Petronor E&P ASA

OSE:PNOR

Earnings Call Transcript 2022-Q2

[Eyas Alhomouz, executive]

Good morning, and welcome to this presentation of PetroNor's Second Quarter and Half Year Results. My name is Eyas Alhomouz, I'm the Chairman of the Board. And with me today is Jens Pace, our Interim CEO. During the summer, we completed the long-awaited Aje transaction and engagement with the JV partners on redevelopment opportunities of the asset is currently underway.

Our infill drilling program is progressing rather well, and production is expected to ramp up as it matures. Financially, there was a lack of lifting in the first half of the year. However, I'm pleased to announce that we have [indiscernible] for the confirmed scheduled lifting in the first week of October for our entitlement production inventory.

I will now leave the word to Jens, who will give you more details about our performance in the quarter and the prospects of our assets going forward. Jens?

[Jens Pace, executive]

Thank you, Eyas, for the introduction, and I'm very pleased to be here once again to present the quarterly results for PetroNor. I've got a few slides that provide a little bit of extra context for the report that went out earlier this morning and then there'll be an opportunity for anyone to ask questions at the end of my presentation.

Starts with the usual disclaimer, which I'll let you read at your leisure. So the headlines for Q2 and what's happened subsequently, our Congo infill drilling program has been continuing and 4 new wells have been brought on, on the Litanzi field. That actually completes the program on Litanzi, and the rig is now moving to the next target at Tchibeli. And we're very pleased with the production from these new wells. In fact, there's a tenfold increase in the capacity of Litanzi from what was previously about 1,000 barrels a day to about 10,000 barrels a day now potential from that field on the initial rates that we're seeing.

The average quarterly production in the second quarter for PetroNor was 3,737 barrels of oil per day, a little bit shy of where we wanted it because of some wells that came -- that went off-line during July. They've all been brought back on now and we expect with the new production from Litanzi to see a continued ramp up to our target of 5,000 barrels of oil per day during the year.

In fact, over the last weekend, the field was producing 29,000 barrels a day on a gross basis, which is getting us close to that target. That makes our net about 4,880 barrels a day. So good progress towards the production increase that we were signaling in the last quarterly report.

We've made some new lifting arrangements with an established terminal operator at Djeno with a lifting now scheduled in early October. We previously had and we still have an agreement with ADNOC, but it has been -- not able to be operationalized because it needed ancillary agreements with the terminal operators, which have yet to be forthcoming.

So as an intra measure, we have agreed lifting arrangements with an established operator, and we have our first lifting scheduled for early October. So we have visibility on when that will happen now, and that's something that will change our financial situation because as you see, revenue for the first half of the year, has had to be restated with the restatement of the quarterly -- the first quarter report since we've had no liftings. We believed that it was inappropriate to carry on using the implied revenue from the ADNOC contract, while we were working this situation.

And as Eyas has said, the purchase of Panoro Energy's Aje field interest is now completed. And I understand that Panoro have made a dividend payment of our consideration shares out to their shareholders. So I'd like to offer a warm welcome to new shareholders on our register from the Panoro shareholder group.

A couple of slides on our financial results. In our report, you'll have seen an inventory of about 440,000 barrels of oil that's been built up through the year with no lifting. And for accounting purposes, that's valued at cost. So we have about $10 million for the value of that inventory. At prevailing prices, that would be worth over $40 million. And so I think that it's a matter of time before we realize the true value of that production, that entitlement production.

We invested about $14 million in the infill drilling program in PNGF Sud during the first half of the year. And from -- as you'll see from the discussion about the rates for these wells, the initial rates for these wells have been very promising. We see a payback period of this investment with less than 1 year based on the current production rates and prices. So we're very pleased with the economics of that whole program.

Our interest-bearing debt has been reduced by $5 million since the beginning of the year. And we have an outstanding $8.1 million to be repaid or refinanced before the year-end and discussions with the working capital facility that we've kept on, on the Congo is underway. So we expect that we probably will be doing some refinancing before the end of the year on that basis.

The liabilities we have include $22.5 million for what we owe our operator in the Congo for the ongoing operations there. And we have arranged to transfer part of our inventory to Perenco in settlement of these in order to honor our license obligations.

So perhaps restating it, we haven't had any physical oil liftings in the first half of the year. So we're restating the revenue reported for Q1. We expect that our full year profits are largely going to be unaffected. This is a timing issue, and the new lifting arrangement gives us visibility now on the first of what we expect to be 2 or 3 liftings in the latter half of the year. And so we expect that by the end of the year, we will be back to where we wanted to be for the year.

The ADNOC sales agreement is still waiting for a third-party pooling agreement to become operationally effective. And I think in the longer term, it's important for our Congo subsidiary to have the rights to lift its own crude through the terminal.

And this is -- this is in discussion with the terminal operators and the government at the moment. And I think it's a government-led initiative to try and create a more competitive situation for lifting out of January, and we welcome that and support that process.

You'll see that our costs have included some one-off fees for the redomicile process and the uplisting on to the main Børs. So you'll see costs for the first half, slightly above where they were for 2021. And this is because of the one-off business that we had and we reported on during the first quarter.

Just a quick run through the portfolio to -- which is composed of 3 main ingredients here. So our production bases in Congo, the PNGF Sud license and it's operated by Perenco. Our net is 16.83%. High-margin production with lifting costs around $11 to $12 a barrel. So a good asset, as I'll describe a little bit more in the next couple of slides.

The next component is in Nigeria. It's the Aje field, which we've just completed our entry into with the purchase of Panoro's interest. We see the potential for a development plan there for 25,000 barrels of oil equivalent per day in the future. And a good deal of that is gas, which I think is a desirable product for this part of the margin and is -- it allows the development to present a strong ESG profile.

And then -- although there's kind of infrastructure-led exploration in both of those 2 assets that I've mentioned before, the main exploration component of PetroNor is in a high impact acreage that we have in the Atlantic margin in Guinea-Bissau and the Gambia.

These are in a proven basin with multibillion barrel potential. And there's been some success along the Atlantic margin recently, I think the flavor is coming back to exploration in this part of Africa.

So focusing a little bit on the Congo now and our position in PNGF Sud. This is a long-life asset. It came on stream in the late '80s. It's 2 billion -- has 2 billion barrels of oil in place. And to date, less than 500,000 hundred barrels have been produced. So we see a production profile extending beyond 2040. And the potential for a significant addition.

Our current CPR has -- projects about another 150 barrels of production is -- reserves is possible there. And with the success of the current infill drilling program and the longevity of the infrastructure that's in place, we see potential above that.

Even if we completed that, it would still mean an overall recovery factor of about 32%, which is still low by North Sea standards. So this is a high-quality asset, high-margin production and has legs to run for the next decade or 2.

Just zooming in a little bit on the recent performance of the field, you can see a typical production from the existing well stock, it's around 20,000, 22,000 barrels a day. And then as we approach the end of this curve, you can see the impact of the Litanzi wedge that is coming in with the infill drilling program and then also the -- what we anticipate from the next target at Tchibeli with where the rig is moving now.

So this brings production of the field over 30,000 barrels a day, which is our target for the year. The slide has a little bit of graph of the performance from Litanzi and you can see it started the year at flowing at about 1,000 barrels of oil per day.

And it's just recently been shut in to effect the rig move, but just prior to that, it was over 10,000 barrels a day from that field, including the infill wells that have been drilled there. So high hopes for the rest of this program, it was a total of 17 wells to -- in the program and so 13 more to come in the coming year.

Moving on to Aje. We now have a seat at the table with the license group, which has been a long time coming. This -- this was a transaction that had quite a long delay waiting for government approval and then for us to resolve issues associated with the redomicile to Norway and the uplisting on to the main exchange. So all of that's behind us now.

And the next milestone for Aje is we're finalizing agreements with the license operator YFP to form a joint venture, which will be called Aje production. It will be a Norwegian entity that PetroNor will hold a 52% interest in.

And -- this is the vehicle by which we hope that we will be able to forge a new dynamic in the partnership. And we have started in parallel to engage technically with the rest of the license partnership and we are putting together plans to work with the current technical service company to bring about a definition of what the group chooses to do in terms of redevelopment of Aje.

It was previously produced as an oil producer. All the gas was -- which was associated with that production was flared. Our plan is to exploit that gas, bring it to shore and also to extract liquids both from the gas and the underlying oil rig.

So we see an attractive economic development there, but 1 also that addresses some of the regional needs for a clean fuel that the gas will provide and will help displace the use of other sources of energy onshore such as diesel and wood that would be a benefit to the environment as well as the economy of Nigeria.

Touching on the high-impact exploration acreage that PetroNor has offshore Guinea-Bissau and Gambia. We have advanced well planning for a well in 2023 for Guinea-Bissau. It was a position we largely inherited from Svenska when we picked up the license in the course of last year.

And in the Gambia A4 block, we have an option on a license. The option is expiring on the 18th of October, and we've initiated discussions with the government about what could be the desired outcome here in terms of either an extension or a commitment to enter into the license itself.

We are in the midst of farm-out discussions with IOCs across this portfolio. And this is supported by what's seen as a revival in exploration from strengthening balance sheets of companies as well as the recent success enjoyed by some of the deepwater discoveries in West Africa. So this is very much work in progress, but we have hopes for this position.

Perhaps also to mention that the arbitration with Senegal over our licenses in ROP and SOSP, we don't typically report on the arbitration, it's confidential, but we are expecting a result from this process before the year-end, and we'll be reporting on that as it emerges.

So this is my last slide to wrap up here as we see continued strong delivery from the Congo assets and a rising production outlook. So targeting our 5,000 barrels a day that was mentioned in the last quarterly report, that we still see as in front of us, but with good progress towards it.

The infill drilling program, I think, supports the long-term production growth, the success of these wells suggests that we'll be able to find more targets above and beyond the 17 currently planned to increase the overall recovery from that 2 billion barrels that was initially in place in the Congo asset.

The new arrangements around lifting gives us visibility on getting value for our entitlement oil inventory, and we're looking forward to getting that done in starting in October. And we are in the midst of engaging with partners on Aje and look forward to presenting a redevelopment opportunity to them and to our shareholders in due course. So we still see a significant amount of organic growth opportunity within that portfolio. But we are -- have ambitions beyond that.

Our 3-year target remains as unchanged, and we have a significant effort on looking for the transformational M&A deal, and we have several conversations that are maturing and have been ongoing through the year that I hope we'll be able to report on in the near future.

So thank you very much, and I'd be happy to take any questions.

[Unknown Executive]

We'll be moving over to the Q&A part of today's webcast. And Jens, going into the third quarter, just a new lifting agreement imply that you will stand without revenue also this quarter? And if so, what will that mean for the fourth quarter?

[Jens Pace, executive]

So our lifting program envisages a start in early October, I think, the first week of October, and we anticipate liftings through the fourth quarter. So the third quarter is -- will be -- there will be no change to our revenue situation. We are looking at the potential of accelerating some of the cash from that lifting program through credit discussions.

But on the face of where we are now, we won't be seeing any revenue from that program until October. And it does leave us quite exposed to the fourth quarter in terms of oil price, while we see that there's plenty of support for oil price going forward, through the rest of this year, we are looking at the possibility of hedging that position for the fourth quarter so that we can manage that exposure.

That's at an early stage at the moment. So we haven't typically hedged our production, but it's something that we might consider given the exposure to the fourth quarter in this year.

[Unknown Executive]

And when can we expect that the mentioned 5,000 barrels of oil per day will kick in?

[Jens Pace, executive]

Well, I'm hoping that with the addition of another well on Tchibeli, we would be at the -- assuming that all the rest of the well stock stays online, and we would envisage that we'd get to 5,000 barrels a day after the completion of that well, the rig is just moving to location at the moment. So it will be after that first well is completed.

And with the field producing 29,000 barrels a day last weekend, I think we're getting tantalizingly close to that target now.

[Unknown Executive]

Are there any plans for consolidations of shares?

[Jens Pace, executive]

We have a commitment to have a value of our share price on the Oslo Børs. And so we will be meeting that commitment. It will probably involve a consolidation at some point, but we haven't finalized that at this stage.

[Unknown Executive]

Can you give an update or let us know what is the status for PNGF business?

[Jens Pace, executive]

We're very much in the hands of our operator, Perenco on PNGF Bis. This is -- we have a right to enter that license as a partnership group with them as operator. And I think, to some extent, the priority for that has been has been circumvented by the opportunity for investment in the infill drilling program on the other fields. . So it hasn't been something that we've approached urgently, but there is potential there for additional investment, and we are certainly carrying the opportunity in our books and in our CPR. So we will anticipate that Perenco will get to the completion of those negotiations with the government in the coming future.

[Unknown Executive]

Thank you, Jens. It seems that concludes the Q&A part of today's presentation. The complete recording of the webcast will be made available on the company's website.

[Jens Pace, executive]

Thank you very much.