Karoon Energy Ltd

Thank you for standing by and welcome to the Karun Energy 2023 full-year results call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question via the phones, you will need to press the star key followed by the number one on your telephone keypad. If you would like to ask a question via the webcast, please enter it into the ask a question box and click submit. I would now like to hand the conference over to Mr. Julian Fowles, CEO and Managing Director. Please go ahead.

Yes, good morning, everyone, and welcome to Karun Energy's FY23 results webcast. My name is Julian Fowles, and I'm the CEO at Karun, and I have with me this morning Ray Church, our CFO, and Anne Diamond, our head of IR. Earlier this morning, we released our FY23 results, our annual report, and this presentation to the market, which we are now going to talk through. I'll focus on a number of key slides rather than go through every single slide in detail. given quite a bit of the information was already released to the market with the Q4 results announcement last month. Noting the disclaimer on slide two, I'll start with the highlights on slide four. FY23 was a year focused on executing the strategy we had developed for Karun's growth. Operationally, this was about growing profitability through growth in production from the intervention in patola programs, while also evaluating the potential for a neon project at the same time as building capabilities within the company. The result was that we achieved substantially higher production, which increased by over 50%, and we had costs at the lower end of our range. Importantly, we also delivered the program safely, improving on our FY22 lost time incident rate and our total recordable incident rates. Our underlying NPAT rose 70% despite a six-week unplanned production outage and a 5% lower realized oil price than in FY22. NEON progressed with good results in both of the control wells and an increase in booked 2C contingent resources, while our Bona 2P reserves also increased. We largely achieved our annual sustainability targets and continue to seek further ways to reduce direct emissions in our operations. We also signed a term sheet for direct equity in a Red Plus offset project. We finished the year in a strong financial position with no further draw on our debt facility, despite a very capital-intensive 12 months. With the promised growth in our production now delivered alongside continued strong oil prices and a largely fixed cost base, we are in an excellent position to continue to seek further value accretive opportunities through M&A in addition to the potential organic neon project. Noting that safe and reliable operations continue to be at the core of what Karun aims to achieve, slide 5 goes into more detail on our HSSE performance. I'm pleased to report that we saw meaningful improvements in LTI and TRI rates despite the 90% increase in hours and the high degree of complexity of the work that we undertook. There is still room for improvement, especially in the area of process safety, where a gas leak led to an unplanned shutdown of our production operations for six weeks from late March. I would emphasize that safety continues to be a key focus for the board and the management team. I'll come back to our operational performance a little later in the presentation, but I'll hand over to Ray now to talk in more detail about our financial results.

Thanks, Julian, and good morning, everyone. I'll also speak to the highlights of the slides and try not to repeat things covered by Julian or covered in later slides. Slide 7 provides the financial highlights of continued strong delivery from production and sales growth over a relatively fixed cost base. The resulting EBITDA growth after payment of the interest component of capitalised operating leases and income taxes means our operations generated $271.8 million of cash. which, when combined with our opening cash position, fully funded our $356.2 million spend on CAPEX and contingent payments, so that no debt draw was necessary through this CAPEX-intensive year. Moving on to slide eight, I'll highlight a few details on the income statement. Increased revenue was driven mostly by production growth from the Bona intervention and Patola development programs. $212 million of additional revenue were due to higher liftings, partially offset by realised prices for Bona crude, which were marginally down as global inflationary concerns cooled Brent prices in the second quarter of 2022, and China temporarily focused on Russian imports in the first quarter of 2023. The combined result was a net total revenue increase of about $181 million. Production costs were impacted by the effects of AASB-16 emissions, to the FPSO operating lease, and I'll provide more colour to this in a few slides. Royalty and other government take grew by $25.2 million. This reflects the higher production levels, as well as $14.6 million associated with the temporary export tax, which applied from 1st of March to 30 June 2023, and fortunately has not been extended. Finance and interest costs included $3.5 million of debt facility costs, mostly related to establishment and facility fees, up from $1 million last year, and $2.4 million unwinding of discounts in the Bowen restoration provision, up from $1 million last year. The effective tax rate is approximately 36%, slightly higher than the Brazilian tax rate of 34%. due to non-deductible share-based payments and Australian costs, as well as appreciation of the Brazilian real against the US dollar across the year. The resulting FY23 underlying net profit after tax was $145.9 million, or up 70% on the prior year. Slide 9 illustrates the peak capex now behind us in FY23 as we transition to a capital light phase. Looking ahead, we still expect sustaining capex to average less than $10 million per annum. I'll move on to cash flows on slide 10. As you can see, sales proceeds exceeded $550 million in the year, which then funded $281 million of operating costs, taxes, and other running costs, leaving a surplus of $272 million operating cash, which covered the contingent payment and the majority of CapEx outflows, and required only $83 million drawn from opening cash. This reflects the benefits of the increased production, a relatively stable cost base, and a higher oil price environment. and no additional debt was drawn in the financial year. I would also like to note that approximately two-thirds of the contingent consideration payment paid in January each year is deductible for Brazilian tax purposes in the calendar year of payment, which should result in savings of income tax due in the first quarter of the following calendar year. Staying with cash and debt, slide 11 provides the total liquidity movement between balance dates. Undrawn facilities will be cancelled at the end of September this year, and we're currently in advanced stages of negotiations with lenders on refinancing plans. Appetite and support from both our existing lenders and potential new lenders is good, and we'll update the market when that process is complete. Conceptually, we expect to create a funding package that aligns with our plans to fund further growth at terms no worse than our current facility. Moving to the application of cash, slide 12, reflects our priorities for allocation of capital. First priority use, of course, is safe, reliable and sustainable business operations, which includes meeting our emissions reduction commitments, then ensuring we fund our sustained CAPEX needs and existing commitments, followed by debt service and management of balance sheet health. Cash available after these priorities will then be allocated on economic merit to pre-development of the NEON discovery, acquisition opportunities and dividends or return of capital to shareholders. This priority waterfall is of course aimed at maintaining liquidity and balance sheet health while supporting growth as we build scale to higher future levels of operating and long-term free cash flows. Moving to slide 13, as I previously mentioned, the uplift in our reported FY23 production cost is largely driven by AASB16 treatment of operating leases, reflected in depreciation and amortization and interest on lease liabilities capitalized. This slide shows production costs on a pre-AASB16 basis, which is how unit costs are expressed by our industry peers. As you can see, on that basis, underlying gross production costs declined year on year by $7 million from $118 million to $111 million, while unit production costs fell 38%. This $7 million production cost reduction included a number of factors. Lease and related costs were $13 million lower due to the extended FPSO shutdown. and $4 million of other year-on-year savings related to FY22 local content levies no longer applicable as the production period passed 10 years and COVID-related costs were not incurred in FY23. This was partly offset by $6 million higher logistics, chemicals and manpower costs driven by year-on-year increased FPSO production activity and about $4 million inflationary increases. I should point out that AASB 16 adjustments in FY22 did, in fact, match on a pre- and post-AASB 16 basis. So the table is, in fact, correct. Finally, slide 14 provides a reconciliation to statutory NPAT and EBITDA. Consistent with our past approach, non-cash movements in fair value of continued consideration have been removed, as have FX movements. The $25 million in non-underlying tax benefits in statutory impact relates to the impact of currency movement on the value of future tax deductions on Karim's balance sheet, which is re-measured at each balance date. Thank you, everyone. I'll now hand back to Julian to talk more about strategy and outlook.