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Earnings Call Analysis
Summary
Q2-2024
In Q2, the company saw a solid performance with a 10% revenue increase to $164 million, driven by higher lifting and better prices. Production was slightly lower than the previous quarter but still above initial expectations, thanks to strong performance at Wassana and Nong Yao A. Cash flow from operations increased by 37%, reaching $66 million. Looking ahead, production is expected to ramp up to around 25,000 barrels a day by year-end with the recovery and development in Wassana and Nong Yao fields. The company maintains a robust balance sheet with $147 million in cash and no debt.
Hi, everyone. Welcome to the Valeura Energy Q2 2024 Results Webcast. I'm Robin Martin, Vice President, Investor Relations and Communications.
Joining me on the call today are Sean Guest, President and CEO; and Yacine Ben-Meriem, CFO. We're recording the event today, August 9, 2024, and we'll post a replay to our website when available in the next day or so.
So running order for today. In a moment, I'm going to hand over to Sean and Yacine, who will go through some prepared remarks in conjunction with the slides that should be shown on your screen. Thereafter, we'll go on to a Q&A session. [Operator Instructions]
And with that, I will ask Sean to go ahead and unmute your line. And the floor is yours.
Thank you very much, Robin, and thank you for everyone joining us here today. Robin, if you could just go forward to the first slide, please.
Yes. And again, I'm not going to go into the slide in detail. It's really more of a summary reminder for people. I expect that most of the people who are on the call here today are familiar with the story and have been in the story for a while.
The key thing to emphasize is we have had very good returns to shareholders, who are in the past couple of years. And in fact, even for this year, we still remain in the top quartile performance for our peer group. But the real focus of the company is creating a highly cash-generative portfolio of opportunities.
And I think with what we'll show here today, we are seeing that, but we're also seeing that, that's not only for today, but we still have much more life in these assets as we move forward. So we can move on, Robin.
So the three key points we'd like people to take away from today is, one, the strong financials.
Now I'll hand over to Yacine in a minute to through that in detail. But the main point for me is that, given that we are looking at about 21,000 barrels a day for the quarter, we are looking at cash flow from operations of $66 million, which is up 37% from Q1. We have -- still have a cash stockpile about $147 million and a final reminder that we have no debt.
But when we look at production. Production for the first half of the year was between 21,000 to 22,000 barrels a day depending on the quarter. And that was even with some outages we had planned on the facilities as you have to do regular maintenance. But as we look at this and moving forward, what we want to be able to really focus on is that while Wassana was out for July, Wassana is now fully back on and delivering about 5,000 barrels a day of production. But importantly, the Nong Yao facility is now really ready to go and should come on and ramp up during August.
And with those two facilities now back producing, that should yield about 9,000 barrels a day more once we get to September relative to what you just saw last month in July. And that will really look at -- looking at September through to year-end, you can be looking at production of about 25,000 barrels a day.
So just even with the production, the cash flow we've seen from that 21,000 barrels a day, we're quite optimistic about getting that production up and being around 25,000 barrels a day for the remainder of the year.
The other point for people to take away, and that's reserves. And this has been a challenge for us since we did the take over the Mubadala assets in the Gulf of Thailand, people have generally pointed to the short reserve life index.
But we keep extending this more and more. So we saw last year, we had more than 200% reserve replacement ratio. And now it's quite exciting with the work that we're seeing going on to date.
Wassana, I'll talk about it in more detail, but a whole redevelopment there that should take the reserves from that up above the 13 million barrels that we saw at the end of last year.
Nong Yao C was in our reserves. However, while drilling the wells, we did additional appraisal. We added an extra development well in there. And we see that those -- that's now a producing asset, and that will come into reserves at the end of the year, including drilling a couple of extra wells at Nong Yao, which while those were designed for production, actually, they did find some new oil that we expect to be a target for future drilling.
Then I add on to that, that Jasmine is still performing extremely well. And Manora, which was again a field that was due to be abandoned a few years ago. We're now going into a new drilling campaign there, which we expect to start later this year. So all of these elements are building into reserves that we expect at year-end. And additionally, we went in and drilled 3 exploration wells this year, all successful, and we expect those to come in largely as probably contingent resource at year-end, but we're still seeing that we're able to increase the reserves on these fields and kind of get away from that myth of the short reserve life index.
And just as noted at the bottom there is, again, the focus still remains on safety, operational excellence, and that was one of the reasons why we had to look at that short shutdown in the Wassana field to assure that, that facility was still in good order. So that's really the key points that we're trying to get you to take away from today's presentation.
And with that, I'll hand over to Yacine just to give a bit of an update on the Q2 financials. Yacine?
Thanks, Sean. Greetings, everyone, and good evening from Singapore. I'd like to start by highlighting some key achievements of what we described as being a solid quarter in Q2. As you can see, our revenue in Q2 came in at $164 million, which was 10% higher than Q1. This was on the back of higher lifting during the period and also improved realized prices. Both in terms of underlying benchmark, but most importantly, from our perspective, is also the premium that we received for our crude.
Production, on the other hand, came slightly lower than the last quarter, though still slightly above our initial expectation for this quarter. Thanks to better performance from Wassana and also the drilling the infill well in Nong Yao A to counter some delay in Nong Yao C.
It's good to remind everyone or the audience in general that it's quite common for us or indeed even other offshore producers to have a slight mismatch between production and sales. Since all of our crude is stored, is produced, and then there after store them in vessel, be it an FSO an FPSO before it is sold, i.e., lifting. It's just part of our offshore operators work. The industry works.
With cost and capital expenditure staying steady, we saw our EBITDAX for the quarter rise at $200 million, which was 12% above the last quarter. Things standout takeaway from these figures is really our pretax cash flow from operation and our tax reform operations which reached $87 million and $66 million, as you can see in front of you, respectively, for in Q2, reflecting an impressive 20% and 37% increase versus Q1.
And I will elaborate further on this in a moment. As for the balance sheet, we have recorded an increase in book value and so did our working capital surpluses. And importantly, as Sean mentioned, we ended up the quarter with $147 million, which, again, I will elaborate further in a moment.
Robin, next slide, please. Now let's break down our cash flow from operation in Q2. Our revenue of $164 million during the quarter, we also recorded a royalty of $18 million. Royalties on a percentage basis were 11% versus our guidance for the full year of 13%. This is due to lower production from Jasmine, which, again, to remind everyone, has a high royalty tariff on it.
OpEx came in at $54 million, consistent with what we projected internally and just slightly higher than the $52 million we recorded in Q1. On a per barrel basis, that comes out at $28.3 per producing barrels, a bit higher than the previous track in Q1, but not surprising given the dip in production and the level of activities during the quarter.
Our SG&A are in line with our run rate of just $5 million, which ends up with our pretax cash flow from operations of $87 million. For Petroleum income tax on PITA, we accrued $21 million in this quarter. And just to clarify, this is an accrual amount and cash payment is a separate topic.
There was no special remuneration benefits or SRB during the quarter, because of the drilling we've done, which ultimately resulted in a strong $66 million in adjusted cash flow from operation, which, again, as Sean mentioned, it's a multiple 37% increase compared to Q1.
Now, sorry, Robin, can you move to the next slide, please?
Now moving on to our cash balance. I think, you all know that we are focused on maintaining a strong and robust balance sheet to facilitate both growth and also value-accretive opportunities that comes our way, and also to our shareholders.
First, let's look at our cash balance on a pro forma basis compared to Q1, and then we can talk a little bit more about some one-off cash payment done during this quarter. We, during the quarter, we had our cash flow from operation -- adjusted cash flow from operations of $66 million.
We spent CapEx of $31 million. We also spent $5 million during this quarter on exploration, [ just on ] explorations. We also, during this quarter, had $72 million cash payment in May, which obviously impacted our cash position. But just as a reminder to the audience, in Thailand taxes are paid. PITA and SRB are paid in May and August. So we will see more tax payment in Q3, but it's not going to be as big as, what you see in front of you now.
The adjustment of working capital or cash balance would have been $177 million this quarter. However, as I mentioned, we had some non-recurring outflows during this quarter. We've made an $11.3 million tax payment related to reassessment for taxes -- for PITA taxes for the year 2018 and '19, which was actually during the previous ownership of the asset.
We are now actively working with the counterparty to see if we can recover this amount. And obviously, we'll keep the market updated on this in the next quarter. During the quarter, we also closed the transaction for the acquisition of the Nong Yao FSO for $19 million and made the fund contingent payment of $7 million related to the KrisEnergy acquisitions. As a reminder for the audience as well, out of that $7 million, we also received $5 million from us selling to Rossukon field as well. So that's risk and offset payment.
So at the end of the quarter, we're looking at a solid cash position of $147 million, but most importantly, with no debt. Our priority is, as Sean mentioned, our priority is to keep the balance sheet strong, which positions us well for the future.
And I think, thus with that, I'll hand it back to Sean.
Okay. Looking at Wassana, obviously, we had the issue there where we had to shut down the field temporarily at the end of last quarter. It's back up and running now. But one of the key things we're seeing, and that's on the chart on the left is the blue line is really showing our planned production that we had from the facility. And you can see the green line with the drilling that we did in Q1, we're getting better performance from the field, which is averaging around 5,000 barrels a day. So we're getting that good solid production, obviously, very happy to have that back on considering we're 100% interest in this field.
Now the one thing to kind of discuss is that we had the inspection, part of a regular inspection that identified a crack in one of the wells and the legs right down on the seabed, which caused us to do a temporary shut-in while we analyze that crack in detail. And determine that it really was confined within the world, it was not -- has FX structural integrity at all, and we've been able to start that back up.
But it does point out one of the things that we want to note to people is that a majority of our facilities are from platforms, which are obviously much longer life, much more solid structures. We have 2 MOPUs within our portfolio. The one of them is the Ingenium at Wassana, where we have had the problem. And the other one is actually the new one that's just been installed, just come out of the yard and been certified, which is brand new, which is one on Nong Yao C.
Now we recognize that the one in Wassana has been around, it's coming up near the end of really its planned life. And with what we've seen with our appraisal drilling on Wassana, that's really one of the reasons that we're right now focused on a redevelopment of this field. It's a recognition that this facility that we have does not have the size, the processing capacity nor the life to be able to fully reaps and rewards from the Wassana field. And that's the reason we're going into the redevelopment now is to replace this with a much more solid facility that can take production not from mid-'25 -- sorry, from the mid-20s, '25 or '27, but we want to see this field producing out to 2035.
So that appraisal work was done last year, again, demonstrating that we have this upside potential. We're in the engineering work right now on that, and that will lead to procurement probably in Q4 of this year. And a final investment decision for that as expected.
We're saying now early '25 just after the new year, saying that it will be around the end of the year, well, it's highly unlikely any decisions were getting made in the latter half of December. So we see that as really extending now into early '25 to make that decision.
But again, bringing it back to focus on reserves, the first reserve report that we put out in Wassana, when we took it over in '22 was for 4 million barrels of recoverable oil and that would yield about a 3-year reserve life for that amount of oil. At the end of '23, we'd increase that pretty well 13 million barrels, and we're talking of reserve life now producing out into, I think, at the time for that reserves was 2032.
And with this final investment decision, we see that we should be able to extend that life further out and add some more reserves when we get that done in early '25. And that's even before we start talking about the exploration we did, which shows more oil to the north or we already know there's more oil to the South. So it's really pointing to this is that we're not just extending these fields by a 1 year or 2 years, but we're looking at extending the life of these things by around a decade.
Next slide.
So Nong Yao C. Nong Yao C was really our growth project for the year. The new greater Nong Yao field already had two platforms on it: A and B and C was the third development area of the field.
Now you remember in Q1, we installed the facility out there. And then since that time, the drilling has really been focused on drilling all of the development wells, water injection wells that were required here.
Now while the plan was originally for 6 horizontal development production wells, in the end, we are able to use rig time. We drilled one more appraisal well into the zone, which was successful. The team have actually now converted that over to a development well, which will be brought on as we go forward here and ramp up the production from the field. So all of those wells are now currently drilled and really ready to go into the facility.
The other point to note, I mentioned the one well that was dedicated appraisal and now converted to development. But two of the horizontal wells were also deepened at the end to test deeper targets. Both of those were successful, and we expect those to form further infill drilling for this area as we go forward in the future.
So again, while a lot of the reserves were captured in this, we're now going to bring the production on and we've had several appraisal objectives that are successful that we expect to build on the recoverable oil volumes in this area.
Next slide. So as I noted, the facility was installed. The wells have now been all drilled. All of the work on the facility is done to tie in the wells, to get it all completed, all the fabrication work that was required. And the only thing that we're actually waiting for now is the final inspections and the certification to allow you to flow hydrocarbons through the facility.
And in that way, we've been guiding the market that we would have first oil here in Q3. I now see that we're going to have first oil from this facility in August. And what's quite exciting is the volume of oil we're talking about here is 4,000 barrels a day plus net to us from this. And it's quite interesting to hear the team talking about the greater Nong Yao facility, really being related to now the amount of oil that you can flow from the main production facility over to the storage vessel, which is limited to 13,000 barrels a day gross.
So this is really where we see a lot of the production coming from and really looking at Valeura having about 25,000 barrels a day from September through December.
When we look at the drilling performance, it's also important to note that actually the cost for Nong Yao C came in about 25% under budget on the drilling. Now some of this was related to the change in scope, where we took out a couple of water injection wells and actually drilled these appraisal wells in that extra well.
But we also saw drilling efficiencies here that were about 13% less than our plan. And what this means is it even though our drilling budget for the year is remaining largely fixed at just over $120 million total for all of our 2024 drilling, we're now starting to get more wells drilled than were planned. And for that reason, we're seeing that Manora campaign, which was planned for '25 is now we see that -- we expect that to actually get drilling in late Q4 and to get some extra drilling coming from that well over there.
So as we look forward to the rest of the year, the Nong Yao C drilling is completed. We expect the rig to be demobilizing from the site shortly. It will go up to Jasmine and do some infill drilling at Jasmine to look to bring the production up there. And then once that's done, it will head over to Manora to start that 5-well campaign that we're looking at over there.
So a good full program coming up. Again, getting back to more Jasmine and Manora, where we're looking to just, have really managed the slow decline in production on these fields.
Next slide. So that just leaves us really as a reminder of where we're at on our guidance and a midyear update relative to what we put out at the beginning of the year. So in the production, with a mid-case of around 23,000 barrels a day for the full year, we still see that we can maintain that. While the production in Q1 and Q2 is planned, was in that 21% to 22% range. If you start to look at 25,000 barrels a day out to year-end, we're able to support that midrange case, and we're kind of then narrowing the range.
Prices were sticking to a price realization of approximately Brent. Now again, in the first half of the year, we were achieving a premium, but a lot of this is due to a change where we're starting to see the Dubai oil price that we actually are benchmarked to. While it's always been at a slight discount to Brent, is now pretty well coming in online with Brent, and all of our fields are getting a premium to that.
So while that -- if that continues, we will get a big bump -- a bit of a bump in the latter half of the year. But again, the guidance-wise is really sticking towards Brent.
OpEx-wise, we're maintaining the same guidance. Now we have had some cost increases, recognize that these Wassana Subsea, it's review work actually all comes into the OpEx budget.
And the other thing we're seeing is because of the higher oil prices, we use a significant amount of diesel, and those costs were increased. But these have been offset by really the acquisition of the Nong Yao FSO. So we're maintaining that guidance for now.
And then finally, the CapEx we talked about, the majority of that CapEx is drilling related and you've pretty well got an equal run rate from the first half to the second half of the year. But we are starting to look at some of these brownfield projects that take place out in the facilities, some of those occurring later in the year, but we still are guiding towards the lower end of that number. So we've brought the top end down. And exploration is really largely on budget as to what we had planned.
Next slide.
So really, as we started the presentation here, bringing back to this point of we see getting Nong Yao C back, getting Nong Yao C on, Wassana is on, good production numbers for the remainder of the year.
Wassana, that redevelopment of the field still remains a target for us, and we're looking at that final investment decision just in the Q1, and that's looking to then have a facility out there that we can have higher production than we currently have on Wassana, and again, maintaining that higher production well out into the 2030s.
Exploration, we've done the three exploration wells, all of which were successful. [indiscernible] prospect, which is one we've talked about, we expect that now to slip into 2025. And that's just both for a reason that we're focusing on production wells right now as we go towards the end of the year. But also there are some commercial reasons that, that well around Jasmine may be better to do in '25.
At the balance sheet, Yacine has talked about that, good strong cash flow for the remainder of the year. But I know a lot of the questions that people have is really related to the corporate consolidation that we are looking at, which give tax benefits. What we can say at this time is that all of the work is done at that, all of the reviews are done at that, and we are really just waiting for a signature on that. But again, we'll have to just wait and see when that signature comes as to whether it's next week, next month or next quarter.
And finally, on M&A. And really where we're at on there is similar to where I can say we were in 2022. We are active on deals. We are in discussions with people. We are working on a number of opportunities. But again, we don't make any announcement there until that we actually have something that we have signed and that we can actually release the details on.
So all in all, we see production up that should yield better cash flows as we go in later in the year and some exciting opportunities like Wassana, that are coming up. They're potentially looking at further M&A in the latter half of the year.
So at that point, I'll hand it back to Robin, and we'll take questions. Thank you.
Thanks, Sean. Thanks, Yacine. Sean, I'll let you rest your voice for a moment and ask some other questions about tax, so that Yacine can speak here.
Now Sean, you've already mentioned the state of affairs we're at with the tax consolidation. So I won't ask the -- I won't voice the many questions we've had along those lines. On the $11 million tax payment that we had, simple question, can you explain what this is all about?
I think, as I mentioned earlier on, it's related to reassessment of taxes during that year. The tax office in Thailand has the right to audit. And as part of an initial discussion with the audit with the tax office in Thailand, it transpired that the previous owners might have made a small -- might have needed to do a small adjustment to that tax filing.
Now just to kind of like deal with it from on our side. Obviously, in collaboration with the previous owner, we have chosen to resubmit or resubmit our filing, and that has led to a $11 million increase in taxes. So we submitted that. But as I mentioned, look, we are in discussion with the previous owners to as per our SPA with them to try to recover this amount from them.
Okay. And just by point of clarification, there's another question along these lines as well, saying what options are available to recover the $11 million taxes in that KrisEnergy was acquired out of receivership. And just to clarify, we're talking about the producing assets that came from the other acquisition that we did. It had nothing to do with KrisEnergy, unless there's something else that you want to contribute there?
No, no, that's absolutely correct, Robin.
Okay. Moving on then. A couple of questions on shareholder returns. And in particular, has there been any advancement around putting in place an NCIB? And if so, could that possibly be a 2024 event?
Look, we do get this question a lot. And what I will say is that our messaging for the past 9-plus months has been very similar on this, is that this would -- this is an item that we take and discuss with the board at every quarterly meeting. We said the appropriate time for us to have a significant look on this was the mid-'24 meeting, which is about now.
And obviously, it's related to what we see coming in a deal space, because our priority does remain on growth and having the cash to underpin that growth, given the problems in raising capital for oil and gas right now, but this is something that we are reviewing and that could quite -- could potentially be a 2024 event. But we'll just -- we need to go through a final decision and review with the Board on that.
Okay. I think that's clear. Switching to an operations question specifically on Nong Yao C. The question is how many barrels per day do you expect individual wells that were drilled for the Nong Yao C development are going to be capable of doing?
Yes. The total initial production we expect from that is, when we talk gross numbers is, let's talk about approximately 4,500, 5,000 barrels a day gross from that and you're getting that from -- the plan was to get that from six wells. Obviously, we'll have to see what we get more now that we have a seventh well on there. But the other thing is we just have to make sure, too, that we're at some point, we're going to hit facilities constraint on the number of barrels we can push through the system. So that's kind of the numbers we're looking at for there is that 4,500, 5,000 gross.
Okay. Maybe back to Yacine, just for a moment before we leave taxes. A question sort of in response to the responses before. Are there -- is it possible that there will be any other tax reassessments? Or is there a statute of limitation that prevents the tax authorities from going back further than they already have with this reassessment?
Correct. So for the period -- the tax office has a period of 5 years, up to 5 years to revisit to audit. So effectively, anything from 5 years back, the tax office will have the right to audit.
Okay. Okay. [Operator Instructions] In the meantime, just one more question in the queue here, and that is on M&A. Can you comment on your timeline to reach the target number of 100,000 barrels a day that you previously mentioned? And what sort of debt and share price dilution would you be willing to accept to get there?
Well, the first one is we look at deals coming in the near term, let's say, in the next 18 months. We mentioned that we are looking at some relatively significant deals there. All of the work that we tend to do really looks at funding these from cash or from debt.
We just think, it's extremely hard to look at funding these -- that sort of deal from new equity placements, given where the markets are at, even if we have a good story. So that doesn't work into our base case assumption. We're always looking at how much debt we can access still relative to the size of the deal that we're trying to do and the cash amount that we'd be able to put into the deal. So that definitely is not a priority for us to go out and issue new shares to be able to go through and raise the money for a new deal. But we're still looking at the message we've said is our target is to try and get to that number by the end of '26.
Okay. Let me just see, I think we've had one more question coming in just in the last moment here. Any early steer on 2025 CapEx?
Yes. We're just really into the business planning cycle on that now, and we are looking at a number of scenarios. And as I mentioned, if you're looking at 85%, 87% of your CapEx coming from drilling, obviously, that's where the majority of the spend is. So the scenarios we're running now are really what level of drilling do we need in '25 to maintain that production level. Again, as we've said to people, we target to keep it between 20,000 and 25,000 barrels a day.
So it's really looking at the amount of drilling that we actually need to keep this at a reasonable level. And that's -- given the now all the opportunities the team have, drilling opportunities, we're reviewing that and doing the portfolio modeling on that right now. So there is a potential for it to drop. But again, we are looking at a Wassana project coming up, and this is a redevelopment up there, and that expenditure would start in 2025. So that would be in addition to what we're kind of talking about as our base numbers.
Okay. Thanks for that. We have no further questions at this time. So over to you to wrap up, Sean.
Yes. Maybe just one thing I'll say. The first question we had, Robin, in the question that you get -- I know a lot on the IR website is, have you had approval of the corporate restructuring. Right? Now just I will mention to people that that's a significant event. When we get approval of that, it will be announced. So just kind of expect that if you haven't heard from it, it hasn't -- we haven't received that approval. It's a material event that we would announce immediately.
And with that, so I'll just say, to me, it's really exciting as we look at through going into September here and getting really that production up, getting the new facility ramped up and operating smoothly at Nong Yao C. It's a real exciting focus for the remainder of the year to see the production numbers up that high of 25,000 barrels a day or even higher than that for the remainder of the year. So that's what's gotten very much focused on that and then heading into a Wassana decision at year-end.
So with that, I'll thank everyone for their support and for attending today.
Thanks, everyone. That ends the call. We'll make the replay available within the next day.