operator]

[Operator Instructions] And we have a question from the line of [indiscernible].

[Unknown Analyst]

I have 2 questions. The first question is for the field 3&4. You tell us a lot that you have very good prospects. You see a lot of potential in 3&4. But now you have to tell us that there are 3 wells that are not that productive, they show oil but no productive. How does that fit together? Is there a long-term possibility in these 2 fields? And you will -- you can sustain or expand your production there? And the second question is the share buyback program you launched, you used it a little bit. But you used it very sensitive. And we see a lot of maybe irrational investment decisions in the oil industry. Maybe can you give me some picture on that, if you move up with this share buyback or you get more aggressive? What are your plans?

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

Certainly, to address the share buyback question first. The share buyback program is one tool that we use to distribute the cash to shareholders. Both in 2019 and 2020, we have had reasonably large cash distributions. And I would say for 2020, that is probably going to be the primary way of distributing cash. But we're certainly attuned to what's happening in the markets, and we're certainly attuned to the possibility and opportunities that we have to buyback shares, and we expect to be doing so from time to time without offering any more detailed guidance as to when we will and will not be active in the market. So we will be certainly aware of the tool. We want to keep the tool, but the bulk for 2020 we expect to be the cash distribution as announced or proposed to the AGM today. Returning to 3&4. The -- we do see quite a bit of potential in that we have mapped a number of structures that could very well hold oil. We have in the past seen these carbonates being difficult. And as I mentioned, we have had within the same field wells that have done several thousand barrels of oil per day and other wells, just a few hundred meters or kilometer away from that well, have done a few hundred barrels of oil per day. So one of the major challenges is to understand how the carbonate reservoirs are built and where our best spots to drill them. And that's an ongoing work where we actually, I should say, we've learnt more about that from 2019. But the overall prospectivity of the remaining part of the block remains quite interesting. And that's why we are focusing a full rig year on exploration and appraisal drilling for 2020. So I would say it's -- that we had 3 wells that were not economic this year does not contradict the overall prospectivity of the block. And the -- that exploration effort will continue.

[Unknown Analyst]

One more question on the Block 49. Can we expect the drilling in the first half year?

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

We're certainly aiming for that, given that we don't have a rig contract signed yet. So we don't give any more precise guidance. But we are actively searching rigs, and we are talking to several parties and several possible rig contractors. So we hope to have a rig as quickly as possible, but without a sound contract, we don't guide exactly when we're going to start.

[Operator]

[Operator Instructions] And there are currently no further questions registered. So I'll hand the call back to the speakers. Please go ahead.

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

In that case, ladies and gentlemen, thank you very much for listening, and we hope to actually listening again in May for our Q1 2020 report. Thank you very much.

[Operator]

And this now concludes the conference call. Thank you all for attending. You may now disconnect your lines.