Tullow Oil plc (TLW) Earnings Call Transcript

Good morning, everyone. This is John Hamilton, Chief Executive Officer of Panoro Energy ASA. Welcome to this morning's webcast. Yesterday, we at the pleasure of announcing a transformational transaction for Panoro, which we believe is creating 1 of the world's largest and leading independent African E&P companies. We're absolutely thrilled to have announced this yesterday, and I'll take you through some slides that tell a little bit the story of how we think this sets Panoro for the future. Today, I'm joined by our Chairman, Julien Balkany, our Technical Director, Richard Morton, our Projects Director, Nigel McKim; and our CFO, Qazi Qadeer. Next slide, please. As a reminder, for those of you who haven't used the webinar before, you can ask questions by raising your hand, as shown in the left with the arrows. And you can also put in written questions into the question pain that you see down there on the bottom left, and we will be taking questions at the end of the presentation. Next slide, please. So I'd like to talk to you first about the transaction that we've done, and then I'll take you a little bit to the outlook of the company as well at the end before taking some questions. Next slide, please. So this is a summary of the transactions we've announced yesterday. These are truly transformational acquisitions for Panoro. These were transactions negotiated time when oil prices were in the 40s, sometimes in the low 40s, sometimes in the mid-40s. But the entire environment in which this transaction happened and the negotiations happened at a time in a very, very different oil price environment that we now fortunately find ourselves in now. We've announced yesterday, the $140 million acquisition of 2 assets from Tullow Oil plc. We have a 14.25% working interest in a Ceiba Okume Complex in Equatorial Guinea and an additional 10% in Dussafu, which as for those of you who follow us will know that we already have a stake in, and this more than doubles our stake in very exciting Dussafu block. These transactions were negotiated at an effective date of the 1st of July. Tullow Oil, for those of you who don't follow it, Tullow Oil is a very, very famous E&P company here in London. And they have an over-levered balance sheet. They've had to announce a series of disposals. They sold about a year -- about 8 months ago, they sold an asset in Uganda to Total. And that was really kind of the beginning of this whole thing. They needed to sell a few more assets as well to delever their balance sheet. And we were able to identify these 2 assets as things to talk to Tullow about and negotiate with them. And we very much structured our deal, very much along the lines of Total and Total's purchase of a Tullow asset as well where you offer some money upfront and you offer some contingent consideration as well if certain economic and technical parameters are met. And that's exactly what we've done here today. The assets themselves, they're extremely high quality, we believe. They're non-operative for Panoro. So -- but they're a core area. We're acquiring about 25 million barrels of new 2P reserves. With production, which we anticipate to be around 6,900 barrels a day in 2021. There's lots of upside. Everybody who follows us knows, there's lots of upside in Dussafu, but in Equatorial Guinea, there's also significant potential, these are low operating cost assets with excellent operators. In the case of EG, the -- these private equity-backed operators were looking to extract every bit of oil that they can. This transaction has been financed through an equity issue, which we announced yesterday, $70 million, which was multiple times oversubscribed we announced this morning and a debt facility of up to $90 million. There are a number of metrics on the right here. I would simply point out that the operating cost of these assets are very low. The acquisition cost for 2P barrel or 2P plus 2C barrel are very, very low, a very attractive metrics. We have a very, very short payback on these. If you exclude CapEx that we're going to be spending, payback is just a little over 2 years. If you include all the CapEx over the incentive over the next couple of years, it's probably closer to 3. But we have very, very long reserve life to counterbalance that. So these are long-life assets. Next slide, please. We have a couple of slides which show what we think this does to Panoro when we say transformational. We have 6 different -- 5 different metrics here. One is the number of fields. The production, 2021, the 2P reserves, the 2C resources and the operating cash flow. And these are things that we've calculated based on our assumptions, the operators assumptions, economic assumptions. But as you can see, we are going to be about 4x as much production this year than we would have been otherwise, probably 3x many 2P reserves, about 8x as much contingent resource and close to 6x the amount of operating cash flow than we would have been before these transactions. So we have a situation here where the company is truly transformed and we're fully financed for all capital expenditure in Dussafu Phase 1, Dussafu Phase 2, Equatorial Guinea. Everything is fully financed, ramping up to a production of 12,000 barrels a day in 2023 as Hibiscus/Ruche comes online. Next slide, please. Here are a couple of different ways of showing that same transformation. Here's what our production growth looks like over the coming years, 2021, we should be doing north of 9,000 barrels a day as a group, Panoro, including our existing assets. Rising to 10,000, the following year. And then as Hibiscus/Ruche comes online, going up well above 12,000 barrels a day. And this really puts us into a different league than we were in before, and it also puts us in a very, very nice lead in terms of our larger peer group internationally that focus on Africa. The charts in the middle, in the blue show free cash flow in the blue bars, showing you what's happening free cash flow after CapEx. So this is after all the capital expenditure, we're still generating a huge amount of free cash flow even this year. And when 2023 comes along with the Hibiscus/Ruche comes online in Gabon, we really start throwing off cash flow. The blue line is our indicative year-end cash position at the end of each of those years. And as you can see, we're going to start building up a material cash position. We're going to be net cash, so all debt effectively going on a net basis in 2023. And what that does is that sets us up to be a dividend payer, a substantial dividend payer potentially. Certainly, if oil prices stay anywhere like they are now. These graphs here are shown on an assumption of $50 oil. We're currently at $60. So there's even upside -- a considerable upside to what I'm showing you here today. But again, this is putting us into a position where we should be able to finance all CapEx and pay dividends and pay down debt and still have money left over. Next slide, please. A little bit about the financing that we did. We announced yesterday a $70 million equity private placement, which was multiple times oversubscribed, an extremely strong response from existing shareholders. We were able to attract a number of very high-quality new investors into the company. We're very, very pleased to have them on board. We financed this also with $90 million of a committed debt facility with Trafigura, this is a typical type of loan facility for oil and gas companies. And what's important to note here is that there is no longer term oil price hedging requirement as part of this loan. So we don't have to lock up the oil price, even though it perhaps is more attractive now than it was. When we negotiated this loan, when oil was even in the mid-40s, they were not requiring us to do agile hedging. Part of this facility, we also have a $20 million working capital facility that just allows us to manage cash flows in between lifting of crude, so just managing our cash flows a bit. They've also offered us a $50 million accordion option if we would ever want it if we would find another asset that we would think might be attractive. That we have significant firepower through this financing and lots of comfort and cushion and growth within this financing as well. Next slide, please. A couple of brief words. I do have some of our technical team on the call, and maybe if there are any particularly technical questions, we can ask those in the Q&A session. So I just have 1 slide on the Ceiba Okume Complex, this is a new asset. For those of you who follow us, who already know Dussafu quite well. This is a series of fields, which were discovered already some 20 years ago. They are operated by Trident Energy, which is Warburg Pincus backed vehicle, ex Perenco team. And our partners in this are Kosmos, which are another big listed E&P company, global E&P company, been very, very competent private equity-backed oil companies who are seeking -- who bought these assets from Amerada Hess a few years ago and are really seeking to exploit these assets to the best of their ability. Production in 2020 was about 34,000 barrels a day gross, but we believe there's potential to get up to about 55,000 barrels a day in 2023, and we believe that the current partners are committed to try and achieve that growth. The operating costs are very low, about $13 a barrel OpEx, very low CapEx intensity on these. So we're not going to be spending tons of money. As we go along here, it's moderated. So about 100 million barrels of gross 2P reserves left, but the real upside comes from the 3P and the 2C resources. So this is a good mid-life asset where we believe that the upside largely resides on the 3B and in the 2C resources here. And again, we have highly proactive operators. So these are private equity-backed operators who are really looking to make the most of this asset, and we couldn't be happier to be partners as Panoro along with such respected peers. Next slide, please. So a couple of summary slides. Again, there's a more extensive slide pack that was attached to the press release yesterday that we made and will be loaded up on to the website shortly. So I'm just concentrated on a couple of the highlights, and I have a couple of slides just to finish off the story here. Next slide, please. We have active news flow, we believe. I think it's going to be a very, very busy 6 months even. But beyond that, even, I think you'll see that there's plenty more to come. But in the next -- during the course of this year, we will be drilling in Gabon, the production well [ DTM-7 ]is the final production well of the Tortue Phase 2 project and bringing that and the DTM 6-well online. So in the middle of the year, we should see a boost in production in Gabon. We'll, of course, be reporting how that goes. But that project is underway. We'll also be drilling excitingly an exploration well in Hibiscus. For those of you who follow us, Hibiscus was a material discovery that we made about 1.5 years ago. Where we took something that was -- we thought was about 10 million barrels. It became about 44 million barrels. We now think the structure could be quite a bit bigger, and we have a well that we anticipate really probably as early as April to test out that larger upside. So there's truly another transformational operational activity, which is happening in about 2 months in Gabon, and we're very excited to have doubled down on our bet on that well. The partners are also discussing perhaps a second exploration well, perhaps in the third quarter, perhaps again into the Hibiscus structure or an alternative location being debated. But we think there's a good chance we'll even have a second exploration well in the third quarter of this year. In Equatorial Guinea, we have a busy program with the operator, boosting production, as I noted, with 3 infill production wells coming in during the middle part of the year. So hopefully, we'll have some press releases about the activities there and hopefully, some success in boosting production in that asset. In Tunisia, we continue to pursue our workover activities we did in the past. And we see that as an ongoing program and ongoing attention being paid together with our partner, ETAP, in terms of trying to maintain and boost production in Tunisia. [ Saloom ] well -- we're still pending some approvals there that looks like it could happen in perhaps in the third quarter. And we also have a couple of other things happening. We have the PetroNor dividend. We have sold our Nigerian business to PetroNor E&P, another Norwegian listed entity. Who are paying us $10 million in their shares. We intend to dividend that to our shareholders as at the record date when we announced that. And that's subject to regulatory approval still that we could have in the second quarter our first dividend, which will be a scrip dividend. The cash dividends, you have to wait another 2 years for, but a scripted dividend coming. In South Africa, we're working together with Africa Energy to close out the approvals for the farm-in of that well in South Africa, we would hope that that's something we can drill in the second half of this year. So again, for anybody who is a shareholder of the company or thinking about becoming a shareholder company or just watching the company, I think you're going to see us with a very, very busy year. Next slide, please. This is really a summary slide. Sorry. I lost some, there we go. The summary slide of what we think this transaction does for us. We believe it has transformational growth where we're immediately multiplying the size of our company by 3 or 4x on a production reserve basis. We're adding new fields of diversification of wells of reservoir of country, which can only benefit a company like ours. We hope to be moving towards being a 12,000 barrel a day producer. So we have growth coming here. We have excellent metrics on these deals. These acquisitions are metric are accretive on pretty much any metric that you can find, I challenge you to find 1 where it's not a payback time is going to be very, very quick on these on a 2P basis alone. And 1 of the very interesting things about this transaction is that actually we're not taking on buildings and people and staff and teams. We're taking on nonoperative positions here. So if Panoro can maintain, it's relatively small corporate footprint and cost base despite the fact that we've tripled the size of the company or quadrupled the size of the company, it is very attractive to us. We believe the assets we bought are attractive, low OpEx, low breakevens, long life in our core area, and they're very complementary to each other in terms of when the cash flows come. They really -- 1 plus 1 is more than 2 here in terms of the way that the cash flows of these 2 acquisitions marry up. We believe there's upside in both of these assets we produce, both production growth and exploration opportunities, and we have the quality operators and partners to help exploit that. And finally, we really believe that we are positioning ourselves to be a very, very sustainable company in many ways. But importantly, financially, where we're fully funded. We're going to be in a position to pay dividends as soon as we possibly can. And at the same time, maintaining a growth story. So we hope we position ourselves now to be what all E&P companies I believe strive to be, which is a dividend pain, but still having a growth story to us. And we believe that these transactions position us for that. So that concludes my speech, I think the next slide is just to remind you if you would like to ask a question, you can drop a question into the question panel. Or you can raise your hand and we can try and get you verbally. My colleague Qazi is kindly going to field questions. And between us, we will try and answer those questions. So I turn it over to you guys. If you have any questions. Qazi, you there?

Yes, John. [Operator Instructions]

I think I see 1 written question here, Qazi, if you'd like to take that one?

Yes, please. I have a question from Fredrick [indiscernible] says, can you say something about how and when you started negotiating with Panoro?

Sure. Well, we know Tullow extremely well in this company. They're people that we've known for many, many years, and myself doing Tullow for 20 years, other people associated with Panoro, are very familiar with Tullow. And so we've obviously seen their stated disposal ambitions. They're looking to sell $1 billion worth of assets. They needed to delever. This is a very clear message from them. We saw the Total transaction. So we really thought that we had an opportunity. We had the access, and we have the creativity to approach them back in the summer. So during lockdown, we approached Tullow and started the dialogue with them around where -- which assets we thought were ones that they could easily sell that were readily sellable and were attractive to us and that made sense for Tullow perhaps to dispose. So ones maybe where there was some CapEx coming up on or ones that structurally within their company made sense for them to sell other assets might have been harder to sell. So we really did our homework on that and started the dialogue with them, which started with 1 transaction and ended up being 2. And I think the -- again, the oil price environment was quite different when we're doing this. And thankfully, the oil price has now rallied. But the reason that the company has worked so well together is, I think that Tullow recognized we could move fast that we are serious people that we have the right technical resource to evaluate these opportunities, that we have the right financial muscle shareholder base that was supporting our growth ambitions. And that they saw that by doing 2 deals with us rather than 1 with 1 party and 1 with another party that they could actually be extremely efficient and do this quickly. And that's exactly what happened. And we both Tullow and ourselves set out to do it that way. And very, very pleased that it's worked out that way. This has been an excellent collaboration. We think they've done something that makes sense for their stakeholders. And we've done something that makes a lot of sense for our stakeholders. So that's kind of how it came about. And started with a small conversation, ended up being a big one. We're just very pleased with that, that happened. I think there's a question here, Qazi around is Dussafu business development fully funded? Is that right? I think so.

Yes.

So there's a question about the Hibiscus/Ruche development in Gabon. As everybody's followed, we have -- we're producing oil in Gabon in Tortue. We have the Hibiscus and Ruche discoveries. We're calling the next phase Hibiscus/Ruche, which is development of 6 wells over in the middle of the Dussafu block that is something that's been well flagged. It was put on hold for a little while during COVID. That will be starting back up. We're hoping to achieve first oil there in the fourth quarter of 2022, so about 1.5 years from now. And that is -- that project is starting back up again. The joint venture purchased a jack-up rig, which will serve as a wellhead platform. Long lead items are being procured. We're drilling an exploration well in advance of that, just to see whether it might change our ideas exactly about where to put the development wells when they come. The question specifically here is about to whether we're fully funded. And yes, the whole idea behind this transaction was not just have enough money to buy these things was to make sure that the money and the cash flows it came from these assets would effectively be self-financing the business, which they do comfortably even at considerably lower oil prices. So the question is around our fully funded position for the next phase, 2 phases, frankly, of Dussafu. So there's Hibiscus Phase 1 and probably Hibiscus Phase 2 as well. And the way we see it based on production and economic assumptions. So we're comfortably financed for all of that and still be able to pay a dividend. Okay. There's nice congratulations I see in the -- thank you very much. Qazi, are there any raised hands? Okay. Well, I think that, that probably concludes things. So again, on behalf of the team here, have worked very, very hard over the past 8 months. This really taking everybody from our Board. Straight through every staff member we have been involved in this transaction. We worked very hard. We think this is an extremely positive transaction, extremely accretive transaction. That I think will benefit all Panoro stakeholders for many, many years. It really has set the company on to a completely different trajectory. We will get lots of attention, I hope, in the stock market, but also just as importantly in some ways within the industry in which we are now at a different table in terms of our ability to be entering in other discussions in terms of our visibility within our industry. And we would like to thank all of you on the phone. We'd like to thank all of the shareholders who supported us to get here. Because we think it's all been worth it. And these transactions really, hopefully, should be a nice catalyst for us to continue to grow. We think, again, the new service is going to come, we'll have to pull us even further. So unless there are any further questions, which I don't see at the moment, I would like to thank you very much.

I think Stephane has it been raised, John, sorry?

Does he? Okay. Sorry. Okay. Stephane, how are you?

Congratulation for today. That's great. I had a question on EG, when Trident's bought the asset a few years ago, I think there were some expectations that more than just stopping the decline, they would start growing the production. But for some reason, this has not happened. Why do you think it's different this time around? And related to this, what sort of influence do you have on your operator to motivate them to invest and grow production if you feel that they are not acting according or whatever reason?