Ithaca Energy plc (ITH) Earnings Call Transcript

Good afternoon, everyone. Thank you for joining our first half earnings call and presentation. I'm Yaniv Friedman. As most of you know, newly appointed Executive Chairman of the Ithaca. So it's my first call, and I'm very happy to be here and very happy and excited to join Ithaca at this really pivotal moment for Ithaca. We'll run through the presentation, and it's split between Iain and myself, and we'll be happy to take any questions at the end. So if you're -- if you could all move to Slide 3, we'll run through first half 2024 highlights. We are continuing executing our 2024 strategic objectives with our buy, build and boost strategy. The main point of it is obviously the transformational business combination with the E&I U.K. assets. Iain will talk more through this, but we are progressing towards completion. We're mostly facing some technical pieces for closing, and we expect these to be completed by early October, mostly technical, including the Delek sell-down that will happen in accordance with the deal completion time line. Captain [ enhanced ] recovery Phase II project completed with a milestone of first subsea polymer injection in May 2024. Rosebank progressing materially to plan with completion of all the major subsea campaign through the summer window, completed well workover on our operator Erskine field and reinstating the fifth production well at that field. Production. Lower than we projected for the first half, mostly reflecting non-operated portfolio and short-term production issues that are now mostly resolved, still robust EBITDAX of $533 million, net cash flows of $560 million from operating activities. We have a strong balance sheet, a net debt of just over $500 million and significant available liquidity of circa $1 billion. As I'm sure you've seen, we have declared an interim dividend of $100 million with the ambition to go up to $500 million dividend for 2024 and 2025, and I think that reflects the high cash generative nature of the business combination. And if you move to Slide 7, and all of this obviously is something that we've talked about before, but creates -- this business combination creates a platform for value-driven growth. We have a very diversified portfolio in the North Sea with significant scale. And our overall group's capabilities are significantly enhanced through the partnership. Supports the attractive and sustainable shareholder returns and distributions. We're demonstrating that today as well. Very strong balance sheet. Not less important, supports our responsible operations with ESG and decarbonization. We have a strong leadership team in place with the new CEO that will join the leadership team, but also new leaders that have joined the team, and I really truly believe that we have a first-class team in place. And last but not least, 2 major shareholders, both with Eni and Delek Group that are committed, long-term shareholders and committed to see Ithaca's growth. On Slide 8, very briefly, this has been talked a lot about, but we're seeing this transformational combination, essentially doubling production over the course of the next few years with 100,000 to 110,000 barrels per day of production that puts us really at a material scale. And in Slide 9, really creates a strategic platform for additional value-driven growth. So Ithaca has been growing through acquisitions. We also have 2 assets that are currently not developed or one is under development, which is Rosbank. We also have Cambo. So we have our organic growth prospects. We're looking at potentially U.K. additional consolidation and accretive assets that could add to our portfolio. And we're also seriously looking at international M&A as we believe that we have a really credible platform with the enhanced capabilities that we have to go and execute on that strategy as well. Iain, to you.

Yes. Thank you, Yaniv, and good day, everyone. So yes, Slide 10, please. And this is just showing a little bit of an outline of the asset base that we're bringing together with the combination. So we're able to publish later today, we expect a prospectus in relation to the deal. And together and appended to that will be a revised Competent Person's Report, which has been run as of 30th of June 2024, so an independent view of the assets, both Ithaca assets and the assets coming in with the Eni combination. And what this shows an independent view of the business going forward with organic potential to be over 100,000 barrels a day for 10 years. It shows combined pretax cash from operations of over $10 billion in the next 5 years, '25 to '29, significant resource base, largest resource base in the U.K. by a number of measures at 632 million barrels and a 16-year production to resource ratio. So this is an excellent combination in terms of the asset base, but you can see in the bottom right there, the diversification this brings us is major stakes in large long-term assets in the U.K. with a diversified portfolio. So moving on to Slide 11 and a bit of our reserves and resources picture on the left-hand side. And again, this is showing you the overview of the 2P reserves in the blue and then the 2C potential in the green. And you can see the shape of business that we've built as we bring these assets together, a very complementary portfolio, a split of resources operated, non-operated with short-cycle value opportunities like Fotla and infill drilling in the likes of Schiehallion, Elgin Franklin and Mariner. And then larger longer-term portfolio assets like greenfield assets, of course, Rosebank under construction and Cambo moving forward towards a farm-down position. So very complementary, very large scale with lots of optionality in the U.K. And that's what we've been doing in the business is building strength and building optionality in the portfolio, which is really coming to a climax with this transaction. The next slide, Slide 12, please. Just summarize a bit of the value that the partnership with Eni brings. This is part of a strategic development of the Eni's business, where satellite businesses are spun out where the strength and the capabilities of Eni are able to be deployed into other businesses where Eni have a large stakeholding. And this has been very successfully done with the likes of Var Energi in Norway and in Africa with Azule. And this is the next phase of that journey. You can see something of the financial capability that comes with the deal in terms of the balance sheet and the capability of technical expertise that we'll have access to and all of this enhances Ithaca's business going forward. And we've referred to this repeatedly as a platform for value-accretive growth either in the U.K., where clearly is our home, where we have lots of capability and deep synergy opportunities, but also the potential for overseas as well. So it's a value-enhancing integration on all levels. Slide 13 maybe brings this to life a little bit in terms of numbers. So the 5-year average production outlook from the new CPR, you see a 34% increase in the overall position. You can see that this is largely a 2P addition. So this is the injection of high-quality cash flow assets that don't require very significant investment to deliver those barrels. In terms of the OpEx base, you can see there is a stabilized OpEx-based position. So our previous cadence on that and trajectory was an increasing and then decreasing OpEx per barrel. What this does is gives us a very flat OpEx per barrel profile in the kind of $23 range over the next 5 years. And you can see the pretax cash from operations addition, which is in the north of $3 billion range over the next 5 years on the right-hand side with 30% increase in the base position. So again, just a bit of a graphical representation of the strength of the combined businesses as we move forward to close out the transaction. So the business changes, but Slide 14 moves us to something that hasn't changed the capital allocation framework. Since IPO, this has been our guiding principles around cap allocation. We knew that our investors value it and appreciate it. It brings together a commitment to sustaining the business through investing in CapEx that keeps us above the 100,000 barrels a day aim, but also commits to protect the business with a 1.5x net debt to EBITDAX target ceiling around that, which we're a long way from today. Commitment to return to shareholders, which we are able to reiterate again today with announcement of the first interim dividend for 2024 of $100 million. But that commitment to 15% to 30% post-tax cash from operations with a specific commitment in '24 and '25 for 30% is the basis of $100 million initial interim dividend today. But then the cash flow beyond, and this is where the optionality sets we have options to grow CapEx through the U.K. and beyond in terms of deploying organic CapEx developments in the U.K. We've built the optionality to do that, and it's within our framework. We have the potential to be the largest producer in the U.K. by 2030, and that will come out of the evolved category of cash flow allocation. We also have the option to extend through M&A. We continue to be active in the M&A market, but we are able to be specific and targeted and strategic about that given our strength and breadth of capability, including our operational capability. There's nothing which is off the table in terms of our M&A because of the breadth of capability that we have, particularly partnering with Eni in the new business. So continue to be active there, but we'll do value-driven deals. And then the ability to yield additional distribution, and that's part of our plan for '24 and '25. We've referenced an ambition to get the dividend up from 30% post-tax cash from ops up to $500 million for these next 2 years, and that's what we're seeking to do, and our history is about targeting and executing on targeting on those targets around dividend distribution. So that's the capital allocation framework that continues to guide our business. Slide 15. Just a few high-level bullets here around what the balance sheet strength and financial strength looks like post deal, the scale of assets and the diversification of assets gives us access to lower sources of capital. We're coming up towards a time frame, which we always said we would look to refinance and over the next period, that's an option for us, but we have significant cash flow generation capacity. So we have lots of optionality in the asset base post completion supports that. We have a material combined tax loss position of getting up to $6 billion, and that clearly helps from a cash flow perspective and fiscal synergy perspective. So valuable accretive position there. Our leverage position at the end of 2023 on a pro forma basis of the combined business is down 0.23x, so significant leverage capacity in the business to support growth. And we expect to move forward in the credit rating path towards BB negative in the next round of up ratings, and that's been supported by Fitch and Moody's in the market, that's the expectation of a change. But we're working through that at the moment, and we'll do that push deal with the agencies. So all builds capacity, we have strong cash flow, and we have strong capacity and optionality going forward, which is the key value driver of the new business. Slide 16, again, this combination brings together assets that are very synergistic from an ESG perspective and the environmental impact. We have made clear we're an oil and gas operator. We do so responsibly. We do so with a view to minimizing our impact. That's seen in the portfolio here in the short term. We're bringing in very low-intensity assets the likes of Cygnus and Seagull. And then the medium term, we're clearly moving towards asset developments like Rosebank, which has a much lower ESG and emissions intensity than the basin in the U.K. and, of course, new assets more efficient with the potential electrification brings our portfolio position into a better place. We're already in a good place, and this brings us forward into an even better place. So moving on to Slide 17, again, what the partnership with Eni has done has enabled us to put together a new leadership team. So the current speakers today, obviously Yaniv and myself continue as Exec Directors, Luciano Vasques will join as Chief Executive, and the closing of the deal in early Q4, as we mentioned, but we've also announced the leadership team that will be in place from closing and the contribution here of some personnel and expertise from Eni, again, just bolsters the team and the overall capacity as we move forward. Slide 18 just references what Yaniv brought out earlier that we have 2 long-term support of shareholders. This is a long-term business where long-term value will be driven and Eni and Delek are critical to that. They both have portfolios and investments that have shown significant value growth over the past. We had a slide in the back here referencing and showing Eni's recent successes, particularly relative to other majors. And we're really excited about how this works going forward and the optionality here around the future business. So having the access to the skills capacity and direction of these 2 major shareholders is a real positive, we think, for investors. Slide 19 is a summary of the timeline to completion. So no real major change here from previously. We did delay the prospectus issuance so that we could get that 30th of June Competent Person's Reports updated. We felt that was the right thing to do in terms of having up-to-date third-party view of our business into the material on the prospectus. So that's meant that we're announcing that today with the results for 1H. And that means that our time line, as Yaniv said, there's not a lot standing in the way now of completion in reality. So early Q4 is targeted, and we have no reason to expect anything else but delivery on that. Okay. A bit of operational review for 1H, and I think all of this needs to be looked at in the context of the significant value associated with the closeout of the deal and the go-forward position. 1H has been a little bit frustrating from a production perspective, a number of nonoperated assets, particularly where we've had unplanned shutdowns and issues, which are now essentially all resolved. Actually, we've had Pierce, which is off-line for the entirety of Q1 when we expect it to be on. It's now actually running at the highest production efficiency, I think it's ever run at and has been an excellent producer in the last couple of months, and we expect that to continue. Schiehallion had some issues around riser management, as I think has been understood. But that, again, is now back at essentially full capacity. And the Lomond facility, which Erskine flows through, has been down for a large part of 1H. Again, now up and running, the new well that we completed on Erskine, a recompletion, a work over on a well that was scaled, successfully completed with the VALARIS 123 rig during 1H and is online as of 2 days ago and performing well. So that's turned around. J13. Again, the J13 well harbor operated that ceased production due to scaling at the very end and early into this year and a rig active on the well right now, and we expect that to come back in the next couple of weeks. So lots of short-term things really, which don't back long-term value, but has been frustrating. But you can see from the chart on the left hand side here, we expect H2 production. This is in our guidance to be back up towards 60,000. So you can see that kind of range on the guidance to close out the year. And the pro forma business really is the key point going forward on the right-hand side, as you see that over 100,000 barrels up towards well north of that for the pro forma business for 2024. So we're back to much higher production rates, and we believe these issues are behind us in terms of 1H. Quick update on a couple of projects. Slide 22, just referencing the closeout of Captain EOR II, continued high activity on Captain. We completed the project and first polymer injection was achieved in May. We're recertifying the rig, and that's coming back into drilling operations now, so we will not be drilling ahead on Captain in the coming months. And in fact, this will be a multiyear campaign, a platform drilling in Captain with infill and full capacity being brought on. And we're also completing the FEED of the Captain electrification project, which is a real live and real electrification project option. I say that in a world of options, which aren't always real, Captain electrification is very much a real project that is completing FEED. Rosebank on Slide 23. Again, a quick update on that. A couple of key milestones achieved in the period. The subsea structure, execution of that -- those scopes during the summer, difficult weather West of Shetland actually this summer, but a very good program of execution on the subsea structures kind of ahead of schedule, actually, which is great. Continued work on the FPSO phasing and the timing of that means that we've been able to defer some CapEx out of 2024 and continue to work hard to maintain the schedule on that project, as is always the case with major projects like this, but Equinor driving the project hard. Okay. Financials, Slide 25, please. Just about a summary of 1H given the production, which is a little lower than we were hoping for as I've mentioned before. Given that strong EBITDAX of $533 million for the half year and again, maintaining statutory net income at $106 million, maintaining the leverage ratio of 0.4x net debt to EBITDAX by being able to reduce our net debt position down to $506 million. And we closed with over $1 billion of liquidity. So very strong position and good EBITDAX return despite production being under expectations. And actually, Slide 26 shows part of how we've done that. And so clearly, oil and gas price movements mean that year-on-year positions are different than the oil and gas prices lower year-on-year, particularly gas, which was for 1H '23 $82 a barrel versus $57 in the market. But our strong protection position in the hedge market and the hedge book has meant that we added $98 million of EBITDAX in 1H through hedging gains. So that's $10 a barrel on to our EBITDAX through hedge delivery. So this continues to underline our strategy and the value of our strategy around hedging. Continued cost management, you'll see in the operating cost position, we are down 1H '24 versus 1H '23. That is quite an achievement on a number of fronts. Firstly, because actually we had shutdowns -- planned shutdowns on Captain and Greater Stella Area, which last year were in the second half of 2023. This year, they were in the first half of 2024, so in June. So we had more activity than 1H '24 versus 1H '23, but a lower cost base. So higher inflation and more activity but lower costs. So good cost management on the OpEx side. The cost per barrel is higher, clearly because of the production reductions. But as we look at the specifics on that, this is mostly around Alba and Erskine because of the Lomond position on Erskine. If you take those 2 assets out, we're at $22 a barrel, which is kind of our long-term stabilized rate. So good value delivering EBITDAX despite slightly under delivery on the production. So continuing to support our financial position, which in Slide 27, we see this brought out in the summary of our debt and financial position, closing the half year with $288 million of cash, so RBL at 0 and then cash beyond that. You can see that, that takes us to a net debt-to-EBITDAX expression of 0.4x at the end of the year despite lower EBITDAX and over $1 billion of liquidity, as you can see from the middle chart there. So we leave this position strong financially at the half year, and that's before the unlevered assets come in from the any combination, which just adds to our material capability and optionality financially. Slide 28, summary of our kind of hedge position. We have been -- as we've done for some time now, we are thoughtful and value driven on our hedge book and our financing arrangements allow us to do that. We hedge when we like the pricing, we hedge when we see the pricing in a place that we believe is value-add. And you'll see in the bottom right there, we've done a lot of hedging in July and August, 136 million therms. That has been driven by prices kicking up in the curve. So our swap book on gas is now pretty full in according to the policy, and we're averaging over 100p of therm swaps through Q1 2026. So that's kind of long-term hedge book on gas, which really locks in swaps at over 100. And then we've had significant collar positions put down with floors of 75 and 80 with ceilings up to 140p of therm. So we actually adjusted the policy a little bit here in application because of the cost of put options was prohibitive to us putting them down. So we have now introduced a wide zero-cost collar option in that bucket of our hedge book, which has really helped us, enabled us to take very wide collars, giving a lot of upside, but we are looking in the kind of base downside position in the kind of 75p to 80p of therm range. Oil is softer at the moment. And again, we've got a decent oil hedge book position, but we expect to bring that up more fully as oil prices strengthen and continue to move in the volatile manner. Okay. I'll hand back to Yaniv to close out.

Thanks, Iain. Thank you for this. If we -- if you please flip to Slide 30, a lot of numbers on this slide, but I think a couple of points to make. One is, yes, production is lower. But if you can see at all other parameters, we're doing as projected and better. So I think that's something that's important to note. As we're looking at, as Iain said, focuses on where we are economically July 1 with the Eni combination and going forward. So significant scale, diversification of assets, and you can see the cash flows gives us a lot of material firepower that allows us, again, to reaffirm our dividend commitment going forward of 30% post-tax cash flows with the ambition of up to $500 million in each of the years 2024 and 2025. So a lot of numbers, but I think the main points are there, I'm pretty clear. Before we jump to conclusion and Q&A, I think the most important thing to show is that even with this production being lower than what we've anticipated, really minimal cash impact on our cash flow. So if you're looking at kind of the net impact of this is about $50 million from the guidance revision at $76 BOE. So this kind of gives you the breakdown of where we are, again, enables us to reaffirm our dividend target. And as we said, we're looking at both protecting the dividend and distribution alongside growth and scale. Moving to Slide 32, really just closing remarks. You've heard of this before, but business combination going forward, looking at an October completion, new executive and leadership changes that will enable us to move to the next phase of growth post completion. Captain [indiscernible] recovery Phase 2 delivered on time and on budget, gross back progressing materially to plan and also subsea -- material subsea work completed. Declaring an interim dividend of $100 million as part of our commitment that we've just explained, highlighting the highly cash-generative nature of this business combination and obviously enhanced capabilities that this brings to Ithaca going forward. So with that, if there are any questions, we'll be happy to take them.

[Operator Instructions] Our first question comes from Werner Riding of Peel Hunt.

I know you haven't yet completed on the Eni deal, but a simple one around future inorganic growth. And it's do you currently see more attractive M&A opportunities in the U.K. or internationally? And when you say international, could this mean Africa, Asia Pacific? Or is it more likely to be closer to home around Europe?

Iain, do you want me to take that?

Yes, please do.

Sure. So thank you. Yes. So we're looking at international expansion. We think that this is something Ithaca should definitely look at. With this new or enhanced platform, we have the capabilities of looking at that. I don't want to go kind of geographic specific on where we will go or won't go. I don't think there is any place on the map that is kind of off limits. I think the main thing for us, Iain said it earlier, is looking at value-accretive assets to Ithaca, value to shareholders. I think that's what's guiding us. And obviously, a place where we can do more than just a one-off type transaction, but a place that we could potentially grow in through more roll-up acquisition. But I don't want to go into specific geographies.

Okay. All right. Maybe just a quick second one then on your shareholder distribution policy. Iain, maybe perhaps I know you referenced that the cash flow doesn't stop at the end of 2025 and you have this policy of topping up your 30% of post-tax operating cash flow with specials such that you'll pay up to $500 million out this year and next. So what is the normalized dividend yield look like after 2025? On a pro forma basis, the $500 million, it's a yield of about 15% to 20%. So what does it look like after that?

Yes. So tell me the future share price, Werner, and I'll tell you the yield. But the -- yes, I mean I understand this. We're in this position where we have significant cash flow, significant dividend targets. And clearly, we're looking for the market to reflect our valuation properly. So yes, I mean, I guess, the yield looks solid at present. But yes, we have our own views as to what that means in terms of the views of the market value. But yes, I mean, what we're aiming to do in our long-term policy has not changed. I guess that's the key thing on the capital allocation framework. We are committed to a long-term dividend policy of 15% to 30% post-tax cash from operations. So as we develop and grow the business and seek to develop and grow cash from operations, that will move the dividend position. We always said we'd move it within the 15% to 30% depending on circumstances. We're committed in '24 and '25 to 30%, and we have every intention and full intention of delivering that. As you've said, we're targeting higher than that and looking to get up to $500 million. So I think the short term is clear, and the long term is 15% to 30%. That's our framework, and that's what we'll continue to see to deliver on.

Our next question comes from Mark Wilson of Jefferies.

I've got a few questions. I'll start with the first one, just specific to your largest growth project at the moment, the Rosebank project. Clearly, that project is moving forward with the subsea 9 modules installed. But on the FPSO, I'd just like to ask about that and remind us what that targeted first production date is because it did strike me it's kind of strange to see that the CapEx on Rosebank was slightly reduced due to phasing of work on the FPSO. And so could you just give us an update on the timing and specific progress of that FPSO? I asked this because FPSOs tend to be the -- particularly refurbished ones tends to be the critical point, and you say it's the critical point time line for that project. So just remind us on what is the expected timing for that vessel?

Sure. Yes. Thanks, Mark. So yes, the FPSO is in Dubai. It's being worked on, as you probably understand out there, it comes in and out of dry dock. And it's both the engineering preparation, the removal and then the installation and the execution of the upgrade scopes are all kind of linear, that will be a critical path. We have no update from Equinor formally through the channels that we work in. We've got people in the project, and we've got close working with Equinor, they're still targeting the end of '26. We've always said that could slip into '27 and that continues on Slide 23. There's '26, '27, no material issues that we're aware of, and it continues to be a big value project that we fully expect to be developed and to continue to be developed. It is every month, yes? So yes, I mean, it continues. We will update the market as we get more information as the project evolves as will always be the case. We expect Equinor to lead that, obviously, as the operator and 8% equity holder. But it's progressive. And FPSO continues in the critical path would be the headline message.

Okay. That's very good. Then a follow-up question. This is a completely different angle. It follows a little bit on what Werner asked about international expansion. Very interesting to see a new addition to your leaders. There's been a few new additions, but one in particular, I noticed from the slide deck today is a new EVP of Exploration, Alessandro Barberis, who, as I understood it until I saw this slide, was at Var Energi over in Norway. U.K. asset base at the moment, U.K. exploration arguably not at front and center, one would expect or maybe we're wrong with that. Could you speak to that appointment if I've got this correct and how that looks in terms of where you would be looking to explore in the future?

Yes. I mean I'll go with that first and Yaniv can jump in to add. But essentially what this does is a good example of a leadership team that's set up for all eventualities. So I think we have exploration in the U.K. In fact, we drilled a well last year at K2's exploration well. We have other current licenses and the government has been clear that current licenses will continue. We've quite a lot of license optionality, but also other options in other exploration licenses. Other people hold that we would be capable of moving into if that was what we wanted to do. So it builds optionality in the U.K., that still exists, but it also does speak to having a leadership team, which is the capability to look at any jurisdiction, as Yaniv says, the world is big place and there's lots of options. So yes, having an EVP Exploration is helpful in that. But yes, Yaniv, do you want to add anything else?

Yes. Maybe just to add, look, this is an another example of really bringing in -- look, Eni is known to being a great explorer. I think this is one of the enhanced capabilities that Eni brings in with experience and know-how and knowledge. So we're happy to let Alessandro in. But as Iain said, we're looking at organic growth in the U.K., inorganic growth, both in the U.K. and globally, and we're building the team for that.

Okay. Great. And then my final point, and this is just thinking longer term and I guess speaking to yourself and Yaniv, the deal to get done requires the 10% free float, but in terms of a longer-term outlook and new investors, how do you view that level of free float as the ongoing company? Do you think that needs to be better? And is there a plan for doing that?

Yes. Maybe I'll take that. Look, I don't want to speak to the shareholders here. Obviously, that's up to them. But I think there is an understanding that the current float needs to grow, not that I'm aware of any specific plans. But clearly, that's something that I guess the shareholders acknowledge. Except for that, I guess, this is for them to decide what's the right timing and quantity for this.

[Operator Instructions] Our next question comes from Sasikanth Chilukuru of Morgan Stanley.

I had 2, please. The first one was regarding the acquisition strategy. Again, I get your comments on value accretion. But I wanted to check further on what kind of resources would you be looking -- would you be interested internationally? Whether you would be looking at producing assets? Are you hoping to acquire predevelopment assets? Whether is there a bias for oil or for gas as well? If you could provide some color there. The second question was on the U.K. fiscal regime. I was wondering if you could highlight the level of engagement you have with the new U.K. government, perhaps provide some color on the tax discussions that you're having and the expectations that you have? And particularly, how is this impacting your view on the Cambo development and the farm down as well?