Aker BP ASA (AKRBP) Earnings Call Transcript

Hello. I'm Kjetil Bakken, the Head of Investor Relations at Aker BP. It's my pleasure to welcome you all to the Q&A session of our 2021 capital markets update. Since COVID prevents us from hosting a physical event this year, we have chosen a different approach, and I really hope that you liked it. With me in the room today, I have our CEO, Karl Hersvik; and CFO, David Tønne. We also have our Head of Operations, Ine Dolve; and our Head of NOAKA, Lars Hoier, on the line from separate locations. This Q&A session is scheduled to last for 1 hour. If you have any follow-up questions, please do not hesitate to contact us in the Investor Relations team. And with that, we hand it over to the operator to open up for questions.

[Operator Instructions] We'll now take our first question from Yoann Charenton from Societe Generale.

I would like to thank you as well again for the transparency of projections you share with us. And I will have 3 questions, if you don't mind. The first 2 questions are on production profiles. The first one would be about the Valhall area. And I understand that there is a certain degree of certainty that is associated with this newly unveiled production profile for the Valhall area. And I would like to get a better understanding of how strong it is. How confident were you with your prior production outlook when it was presented last year? And what has changed since then? The second question on production profiles, again, will be more focused on the Ivar Aasen area. This is clearly your most recent production arc, and you have invested billions in the platform. But then if we look at these projections that you are showing today, there is -- I mean it appears that this platform, unfortunately, does not have the right [ post ] course. The field is depleting quite quickly. So I would like to get some color on how much supply there is for this production profile to be reassessed in the future. And my third and last question will be on a different topic, which is carbon capture and storage. This appears to be of great importance to Norway's government. Do you have a mandate to play a role in the development of carbon storage within the Aker galaxy?

Thank you, Yoann. So maybe I can answer your questions. So first, on the Valhall production profile. So first, let's remind everybody that Valhall is a pretty big field. It's a gigantic field. We're expecting to produce more -- 300 million barrels now, but we're expecting about 1 billion more out of this field. But it's also a highly complex field. It's a field where we have historically, that is after 2016, been testing a lot of technologies to support that long-term ambition. Some of these technologies have not proven entirely successful, and we've been working on rectifying that, as we've discussed in this for -- before, for example, the Single-Trip Multi-Frac, which is now working. So my view on this is that the Valhall production is pretty much in line with our internal expectations, and we may have been a bit optimistic previously. However, there is a lot of work ongoing to rectify the current issues, and I'm confident that we will be back on track soon. And then, of course, all these technologies are actually really value creative for our long-term development of the ambition on the Valhall field. So while we have been working quite ambitiously on discovering new technology, Single-Trip Multi-Frac, new lower completions, multilaterals in chalk, digitalizing chalk influx, et cetera, et cetera, I think this will prove crucial when we look at the longer-term ambition on the Valhall field. And then your comment on Ivar Aasen. If you look at the presentation that we have put out there on Slide 26, you will see the production profile. And you're right, there is a certain decline from 2020, which is all planned and pretty much following the original plan as communicated also in the PDO. Then we have recently approved the drilling of 2 IOR wells in 2021, which will increase production in '22, '23 and '24 compared to the existing decline, which will offset decline at this field significantly. Your comment on CCS. Our strategy when it comes to climate change and, let's say, renewables and also accounting for CCS is that we will support these developments but we do not necessarily attempt to participate or directly invest. As you may have observed, Aker has recently launched the Aker Clean Carbon this summer -- or last summer, and is now expanding that portfolio. There might be investment opportunities, particularly related to storage, in either existing Aker BP fields or Aker BP fields in the future, and in that case, we will come back to that. When it comes to the broader CCS picture, I see CCS as an important technology, particularly related to electricity production from hydrocarbons in the future, and we're highly supportive of that trend. However, at this point in time, we see that there are other CO2 reduction mechanism that gives a higher yield and is more important to the Aker BP investment.

We will now move to our next question from Teodor Nilsen from SB1 Markets.

Two questions from me. First one on the dividend, which I guess has been a hot topic ahead of the Capital Markets Day. You said that you expect dividend to grow by value creation, which, of course, is nice. But how should we interpret that? Will future dividend be a function of EPS or free cash flow or some kind of internal NAV estimate? Second question is on NCS, M&A market. I guess you still only be on NCS, so that will be important for you? Is it still fair to say that it is a buyers' market out there? Any comments on that would be very helpful.

Thank you, Teodor. I think I'll hand over to David on the dividend, and then I'll reflect a bit on the M&A question, both in regards to the current market and also Aker BP strategy. So David, if you want to expand on the dividend question.

Sure. I'll do that, Karl. Thank you, Teodor. So on the dividend, we have put forward a pretty clear framework for how we're thinking about dividends going forward. And as stated, the underlying goal of Aker BP is to maximize long-term value creation, and the 3 capital allocation priorities remains the same. When we talk about following the underlying value creation, we're talking about the value creation through the cycle as we are growing production and thereby also free cash flow. We haven't linked the term value creation to any specific financial metric. But as indicated with the different oil price scenarios in the presentation, we expect or have an ambition for dividends to grow by at least 5% in an oil price environment between $40 and $65 Brent.

Yes. And then on the M&A. Well, of course, after the temporary changes to the tax system, I think most of the CapEx projects in Norway changed appreciation. Of course, that relates primarily to the project inside the temporary tax system, that is for those with a PDO to be delivered by the end of 2022. So our strategy when it comes to M&A remain unchanged, Teodor. We haven't really made any modifications to this essentially from 2015 and onwards, and we're still predominantly only focused on value creation and how we can maximize value for our shareholders using M&A as a vehicle. Historically, we've been extremely active, as you know, but that has also resulted in a large hopper of highly value-accretive organic projects, which we're now in the process of executing, as communicated previously today. And I think the main driver right now is that most of the M&A we look at has a much lower value creation potential on the inorganic side than it has on the organic side. So if you look at that -- this as kind of a use of cash to generate value, right now it's much higher value to be generated by investing in our organic hopper, which we, by the way, mostly expanded through an M&A strategy. But that doesn't mean that we're not revisiting or looking at opportunities. If the NCS is buyers or sellers market, I think that list prices, particularly on CapEx, has gone up significantly following the temporary change of the tax system, particularly for those players who can utilize those tax positions. And I think right now, at least, NCS is a highly competitive M&A market where we are going to be cautious.

Okay. Can I just follow up with one on the dividend question? What's the specific reason for preferring cash dividends and not the buyback?

Sure. I can do that, Teodor. So as you stated, so we're pretty clear that our main distribution mechanism will be cash dividends. And the way for -- the way we think about this is basically that it doesn't exclude buybacks in the future, but as sort of a policy statement, we believe that, that's what creates -- or it's the best way of returning value, given also the fact that if you were to include sort of buybacks as a mechanism at various oil prices, you would probably be buying back shares when the oil price is higher and the share price would be higher. So for us, buybacks would not be viewed as a distribution mechanism, but more an investment opportunity if that appears to be value-accretive for us as a company.

We will now move to our next question from Anders Holte from Kepler Chevreux.

I'd like to second to Teodor's congratulations on a well-held presentation. Now obviously, the effect on the tax change is going to have a pretty substantial impact on the net free cash flow going forward as we look at your investment plans. So I guess that all the CapEx this year is going to be covered by the tax changes in place. But the key question becomes how much of your future-guided CapEx that you see on your long-term guidance will be covered by the tax amendment that's now available for projects that are ready for plan and development operations handed in next year? So just to simplify, how much going forward is related to projects that are eligible for the tax change?

Yes. Thank you, Anders. I'll hand that question over to David.

Thank you, Karl. So the way to look at this is that 80% to 90% of our CapEx that's included in this plan is either related to already sanctioned projects or projects that are going to be sanctioned with FID before end 2022. That means that most of this CapEx will be eligible for the temporary fiscal regime. And then we've also given you -- done you the favor of actually calculating the post-tax cash outflow on Page 53 in the presentation. And there, you definitely see the effects of this.

I will just pause here to ask the speakers whether any questions have come in over the web.

Yes, there is. We have one question here from Mark Wilson of Jefferies, and he has a question on the longer-term production ambitions. It would appear that around 50,000 barrels per day has disappeared from the underlying plan, and particularly the non-sanctioned part. At the same time, NOAKA has got larger. And the second question -- I'm not sure if that was a question, but we'll see. The second question would be details on the appraisal of Liatårnet. What is the current range of resources? What does success look like? Is a flow test included? And do you expect to farm down ahead of that? And I guess that's a question you can start off, Karl.

Yes, I can certainly try, Kjetil. So thank you. Let's start with the production, Mark. And no barrels have disappeared. But what we have done is an optimization of the production -- of the project in the hopper, where we've basically focused on maximizing value, but also on making sure that the project we do execute have a sufficient maturity as we reach the end of 2022. So most of these barrels are directly linked to King Lear, which is a high-pressure, high-temperature project, which will require maturity and time before we reach a PDO. So our assessment was that there were better investment opportunity generating higher returns in that portfolio. And we have, therefore, delayed the King Lear project to maximize both value, but also to minimize risk in the portfolio. That does not mean that King Lear has disappeared, but it means that it's been pushed out, and we have delayed that project. So I think from my perspective, this is about making the execution plan more robust as we're now speeding up a lot of the early phase project to put them inside the 2022 hopper. And let's just remember that the key to robust and successful project execution is a good early phase. So the groundwork we're doing now is the basis for a solid execution post 2022. Then on Liatårnet, the resource estimates are largely unchanged. This is a rather shallow reservoir and it means that the seismic response is quite good. So we understand fairly well the size of the container. So the big questions are now related to oil quality and how we can design the PQ at the NOAKA field to receive this oil. So what we're looking for is not necessarily a flow test, but we are looking for a sample of sufficient size to update our design profile on the NOAKA project. And then, of course -- or not necessarily of course, but we don't plan any changes to ownership on NOAKA.

Yes, I guess that's a good answer to Mark's question. And then operator, we pass the word back to you.

We'll now take our next question from Al Stanton from RBC.

Yes. Well done for a very polished presentation where every word, I think, was chosen with consideration. So it's interesting that you never used the phrase net zero. And I would have bet my house that senior management, even in an elevator pitch, would use the phrase net zero in any discussion about their strategy going forward. So I'm wondering, have you deliberately not mentioned it? And then more generally, what is your strategy towards achieving net zero?

Thanks, Al. So I think our strategy, when it comes to the transition and the energy change is quite clear: We will remain an oil and gas company. We will focus on optimizing our portfolio and reducing our emissions, and we will contribute to the energy transition by, I would say, participating in value creation in these value chains. And then net zero is essentially a way of optimizing your cash portfolio. And to me, the most value to be had right now is to minimize emissions, and that's what we're doing. And then if you look at our portfolio, we will reach net zero -- as a matter of fact, I mean we will reduce our CO2 emissions by about 50% in the 2030s. And by 2050, we will be virtually net zero, as a matter of fact. So my view on this is that we invest where we can maximize efficiency of those investments when it comes to amount of CO2 reduced per dollar or per NOK. And right now, that is not necessarily on the, I would say, offset side of that equation. So it's simple as that, Al.

Right. So I suppose my concern then is whether you think the audience accepts virtually net zero in 2050 is good enough, given the amount of pressure that I'm seeing on your peers who are embracing offsetting and other initiatives to achieve net zero much more quickly?

I think that's a good question. I think so far, we've had a lot of positive feedback on the clarity and obviously direct strategy. And then of course, there are opportunities to reach net zero more quickly if that is believed to be of value later on. So it doesn't necessarily mean that we can't do it. It just means that there are better ways of investing those money rather than reducing CO2 emissions in Aker BP.

We will now take our next question from Matthew Smith from Bank of America.

I think sort of key questions have already been asked, to be fair. So I'll just go for a quick clarification on the dividend, if I can. So just to be clear, the 5% minimum annual increase, that minimum phrase, that applies to oil prices between the $40 and the $65, is that right? So there could be upside to that 5%, even without oil prices above $65. Am I reading that right?

Yes. So the way to read it is that we have an ambition to grow dividends by minimum 5% at oil prices at or above $40 Brent. And then we are also indicating in our framework that above $65 Brent, you could consider also extraordinary dividends on top of that. So it's basically lifting the floor by minimum of 5% as an ambition of oil prices above $40. And then I think, just to make it very clear, right, so what we have done here is basically put in plan a financial framework which is robust down to at least $40 Brent, including the investment plan that we have. And of course, what we're solving for is the #1 priority in our pecking order, which is the financial robustness and our investment-grade credit rating. And then secondly, of course, then investing in profitable growth, which makes a lot of sense given the opportunities that we have available.

And we will now move to our next question from Chris Wheaton from Stifel.

Thank you. Two questions if I may, please. Firstly, can I go back to Mark Wilson's point on NOAKA. Your future production slide shows quite a substantially bigger project than I thought, so pre-production in excess of 150,000 a day in 2028. The ownership of NOAKA hasn't changed, which I don't think it has. Could you talk about what's driving that bigger project upside versus before? Secondly, a question about managing all the CapEx and the projects you've got to sanction before the end of 2022. A lot of the strategy today you've outlined is because the Norwegian tax changes have enabled a really very attractive window of growth opportunities to open up for you. You've got to deliver a lot of project definition and a lot of project scope work before the end of next year to get things sanctioned to get access to that advantageous tax structure. Could you talk about the capacity in your organization to deliver that number of projects in that compressed timescale? And also, once you've delivered them, you can't all execute them at once. Is there an issue -- could that be an issue that there could be quite a delay between sanctioning the project in the next 18 months and then actually finally spending the money in let's say, 2025, 2026? And is the Norwegian government going to be okay with that kind of extended delay between taking advantage of the tax break and actually spending the money?

Thanks, Chris. Maybe Lars, I'll hand the NOAKA question over to you since you are the guy actually running that show.

Thank you, Karl. Yes, we are working full time with our alliance partners and also with the license together with Equinor and Notos to find the right concept. And we're in the middle of the concept development phase now. So that's really interesting to see how we can optimize the production. But we are in the middle, and we are also working with the right number of months. So it's too early to say, too much on the production level. But we will work hard to optimize it and we will take final investment decision end -- by 2022 4th quarter. Then we'll come back to it in more detail when we have the right solution and optimal solution.

And I only have one follow-up to that point then, please. Because what is the scenario that's represented in the disclosure you've made today? Is that a base case? Is that the most likely case for that 150,000 a day net to you in 2028?

Yes. Thanks, Chris. So just to be clear, what we have done up to now is optimizing the concept, as Lars was just discussing. And the case represented in a material release today is what we believe to be most likely at this point in time. And of course, as Lars also pointed out, we are in the middle of the project development phase, so we can't exclude that there will be any changes. But this is the most likely case as we see it today.

And Al (sic) [ Chris ], just to add one point from my side as well. So I think it's important to note also where we were back in 2020 at our previous Capital Markets Update with regards to discussing also commercial arrangements also with our partners. So what was assumed in the business plan at -- in 2020 was roughly a 50% ownership share in the NOAKA project. While what we are including here now, as stated on the slides, is basically our share of the different licenses, which is included in NOAKA, which then accumulates to around or above 60%. So that's also a part of why there is a bit of a difference in the size of NOAKA on the slides.

Thank you, David. And then your last question, which is a crucial one, which is about capacity. And let me guide your attention to our previous discussion in several of these Capital Market Days around alliances, where we spent considerable amount of time explaining why and who -- with whom and how we set up these alliances. So just a very short recap. We have now established 7 alliances across the value chains from projects to drilling and into brownfield modifications and well maintenance, now top side maintenance work. I must admit that once we establish these alliances, the primary driver was to optimize cost and reduce error and time. And then as we're now growing the portfolio, we also see that these alliances allow us a far higher execution capacity than would otherwise have been possible. And the simple fact is that by these alliances, where we worked with a lot of these partners over quite a few years now, we have established an execution mechanism that doesn't necessarily rely on a growing Aker BP organization. So in many ways, this alliance has actually been a foundation for the execution strategy, which then proves far more scalable now than the previous execution strategy we had before the alliances. And it also allows us direct access and priority to resources in the market. So it means that even if the market is heating up, particularly on, I would say, engineering, drilling and well-related services, et cetera, that doesn't necessarily impact our execution strategy. So in many ways, you could probably say that this was luck, Chris. But I think we actually ended up in a really good position when it comes to the execution, both in terms of scale, risk and also management of fluctuations in capacity. And then finally, your comment about plans. So the current plans does not necessarily mean that there will be a delay in terms of project execution. So it's not like we're ramping up, delivering the PDO and then cooling down again. These projects are scheduled and optimized such that they will actually follow a pretty normal execution schedule. So the questions being -- that was asked a bit earlier today about optimization of that schedule is exactly to minimize that, I would say, delay or possibility of delay so that we can actually follow our continuous schedule. And the reason is very simple, Chris. And that's -- if we ended up in a situation where you would deliver the PDO and scale up the organization to make a financial investment decision with all the associated engineering and technical studies and then cool off again, these people would have gone elsewhere and the project would have been at risk. So in reality, that is a very complicated strategy to execute, and we do not plan to do that.

And we'll pause here again just to check with our speakers whether any more questions have come in over the web.

Yes, there are. The next question comes from James Hosie of Barclays. In the future CapEx profile on Slide 52, NOAKA is clearly the largest part of the 2022 to '28 spending plans. How wide is the range of uncertainty in the budget for that project today? And second question, in the free cash flow outlook, Slide 60, we see it declining in '23 to '25, such that the $50 per barrel, the dividend would not be covered by free cash flow. Is that a constraint on your capacity to raise the payout by more than the 5% minimum in '22 to '23, regardless of the oil price? And I guess that last question goes to you, David. And the first question, I guess Karl can take.

Yes. So if you take the last point, I can comment on the NOAKA expenditure later, David.