Valeura Energy Inc

TSX:VLE

Earnings Call Transcript 2023-Q1

[Robin Martin, executive]

Hi, everyone. Thanks for joining us today for this Valeura Energy webcast to discuss our Q1 2023 results, which were released earlier today. I'm Robin Martin, Vice President, Communications and Investor Relations, and here with me in our Calgary office is Sean Guest, our CEO; and Kelvin Tang, our EVP Corporate, General Counsel and Corporate Secretary. Heather Campbell, our incumbent CFO, is on the call too, just connected by audio.

This event is being streamed live and is being recorded today, May 12, and we'll make a replay available on our website later today. [Operator Instructions] And in a moment, I'm going to hand over to Sean, who will take you through some slides that are going to be shown on the screen if you're joining through MS Teams, and if you're joining by dial-up, they're available on our website.

So after that, we'll take any questions you might have. [Operator Instructions]

Give me a second to switch back to the presentation here. So before we get started and I hand over to Sean, I'll just draw your attention to Slide 2 in the deck, which are our disclaimers about the materials we'll share today. In particular, please note the cautionary language around forward-looking information.

So with that, over to you, Sean.

[W. Guest, executive]

Thank you very much, Robin, and thank you, everyone, for joining us here today. So just before the end of Q1, we completed the acquisition of the Mubadala Gulf of Thailand assets. So the Q1 financials that we sent out today really show the transformation of the company as we bring together Valeura, the KrisEnergy Gulf of Thailand assets and the Mubadala Gulf of Thailand assets. What's really not shown is the operational performance, and that's because picking up the assets at the end of the quarter, there isn't the revenue there. So the focus is really on this being a balance sheet matter. And as we go through the year in Q2 and others, that's when you'll really start to see the cash flow and the numbers coming in from operations.

So what I'd like to really get people to focus on today is a couple of points. One, the level of transformation that you're seeing here in the company, and from a company that had $30 million in assets a year ago to now $900 million in assets through this transformation. The other point being, as you look at the purchase price allocation in the financials, Valeura and its shareholders ended up with a bargain purchase gain of about USD 200 million for this acquisition.

The second point is that all of the assets are performing as we had expected. The production is good. The assets are good. We're delivering on the financials and the Wassana and Nong Yao growth projects are online to deliver increased production throughout the year.

And thirdly, as we're bringing the companies together and we're transitioning the companies, we now have an extremely strong, full business unit operating in Thailand to deliver those results, and we're transitioning the executive to a Southeast Asian executive with significant experience of delivering results in the region as well as new business growth. So those are the key points you are to focus on for this year -- for this presentation.

So as we look at the slide that's kind of in front of you now, quite simply, as we put out before, Q1, the assets produced 20,500. We had good safety performance, and the capital spending was about $34 million.

Now looking at that in a little more detail. The first 4 months of the year were really dedicated towards operations on the Jasmine field, right, so that we had a rig that arrived there near the 1st of January and departed around the end of April. So 4 months of activity.

During that time, 8 wells were abandoned that were no longer economic. Eight new development wells were drilled and another delineation/appraisal well was drilled and a workover. Now 7 of those 8 development wells were successful and have been brought onstream, and that's really led to this 4 months of activity, increase of production to what we're seeing for May, an average of about 11,000 barrels a day as opposed to the 8,500 barrels a day that we had in December prior to starting these activities. Now all that's very good and very successful, increasing at about 30%. But now what we'll see as we move the rig to other areas, the field will start to have a natural decline, and that will decrease as we go through the year.

So the other point I want to note on Jasmine is we expect next week that, that field will produce its 90th million barrel. Now obviously, as Valeura, we can't take credit for that, having just done the acquisition, but it really brings up 3 points that I'd like to highlight.

First, the field was sanctioned 18 years ago and brought online to recover 7 million barrels of oil. The expected ultimate recovery now of the Jasmine field is over 100 million barrels. And this is really the message we've been trying to get out to people about the Gulf of Thailand assets and how they can keep delivering this type of reserve growth, production growth over time.

The second point is while Valeura can't take credit for the 90 million barrels, the team in Thailand can. And this is now our team. This is the team that has been developing these fields, drilling these wells, maintaining these assets and delivering the results that we've seen. It is now our team, and I congratulate the team there for the delivery that they've had on taking this field up to this level of 90 million barrels recoverable.

And the last point I'll just make is, it does point to the stability of the fiscal terms in Thailand. What we can say as an operator in Thailand, when we make business decisions, we know what our fiscal terms are, and they're stable. And for anyone who's on the call, whether in Canada or in the U.K., you can appreciate that difference as you deal with some other regimes, I mean, like in the U.K. where there's much more risk on fiscal stability. So for us, it's really a low country risk environment given that type of stability you see.

So the last point I just want to make on this slide is the operating costs for the quarter were about $38 million, and that comes in at about $21 a barrel. Now the guidance we put out, we've had just under $30 a barrel for the full year. We do expect that this OpEx will go up. Wassana is now on production. So those OpEx costs will come in as well as later in the year as we go into the Nong Yao development, we're likely to pick up increased OpEx costs there. So while this is a really strong number, we'll have to see as we progress through the year, but we do see the potential for trying to bring that OpEx down as we bring these companies together.

Okay. Going on to the next slide, Robin. So just summarizing the Valeura financials. At the end of the quarter, cash and cash equivalents, $268 million. But when you work through the additions of inventory receivables but then take off tax and other payables, now you end up with about $104 million in working capital at the end of the quarter, which is very positive.

Now when the acquisition completed, and I talked about that purchase price allocation, which you'll find in the financials, we end up with a purchase price gain of over USD 200 million, right? Now that comes on to the income for the quarter. And therefore, if you look in the financials, you're seeing we're just getting about just under CAD 3 a share income for the quarter. Obviously, this is a one-off event at this time. But I think we traded -- closed trading yesterday at about CAD 2.18 a share.

And then looking at the last point there. During the quarter, we did complete the acquisition of the 12.5% interest in Valeura Energy Asia. And what's this done, besides being value accretive to the shareholders, the deal also cleans up our corporate structure so that now all of our subsidiaries are 100% wholly owned, which just increases our ability to operate and our commercial flexibility.

Next slide. It also kind of -- I wanted to highlight, as we look at some of the subsequent events, when we announced the deal to acquire Mubadala's assets in December, a lot of the questions we've had since that time is, well, what other deals do you have coming? And what we've said is we do have a lot of -- we expect smaller deals, equity consolidation and those types of matters. And that's what we've been seeing.

So we've cleaned up the SPV, buying the 12.5% interest. We've increased our working interest in the Wassana field to 100%, just as we brought that field back online. And then also in our announcement, we saw that we've actually exited the G6 block with the Rossukon field, but have taken a royalty going forward on that. And a lot of these, as we talked about, is just really trying to clean up our ability to operate and to work commercially and get the most value out of these assets, okay?

The other point in the subsequent developments here is we brought on the Wassana oil field. That came on in April 28, and it's been averaging about 2,600 barrels a day for the past 10 days. Now they are still bringing that field up to speed slowly. We expect the production numbers to keep increasing back to the levels we've talked about before, about 3,500 barrels a day, and can even be higher. But those operations are ongoing, and it's continuing to produce. We're just trying to make sure we optimize that as we go forward.

Okay. So the guidance we've put out several weeks ago, and that guidance remains through this point in time largely unchanged. I touched on the operating costs, which we really hope we can see [indiscernible] there, to bring that down. But the main point I wanted to talk about on this slide was the capital spending.

Now we put out the range of $180 million to $200 million. We do hope to see synergies on that, that can bring that number down as we bring the companies together in Thailand this year. But the main point to make there is that there is a split there between what we would consider to be normal maintenance spending and what is growth spending.

So as we look historically at the 3 fields we've acquired from Mubadala, generally, the spend per year there has been in the $70 million to $85 million range, and that's kept the production, what you've looked at in the slides we put out before of the 7.5 million to 9 million barrels of production.

So we now do add Wassana in there, but a lot of that CapEx, just under half, is likely focused on the Nong Yao C development, which will increase production there to about -- over about 50%. So we're looking at an average just from that field in 2024 of approximately 11,000 barrels a day. And also the Wassana field, where we're looking at that 5 horizontal well campaign in Q3 into Q4, which should increase the production from that field approximately 50%. So it's really indicating that it is an enormously high year on this, but this we expect to deliver production in 2024 above the levels that we're currently producing at now in these assets.

So just the next slide, Robin. So finally, just summarizing around on the leadership team and the changes that we have there. So when we've talked about the acquisition of Mubadala assets, and we've also really highlighted that we're really buying a full business unit there. And we said that the only person who's been leaving that business unit has been the Emirati country manager, who stayed with Mubadala and returned to Abu Dhabi.

We've now brought on Dr. Ian Warrilow, who will take that role, and he's on seat currently in Thailand. So Ian and my career passed each other as we worked in Shell and Woodside early in our career, but recently, Ian has been working in Mubadala, where he was a country manager of Indonesia, oversaw the development of gas field there. And more importantly, he had the senior leadership role in the Thailand business unit here. He is well known to the team. He knows the team. He knows the assets. He knows the regulator, and it's just he's moving into a role there, where we see that business unit now is now fully set up to deliver the operational results we need.

Now if we step up to the executive team, a key point to note is the executive team will be moving over to Southeast Asia. It is just too hard to run a Southeast Asian business, to grow a Southeast Asian business from Calgary. It's just too remote. I've been living over in the region most of the time for the past year. And with these changes, we've actually brought on Yacine Ben-Meriem, who will be the Chief Financial Officer. Yacine has been working with us now for almost 2 years and really led the acquisitions in 2022 of KrisEnergy and the Mubadala assets. So he's well-known in energy, and his backing -- his background in investment banking in the region has done a number of deals that also brings both financial acumen in the area, but also a lot of new business success.

The other role and joining me in Calgary here today is Kelvin Tang, who's EVP Corporate. Kelvin is a lawyer by background, but Kelvin has been intimately involved in the assets that we've just acquired, right from the blocks originally being acquired through the development of these blocks and many commercial deals throughout Thailand. So he's got that strong experience of how to operate, how to work legally and commercially within Thailand and the region and as well as has done new business in the region.

So we now believe we're getting the team in place that can deliver the operational performance and financial results from Thailand as well as the executive oversight there to deliver the financial results, but also to deliver the growth that we're looking for in Southeast Asia as we move forward.

So really just bringing it to a conclusion there. The key point is the financials this quarter demonstrate the transformation of the company that we've been promising you. The assets are performing extremely well, and the company is really getting positioned as we move through 2023 to bring these companies together and look for savings and delivering strong cash flow in '23 and '24.

So at that point, thank you very much, and I'll hand back over to Robin for any questions.

[Robin Martin, executive]

Okay. Thanks, Sean. [Operator Instructions] So Sean, first question, you ended on a production note there. And specifically, what do you anticipate production will be in about December of this year?

[W. Guest, executive]

Well, in December of this year, we expect production to be likely around the guidance number that we've put out, in that mid-range. And the main reason for this is that as you get into Q4, the rig is going to be working on the development of Nong Yao C and not other maintenance activities. So Nong Yao will be declining through that period. And it's really as we hit Q1 next year and you bring on that facility that you're going to see the jump up to probably more than 25,000 barrels a day and above as you get towards the end of Q1 or Q2 next year in 2024.

[Robin Martin, executive]

Okay. And speaking of changes in the portfolio toward the end of the year, we've had a few questions on operating costs. I think you addressed much of this in your prepared remarks, but perhaps you can just rehash for the few people who've been asking this question. We've presented in these results a number of $21 per barrel for OpEx in the first quarter, which obviously compares very favorably to our guidance number of $30 per barrel, thereabout. Can you comment on why such a difference between what we observed in the first quarter and what we're anticipating for the full year?

[W. Guest, executive]

Yes. So a few things on that is obviously the OpEx that we've built out and put up in guidance is you still have 2 companies that are operating. As we move through 2023, we will look at how the synergies that exist and how we can use this to kind of bring down some of those costs. So the guidance numbers though are really based on looking at the 2 companies and building them up separately. And we do expect synergies as we move forward.

But the main point is that Q1 did not include the OpEx for Wassana. And Q4, we expect Nong Yao OpEx to come in at a higher level as you're paying some lease costs on the equipment that's installed and yet you don't -- you won't have brought that production on.

[Robin Martin, executive]

Okay. Okay. A couple of questions on CapEx as well. And again, I know in your prepared remarks, you went through some explanation of the split between what's to be considered maintenance and what's growth. And specifically, the question is when we're talking about growth CapEx and that approximately 50% of the capital budget we've got per year, are you talking about growth in reserves? Or are you talking about growth that's just oriented toward production?

[W. Guest, executive]

Yes. So the key point is we've shown to people, and it's been in our other slides is that the reserves that we have largely remain unchanged each year because the amount of production you're getting tends to be replaced to about 100% reserve replacement each year. And we do expect a similar result this year. So you are talking really about more, it's the production that you're actually yielding with that. And as we noted, we do expect the average production in Q4 to be above the levels that we're currently producing at, which is just over 23,000 barrels a day.

[Robin Martin, executive]

Okay. A question on reserves, while we're on the topic. One of our investors has noted in our reserves report that we published earlier in the year, there were a couple of the 1P reserves values that were negative. Can you comment on this? And do you believe that the future outlook of our assets is being misinterpreted by the reserves evaluator?

[W. Guest, executive]

Yes. And it's not so much that I would put it down to the -- put any blame on the reserves evaluator at this point in time. But it's back to that slide I was referring to a moment ago, which shows, especially as you look in those slides, the 1P each year remains largely unchanged. So that's one of the key points is that, okay, yes, the 1P for a couple of fields is looking like it could be just borderline economic, but the number doesn't change each year. And that's going back 6 years, we've demonstrated that.

And then the other key point to really bring up is the 1P always just assumes this drop in production. The abandonment comes very quickly, and the 1P is fully burdened with the abandonment costs. So it's really not surprising that if you only have the 1P, you accelerate the abandonment forward and you burden the 1P with the full abandonment cost. That's why you see that kind of number. But again, I'd ask people to refer back to the presentation we showed before, which is 100% reserve replacement ratio on the 1P.

[Robin Martin, executive]

Okay. Okay. A couple of questions on taxes as well. And a specific question, what can we expect for taxes in 2023, either as an effective rate or kind of general expectation on applying tax pools? And the investor has noted here that when we announced the KrisEnergy deal, we did mention that there were tax losses involved. What should we expect is the question. And Heather, perhaps you could take that one, if you don't mind coming [indiscernible] you.

[Heather Campbell, executive]

Yes, no problem. So for 2023, you can expect, as we've said before, Wassana is fully tax yielded. The Mubadala assets are not at this point in time. However, work is progressing on that reorganization to allow those tax pools from Wassana to be shared across more assets. And that will -- but that will take several months.

[Robin Martin, executive]

Okay. Thanks, Heather. While we've got you, couple of questions, more balance sheet-related things. Special remuneratory benefit, or SRB, which is Thailand's effective windfall tax. The investor is asking, how much of that SRB is included in the payables that we have on our balance sheet, which are about $173 million in total?

[Heather Campbell, executive]

Right. So about half of those are SRB. SRB will be in the range of about $80 million, and it will be paid actually later this month.

[W. Guest, executive]

And that SRB is really related to 2022, right, with the period of high oil prices that existed there, and that's why there is this high level for the payment that's now due.

[Heather Campbell, executive]

Correct. Yes. That's all related to 2022 and that over $100 oil price we've had in the middle of the year.

[Robin Martin, executive]

Okay. Also a couple of questions have come in on decommissioning. And specific question, are payments for decommissioning deductible for tax purposes in Thailand?

[Heather Campbell, executive]

They're deductible when the expenditure is made. So I think we've described before about the securitization of that with the government. That is just putting in place letters of credit or deposits. That's not tax deductible. But when the expenditures are made, they are.

[Robin Martin, executive]

Okay. And another question on [ decom ]. Has the undiscounted estimate for total decommissioning costs changed? Or is the number that we're seeing on the balance sheet really just the discounted value?

[Heather Campbell, executive]

Yes. The number on the balance sheet, it's older. The undiscounted, uninflated value has not changed. The amount on the balance sheet is the present value.

[Robin Martin, executive]

Okay. Just a couple more questions. [Operator Instructions] Just trying to sift through the last few of them here. A favorite question, dividends. Any plan to start paying a dividend?

[W. Guest, executive]

Look, at this point in time, not immediately, Obviously, our key focus this year is on demonstrating that we have the cash flow from these assets and starting to really put in place that kind of cash cushion as we go forward. We expect the Board, again, to kind of look at this dividend policy and whether there might be a dividend introduced in the future. But really, at this point in time, as we've tried to emphasize, we do believe in growth, and we can actually put money into growth to deliver good value as we did last year and as we hope we can do as we go forward the coming years.

Now just to reiterate, again, if we find a few years from now that we're getting strong cash flow from the assets, we're not seeing good accretive opportunities for growth, then I would expect the Board to look much more at how you return those funds to shareholders.

[Robin Martin, executive]

Okay. We've had a few comments from investors here saying to the effect of why is the share price still so low. And maybe just to sort of bundle that with a slightly more specific question, one of our investors is asking, your Q1 earnings are nearly CAD 3 a share, which is obviously well above your current share price. So clearly, the company looks very undervalued. What are you doing to attract investors and in particular, long-hold institutions into our stock?

[W. Guest, executive]

Yes. So that's a really good question because obviously, we believe, like the investor does, that the share price is currently well undervalued. When you look at the metrics relative to other companies, when you look at the cash flows in that, it just -- in our view, it just doesn't make sense at this point in time. So we appreciate the question coming forward.

It is a focus now as we kind of get the company operating stable to find the executive. Yes, we are going to start to look at marketing more. We're going to be -- as we get the assets fully understood, we'll be looking at a Capital Markets Day because we really think it's important at the time with the investors to explain the story.

It is really a bit of a different story, and it takes a bit of thought, but we really see the potential for growth in the share price continuing. Last year, we are obviously, I think, #2 on the Toronto Stock Exchange and Venture for returning to shareholders at 375%, and we see more of that this year.

[Robin Martin, executive]

So Sean, maybe I'll just add another comment to that. It bears mentioning that for much of last year, and in fact, the last 2 years, we were in a blackout phase, which prevents us, as insiders, from buying and selling shares. Also prevents us from being in the market and actively marketing the story. We're beyond that now. We're out there on the road and doing just as much as we can to meet with investors. We've had a very good reception, both in the U.K. and North America, and that work is continuing as soon as next week, we'll be back on the road.

[W. Guest, executive]

Yes, Robin. And maybe another point on that is just to say now where we've got to with our Board and executive holding, I believe it's over 10% of the shareholding in the company, at approximately that level. So we remain heavily invested in the success of this business.

[Robin Martin, executive]

And speaking of investors that are heavily invested, we've had a couple of questions here about our largest shareholder, Baillie Gifford. And right off the bat, obviously, we can't speak for their intent and what they might be doing. You'd have to ask them themselves. But the question is, did Baillie Gifford sell down in large volumes in April? And do we know if they're looking to exit?

And the one thing that I'll mention is Baillie Gifford is very good about publishing the transactions that it does when it crosses through the statutory thresholds. So on SEDAR, you can see their reports as to what they've sold and when they've sold it. Beyond that, yes, you'd need to ask them what their intent is, but we believe them still to be a very significant shareholder of the business.

[W. Guest, executive]

That's correct. We would have had to have seen on SEDAR that they would have made a filing if there had been a large change. And all I can say is we do remain in communication with them.

[Robin Martin, executive]

Good. It looks like, Sean, that's all for questions. So with that...

[W. Guest, executive]

So maybe just before we kind of sign off, I just really want to thank Heather. As the company is moving over to Southeast Asia and given mobility issues, Heather has decided to remain in Canada and seek other opportunities. So I really wanted to thank her for her time with Valeura and her really financial oversight as the CFO over the past number of years. So again, thank you specifically for that, Heather.

[Heather Campbell, executive]

Thanks, Sean. It's been a great ride and wish everybody all the best.

[W. Guest, executive]

Thanks.

[Robin Martin, executive]

Thanks, everyone. We'll make a replay of the call available on our website later today.