Okea ASA

OSE:OKEA

Q2-2025 Earnings Call

[Svein Liknes, executive]

Good morning, and welcome to the OKEA Second Quarter Results Presentation for 2025. My name is Svein Liknes, CEO of OKEA. And as usual, I have my CFO with me, Birte Norheim, who will then do the financing afterwards. There is a link on our homepage where you can post questions or also call in for the Q&A session, which will start immediately after this presentation.

The highlights for the quarter is, again, that has been a very strong operational performance throughout the quarter. We've seen high production efficiency and we've also seen strong production with 31,700 barrels of oil equivalent per day, which is in the high end of the range we have guided for. This is even though we have seen some lower production from Statfjord due to delays in drilling of new wells, which has to be drilled to increase the production as it is declining. We have also seen the strong production performance on Brage especially, and also Draugen and also Gjoa, which is operated by others, but which has also contributed significantly.

The financial performance through the quarter has been affected by reduced forward prices. So we have seen a technical goodwill impairment of USD 32 million this quarter. And we have also refinanced the OKEA06 during the last quarter. And Birte will go through the details of the financing section more afterwards.

In our portfolio, we have completed the Sognefjord East well, which was something we call the Kim discovery 2 years ago, and we have now completed the drilling there and we started that on 1st of July in accordance with plan, and we see very healthy production from this reservoir, which has lifted production on Brage, again, back to a 10-year high.

We have also commenced drilling of the Talisker exploration and production well on the west side of Brage, which again, we will continue to drill now, and we'll then start production next year, which is an important contributor as we do have a no drilling period in 2026 on Brage as we need the bed space for the Bestla development.

The Garn West South production wells have also been sanctioned, which is a tieback to Draugen. There is already well there. So we will do a sidetrack on this well, which will also lift production from Draugen from next year again.

Bestla development remains on track. We have now installed the subsea template, and we are expecting the drilling rig, the Deepsea Yantai, to arrive in the -- between July and August is the latest update for drilling -- starting drilling of the wells.

And we have completed the protection of the power cable, which now is completed from onshore to Draugen and from Draugen to Njord. So that work is also completed, and we do see good progress on the onshore facilities, which will be in operation from mid next year.

These are the key numbers for the quarter. Everything we do, we need to do safely and also sustainably. So I'm happy to see that we have a sustainable and continued stable serious incident frequency of 1.1. That means we have had no new incident. We've seen lower production, 31.7, as you can see here, which is still in the high end of our range. And due to this increased or strong production, we are also narrowing down the guiding, from 28,000 to 32,000 to now 30,000 to 32,000. So we are narrowing it down on the upper end of the guiding.

Production efficiency has been very strong of 93%. So we do see above 90% on all our assets. And our production expenses has increased slightly during the quarter, and that is predominantly due to subsea intervention and on a scale squeeze on the D2 well on Draugen that I will get a little bit back to, which is an expensive thing to do.

On this one, we do see a natural decline, from 34.2 to 31.7 over the quarter. This is mainly due to lower production from Statfjord to the drilling of wells that I have mentioned, but also backed then by increased production from other assets that we have in our portfolio. The production efficiency on our whole portfolio, as you can see here in the bottom, is all above 90%, and that is obviously something we are working very hard to achieve.

A quick rundown of the details on all our assets. Draugen, as I have mentioned, a very good production performance. We did attempt a scale squeeze, which is an intervention in the well, D2, to get it flowing again, but we was unsuccessful in actually doing that. So we are still working on a solution, how we're going to get the D2 well back. The D2 has not produced neither in Q1 nor in Q2 this year.

And we are commencing the drilling of the Garn West South, which we now have sanctioned by the end of 2025. We are using the same drilling rig that will be drilling on the Bestla field, Deepsea Yantai first, and then we will come to Garn West South immediately thereafter to do this production drilling, which will then increase production on Draugen from medio 2026.

On Brage, again, extremely strong operational performance with high production efficiency, also very high drilling efficiency, I would say. So we have now completed the Sognefjord East production well, which have shown very good results and is now producing. And as I just mentioned, taking the Brage production back up to a 10-year high. So this will contribute significantly into Q3 and the rest of the year as well.

And we have started now the Talisker exploration and production well drilling in July, and we expect the first production from this one in the first quarter of 2026.

In the Statfjord area, lower production, as I already have mentioned, due to delays in the drilling of new wells, and we are working very closely with the operator and also [ Vår Energi ] as partner in the license to sanction new wells, but also look into the drilling performance on how we can contribute with our experience from our drilling operations as well to have the drilling operations more efficient, but also put it more quickly into operation after completion.

Ivar Aasen, again, a very good quarter, very high production efficiency, somewhat lower volumes from Ivar Aasen that is due to allocation of gas volumes related to the Hanz tieback to Ivar Aasen. The increased oil recovery program for 2026 has been sanctioned, and we do expect first oil in the fourth quarter of 2026 after these wells have been drilled on Ivar Aasen.

Last but not least, the Nova area, again, continued very high production efficiency. We will have a 3-week maintenance shutdown planned in August for this asset, which will affect both Gjoa and Nova, and this will include adjustments of the processing facilities and an attempt to enhance production even further.

On our development projects, they are progressing well. We have the Bestla project, which is the tieback to Brage. The subsea template is now installed. As I mentioned, we are expecting Deepsea Yantai to arrive and start on the 2 wells to be drilled on Bestla in between July and August. We are still on track for a startup early 2027, and we believe that we have good control of the risk on this project, and this will be a very significant contribution, with 10,000 barrels net to OKEA when it starts early '27.

And also the Draugen Power from Shore, a very complex project, but the onshore facility is now well underway. The onshore facility will actually be in operation from mid-next year as we are providing power to Njord. We have completed the cable from onshore to Draugen. We have completed the cable from Draugen to Njord, and we are now continuing with the equipment installation offshore, which is the next phase we are going into. Again, an important and significant project for the Draugen to be sustainable until 2040 and beyond. And this will also reduce then the CO2 emissions by 95% when it comes in operation in 2028.

So with that, I will get back on a summary later on. But before I do so, I will hand over the word to Birte to take you through the financial section. Thank you.

[Birte Norheim, executive]

Thank you, Svein. The financial statements for the second quarter are impacted by the reduction in petroleum prices, which resulted in a technical goodwill impairment. And that drives the bottom line into the red. I want to remind you that this is a technical expense, which will never have a cash impact, and it therefore also has no tax shield. But let's dig into the details and starting with production and sales as usual.

Production ended at 31,700 barrels of oil equivalents per day. The lower production mainly relates to start fuel, where drilling of new wells was offset -- to offset natural decline was delayed. We sold 33,000 barrels per day, which is a total overlift of 117,000 barrels.

Market prices for both gas and crude decreased significantly during the quarter. The average realized liquids price was down 13% and ended at $63.1, and the average realized gas price was $71.4. The underlying realized gas price was down 23%, but was partly offset by a hedging gain on gas equivalent to $5.6 per barrel, and this is included in the realized gas price. This resulted in total petroleum revenue of $196 million.

The graph to the left illustrates our crude liftings over the last 5 quarters as well as the average observable market price. The graph to the right outlines the difference between the average market price of Brent for the quarter of $67.9 compared to the average realized liquids price for OKEA. Positive quality and price adjustments brought the realized crude price to $68.4, which is $0.50 above the market. 14% of total volumes sold were NGLs. This is equivalent to 20% of the liquids volumes. As NGLs trade at a discount to crude, it reduces the average liquids price to $63.1.

Here, we illustrate the volumes of gas sold over the last 5 quarters and the observable average market price in the same period. Following the peak in the first quarter, prices have come down, but remain historically strong.

And then over to the profit and loss statement. We delivered operating income of $206 million, consisting of the petroleum revenue of $196 million and other operating income of $10 million. Other operating income, mainly related to net tariff income at Gjoa and Statfjord of $5 million and a change in fair value of contingent considerations of $3 million. The change in contingent consideration was due to lower forward prices.

Production expenses amounted to $74 million or $23.5 per barrel. The high cost per barrel was mainly due to maintenance activities on several assets as well as the lower volumes. And as mentioned, impairment of technical goodwill amounted to $32 million and was mainly due to the lower forward prices.

Exploration expenses and SG&A of $27 million comprise exploration expense of $21 million, of which $8 million relate to the dry well at Prince, and $10 million relate to seismic purchases. SG&A amounted to $6 million.

Net financial expense amounted to $3 million and comprised $1 million in net expense interest and $7 million in expense cost tied to the refinancing. This was partly offset by a net currency gain of $9 million, following a strengthening of Norwegian kroner against the U.S. dollars by about 4% during the quarter. Tax expense amounted to $26 million, which brings the net loss to $21 million.

And moving on to the balance sheet. Goodwill amounted to $114 million and comprised $98 million in technical remaining goodwill and $16 million in ordinary goodwill. Cash and cash equivalents amounted to $423 million. In addition to the cash balance, $41 million in excess liquidity has been placed in money market funds, which are classified as other assets.

We issued a new bond loan in June with a nominal value of $175 million. And due to settlement of the $125 million of OKEA04 bond in early July, interest-bearing bond loans at balance sheet date amounted to $422 million and comprise all 3 bond loans. Both cash and bond debt on the balance sheet as per 30th of June is therefore artificially high, but with a net zero effect.

Income tax payable of $98 million represent tax accrued for the first half of the year, partly offset by $5 million in tax refund for 2024, which is expected repaid at the end of the year. Asset retirement obligations of $935 million is partly offset by asset retirement receivables of $445 million from Shell, Equinor and Harbour Energy.

As mentioned, we issued a new bond loan in June, which is our sixth bond issue. OKEA06 is a senior secured $175 million facility with 4-year maturity and a fixed coupon of [ 9 1/8% ], and this interest is payable semiannually. The proceeds were used for calling the OKEA04 bond and for general corporate purposes. OKEA06 has the same general terms as OKEA05, with the exception of the distribution clause tied to net profit after tax. In OKEA06, the definition has been modified to exclude the effect of technical goodwill impairments.

In relation to the refinancing process, we also increased the revolving credit facility to $45 million. The revolver still remains fully undrawn. Overall, the refinancing provides for a strengthened and longer-dated capital base with no bond maturities until medio 2028.

Cash generated from operations was $115 million. Taxes paid of $108 million includes the 2 last tax installments for 2024.

Issue of the new bond loan resulted in net proceeds of $170 million. $80 million was used for investing in the Draugen electrification project, Bestla development and production drilling on Statfjord and Brage. This brings the total cash to $464 million.

During the quarter, we placed another $15 million in money market funds, bringing the total balance there to $41 million and the cash balance to $423 million. If we adjust for the settlement of the OKEA04 bond, which as mentioned, was paid in early July, it brings the total cash to $337 million and the cash balance to $296 million.

And finally, I will provide an update on our guidance. With a strong first half with production on the higher end of our expectations, we are tightening the spread towards the upper range and update our guidance for 2025, from 28,000 to 32,000 barrels per day to 30,000 to 32,000. And as Svein mentioned, as a result of the newly sanctioned production wells, we increased our 2026 production guidance by 5,000 barrels per day, from 26,000 to 30,000 barrels per day to 31,000 to 35,000.

In relation to the newly sanctioned wells, we also increased the CapEx guidance for 2025 by $30 million to $40 million to $350 million to $380 million. CapEx guidance for 2026 remain unchanged at $300 million to $360 million.

So just to end, a couple of other elements that's worth highlighting. As mentioned, the OKEA04 bond was repaid in early July after the balance sheet date for the second quarter reporting. This results in a somewhat gross stock balance sheet with respect to cash and interest-bearing debt.

As you may be aware, the -- with effect from the tax year 2025, tax payment intervals have changed. From the tax bill being split into 6 installments per year, petroleum companies will now pay 10 installments per year. The overall structure remains the same where half of the payments are payable in the second half of the income year and the remainder in the first half of the following year. For OKEA, we have estimated that each of the 5 tax installments payable in the second half of 2025 will amount to between $5 million and $6 million.

In line with previous communication, we currently do not have an announced dividend plan. This is due to a relatively large investment program, particularly in 2025 and 2026. The Board intends to revert with a dividend plan when it considers to be in a position to distribute. And this will, amongst other things, depend on the macro environment.

That's all from me for now, and I'll give the word back to you, Svein, for some closing remarks. Thank you.

[Svein Liknes, executive]

Thank you, Birte. So as a summary then, for the quarter, before we go into Q&A, we've seen strong production performance on our assets. We have produced in the high end of our guiding, which means that we are narrowing in our guiding as well in the upper end. We have done successful refinancing of the company in this quarter. We are sanctioning new wells that will add to our portfolio. And as has also been mentioned, adds so much that we are increasing the guiding by 5,000 barrels for 2026. We still have an ambition to drill up to 4 exploration wells per year, but that always depends on having the right targets, which is attractive enough to actually invest in. And we are building our portfolio continuously, and we are still looking for investment opportunities to grow the company further.

So with that, we will go into the Q&A session. And there should, as I said earlier, be a link on our homepage, and I hope as many as possible will attend and ask questions that we will answer thereafter. So thank you very much.

[Operator]

[Operator Instructions] As there appears to be no questions on the conference call, I will hand it back to the speakers for any written questions.

[Unknown Executive]

Okay. First question from [ Jon Egalan ]. Is the start of dividends getting closer now that liquidity for 2025 and '26 has been secured after the announcement of the new bond?

[Birte Norheim, executive]

Thank you for the question, [ Jon ]. Well, the purpose of the bond issue was to refinance OKEA04 and to increase the liquidity buffer into a period of higher organic investments. So through this exercise, we provided added flexibility and also extended the maturities of our debt. But as of now, we have no other updates than that the Board will revert with a dividend plan when it considers to be in a position to distribute.

[Unknown Executive]

Okay. Next question from [ Russell Sewanka ]. Arkenstone, one of your JV partners, has guided the restart in Q4 '25. Does OKEA agree that this is the targeted redrill and comfortable with drilling safety risks?

[Svein Liknes, executive]

Yes. Thanks for that question. Yes, I noticed that. Our assessment is that it's not realistic for us to do the Arkenstone spud again in Q4 '25, and that is something which is being continuously assessed in the license, obviously. So it could be updated, but we believe it will be pushed further out.

And I guess it also links to the second question that you have here, the drilling safety, and that is the reason why we also believe reengineering of the well needs to take place, and that's why we also believe it will be drilled at a later stage. And obviously, we will not drill that well until all the JV partners are comfortable with the drilling safety risks.

[Unknown Executive]

All right. Another question from [ Russell Sewanka ] again. Mistral and [indiscernible]. What is the development plan and timing for Mistral? And with [indiscernible], what is the status of that project? Is it still going ahead? There are several other discoveries in addition to [indiscernible]. So are there any complications with different JVs or agreements?

[Svein Liknes, executive]

Yes, good questions. When it comes to Mistral, the license there is working to develop that as soon as possible. And from the operator, Equinor, it has also been defined as a fast track development project, which most likely will then be linked towards the Linnorm development.

When it comes to [indiscernible], we have now decided to take a DG2 it is in December this year on what to do further on [indiscernible]. And that is linked to the last questions, where you say there are several discoveries in the area. I do not see that as complications. I see that more as opportunities because then you can have a coordinated development of all these discoveries in the area. So that is something we are assessing at the same time. So the next decision gate for the [indiscernible] and the area development there is to have a decision gate in December this year.

[Unknown Executive]

Okay. Thank you. Another question from [ Jon Egalan ]. Does the bond that expires in 2028 have the same covenants as to 2029 in regards to technical goodwill?

[Birte Norheim, executive]

Thanks again, Jon. As we also stated in the presentation, the general terms are the same, with exception of the net profit after tax definition under the distribution clause, which in the new bond explicitly excludes the effect of technical goodwill. But bear in mind, for as long as the OKEA05 bond or the 29 bond is outstanding, the technical goodwill will not be excluded from the dividend capacity as that will be the least common multiple of the 2 bonds.

[Unknown Executive]

There is another question from [ David Metsi ]. In terms of looking at the investment opportunities OKEA sold [indiscernible] interest as was nonmaterial. Will additions require operatorship or large equity stake? Or what other asset characteristics are you looking for given current intensive CapEx phase?

[Svein Liknes, executive]

Yes. And the M&A market and what we are looking at there, obviously, is quite a big picture. When we did the Wintershall Dea transaction, that was a perfect portfolio, I would say, because then you take over an aging asset that you actually operate and we have demonstrated that we can turn it around. In addition, you are also including partner-operated barrels in the same transaction. So I would say that is kind of the ideal transaction.

But we are trying not to be -- to screen out too much. So we are very open to a lot of opportunities. But having demonstrated now twice that we are able to turn assets around, which has been in a late life and put them in midlife again and extend the lifetime, I think operated assets will always be of a greater interest.

[Unknown Executive]

I think that concludes the written questions, unless there are any final ones. And no one on the line, so...

[Birte Norheim, executive]

That appears to conclude the call, and we wish you a good summer.

[Svein Liknes, executive]

Thank you very much for your attendance. Have a good summer.