Meren Energy Inc. (MER) Earnings Call Transcript

Hello, everyone. My name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Africa Oil Corp Q2 '24 Results Management Presentation. [Operator Instructions]. Please note that this event is being recorded. The recording will be available for playback on the company's website. I would now like to pass the meeting to Mr. Shahin Amini, Africa Oil's Investor Relations Manager.

Thank you, operator. On behalf of management, I thank you for joining us today for our second quarter 2024 results presentation. On the call today, we have President and CEO, Roger Tucker; our CFO, Pascal Nicodeme; and our Chief Commercial Officer, Oliver Quinn. There will be a presentation for around 20 minutes before we go into the Q&A session. But first, I would like to remind everyone that remarks made during this session are subject to forward-looking statements, which involve significant risk factors and assumptions and these have been fully described in the company's continuous disclosure reports. The information discussed is made as of today's date and time, and Africa Oil assumes no obligation to update or revise this information to reflect new events or circumstances, except as required by law. The company's complete financial statements and related MD&A are available on our website and on SEDAR. I will now pass you over to Pascal for the highlights of the second quarter, and Pascal, over to you.

Thank you, Shahin. Can you please move to the next slide. So, I will present the financial statements for the second quarter of 2024 and the first half 2024. And first, I would like to start this presentation by showing how we've used our resources and how we have maintained the strength of our balance sheet in the first half of this year. So, we started the year with $232 million of cash on the balance sheet. We are ending the second quarter with $185 million. And the main use of this cash for the first half of the year has been the return to the shareholders to a magnitude of about $51 million, both in dividend and share buyback. I will come back on to that. Minimal exploration expenditures, mainly on Energy, about $6 million, and the negative $11 million that you can see on this chart, the fourth bar, named as operating activities is mainly G&As actually. And you will see in this $11 million that a significant portion of this $11 million, about $5 million, is a one-off cost in relation to the signing of the amalgamation agreement with BTG. We've received another dividend from Prime, the first of the year, $25 million net to Africa Oil in April, which is the only source of cash that we received this first half, which explains our end of quarter cash balance of $485 million. So, if we aggregate this cash balance with Prime's net debt of at the moment of $222 million, it means that we have a combined net debt of $36 million, which once we have completed the deal with Prime is what you will see actually on the balance sheet as we are going to consolidate 100% of Prime going forward after the completion of the transaction with BTG. Next slide, please. Thanks, Shahin. So yes, in terms of buyback and dividends, I think it has been the main use of our cash in the first half. We want to continue to manage the company and the balance sheet and continue to return some of these positive resources to our shareholders. During the first half, we basically bought back from shares for an amount of $39 million plus $11 million of first half dividend paid in March. And so, in total, since we have started the dividend return program in March 2022, we have returned a total of $143 million to our shareholders. And the Board has also decided to reconduct the existing semiannual dividend. So, we are going to pay another USD 0.025 per share to our shareholders end of September. Next slide, please, Shahin. Thank you. So yes, a few financial highlights for the quarter and the previous quarters. So, Prime's performance has remained very solid with an EBITDAX for the quarter of $92 million and a free cash flow of $77 million. So very stable performance. Looking on the left side of this slide, you will see the Africa Oil net income and which have been impacted by civil exceptional items. And this quarter, again, we had a few exceptional items. The first one we've picked up our share of loss of Africa Energy following the withdrawal of Total and CNR from the Block 11B/12B in South Africa. We basically accounted for our share of that loss, that impairment into our net income. So that accounts for an additional loss of about $7 million. And also, worth mentioning that our share of net profit from Prime this quarter has been slightly down at $17 million, which has been impacted by a negative overlift balance of about $12 million net to us, so which explains why our net income for the quarter just breaks even. Next slide, please. Thank you. So, coming back to oil sales, I've explained in the past what we market oil now. And I think this quarter still has been the evidence that we manage now to sell our oil in Nigeria consistently above dated brands, in Q2 has been the case again, where we sold on average our barrels at $89 per barrel, while dated brands has been 85%. So Prime has sold 3 cargoes, so 1.5 cargo net to us. And going forward, 2 cargoes have actually hit their trigger price in September and October with an average price of $79 per barrel, which also evidences that the marketing strategy that we have now is efficient, and when the oil price goes down, we manage to secure a floor for our cargoes. So, that's also a very good news. Next slide please. Thank you, Shahin. So yes, just a few words on our production performance this quarter. So, you will have noticed that our production is slightly down, and the average product floor has been down at 16,700 working interest and 19,300 for the first half on average on an entitlement basis. So, this is mainly due to a planned 1-month shutdown of production, which has now restarted and actually restarted above expectations. So, this drop that you have seen in Q2 is [Technical Difficulty]. Therefore, we've maintained our existing production guidance, and we are confident that we will -- this will improve in the 9 months and full year period for 2024. I will now hand over to Roger.

Thank you very much, Pascal, and thank you all very much for joining this webcast. What I'm trying to do with this slide is just to demonstrate to you that we have been extremely active in pursuing a strategy of trying to consolidate and concentrate our efforts in particular assets. At a gross level, the value of the transactions that we've done in the last 6 months, it well exceeds over $1 billion of value. Every single one of them was designed to get us into the position that we could then do the big consolidation, which was the Prime consolidation with BTG. So, we have negotiated the farm down and full carry in Venus with Total. We've done the Block 3B/4B farm down with the carried exploration with Total and managed to maintain a significant equity position in that. And we're, as I mentioned, now in the process of attempting to consolidate via an amalgamation agreement the Nigerian producing assets. And the whole process of this has been designed to really simplify the way that the company is valued at the end of the day. However, as it points out at the bottom, we have managed to maintain zero cost to us, very significant drilling catalysts in the Venus Block 2913B, and Block 3B/4B in the Orange Basin, where we are targeting multibillion barrel growth prospects by the end of 2025. And those are, if you like, trips to the casino where we're going to be fully covered on the chips, and there are very, very significant drilling targets are preserved in the portfolio but still carried. Next slide, please. And over to you, Oliver, to take us through that, and I'll come back later.

Yes. Thanks, Roger. So, what we wanted to do here was just show you really, how do we think about value proposition in the company on the back of the transactions that Roger has talked about. And secondly, then, what is the shape of the business going forward long term? Because I think on the back of the transactions, we have much visibility on that than in prior years. So, look, in terms of value, look, ultimately, we see a very compelling value proposition for the company today. If you see on the chart on the slide here, we carry a very disciplined core NAV. So, we have Nigeria flowing barrels production. We have cash when we take off kind of G&A corporate adjustments in the next few years. And we see that, again, this is the new core NAV at just under USD 800 million, and that's versus, of course, a market cap today of about $700 million and no debt at the [indiscernible] level. So compelling on that participant and core NAV, we then move to say, well, look, the big components of the business, obviously, are holding and can impact Namibia. And of course, we put a public valuation now on that in March when we made an offer to some minority shareholders, and that's what you see reflected here. Of course, the projects matured since then, and we obviously think it's worth more than that because we were a buyer at that price. But again, disciplined view of value on here. And then the second component really is the carrier that Roger talked about, South Africa 3B/4B. And here, we're showing capital value of the carry. We're not showing a kind of risk exploration view, it's simply a disciplined outline how much value we'll receive in that carry in spend. So again, a tangible NAV, which we think is very disciplined, USD 1.1 billion. And again, trading today at USD 700 million, about a 36% discount for that. So again, significant discount and fundamentally, from our view, no real value in the share price and significant value for that Orange Basin position. Particularly given, again, as Roger outlined, we anticipate a series of carry activities potentially next 12, 18 months to test more barrel potential as stated by the operator plans, decision on an FID for Venus. So a lot of things coming down the line in a lot of these numbers. So overall, compelling value proposition. I think we put in the closed pro forma Prime Nigeria consolidation, you can see, of course, in here that our pro forma NAV jumps up with a doubling of Nigeria to just under about USD 1.8 billion, so a significant step up. Maybe we go to the next slide, Shahin. So, in the next slide here, what we wanted to do, again, was show you something, the benefits of the pro forma Prime Nigeria consolidation. As Pascal mentioned, once the deal completes, we'll consolidate 100% of those assets. And so actually, what we're able to do is kind of look at the forward shape of the business in a much more regular way than we've been able to. So, what you're seeing on this plot here is our view of -- our best anticipated view, if you like, over the next kind of 10 years, so very, very long-term shape of the business. The headline is, it's, of course, a very strong cash-generative business. And whilst we have some natural decline in Nigeria next few years, that is offset by the Preowei tieback. That's a significant project that grows its potential for 65,000 barrels a day, that's kind of 11,000 barrels to AOC pro forma. And then that's complemented by the potential for first oil in Venus in 2029, and then that's followed by potential further Venus some other Orange Basin in development phase. So, I think for a company like us, it's a very strong long-term profile. What you see in terms of the cash generation that's critical here as well on the lower 2 blocks is that we have a very relatively consistent generation of operating cash flow in this model. So somewhere plus or minus USD 400 million over this long-term period. And of course, that's generating a lot of free cash for the business because we've done the transactions to take the majority of CapEx out of the system. We have some short-term, short-cycle Nigerian CapEx under $200 million a year, including really development through ‘'28. Namibia Venus, no CapEx contribution to first oil. And the first oil in Namibia, if that comes on in '29, then we will contribute to any residual ongoing development there. But again, the point to take here is that a very consistent and significant operating cash flow, very controlled and minimized CapEx and so resulting in a significantly cash liquid business. And again, to take you back to what we announced on the back of the Prime transaction, which is that we've put in place at completion a new dividend policy with a $100 million annual base. And so again, you can see that these numbers demonstrate the ability and strength of the business to deliver that dividend over a consistent period. So, I'll hand back to you, Roger, at this point.

Thank you very much, Oliver. And I know that you've seen this slide before but what I tried to walk you through is that we are executing and delivering the strategy for like, now, probably 8 or 10 months ago that we are very, very focused on the key core assets that we hold, and they are genuinely world-class assets. These are in Deepwater Nigeria, Offshore Equatorial Guinea, Namibia and the extension of that basin into South Africa. We're associated uniquely, I think, only with Tier 1 operators, Chevron and TotalEnergies. In Nigeria, where we are doubling our production and reserve base in assets that we know extremely well with the prime transaction that we're in 3 of the top 5 fields in Nigeria with a production profile way out into the 2040s at those assets. In Venus, again, we're in an asset with a spectacular operator in a discovery, which has got the potential to add very significant reserves and production and also has significant additional running room in it as a result of the new 3D seismic and drilling activity around the block, which I'm sure that you have seen by third parties, as that basin evolves. And along with 3B/4B, which we have just farmed out to Total whilst retaining a 17% equity position in that block. We have a very material exploration opportunity that we hope that will get drilled sometime in 2025. In Equatorial Guinea, we've actually just increased the size of the block slightly to the north, and we are still analyzing exactly what we've got now that we've increased that acreage a little bit, and we will be continuing with the farm-out activity on what we consider to be an extremely attractive block. So, the question here is that we've delivered, we've focused the organization, and we've put ourselves into a position with the Prime transaction to be a very material entity in this West Africa region. And so, the next slide, please, Shahin. And so, what do we become when the Prime transaction goes through. We think that we will be very differentiated independent E&P investment case via the relationships with the majors, via the scale of the opportunities that we are in. And we have very clearly identified and enumerated to you a capital allocation program. The business is made up of very high netback production from the world-class offshore assets. We've got funded organic growth opportunities in the exploration carries and the development carry in Namibia. We have a robust balance sheet with a very low debt level and material liquidity headroom. And we have explained with the merger or the amalgamation with Prime that we're putting forward a very transparent and committed shareholder returns policy. We have demonstrated over the last 6, 8 months, a little more, that we are returning significant amounts of money to shareholders, as you saw on one of the earlier slides that Pascal showed. So, this is something that we have done. And so, what we're trying to position ourselves to be, we're positioning to be the leading player in the consolidation of the independent E&P space whilst maintaining our key capital allocation metrics, if you like. And with that, I think that I will conclude and then open up to Q&A, which I'll be more than willing, with the team, to answer any questions that you have. So over to you, Shahin, to manage.

Thank you, Roger, and I'll hand it over to Sharon, please see if there are any questions on the conference call facility.

[Operator Instruction] And your first question comes from the line of Teodor Sveen-Nilsen from SB1M.

I have 4 questions actually. First one on the capital allocation. You've talked about both dividends and buybacks and of course, carrying out both dividends and buybacks. Now I just wonder, going forward, how do you think on the split between dividends and buybacks and how sensitive would that split be to the share price? Second question, when do you expect the Prime deal to close? I think you said sometime during 2025 when you announced the deal, is that still the case? Third question, what's the outlook for the upstream dividends for Prime in second half this year, i.e., how much dividend do you expect to receive in the second half? And my fourth and final question that is on Slide 11 on the pro forma outlook you showed. Could you just clarify the CapEx target for Venus, how is that included on the CapEx indication there?

So, let's start with the fourth question first, which was Slide 11. On that note, let's go to Oliver, who can clarify the Venus CapEx.

Yes. So basically, what we've modeled here, of course, with the transaction with Total, all the CapEx is coming by Total. It's effectively an interest-free loan to Impact. And then when first oil from the block, anywhere on the block starts, then there's a mechanism whereby that loan is repaid. It is not the full operating cash, free cash, if you like, that Impact received, there's a portion of it that repay the loan, which is why you see here in a net AOC perspective that there's operating cash flow from first oil. So I think that's important in the structure. This is a model that's our best kind of view today, obviously, a few years in advance of the timing of first oil, but this envisages kind of 2 FPSO phased development on Namibia. So of course, the first one is fully paid for, if you like, by the Total transaction pre '29 and then starts producing in '29. And then we can see a second FPSO potentially, I mean, again, just a model here, but potentially coming on later in the decade. So, what that means is that some of the early spend on that second phase if it goes ahead, would be pre 2029 and therefore equally covered in the Total deal, if you like. So, whatever is spent on the block pre-first oil is covered in that Total transaction, whether that's exploration, appraisal, development, any scale of development, and an inflection point is at first oil. And then Impact will start paying its respective share from its revenues in the block, et cetera.

Teodor, does that answer your question? Do you have a follow-up on that before we go to the next question?

Well, yes, I think it answered my question.

Well, actually, Oliver, if you could stay on and answer the second question that Teodor asked, which is what is the expectation on the time of the closing of the Prime deal?

Yes, it's a good question. I mean, again, as you said, Teodor, we guided in announcement of the deal at the end of June that it would be Q2, Q3 2025, the completion. The key sets for that are a shareholder vote, which we anticipate to not to be a critical path, that should come much earlier. And then what is driving that critical path on time line is government approval in Nigeria, which of course any transaction in Nigeria is required standard. I think it's fair to say that we are, Africa Oil and Prime and BTG together, pushing very hard and working very hard with the Nigerian government. We've got a series of engagements planned. So, it's going well so far. But I think we stick with that guidance. But given the [indiscernible], of course, we are all moving as hard as we can to try and do it as early as possible so frankly we can move on with the pro forma business and all the other things we want to do.

Okay. Let's put the next 2 questions to Pascal. So, Pascal, the other 2 questions asked is, one is the absolute on [indiscernible] Africa Oil to receive Prime dividends in the second half of this year.

Yes. If we look at the budget, there is room for another dividend before the end of the year. So, magnitude is still to be discussed. And I'm sure, as in the previous year, we will wait until December to size exactly [Technical Difficulty]. I think the last element I would like to mention is that before completing the deal, the amalgamation with BTG, we will probably [Technical Difficulty] to make sure that under the true-up mechanism of an agreement, there is no cash payment between the parties. So that's another element that we'll have to take into account. So, I think that addresses the question number 3 [Technical Difficulty].

Okay. And the other question was on capital allocation. Oliver, Roger, you may want to issue here as well that sort of dividends versus buybacks.

I actually couldn't hear the first question. So can you actually repeat exactly what it was, Shahin, so I answer it correctly.

The question was in terms of capital allocation, what is the sensitivities around dividends versus buybacks. But this question obviously is to also consider the uplift for the combination when the new base dividend policy consequently kick in.

As you've seen when we announced the transaction, we are committing to pay a $100 million per annum dividend. But there is also a line in there, which I've shown on previous slides, that we will also distribute 50% of any excess free cash flow to shareholders as well. And it is that excess free cash flow that we could consider going back into paying -- doing share buybacks. But at the moment, it is not optimal for us to reinitiate the share buyback program because, of course, what will be happening until the consolidation is effectively, the position of BTG in terms of equity would be growing. But we have the flexibility in the strategy that we have put together and the financial planning that we have done post the amalgamation to consider share buybacks again.

Does that answer the question?

Yes, it does.

We will now take the next question, and the question comes from the line of Sander Nilsen from Fearnley Securities.

So, my first question, I was just wondering if you could tell us what is your take on the fact that TotalEnergies is leaving Block 11B/12B in South Africa? And I was wondering if this would maybe have an impact for Block 3B/4B. So that's the first question. And then I was wondering if it's possible to say something on the capital structure post the completion with Prime. On my numbers, it seems like you have a lot of capacity there to maybe take on more leverage. So, I was wondering if you have a maximum leverage target in mind? And then maybe a third question, if you could just comment on, you mentioned the overlift that impacted the financials of Prime in 2Q. What is the expectations there in maybe 3Q or 4Q or second half of the year? And then finally, the fourth question is on Equatorial Guinea. You mentioned that it is -- or seems to be an extremely attractive block. Maybe in terms of volume or what you're seeing there, it would be nice if you could elaborate a bit on that, please.

How do you want to distribute that?

Well, actually, Roger, sorry before that. Can you just repeat your first question, please?

Yes, that was probably on the overlift in Prime. I was just wondering, are you currently in an overlift or an underlift precision net in Prime. What should we expect in 3Q, 4Q?

So shall we tackle that in order then. So, the first question was what is Africa Oil's take on TotalEnergies leaving 11B/12B South Africa, and are there any implication for our Block 3B/4B? So, over to you Roger to have a first stab at that question.

Okay. Well, the first thing is that they're in 2 very distinct areas. Firstly, there is no indication at all that Total are not going to continue with 3B/4B. And the 11B/12B situation is basically a long-term issue because it's in marketing gas into South Africa. And that is a different game than dealing with, hopefully, oil in the Orange Basin. Now we are actively looking and revisiting that asset to see if we see any additional value in it. But to answer the specific question, there is no relationship between Total's decision to exit 11B/12B and our relationship with them in 3B/4B. But as I say, we are reviewing the situation with 11B/12B as we speak.

Perhaps the next question can be put to Pascal first, and that is that a large Africa Oil capital structure post Prime consolidation, there's obviously a lot of scope and that's in our balance sheet that we'll be in post that close. Pascal, any views on the sort of potential for management of the capital structure there and leverage targets that you envisage?

Yes, of course. The consolidation of Prime into Africa Oil is going to allow us to streamline our existing debt facilities. At the moment, we have 1 RBL facility, the one at $750 million at the Prime level. We have our corporate facility at the Africa Oil level, which, by the way, has been reduced to $65 million in the second quarter and extended for 3 years. It's clear that when we consolidate the 2 assets, we are probably going to keep and extend again the RBL facility at the prime level because this is to date our most cost-effective way to borrow. So, that is going to stay. The question we are asking at the moment is whether we need $750 million or less, probably less given the cash that we managed to accumulate. It's a fact that the debt capacity at the Prime level will continue to be significant and probably much larger than the $750 million. But if we want to borrow more than the $750 million, we need a use for it. And so, either we continue to grow organically in Nigeria and then we would have potential uses for that larger facility. But yes, so to answer in short, we will keep the RBL facility in place, continue to roll it over maybe at a smaller amount. We could potentially consider alternative financing sources on top of the RBL, second ranking potentially like bonds maybe at the Prime level or also at the Africa Oil level. And the corporate facility is not designed to stay in place after completion of the existing deal with BTG. I mean clearly, that facility was a liquidity buffer just to plan for delays in dividends from Prime. But since we are going to consolidate the cash flows and put a single cash flow pooling mechanism for Prime and Africa Oil, there is no intention to keep that facility in place. So, I've given a few ends here, but I think that's the framework around which we are thinking at the moment.

But the thing to say as well is that you're absolutely right, there is significant headroom should we require to increase leverage for any reason. You're absolutely right. And in certain models, we become underleveraged as we model out. But you are right. There is significant headroom in the business. So, Shahin, next question.

And with that, just one final point, just to emphasize that on the consolidated Prime in the Africa Oil cash allocation framework, there will be a target net debt to EBITDA of 1x. That would be the general rule. So actually, let's go to the fourth question that Sander asked, and that was on Equatorial Guinea. Do you want to share your views on the prospectivity on the 2 blocks Roger because they are obviously 2 very different blocks in terms of price and potential there.

The one that's highest on our focus is EG31, which is the infrastructure-led block, which is adjacent to the LNG facility, which has got significant ullage in it. And we do see some significant features on that block. And as I mentioned to you, we just have agreed with the government to extend the block slightly to the north, and we've taken an extra tranche of acreage in that area because one of the significant prospects we identified does cross what was the block boundary. And I felt it was the best interest of the company to actually get the whole of the feature, the structure in there, do the work on that and then do the full farm out because what you don't want to do is get into a unitization issue if you can avoid it. And that work is ongoing at the moment. We have all of the seismic over that. And what we're looking at, should they be successful, is prospects which are in the north of 1 TCF size is what we will be focusing on, and we believe they are in that block. Now I will say the geology is not the most simple in there. This is taking us a bit of a very careful work to get this right. So as I say, we've extended the block a little bit to the north, we've acquired, not quiet, but we've got existing seismic and reprocessing all of that and are very focused in that particular area on a very particular feature, which looks very interesting to us.