Petronor E&P ASA
OSE:PNOR
Earnings Call Analysis
Q4-2023 Analysis
Petronor E&P ASA
As the interim CEO Jens Pace reviewed the fourth quarter results of 2023, it became clear that PetroNor E&P had a solid quarter and a record year driven by increased production and substantial cash flow, marking a period of significant advancement. Growth in net working interest oil production to an average of 5,168 barrels of oil per day was observed, attributed to strategic investments in new well stock and infill drilling programs.
PetroNor's efficient capital allocation was highlighted by the commissioning of a refurbished jack-up rig as a wellhead platform in Congo, maximizing returns on investment. This platform is pivotal for the next phase of infill drilling, aiming to boost operational autonomy by reducing reliance on third-party power sources.
The company's strategic moves included successful oil sales totaling a record 1.5 million barrels at an average price of over $80 a barrel and a fruitful farm-down in Guinea-Bissau, which contributed $23 million to the balance sheet. Alongside other asset disposals, PetroNor bolstered its finances with cash and equivalents standing at $40.7 million by the year’s end.
PetroNor revealed a strong balance sheet with $46.2 million at year-end, amplifying post-year gains to over $70 million. Gross assets and revenue surged, mirroring this strength, while EBITDA climbed to $141 million from the previous year's just under $100 million, showcasing healthy financial progress.
The company's well-rounded portfolio across the E&P value chain remains sustained by high-margin production in Congo and exploration potential in Nigeria and the Gambia. With lean operating costs of about $9 per barrel, the existing fields and untapped prospects contribute to a robust reserve base and a production level that aligns closely with current market realities.
Infill drilling in PNGF Sud has exceeded expectations, with production exceeding 30,000 barrels per day. While there has been a slight delay in the program due to equipment access, this has also led to a reduction in CapEx for the current year. Moreover, anticipation for the PNGF Bis license, which is expected to be signed in the coming months, lays the foundation for further expansion.
The steps taken towards the Aje field redevelopment, including the formation of Aje Production AS and new technical analyses, aim to maximize gas and liquids production. Encouraging discourse with capital providers signals potential for attracting necessary finance to support these expansion endeavors.
With an open data room and discussions underway, PetroNor is setting the stage for a commitment that would introduce a drilling program in the Gambia A4 license. Coupled with contingent payouts from Guinea-Bissau’s Atum-1X well, due upon development success, the exploration segment maintains an optimistic trajectory.
Foretasting a future of growth and stability, PetroNor's Board is contemplating a dividend policy to propose at the next AGM, with intentions to reflect the company's financial capacity and commitment to returning value to shareholders within the year, marking a significant inflection point in PetroNor's strategic development.
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Good morning. My name is Jens Pace. I'm the interim CEO of PetroNor E&P. And I'm here today to review the fourth quarter results from 2023. The company put out a report earlier this morning. And I have a few slides to present the findings and the detail behind the report. And then it would be my pleasure to answer any questions that you have. So please do send them through.
And it is indeed a pleasure to stand in front of these results because the fourth quarter was a very solid quarter for us and capped off a record year in terms of production and cash flow for the company.
So I'd like to start with a picture. And the last time I did this about 3 months ago, I showed a photograph of the Tchendo platform as it was leaving the Netherlands, where it had been refurbished. And now here it is in the field next to the Tchendo 1. And you can see that it's getting ready to start operations. It's just being commissioned now.
Its' -- the reason I want to show this photograph is really because it's the most recent visible sign of the partnership's investment in the ongoing operations in the Congo and will be a wellhead platform for the next phase of the infill drilling program that we're doing. And it's also going to host or is hosting the power production facilities that will make the field complex independent of third-party power sources. So we're looking forward to having that predictability on power availability.
I guess the other reason is, although it looks brand-new, it's actually a story about efficiency. This is a refurbished jack-up that has come to the end of its life as a jack-up rig and is now being used as a wellhead platform. So it's about capital efficiency and trying to make the most out of the investment that we put into the Congo.
Right. So the standard disclaimer. I'll be willing to take any feedback on this for those of you who like to read these things, but I'll leave you to read that at your leisure.
So my first slide here is really summarizing a really strong finish to a record year. The fourth quarter net working interest oil production was 5,319 barrels of oil per day, which is capping off a pretty much a quarter-on-quarter increase throughout the last few quarters. And this reflects the investment that we've made into new well stock and through the infill drilling program. And so we started to see the benefits of the most recent investment in the fourth quarter, and that gave us a rise in production that brought up the 2023 average to 5,168 barrels of oil per day.
We've been converting that into cash. We were able to sell in two liftings, 711,000 barrels of entitlement oil and that was achieved at an average price of just over $80 a barrel. And that brought up the total sales for the year to a record 1.5 million barrels. And that has fed through to the financial numbers, which I'll show you in a minute.
But they were also enhanced by a transaction we did in our exploration portfolio in Guinea-Bissau. We've essentially farmed down 100% during the end of the year. We received a payment of about $23 million, which has also gone to our balance sheet.
And then around the same time as we were receiving that payment, we had the welcome news in Congo that the Council of Ministers in the government had awarded the PNGF Bis license, which sits alongside our existing production to a Perenco operated partnership in which PetroNor has a 22.7% working interest. So we don't have a production sharing agreement yet. We're looking forward to that being signed in the coming months, but the award by the Council of Ministers clears the way for that to happen.
So looking at the numbers that are a result of the production and oil sales. Balance sheet shows $46.2 million on the books at the end of the year, which is pretty good, but we've actually received another $30 million during January as a result of the lifting that we did in December, which was paid. It's a 30-day payment process. So we were paid for that during January.
And we've also had the results of selling some drilling equipment that was now surplus to requirements as a result of the Guinea-Bissau transaction, which netted another $3.5 million. So a good addition even in January. It shows that we've started the year in a very good place.
Almost all of it is net cash. We've got a small working capital debt facility of about $5.5 million. We'll be paying that down quite quickly. And -- but there's a little bit left. So net cash of $40.7 million at the end of the year.
Gross assets and revenue for the year, understandably showing big increases on the previous year. And EBITDA for the year of $141 million as compared to just under $100 million, the previous year. So all of that looking very healthy.
Cash flow from operations about $70 million. And I'll just show you the use of cash through the year. So we started the year with about $25 million. Net cash from operations is $70 million, and we've reinvested nearly $40 million into the producing assets and also exploration through the year. And then with loan repayments and some leakage of dividends to minority partners, we are left with $46 million at the end of the year. So an 86% increase over the course of the year.
Just to kind of recap for those of you who follow PetroNor. This is the portfolio, and it's a balanced portfolio across the E&P value chain. So our production base is in Congo, Brazzaville. And it is operated by Perenco. Our net interest is 16.83%. The field is currently -- the field complex is currently producing about 33,000 barrels of oil per day. It's very high-margin production. Our operating costs are about $9 per barrel. So this is a high-margin, high-value piece of business for us.
As we move around the continent to Nigeria, we have a redevelopment opportunity in OML 113, which is the Aje Field. Aje used to be produced as an oilfield. We plan to redevelop it as a gas field. And our efforts recently have been in consolidating the partnership group through acquisitions so that we can have control of that project.
The redevelopment plan would be for about 25,000 barrels of oil equivalent per day. And this is largely gas, which is considered a transition fuel in Nigeria. So it's a project that we think is very financeable, and we're talking to sources of capital to help us with that.
As we move up the coast to our exploration portfolio, this is now focused on the Gambia A4 license, where we have attractive prospects on trend with the Sangomar Field which is about to go on production later this year. So we're going to be watching what happens at the early days of that with interest, with some attractive prospects sitting in a proven basin.
So that gives us kind of 2P reserves of over 20 million barrels of oil equivalent. And in terms of production, about 5,500 barrels a day at the moment. Those of you who follow this would see a change in the last quarter. I posted 6,000 barrels a day, and we were doing that then. We've come off a little bit. So 5,500 is probably a better reflection of what we're seeing today. But the field capacity is there to increase that, and we expect to be doing that during the course of this year.
So focusing on that Congo production a little bit more now. You can see in the map now PNGF Sud is a complex of fields with different reservoirs, different accumulations. So it is effectively a portfolio. And then just immediately to the northwest is the PNGF Bis license which has got some undeveloped discoveries in it.
We've seen, as you can see from the production profile, a great track record since entering this field of adding production through workovers and the existing well stock and adding new wells. And you can see, particularly through 2022 and '23, the impact of the new well stock has brought up production to over 30,000 barrels a day.
We announced a couple of years ago, a plan to drill 18 infill wells. We've drilled 11 of them to date. And we're currently drilling one more at the moment into the Vandji reservoir, which was following up on a discovery that was made last year. So we're excited about that. Of those 11, they have exceeded our expectations in terms of reservoir quality and access. So we're excited about the benefits we're seeing from this.
And we're looking forward to the next 6 wells, which will be drilled on the Tchendo field in the course of the next year or so. We have seen a bit of delay in that program as a result of access to heavy lift equipment to move a rig on to the new Tchendo platform that's being commissioned. So the majority of that program will likely slip into 2025. But that has the effect of also reducing our CapEx this year slightly. So we're going to deal with the infill wells in the early part of '25.
Moving on to Aje and was sitting on a gas condensate accumulation just offshore Lagos. So you have the availability of a cleaner energy source that is currently used for power generation in the area, sitting right next to a major population center. And so this is an attractive development that is also linked to the West Africa Gas Pipeline, which runs through the area and has landfall just where we would plan to bring a pipeline to shore as well. So some synergies for the whole region, that means we're well positioned here.
The activity that we've been really focusing on recently is the consolidation of the partnership group. We're forming a joint venture with the field operator, YFP, to create a Norwegian company called Aje Production AS. And we'll have a 52% interest in that joint venture.
We announced last year the acquisition of our partner, New Age's interest in the field. That is awaiting government approval. And when that completes, so in combination with YFP, will give us a controlling interest in the partnership group.
Our plan for the redevelopment involves a new FPSO with gas processing capacity and reconnecting some of the existing well stock and drilling a few other wells, that would give us 4 to 5 wells for gas and liquids production, a 30-kilometer pipeline to the coast and onshore LPG plant for extraction of LPG.
We've done a little bit of technical work this year. Of note, the 3D seismic has been reprocessed and we're in the middle of a reinterpretation. This is really more about choosing locations for the development wells that are yet to be drilled.
And also understanding the -- particularly the deeper potential for the oil leg that sits underneath the gas condensate reservoir that is the main focus. We're excited actually about the results of that. It does show some additional upside in the field that hadn't been recognized before.
We've also been having some discussions with sources of capital for project finance and these have been encouraging. I think for financial institutions looking at Africa, gas is much more financeable than an oil project is. And particularly in this particular regional setting, I think that this will be something that we'll be successful in attracting the right level of debt support to move through with the project.
So wrapping up the portfolio, let's look at the exploration portfolio on the Atlantic margin. I've still marked the Guinea-Bissau acreage here because although we have no longer got any interest in the license in terms of the license itself, we do have a financial interest because of deferred payments that would be due contingent on success in the Atum-1X well, which we understand will be drilled this year by the new partnership, and we look forward to the results of that well.
So we had receipt of the $23 million this year. And then on a -- in a success case on approval of a field development plan, we have a contingent payment of $30 million that will come due then. And then on establishment of continuous production, there's another payment of $30 million. So $60 million in a success case yet to come. So we'll be watching that project with interest.
I think it's also significant that, that well will have a bearing on the play around this part of the margin. It's a similar play to what we have prospects in the A4 license in the north in the Gambia. And so a success in Guinea-Bissau will, I believe, support a resurgence of interest in the margin generally. And the other activity that's happening in the area is the Sangomar Field, immediately to the north of us in the Gambia, is coming on production later this year. So we'll see real-time performance of that reservoir, which we have prospects in immediately to the south.
So we're working on a partnering program with our partner in the Gambia, the GNPC, the Gambia National Petroleum Company. And we have a data room open, and we're talking to third parties under an NDA. And we are hopeful that we'll be able to move forward into a commitment phase of that license, which would involve a drilling program once we've secured a partnership group.
So to wrap it up, this is my final slide, and I think the main theme here is continued strong operational delivery from the Congo assets, and we've been able to underpin that with regular liftings now to sell the oil inventory and generate good cash flow.
The infill drilling program has proven to be a very attractive investment. And it's given us some long-term reserve growth and an immediate buzz to our production, which we're enjoying the benefits of now. Some of these wells pay out in less than a year at these oil prices and the flow rates we've achieved. So this is really an outstanding investment.
And we hope now with the award of the PNGF Bis license, which will -- would be finalized in the coming months with a new PSC that we will enhance that opportunity for additional investment. We have undeveloped discoveries in that license in a reservoir that we are currently testing with a new well. So we're excited about the potential for that play. It adds huge running room to the project.
The Aje redevelopment is advancing, albeit slowly, but it is advancing. And we are working with our partners, the supply chain and potential purchases of gas to build the investment case for this valuable option.
And then in the exploration program, I think we've demonstrated that we can create value from our exploration portfolio, and we see the potential for more positive outcomes in the position that we've got here in a proven basin.
So all of that has given us a strengthening balance sheet with a pretty positive outlook for PetroNor in terms of financial capacity to execute our organic growth program, in reinvesting in the Congo, the Aje redevelopment and they're kind of fairly holding our exploration licenses at low cost until we have achieved a partnership group.
So we have funds now in excess of our immediate investment needs and the Board have been discussing this with the intent to propose a dividend policy at the next AGM and with the objective of considering a meaningful return of capital to shareholders this year. There are some procedural steps we need to go through apart from having an agreed dividend policy.
We are still dealing with a relatively new company at the topco, which was re-domiciled only 1.5 years ago. So we have to be able to show profit on audited accounts. So those compliance steps that we need to go through in order to be able to fully support any sort of distribution to shareholders, but we are expecting to achieve that in the course of this year.
So that's it. I'll leave it at that. I think a pretty positive story, and I would welcome any questions that you have.
Thank you, Jens. We will start off with a question from [ Henrik Rasmussen ]. What is the intent of PetroNor with regards to market the company's achievements publicly? It does not appear to be a priority of PetroNor to have media and public understand and appreciate the value and outlook of PetroNor's business and valuation?
Yes, I understand the question, and there's always more that one can do in this -- in telling the story. We are actively going around all of the industry analysts after each of these presentations -- these quarterly presentations.
And you will have noticed that since the last quarter, we've had coverage reinitiated by Arctic, and we welcome that. And I have appointments for the next few days with other analysts to try and broaden that coverage.
We're also active at conferences. I will be at a conference in Oslo next week as well, presenting the story, and I would continue with that practice. So we are making efforts to do this, and we have a good story to tell. And so it's really a pleasure to be able to do that.
Moving on to a question from [ Jordi Vilar Rambla ]. How much CapEx, net to PetroNor, is expected in the Aje development, provided that is done?
Well, the total CapEx in our current concept for the development is about $0.5 billion, $500 million. And about 70% of that would be debt, which still leaves a kind of an equity gap of around $135 million that we'd be looking to -- for the partnership to source. So the amount that PetroNor needs to look for is kind of dependent on what our final working interest is, and this is something that is still in flux. At our current level with the joint venture with YFP, we're at about 20%. That would increase to 50% on completion of the deal with New Age. But we're also looking for additional investors to come in to the project as are other partners. And so there are a number of conversations that are ongoing, but that will give you a kind of a scope for what the CapEx that would be -- the equity CapEx that would be required from PetroNor.
Our next two questions come from [ Ganesh Patil ]. What production rate from PNGF Sud is expected until the end of 2024?
So we have well capacity that can flow at about 35,000 barrels a day on a gross basis. And we've had a few production outages during January and February, mainly due to power interruptions from the nearby N'Kossa Field where we get our power generation.
This shows the value of bringing in the Tchendo platform with its 25 megawatts of power capacity because that will make the PNGF Sud independent of third-party power generation and I think will provide a more reliable source of power for the field operations and water injection and that sort of thing.
So I think that the well stock that we have will have a small decline through the year. So although we were at 6,000 barrels a day at the end of last year at the kind of the -- in terms of our total capacity, we'll see that drift down through natural decline until we are able to execute the next phase of the infill drilling program at Tchendo. So it will be above 5,000 barrels a day but it will -- I'm not sure exactly where we will end up, and we will watch the reservoir performance with interest.
Will the dividend policy be for quarterly or yearly dividends?
So we don't have a dividend policy, first of all. So we have to propose that. The Board is looking at doing it at the next AGM as it will be a matter for the shareholders to agree to. And the -- right now, the plan is it would be an annual approach and -- but we will see what is ultimately agreed by the shareholders.
Our next question comes from [ Mikkel Christiansen ]. Is there any reason for a preference of dividend payment rather than stock buyback?
We're considering both options. There are advantages and disadvantages to each. We're a company with quite a concentrated shareholding. And so our free float is something that we are focused on maintaining. So a stock buyback would have an effect on that. But we haven't decided yet exactly what sort of distribution this would look like.
Good. There are no further questions. So this concludes today's session, and thank you all for attending.
Thank you very much.