Aker BP ASA (AKRBP) Earnings Call Transcript

Good morning, everyone, and welcome to Aker BP's second quarter presentation. It was a quarter of strong operational execution and robust financial results. Production averaged 384,000 barrels of oil equivalents per day and operating cash flow was $3.1 billion. And we have raised the lower end and narrowed our production guidance for the year. Our major projects remain on track with important milestones across Yggdrasil, Valhall PWP-Fenris, Skarv Satellites and Johan Sverdrup Phase 3. At the same time, we continue to strengthen the portfolio for future growth, including through a new strategic collaboration with Equinor. We also maintain a robust financial position with $6 billion in available liquidity and an unchanged quarterly dividend. Operationally, this was a quarter shaped by seasonally high level of activity with continued high efficiency across the portfolio. Production was lower than in the previous quarter, mainly due to planned maintenance at Edvard Grieg and Ivar Aasen combined with normal quarter-to-quarter variations. Despite these planned impacts, was 94%, a very strong performance by industry standards. Production costs increased to $8.8 per barrel, mainly reflecting planned seasonal activity across the portfolio, including maintenance at Edvard Grieg and Ivar Aasen, diving operations at Alvheim and well intervention activity at Valhall. Lower production volumes also increased the reported unit cost. Emissions intensity was 3.1 kilos of CO2 per barrel, mainly reflecting lower volumes in the denominator. AkerBP remains among the global leaders in low emissions oil and gas production. Johan Sverdrup is a world-class field, combining large scale with low operating costs, lower emissions and excellent safety performance. In the second quarter, our share of production averaged 214,000 barrels per day, supported by high production efficiency and continued optimization of the field. It remains a key contributor to our cash flow. We are also investing to sustain and extend that production. The subsea drilling campaign is progressing with new infill wells and water injectors, and we continue to mature the next phases of the field. Phase 3 sanctioned last year is on plan. The subsea templates are installed, drilling starts in the fourth quarter and production is scheduled for the fourth quarter of 2027, while Phase 4 is being matured with potential start-up in 2029. We also recently concluded the redetermination process initiated in 2025, following an updated assessment of the field. This resulted in an increase in Aker BP's ownership by 0.15 percentage points, resulting in a net participation of 31.2%. Let me now turn to our development projects. In December 2022, we sanctioned 10 PDO projects. of which 5 subsea tiebacks have started production. And in total, we are over 2/3 completed with the entire project portfolio. These projects are adding more than 800 million barrels of resources and will contribute to lifting our production above 500,000 barrels per day in 2028. Several visible milestones were delivered in the quarter, and before going into the details, I would like to show what that progress looks like in practice. [Presentation]

Such pictures truly make me proud and happy, and we made great progress in the quarter. You just saw that the 2,500 tonne Hugin B topside was safely lifted from the barge and installed on its jacket last week. And with that, the first top side is now in place at Yggdrasil. Hugin B is a normally unmanned wellhead platform tied back to Hugin A. Also at Yggdrasil, another major milestone was achieved this quarter with the completion of the power from shore system, clearing the path of the installation of Hugin A towards the end of the year. I would like to extend my gratitude to all our project teams, alliance partners and other suppliers who have contributed to making this happen, from engineering and construction to offshore execution and marine operations, these achievements reflect the dedication, expertise and teamwork of the entire 1 team. At Valhall PWP-Fenris, we are now preparing for the next offshore phase. Hookup of the Fenris stop side has commenced, and the Valhall PWP topside will leave the yard at and be installed offshore in late August. As Yggdrasil and Valhall PWP-Fenris move through the final construction phase and installation phase, we are actively managing the remaining scope to support safe and efficient completion. For Yggdrasil, we are investing more in the final launch of completion work to ensure that the Hugin A platform is as complete as possible before sail away. This reduces both execution risk and the remaining offshore work. For Valhall PWP-Fenris, the updated estimates mainly reflects a larger remaining offshore scope, including hookup and completion activity. The additional activity is reflected in our updated investment estimates, which are now around 6% above the previous estimates. But most importantly, Yggdrasil and Valhall PWP-Fenris remain on track for first production next summer. Skarv satellites is our most advanced project this year and is now approaching start-up. It ties 3 discoveries, Alve Nord, Idun Nord and back to the Skarv FPSO, extending production from infrastructure we already operate. Drilling and completions of the wells is finished. The subsea installation is complete, while commissioning continues on the FPSO. STADA remains on track for late August. With Yggdrasil and Valhall PWP-Fenris on stream, our production is set to increase by around 35% from 2026 to 2028 and support cash generation well into the 2030s. At the same time, we continue to build the next set of opportunities through increased recovery, maturation of discoveries, targeted exploration and active portfolio management. Transaction package agreed with Equinor in May is a good example of how we are going to do this in practice. Let me take you through some of the key elements. The first element is in the toll prime area of the North Sea. This is a subsea cluster development plan as a tieback to the existing total infrastructure. It brings together several discoveries in the area, including, where Aker BP already has a 19% interest. For the transaction with Equinor, we established a 90% ownership position across most of the RingerWest area, giving us a strong foothold in a development expected to contain around 240 million barrels of gross resources. The strategic logic is very much in line with how we think about the value creation at. Discovered resources, nearby infrastructure and a coordinated development concept that can turn smaller discoveries into a larger, more efficient project. The second piece of the puzzle is the wider fig area around Yggdrasil. Last year, the Omega Alfa discovery confirmed oil in the eastern part of the old fig area. We are now preparing further exploration drilling next year to better understand the full potential of the structure with a clear objective of finding additional oil volumes that can be developed at Yggdrasil. For the transaction, we will acquire a position in the U.K. license adjacent to the Norwegian acreage. This gives us exposure to a larger part of the structure and creates a more balanced ownership position on both sides of the border. This matters because any future development will need to be evaluated across licensed boundaries and across the border. For Aker BP, the strategic logic is clear. Yggdrasil is not only a major project, but the new hub in an area with significant remaining potential. The third element is Wisting. Wisting is one of the largest undeveloped discoveries on the NCS with around 500 million barrels in recoverable resources. It is a long-term opportunity and the project has made good progress through the recent maturation phase, moving towards a concept select. As a part of the transaction with Equinor, we reduced our ownership to 27.5% from 35%. For Aker BP, this is a disciplined portfolio move. We retain meaningful exposure to a major resource while reducing our capital commitment ahead of the next decision points. Before I hand over to David, let me share a few thoughts on exploration. Exploration remains an important part of how we build future growth, and our approach is targeted and disciplined. Over time, we aim for around 80% of our activity to be near existing infrastructure, either as single tiebacks or as a part of future cluster developments. The remaining 20%, it's typically a high impact exploration with stand-alone potential in new areas. This year's program is particularly weighted towards infrastructure and air targets. These barrels can often be developed faster with lower incremental cost because they build an infrastructure and operating positions we already know well. In the second quarter, we completed Tonya and Carmen. Tonya is an attractive addition in the Jonsereile while Carmen is promising, but will require further appraisal. The third quarter will be our most active exploration quarter this year. Looking ahead into next year, we are preparing from an even more active program, including the fig area around Yggdrasil. With that, let me hand over to David, who will go through the financial results in more detail.

Thank you, Karl, and good morning, everyone. The second quarter was another strong financial quarter for Aker BP. High realized prices, all-time high operating cash flow and the transaction package with Equinor supporting more profitable growth in the years to come. Production, operating costs and project schedules are tracking our full year plan. And cash generation in the first half of the year strengthened materially compared with recent periods. . Now let me start off with our achieved oil prices. The quarter was characterized by a strong physical oil market, particularly in the early period before prices somewhat normalized towards the end. Front Month Brent, which is the benchmark most often referenced in the media averaged around $97 per barrel, while Brent dated, which is more relevant for our realized prices, averaged around $104 per barrel. As shown in the bridge on the right-hand side, we also achieved strong premiums on our crude qualities. Combined with some negative timing effects, this lifted our realized oil price to $110 per barrel. Including NGLs and condensate, our realized liquid price was $108 per barrel. In the second quarter, production averaged 384,000 barrels of oil equivalents per day, bringing first half production to 391,000, well within our full year guidance. Due to underlift in the quarter, sold volumes were slightly lower, averaging around 376,000. Together with the strong realized prices, this resulted in a total income of $3.7 billion for the quarter. Oil and liquids represented 86% while gas and other income was 14%. Looking briefly at the income statement. Total income was 22% higher than in the first quarter. Unit production cost was $8.8 per barrel, and as Karl mentioned, the increase mainly reflects the phasing of planned activities in the summer months. We expect lower unit cost in the second half and our full year guidance of around $8 per barrel remains unchanged. After exploration expenses of $47 million, EBITDA for the quarter was just shy of $3.4 billion. In the quarter, we recognized an impairment of $625 million. related to other intangible assets at Valhall. The impairment was driven by lower short-term oil and gas prices and updated cost profiles and is offsetting the large impairment reversal we had on Valhall in the first quarter. The methodology and assumptions are described in Note 7 to the report. As a result, net profit was $521 million or $0.82 per share. Excluding impairment charges, earnings per share was $1.15. Moving from earnings to cash. The second quarter was very strong. Operating cash flow amounted to $3.1 billion, an all-time high for Aker BP. This primarily reflected higher income and positive working capital movements, partly offset by higher tax payments. After cash flow to investments of almost $1.8 billion, free cash flow was $2.10 per share in Q2, up from $0.30 in the previous quarter. This strong cash flow generation supports our financial flexibility and is a natural bridge to talk about how we allocate capital. And the framework is unchanged. A strong balance sheet comes first. It gives us flexibility through the cycle and is the foundation for long-term value creation. At the end of the quarter, we had $6 billion of available liquidity, up from $5.4 billion 3 months ago, while our leverage ratio improved to 0.55x, down from 0.69 at the end of the first quarter. From this foundation, we invest in high-quality projects that drive future cash flow and dividend capacity. This includes Yggdrasil, Valhall PWP-Fenris and the higher return tieback portfolio. Over the next 2 to 3 years, we expect production to grow by around 35% from projects that have an expected payback time of 1 to 2 years. And lastly, we returned capital to shareholders through a predictable growing dividend, currently at $0.6615 per share per quarter or $2.65 for the full year, up 5% from 2025. Zooming in on our investment plan. All our projects are making good progress with several very important milestones confirmed this quarter. And we are particularly glad to see that both big Yggdrasil and PWP-Fenris remain on track for first production next summer. As Karl explained, we have updated our investment estimates to reflect the remaining scope required to complete the projects, including offshore hookup and completion work. For Yggdrasil, we now expect total investments net to Aker BP of $12.5 billion to $13 billion pretax compared to our previous estimate of approximately $12.1 billion. The increase mainly reflects additional activity to complete more work onshore before sail away and support efficient project execution. For PWP-Fenris, the updated estimate is $7.3 billion to $7.6 billion pretax compared with approximately $7 billion previously. This mainly reflects a larger remaining offer scope, including hookup and completion activity. At the midpoint of these ranges, the increase is around $1.1 billion pretax or approximately 6% compared with our previously communicated estimates for the ongoing PDO projects. We expect roughly half of the latest increase to materialize in 2026, with the remainder spread over the completion period. The majority of the investments are eligible under the 2020 tax regime. And as a result, the after-tax cash flow impact is estimated at around $200 million over the next 2 to 3 years. Let me then bring this together in our updated full year guidance. As mentioned, production averaged 391,000 barrels of oil equivalents per day in the first half of the year, in line with our expectations. With half of the year now behind us with strong performance, we lift the low end of our guidance range and update the full year production guidance to 380,000 to 400,000 barrels per day. Production cost was $8.2 per barrel in the first half of the year, impacted by maintenance activity in the second quarter. This is in line with our plans, and we still expect around $8 per barrel for the full year. 2026 remains our peak investment year. We invested $3.5 billion in the first half and reflecting the updated estimates for Yggdrasil and Valhall PWP-Fenris, we now expect full year CapEx of approximately $6.8 billion to $7.2 billion pretax. Exploration spend is $161 million year-to-date. The program is somewhat back-end loaded in 2026 with several exciting wells coming up. We still expect exploration spend of around $400 million pretax for the full year and abandonment around $100 million. With that, let me hand back to Karl for some concluding remarks.

Thank you, David. To conclude, this was a strong quarter for Aker BP with robust production, high efficiency, strong realized prices and record operating cash flow. Our major project in Yggdrasil and Valhall PWP-Fenris remain on track for first production next summer. The updated investment estimates reflect active final phase execution with additional onshore completion work at Yggdrasil and a larger remaining offshore scope at Valhall PWP-Fenris. At the same time, we are strengthening the portfolio for exploration, increased recovery and selective transactions. In short, we are delivering today, progressing the projects that will lift production from 2027 and building the portfolio for profitable growth into the 2030s. We will now take a short pause before opening the Q&A session. And as usual, to participate, please use the Teams link on the webcast page. And if you prefer to listen only, please stay tuned and we'll resume in one minute.

Okay, everybody, welcome back. And I am assuming there are, as usual, quite a lot of questions.

There are. And the first question today comes from Tianhong Bi from Citi. .

Can you hear me?

Yes, we can. Go ahead, Tianhong.

Yes. The first one is on shareholder returns. Last quarter, you guys kind of hinted that if the oil prices stay high, you will revisit the dividend policy. Oil is now trading at $85, your liquidity has improved substantially. Deleveraging seems to be on track, and your peers have raised their return frameworks quite recently as well. So is it time for you guys to reconsider your return framework as well? Second question is on CapEx increase. Can you clarify the split between additional resources versus spending to protect first oil? I think last time with a similar increase, it was 1/3 additional resources versus 2/3 scheduled protection. Is that still roughly the same right split?

You want to start on shareholder returns, David?

Yes, I can do that. So I think the starting point is our capital allocation priorities, they remain firm. All the value creation that we have in Aker BP will be return to shareholders at one point. And then I think the last quarter has really shown us that oil and gas prices are quite volatile. And we are, of course, also currently investing in profitable growth that will significantly increase our production and also our cash flow generation over the next 3 years. The policy framework, it sort of favors a resilient and growing dividend through this investment cycle. And the ambition is to grow the dividend by a minimum of 5% per year. And in the past, we have also increased by more than that. For 2026, the dividend is -- we've been guided 5% up from 2025 and that should also be your base case. And then I think we'll come back to 2027 and beyond at our capital markets update in February as normal.

Thank you, David. And on CapEx, we are approaching the finishing line on this project. That means that we have I would say, a fairly good and significantly more advanced understanding of the remaining risks. So of the CapEx guidance that David just talked about, the midrange includes about a 10% contingency of the remaining CapEx. And the way to look at this is that there is a certain set of risks and risk elements that are now associated with the remaining operations. So the lower end of the guidance, that would probably mean that we have been able to mitigate and alleviate quite a lot of art risks, whereas the upside is including somewhat some of these risks that may or may not occur. And then a lot of this is impactable by Aker BP, but some of it is also non impactable. As you move offshore and you move into a situation where you have logistics, you have flotels, you're also more exposed to things like weather, which are factors that we cannot impact. So what we have done this time is to focus on the start-up in summer of 2027 and put some more robustness around the investment program to make sure that we deliver on that startup. And as I said in my presentation, the projects are on track. Several milestones have already been delivered. We have started up power from shore, that started up but completed. We have installed Hugin B, and we have now fixed the date for both the Valhall PWP topside installation and also the installation, which will happen in late August.

The next question is from Teodor Sveen-Nilsen from Sparebank 1.

Two questions for me. First, on Again, on CapEx, I think I understand that most of the increase is related to keeping your schedule. And I'm just curious in the scenarios you're forced to complete the projects without any CapEx increase, how would that have impacted first oil? Second question, that is on, by the way, congrats on several good deals here on how should we think around the net production contribution to Aker BP?

I'm not sure I understood the question, what would happen if we were forced to...

Sorry about that. And just wondering, if you did not increase CapEx, I assume you will still be able to reach some kind of first oil, but how would that have impacted or would it impact the timing of first oil?

That is a relatively hypothetical question, Teodor. So the point here is that as we are progressing into these projects, we have seen somewhat lower productivity in the final stages of construction which have been compensated by some more resources, which are part of this. And then we have also increased somewhat the robustness of the offshore scope, particularly related to Valhall PWP. These are measures that we would have done almost regardless in order to protect the schedule. That is the most important thing. And then the increase -- you may think that it is large or you may think that is low. And my view on this is that it is relatively modest compared to the overall scope. There's actually really nothing dramatic. It is simply the fact that we are moving towards completion. And then we are adjusting as necessary to make sure that the plants are as robust as we can possibly make them. What would happen if we didn't do that? Well, I don't think I'm going to answer that. I think every prudent operator would have done the same in this case. Then the production impact on. Let me come back to that when we provide guidance and the updated profiles of -- as we usually do in the Capital Markets Day in February. I don't think I will speculate on that at this point in time.

Then it's Sasikanth Chilukuru from Jefferies next in line.

I had 2, please. The first 1 was going back to Ring West. I was -- the development concept is agreed. I was just wondering what are the next milestones or what kind of time line should we expect, especially related to the investment decision or maybe even the start-up, an indicative start-up time. The second was on the realizations. I suppose that you had these crude premiums come through in 2Q. Just wondering how you're seeing these play out right now as we speak and your expectations going in 3Q as well?

Yes, you want to touch on...

I can do that. that's a -- so on West, as you mentioned, the concept to has been agreed between all the partners and the different licenses that goes into this cluster development. FID is planned for late next year, I believe. And then production from this development, you should expect that to be in the 2030s. So this is production that will support our profitable growth in the next decade. And I believe your second question was related to the physical oil market and realized prices, if I was correct? And as mentioned in my presentation, we have seen that the tightness in the market has come somewhat down. The most elevated prices was in the middle of the quarter. So we have seen a normalization, but we are still, of course, seeing the impact of the war in the Middle East. And of course, the volatility related to that situation is very hard to predict. So I will refrain from trying to do that.

That's good. That's exactly what you were supposed to say, David. So thank you. Are we done, Sasi?. Can we move on to the next caller? Next caller is Alejandra Magana from JPMorgan.