Karoon Energy Ltd

Thank you for standing by and welcome to the Karoon Energy Limited 2024 full year results. 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 wish 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.

Thank you, Mel. And good morning, everyone. And thank you for joining our 2024 full year results webcast. My name is Julian Fowles, CEO at Karun. And I have with me this morning Ray Church, our CFO, Marco Brummelhaus, who leads Karun Brazil, and Anne Diamond, our head of IR. Earlier this morning, we released our 2024 full-year results to the market, alongside an announcement that we have signed a sale and purchase agreement to acquire the Bauna FPSO from the Altera Ocean Joint Venture. We shall discuss the FPSO acquisition a little later in the presentation. Now, moving on and noting the disclaimers on slide two, I'll move straight to slide four, which provides an overview of 2024. It was a challenging year in many ways, which saw a decline in our share price as we failed to meet our production targets, both at Bohuna and Hudat, and our safety performance was below our expectations. We'll discuss how we are addressing these issues and the actions we are taking during this morning's presentation. 2024 saw us deliver annual production of 10.4 million BOEs and sales revenue of 776 million US dollars, both some 13 to 14% up on 2023, while our underlying NPAT of $214 million was a slight improvement on 23. We have moved NEON into the select phase with a decision to potentially move into feed due in April this year. Our exploration program at Houdat delivered two out of three discoveries, and we have defined a number of attractive infield opportunities, two of which subject to various approvals we hope to drill in Houdat in the second half of 25 and early 2026. Potential development options for the two new discoveries are being investigated and we expect one of them to reach FID by early 2026. We ended the year in a strong financial position with net debt of less than $10 million and liquidity of $681 million. We formalised our capital returns policy and we paid Karun's first ever dividend of 4.496 Australian cents per share, now supplemented with an unfranked 5 cents final dividend. In addition to announcing two $25 million on market share buybacks. The dividends represent a payout ratio of 23% of 2024 underlying impact. And in January, we also announced the intention to buy back a further $75 million of shares over the course of 2025. Now moving to slide five. We've completed our strategic review, which confirms our focus on strict capital allocation to grow shareholder returns with a focus on safe, reliable, and low-cost operations in our core assets in Biona and Houdat. This slide outlines the strategic areas of focus to ensure we maximize value for our shareholders with Biona reliability and Houdat production maintenance through a value accretive infill program, the first priorities. These will ensure we have a solid platform to deliver shareholder returns. Projects such as NEON and the new Houdat discoveries must meet strict economic hurdles and will be evaluated both in the short term and longer term against capital returns and our balance sheet capacity. Slide six summarizes our safety and environmental performance during 2024. Our performance here was also disappointing and well below the standard we set ourselves. Two LTIs and two medical treatment cases, as well as nine high potential incidents, is not where we should be. We know we can achieve the outcomes we want, but we have further work to do, which will be facilitated by our ownership of the FPSO and a renewed focus on the basics, such as Karun's golden safety rules. On the environmental side, no spills were reported during 2024. Now Marco will go through our operational performance in Brazil and the status of the growth opportunity at Neon. But firstly, I'll hand over to Ray to address our financial results. Thank you, Julian.

Good morning, everyone. I'll move right into slide eight to cover a few highlights of the 2024 results. Then I'll cover earnings, cash flows, and the balance sheet in a little more detail, and then expand on the capital allocation disciplines mentioned by Julian. As Marco and Julian will elaborate, Despite the operational challenges in 2024, production increased to 10.4 million BOE, up from 9.1 million BOE last year. Revenues moved in line with production, with 16 offloads at Bona in 2024 versus 18 in 2023, more than offset by full year of sales at Houdat, concluding the year with sales of $776.5 million versus $680 million in 2023. Underlying EBITDAX increased by 57.9 million or 13% year-on-year as the higher margin BOEs from Houdat offset the margin reduction at Bauna, which was driven by lower production on a largely fixed cost base. The Houdat EBITDAX margin of 73% held the total Karoon EBITDAX margin stable around 64% year-on-year. Pre-AASB16 operating cash flow was 3% down year-on-year at $395.2 million, funding similar year-on-year CapEx investments and contingent consideration, producing $176.6 million of free cash flow from operations, which is comparable with 2023. This reflects the diversification to two producing assets and the addition of high-margin production from Houdat. As you can see, we closed the year with $8.8 million in net debt. Turning to underlying earnings on slide nine, revenue growth was mostly driven by volume, which delivered $107 million higher revenue, offset by a $10 million revenue reduction from lower average realised prices. Transportation costs increased from $7.8 million to $23.3 million, reflecting $11 million relating to a full year of pipeline tariffs in the USA and $4.8 million additional costs in Brazil, where an additional seven offloads occurred via ship-to-ship transfer. This export alternative involves delivering crude to the port of Santos for transfer to a larger tanker rather than direct offload at the FPSO and generates a net realised price improvement to Karun. Production costs increased by $22 million year-on-year, which is primarily a reflection of $29.8 million full-year OPEX for HUDAT, $4 million in increased logistics contract rates at Bayona, $4 million of non-recurring logistics and support vessel costs associated with the FPSO anchor chain repairs in December, offset by a reduction in O&M contractor costs through contract incentive mechanisms. Royalties and other government take are down year on year as $14.5 million of Brazil export tax occurred only in 2023. And the remaining $16 million relates to year on year reduced production at Baona. Corporate and other costs grew by $8 million, including 4 million additional overheads in USA, 1 million inflationary impacts and $3 million of non-recurring HUDAT integration costs. leading to an underlying NPAT of $214 million, or 3% up on 2023. Our reconciliation between underlying and statutory NPAT and EBITDA is on slide 28. And slide 10 provides a reconciliation from statutory unit operating costs to pre-AASB16 unit OPEX mentioned in the rest of this material. And I've just covered the major movements on slide nine. I'd only mention here that the unit production cost of $13.60 per BOE is a blend of $15.96 at Biona and $8.46 at HUDAP, which includes Karoon's insurance costs. Moving to slide 11, as I've already flagged, EVA-DAX of $492 million converted after taxes and net finance costs to 395.2 million of operating cash flow, including FPSO lease payments. This provided adequate funding for the Petrobras contingent payment, CAPEX investments in HUDAT development and exploration wells, and license payments in Brazil. Bond costs and capital returns, leaving $95 million free cash from the year. Moving to debt and the balance sheet, slide 12 outlines the funding work completed through the year and change in net debt, which, as we said, has now improved to $8.8 million from $103.7 million at end of 2023. We accessed the US 144A bond market and turned out our debt. supplementing the RBL debt facility for flexibility in capital allocation. We finished the year with strong liquidity, and this sets up the balance sheet in readiness for the extended shutdown, the Flotel and SPS 88 campaigns at Bauna, contingent consideration, FPSO purchase and capital returns, much of which is expected in the first half of 2025. Moving to slide 13, We've embedded the revised capital allocation framework such that all investments will be evaluated and prioritised after competing within a total shareholder returns lens. This is not a new framework and is provided for clarity of strict adherence to the allocation framework after meeting non-discretional spend and maintaining a strong and flexible balance sheet. Thank you, everyone. I'll hand now to Marco to cover our Brazil asset.

Thank you, Ray. Now turning to slide 15, the operating performance of the Bona project. Bona's 2024 production was at some 7.5 million barrels, significantly below 2023 levels, mainly as a consequence of lower FPSO uptimes due to various topside issues experienced on the vessel, augmented by well SPS 88 being offline for all of the year, plus the reservoir's natural underlying decline of some 15% year on year. Overall, The realized FPSO efficiency was some 8% below the midpoint of our longer-term target level range of 90% to 95%, with ensuing missed revenues of over $50 million at the then-pervading oil prices. To address this, we have commenced a major maintenance campaign that targets executing a significant portion of the backlog of maintenance activities built up during and post-COVID times, while cementing the topside equipment redundancy levels on the FPSO. The maintenance campaign is being executed with the deployment of Flotel and is expected to take approximately 60 days, during which time the FPSO will be shut down for up to 30 days. The Flotel is currently fully manned and on station, having arrived there on February 11. For 2025, an FPSO efficiency in the 88% to 92% range is being targeted. Meanwhile, for SPS 88, we have secured the live workover rate complete the work over the well in the second quarter of 2025. SPS 88 is expected to be online again before the middle of the year. Now turning our attention to NEON on slide 16. The NEON Foundation project, whose resources were discovered by Karun and now form an exciting organic growth opportunity, entered Concept Select in March 2024. Contingent and prospective resources for NEON and NEON-West respectively, when taken together with the adjacent and Goyal's fields discovered from source volumes amount to around 100 million barrels of oil at the 2C2U level. The NEON team are close to completing the interpretation of reprocessed 3D seismic over NEON and NEON-West. In addition, alternative development plans, including well configurations and topside options are being investigated. Next milestone for Neon will be the Zishigate 2, which is slated to take place in the second quarter of 2025. At that time, Haroon will decide whether to progress into the defined phase, which would include front-end engineering design work. Moving forward entails drawing a basis for design specifications, developing detailed cost estimates and conventional project execution plans, executing integrated procurement planning, and negotiating a slate of commercial agreements. The farm-down process to be run in the second half of 2025 is seen as a prerequisite to potentially taking a final investment decision in the first half of 2026. Many thanks to all. I will now hand back to Julian for updates on our assets in the US.

Thank you, Marco. Now to the US on slide 18. Gross production at Houdat was 11.8 million buoys, which translates to 2.9 million buoys on a Karoon net revenue interest. This was lower than the original guidance due to delays in bringing new wells online, production facility bottlenecks, facility uptime below historical averages, and above average impact of the hurricane season. Houdat is a midlife asset, but the joint venture has already identified a number of attractive infield targets which may help maintain rates and offset natural decline. Of these targets, two side tracks are planned to take place in the second half of 2025 and early 2026, pending joint venture approvals. The operator log is undertaking detailed debottle making studies, which will be complete in the middle of this year, and will indicate how best to optimize production and processing capacity on the FPS, as well as improve reliability. This work is a vital first step in understanding how best to partially mitigate the natural reservoir decline over the longer term. Moving to slide 19, the HUDAT East and South drilling successes added significant volumes to our contingent resource portfolio with 17.7 million buoys of 2C on a Karun NRI basis. Development concept studies on these discoveries are ongoing and we are expecting the first FID by early 2026. Given their size and proximity to existing production infrastructure, We believe that they both have the potential to be highly value-accretive developments. Now, slide 20 outlines the resource additions from HUDAT East and South, as well as noting the de-booking of prospective resource from the unsuccessful third well at HUDAT West. The results from East and South were above our pre-drill estimates, with contingent and prospective resources from these two increasing 41%. Now moving to our sustainability programs on slide 21. We have realigned our climate strategy to be net zero by 2050. The shift reflects the current portfolio of Karun and the realities of Karun's scale and resources. It is a pragmatic and financially responsible approach that is aligned with our Australian and international peer group. We intend to increase our commitment to the communities in which we operate by planning to double our investment in voluntary social projects from 2025 to 2027. Now, before I finish with a summary, I'd like to provide some further details on the Bona FPSO acquisition, which we announced earlier this morning. So if we move to slide 23. Today, we reached an agreement with Altair and Oceane to acquire the Bona FPSO. The acquisition is a key strategic move by Karun, allowing us greater control of a critical piece of our infrastructure which has underperformed during 2024. The acquisition won't impact the current and near-term activities on the field, which Marco has already outlined. It is a part of Karun's objective to re-establish reliable and predictable operations at Bona and to improve our safety performance. Owning the FPSO will allow us to lower our operating costs and directly improve reliability, which should enable us to convert a portion of the Bowen Project contingent resource into reserves, subject to further technical and commercial evaluation. More reserves means longer production and deferral of abandonment and decommissioning liabilities to potentially the late 2030s. Now let me go through some of the economics of the acquisition in more detail on slide 24. The acquisition is for a price of $115 million plus transaction costs of around $8 million. The transaction is well above our internal hurdle rates of mid-teens post-tax IRR and has a four-year payback period. We expect production cost savings of 4 to 6 US dollars per barrel starting in 2026. These savings come from the acquisition ending the finance lease, which was around about 50 million dollars in 2024, partly offset by a potential step up in the O&M contract rates once we tender for a new operator. As the owner of the FPSO, we expect to take on an extra $5 million per annum in sustaining capex for Bona. Our business case assumes $80 million in capex from 2026 to 2028, and we also expect further capex in the early 2030s, with both of these programs subject to further definition of the balance of this year and next. Slide 2025 provides a timeline for the three key milestones following today's announcement of the signature of the SBA. The first is transaction close in late April 2025, and the next milestone will be in mid-25 when we expect to select a new O&M contractor. We are targeting that the new O&M contract will be more directly aligned with Karun's safety, field operational and ultimately shareholder return objectives. We expect a six to nine month transition period between Altera Ocean and the new O&M contractor. And by the end of 2025 or early 2026, we expect the transition to the new contractor to be complete. Now, lastly, moving to the summary on slide 26. 2024 was without doubt a year where we've met significant challenges during which Karun did not perform as well as we expected or as well as we had promised. We're facing these operational challenges head on, both in Bo'una and at Hudat, and we are determined that 2025 will see our performance return to the levels we all expect. Our priority is safe and reliable low-cost operations that will provide strong free cash flows to allow us to maximize the near-term value of our high-quality producing assets and create the platform to unlock the longer-term value in our organic growth opportunities at Neon and Houdat. This will allow us to continue to provide predictable returns to shareholders in line with our capital returns framework, bolstered by a robust balance sheet and low net debt. Our 2025 guidance is unchanged at this stage, but we shall provide updated guidance once the FPSO transaction is close to closing in the second quarter of 2025. Now, Ray, Marco, Anne and myself will be very happy to take any questions, first from the telephone lines and then, if there are any, from the online facility. And I'll now hand back to the moderator, Mel.

Thank you. If you wish to ask a question via the phone, you will need to press the star key followed by the number one on your telephone keypad. If you wish to ask a question via the webcast, please type your question into the ask a question box. Your first phone question comes from James Byrne with Citi. Please go ahead.

Morning, team. Congratulations on the transaction. Just to be crystal clear, do the high teens or potentially low 20s returns to this transaction, is that predicated on the monetization of the 2C or does the acquisition stand on its own legs just from the 2P?

Look, we've got some work to do to work this through in terms of the booking of 2C resources, James. Ray has worked through the economics case for this, and it's probably best if I hand to him to provide you the details.

James, I can make that simple for you. The only connection is the deferral of abandonment out to the end of potentially 2038. It doesn't rely on economics of the field itself. Obviously, those workovers at the time would have to justify themselves on their economics. But at the modelling, we expect that to occur subject to all the usual variables of oil price and other sensitivities. So it's not, we haven't, countered that in the economics, the value of the field extension, but we have deferred the abandonment cost. And then we've made some assumptions about capital required to maintain the vessel and make it life last to the end of that field. So there's costs out and then deferral of abandonment. Does that help?

Yeah, thanks. And then, yeah, my follow-up question was just about those costs. The $80 million that you've quoted for the life extension, how certain are you on the scope that underpins that estimate? And then for the workovers in the early 2030s, my recollection is a lot of that subsea infrastructure is rated to 2032 and if you wanted to go to say 2038 by monetizing that to see that there would be work required in the subsea what kind of scope of cost do you think that we should assume when we're looking at you know the accretion analysis today in our models we'll need to make an assumption there and a steer on the magnitude to be super helpful

Yeah, look, so we've obviously done due diligence on the FPSO and we know the subsea infrastructure and the wells very well. We believe our number of around $80 million in that 26 to 28 timeframe will be refined through this year as we undertake further work on the FPSO itself. In terms of the early 2030s, I would be assuming a number about the same order of magnitude would be appropriate for that campaign as well. But as I said during the presentation, we will refine those numbers during 2025 and into 2026. But for the time being, James, I think those are the appropriate numbers to go with.

Sure. And I think James is asking about the ESP work.

Look, there's, yeah, we've always flagged that the ESPs, which exist in two of our wells, the electric submersible pumps, those will require replacement at some stage. We target that or we model that as occurring immediately. around 2026 with a further campaign at the end of this decade we don't have precise costs on that at this stage it'll depend on the cost of mobilization and utilization of the rig that we use for that campaign and yeah that that will be work to define once we we have a better picture of the timing

Great. And if I can sneak in a last one, how do you think that Karun will be able to operate the FPSO in a way that's distinct from how the current operator has been doing it and is there much upside that you think that you can achieve by being in control of your own destiny operationally?

I think for Karun, this is a really strategic move. It gives us direct control over prioritization of activities on the FPSO. That'll be prioritization of both the safety activities, personal and process safety, of course, as well as production reliability. We've been, you know, I think historically we've had to go through a third party owner of the FPSO and negotiate through their own prioritization. And I feel that this will give us a much, much better control of that. So I think that we'll see a significant long term uplift in our ability to meet the type of reliabilities at those levels between 90% and 95% that we would anticipate for an FPSO like this. All right. Thank you so much. Appreciate it. Okay. Thanks, James.

Thank you. Your next question comes from Dale Conders with Baron Joey.

Please go ahead. Morning, Julian and team. I guess following on from James, the When you looked at the differential performance and the IRR uplift of greater than 20%, had you assumed a similar level of production from the asset? So had you assumed the same reliability improvements would occur if you did not buy this SPSO?

So we assume that during 2025, we will see some improvement on 2024, but really the improvements are not realized until 2026 onwards, when we anticipate reliability moving up to 90 to 95%. Now that will be on the order of eight to 12% better performance than we experienced in 2024, and back to the sort of levels that we were anticipating a couple of years ago. So yeah, we do model that, and that is one of the bases for our economic assumptions.

The 20% IRR, just so I'm clear, it's not only about the lease cost savings, but it's about getting more production over the asset?

Yeah, more uptime than we've been experiencing to date, and more than we would perhaps model in the future under a different contractual arrangement.

Okay, thanks. And what's needed in terms of the work and the timeframe to shift that 2C resource into 2P, which is then obviously going to impact depreciation rates and earnings?

Yeah, look, there's obviously a formal process that we will go through in terms of moving contingent resource to reserves. We have a process within Karun that will do that. It'll also be clearly dependent on the type of work that we anticipate doing on the FPSO over the period out to the early 2030s in order to maintain that production profile. But yeah, I expect that we will be in the process of doing that through this year. And before the end of this year, we should be in a position to advise the market to the extent of what portion of those contingent resources we will be booking as reserves.

Okay, and then just finally, how do you think about, Julian, how do you think about this decision to buy back the FPSO in terms of the impact to balance sheet capacity and ability to undertake further buybacks in the medium term?

We've modelled our buyback in anticipation of buying the FPSO at this price. I'll ask Ray to talk about that in a little bit more detail, but that is already in the base assumption for our buyback.

Yeah, Dale, we obviously want to make sure capital returns are sustainable, so we've modelled the ongoing underlying capital returns dividends into the future, looking at potential timing of the three organic developments and the investments there. We have also obviously on the basis that they are, assuming they produce the returns we're expecting, Then, of course, we have with the flexibility of moving in and out of the RBL, although we don't expect, provided oil prices stay up, we probably won't need to draw into that. So we modelled the longer term as well as the short term at reasonable oil prices and then with a drop in oil price to make sure our balance sheet stays within acceptable metrics. So the 25, we would expect that we can continue. We're modelling all of the standards in the guidance, including the capital returns on dividends and the buybacks, as well as the FBSO purchase. So we feel the balance sheet is fine.

Do you think the earnings upgrades and the greater certainty kind of improves that outlook for cash flow, though, and potential for returns?

As Julian said, I'll let you finish, Julian, but as Julian said, most of the real benefit will flow in 26 and beyond. So we're obviously going to have to update guidance as we get further through the due diligence process and as we see progress through the transition, if we see some of that improvement coming through. But right now, I don't think a lot of it will be visible this year Anything else?

I think that's right. I think it'll be in 2026. I mean, the really important part of it, this acquisition, is it removes uncertainty around the FPSO and Bona for the long term. Don't forget the current contract with Altair Oceania. comes to an end in 2028. And this already now provides us with the certainty that that FPSO will and can remain on station well beyond that, without us needing to negotiate new lease contract terms. So I think that's obviously one of the big long-term strategic drivers for this.

I probably should add that most of the value this year is coming from the work that's going on now. SPS-88, the Flotel campaign, planned shutdown, they're the one. They'll occur anyway, regardless of the transaction. Okay, thank you.

Thank you. Your next question comes from Henry Mayer with Goldman Sachs. Please go ahead.

Morning, Tim. There's quite a bit of focus on NEON here in the pack, and you've provided a timeline for feed entry fairly soon, and then moving through to farm down in FID. I'd interpret that as quite high confidence that you'd move forward. So what are the key focus areas that still need to be worked through ahead of feed decision in April?

I'll ask Marco to address that.

Thanks, Henry. So we're moving towards the DG2 side. So we'll take the actual decision in April, more or less. But if you look at it, I already touched upon a couple of these things. So we're looking into the ways we drill wells. We're looking at horizontal, multilaterals, vertical wells. We're looking at different development concepts. And what's very important as well is the level of confidence, let's say, on the negative side of it. We've made great progress on all of it. I'll reserve let's say the final decision to the DG2 gate, but certainly compared to where we were a year ago or so, progress has been quite made.

Okay. Thanks, Marco. And you're seeing the appliance here to farm down as well. Can you share whether you've already had any interest from potential partners and perhaps how competitive you think Neon could be compared to other fields in Brazil that partners might also be able to invest in?

So NEON is obviously a development prospect. So it's a field that we're looking to take into development. There are not many of that type that are or have been farmed down in Brazil in the recent past. And there's been quite a significant slowdown in Brazil activity in that way over the last few years with the change in government to Lula a couple of years ago, obviously. We've had quite a bit of interest, unsolicited interest in the market. There's probably three or four companies that have asked us to ensure that they are included in any farm down process. And we haven't started that yet, of course. We will await the DG2 decision before we take a package to the market. But we have had, I think, some encouraging interest so far, even though we haven't been out to ask for that. Great. Thanks, Julian.

Thank you. Your next question comes from Nick Burns with Jarden Australia. Please go ahead.

Yes, hi everyone. Just a couple of questions on your strategic review slide. Julian, there seems to be quite a lot of emphasis here on organic growth opportunities and no real explicit mention of inorganic. Are we taking that to mean that that's the heavy emphasis here and just wondering if there's still room for you to consider inorganic growth opportunities? Thanks.

Yeah, thanks for the question, Nick. And good morning. Look, we're wholly focused on ensuring we get the value from our organic growth portfolio that we have in front of us immediately. And that's really the focus for the company now. Obviously, returning Bauna to the condition that we want in terms of uptime and reliability and ensuring that we get the best out of the in-field opportunities at Houdat is also fundamental to build that platform so that we have the confidence then to go into that organic growth portfolio at Neon and the Houdat discoveries. So that's really where the emphasis of the company lies at this stage.

Got it. And you've got a line in there about maintaining production rates at Houdat over the medium term. Can you give us any sense about what that type of average production rate you're targeting? Obviously, we're in a period now where outputs likely to decline until you get the intervention happening later this year. So is the right rate around current rates or what you might exit after the possible two additional wells? And then just tying that back into operator Elog's view of this as well, are they on board with this plan as well? Thanks.

Yeah, look, I'll address the second part of that first. LLOG and West Lawn Americas Offshore, our partners in HUDAT, are completely aligned, I have to say, on getting the best value and the optimal timing on our infield activities. We've put guidance out there for HUDAT, so I guess I would calculate that back to whatever the average daily rate should be, taking into account downtime and maintenance periods. But yeah, we anticipate decline rates at Houdat that are reasonably similar to the decline rates we see in Bowna. At the moment, those we see at around about 15% or so. So yeah, that's sort of how I would look at Houdat. Obviously, on a quarterly basis, we'll update the market with the actual quarterly results at Houdat, and we can discuss daily rates up and down and their dependency at that time.

All right. Thanks, Julian.

Thank you. Your next question comes from Gordon Ramsey with RBC. Please go ahead.

Thank you, and congratulations on the decision to purchase a vessel. Julian, I just want to get a feeling for your degree of confidence in the CapEx that you're outlining for the FPSO. And I guess the question is, did you get an independent consultant to review the vessel to have a separate set of numbers in terms of what you have to spend going forward?

Yeah, so Gordon, we've had two groups go over the vessel and records in detail. That work in terms of configuring the capex and the timing of when we spend money on The long-term future of the FPSO is still a work in progress, as I said during the presentation, and during the course of 2025 we will get better definition of that. And then for the later period in the 2030s, we'll get some indication of that through 2025 and 2026 of what we should spend and when. But yeah, that $80 million at the moment is where we believe we are likely to end up with that cost profile, whether that's a single campaign of work or more than one campaign. at this stage is yet to be defined but i think we've got a good degree of confidence around that number itself um and um yeah that's based on on the work that we've been doing through this period of of due diligence julian you want to first gordon sorry um we we've we've projected then we obviously then are looking at the uh deferral of abandonment and extension field so

we then project some of those estimates across to the 2030s. That's obviously, you know, reasonably, I guess, based on a number of assumptions rather than external data at this stage.

One other question on the vessel. Are you assuming it's dry darker? No, we don't.

We've obviously done surveys of the hull and the tanks. We don't see a reason for dry docking at this stage. Obviously, we do hull inspections regularly. There's a program of those, and we'll continue to monitor the hull condition. The FPSO was constructed, I think, in the vessel itself in 1984. And yeah, we're quite fortunate in that the steel that was used at that time seems to have been very high quality and the hull doesn't have any significant issues for us at this stage.

Okay, and just one more for me on Houdat. Just want to clarify in terms of, you made a comment earlier about the joint venture in agreement on infield activities, and I got no issues with that. But what about... either well on either, you know, developing either of your discoveries. I just thought the joint venture would focus more on infill, how kind of lower hanging fruit before bringing on stream a new field. Is it possible that, you know, your discoveries could push out further because they do that?

So the work is going on in parallel, Gordon. We've got a whole series of in-field opportunities that we've discussed in the joint venture, of attractive in-field opportunities discussed in the joint venture. And... We're moving forward with two of those in the short term. And I do anticipate that we will continue that sequence in 26, 27 and beyond, that sequence of in-field opportunities. There is an interplay, of course, in both fluids and pressures between the discoveries that we've made and how and when those get tied back into the field itself. And that's one of the objectives of the optimization and de-bottlenecking study that's ongoing at the moment. One of the objectives of that is to deliver some views on how we are best able to integrate the production from those discoveries with the in-field opportunities that we see in front of us.

Thank you, Julian.

Thank you. Your next question comes from Mark Wiseman with Macquarie. Please go ahead.

Hi Julian and Ray. Congrats on the FPSO transaction. That looks fantastic. The first question I had was on the FPSO efficiency through this handover period, the six to nine months, you've guided 88% to 92% for this year. But I just wondered if you could perhaps explain what incentives are in place for the existing contractor and also as you transition to a new contractor, Do you think some of the staff that are working on the FPSO will simply move over to that new contractor or is that something that would be difficult to occur? I'm just wondering how you manage this transition period.

Yeah, look, it's a great question and obviously it's in the detail of how we actually do the handover and how we make that transition that will determine the success, I think, of the the overall transaction during 2025. There's a number of things that we're doing. We have a transition team that has been in place for some time now that is looking at exactly how we undertake the transition. They're looking at the staff, staffing levels. They're looking at our own capabilities in-house in Karun in terms of engineering and maintenance capabilities that we have and exactly how we will guide and steer the new contractor as they come in and take that operation on board. We've already identified the existing staff. We see our high-performing staff. We believe that they're actually very good and very capable. They obviously know the FPSO very well. And we certainly hope to be able to transition a number of those staff to Karun or potentially to a new O&M contractor as we do that. We're still at this stage in terms of that new O&M contractor of preparing the process itself of bringing tenders in. We have gone through some pre-qualification exercises, but we'll, over the next few weeks, start to finalize the tendering part of that itself. In terms of how we manage the risks, we have a full risk profile of how the transition will take place and obviously of the FPSO. A lot of that work is actually being addressed in the near term through the Flotel campaign, and we're about to also embark on the annual maintenance shutdown, the TAR program that will take place, I believe, in early March. That will start. So those two programs will already mitigate quite a bit of the risk that we saw during 2024. And then with a new contractor coming in, obviously part and parcel of that will be that they have to work hand in hand with Altera Ocean during that handover period. And that very much will be a part of the ongoing contractual relationship with Altera Ocean as we move through to complete those transactions.

Okay, that's great. Thanks, Julian. Just a second question I want to ask probably for Ray or Marco on the tax rate. That seemed to be where you really beat consensus for this result with the real depreciation bringing the tax rate down. That appears to be a real cash benefit in the period. Are you assuming in the 32% forward guidance for effective tax rate, are you assuming Riel appreciates back? And also, could you just talk through, in terms of the Riel depreciation, how much of your cost base at Bayoona is Riel functional? Thanks.

Okay. I'd love to see Marco answer that, but I'll help him out. I'm sure he knows though. Mark, that is a real tax saving, as you know. In Brazil, you know, the income statement is a reasonable reflection of cash tax. But then, of course, we have contingent consideration being deductible. So the cash tax is usually less than the tax expense that hits the account. So there's movements and that adjustment runs through the balance sheet. But in this year, as you spotted, we had gradual decline in the BRL against the USD and a steady decline through the whole year, which translated to this unusual situation of a cash gain, if you like, of the tax bill itself in US dollar terms. Looking at the 32%, that is an accounting basis rather than cash. And I think just to try and explain that, we're assuming when you, the only way you can really model is to ignore FX movements going forward in tax expense. So we can't really predict that. So 32% is removing that FX movement that can potentially do those things. I would say that we actually do move the cash into BRL as we identify the amount of tax payable. In an exposure of cash basis, we almost eliminate that exposure. So this is an accounting movement rather than actual cash out the door, even if it goes against us. And then in Brazil, we have obviously the depreciation of, sorry, the Accelerated depreciation on Patola development, which is still running through these years. So that'll save some tax expense in cash sense. And then we have contingent consideration being deductible. So those two save us cash in tax expense sense. In the US, we're not paying tax there in cash because we have deductibility of the full investment. that will be that way until pretty much 2027 when we start to see that unwind. That's a long question. A long answer, sorry. In terms of the broader FX exposure, we have very modest amounts in BRL, a bit of labour exposure in the FBS O&M contract. Some of our staff, obviously our staff paid in BRLs, but it's very small as a proportion of our cost.

Okay, that's comprehensive. Thanks, Ray.

Thank you. Your next question comes from Rob Coe with Morgan Stanley. Please go ahead.

Good morning. Thank you for the preso and congrats on the transaction. Just, I guess, a couple of questions on the modelling side. You referred to transition period expenses during 2025 as you run Can you maybe just give us some colour there? Will you be running two teams there with the new O&M team coming in or is it just the part year lease cost in that transition period?

Yeah, look, good morning, Rob. Obviously, there'll be a period when we have some overlap of teams. And that will depend on the timing of when we're actually able to bring the new O&M contractor into the relationship. But yeah, there has to be some overlap. I think that's actually a very sensible way to go about things and would be expected by the regulator. So, but yeah, in terms of those costs, we will see some additional costs in 2025. And Ray, you're probably more on top of that than me.

Yeah, we have simple terms, the purchase price. I think in the guidance, we've given guidance on the purchase price, plus some adjustments to that purchase price that are in the deal. And then just over 4 million of taxes. So that's in guidance. What's not in guidance, which would be removed from underlying and will be further defined, is something like $4 to $6 million of transition costs that we're expecting in addition.

Okay, that makes sense. Cool. And then I guess, yeah, related to that transition, and I hear what you say, it wouldn't be safe to just ship one group in and one group out. You mentioned you've already identified who you see as the key staff. Do you have arrangements in place to ensure that none of them jump shift?

So we're going through that process at the moment. We've had some sessions with the staff on board. And yeah, that process is ongoing. Obviously, Brazil is quite a hot market for FPSOs. So yeah, we do need to be very careful about ensuring we keep the key staff that we need. We're well aware of that. And that's something which we'll continue to drive forward over the next few months.

All over it. Thank you very much. Appreciate it and all the best with it. Thanks Rob.

Thank you. Your next question is from Dale Conders with Baron Joey. Please go ahead.

Sorry, just to follow on guys, you mentioned there is a bit of a production needs benefit in the IRR. What oil price are you therefore assuming?

Long term 70 inflated. I've just got to recall from which which date. Can I get back to you on that, Dale?

I think it was 28 onwards is 70. And the future curve out till then? That was all.

Okay, thank you.

Yeah, there's no heroic assumptions around this, Dale.

Thank you. Your next question comes from Henry Mayer with Goldman Sachs. Please go ahead.

Thanks for taking another one. Just to follow on the transition issue, Are there any controls you have in place to guarantee reliable operations over the period? Like any terms linking reliability to the acquisition price?

So obviously the relationship with Altair Ocean is such that they're obliged to continue operations and we expect them to put in every effort to do that. Obviously that's a key part of the agreement with them. In terms of the details of the transition agreements, some of those are still being thrashed out. And yeah, that certainly includes things like ensuring we get the uptimes that we need.

Great. Thanks, Julian. If I can squeeze in another one, maybe. You mentioned that ESPs need to be replaced probably in 2026. Are you expecting those replacements to be preemptive? or there could be a period where they fail and then you need to come and replace them?

So at the moment, we see no issues with the ESPs. They're operating really well. We will typically get some indication of a deterioration in performance ahead of that actually happening. At this stage, we haven't landed on a philosophy of replacement. Obviously, our engineering teams would prefer us to be proactive and our commercial and financing teams would prefer us to wait until we have an appropriate rig in the field. But we will resolve that over the next few months. I anticipate that we're likely to be proactive with it. We already have the relevant pumps in-house. And yeah, we're obviously well aware of of how the market looks for suitable vessels to undertake those interventions. At the moment, though, we see no issue with them. And from the way they're performing, I'm really comfortable that we've been treating them with the TLC that they deserve and that we'll see continued good performance from them through well into 2026. Excellent. Thank you.

Thank you. There are no further phone questions at this time. I'll now hand over to Anne for the webcast questions.

Thank you, Mel. Yeah, there are a couple of questions on the webcast. I might just group them together with Brazil and then Houdat. From Hazmi Hazan, do you consider the acquisition cost of the FPSO to be reasonable?

Yeah, look, that's a great question. Obviously, this is an FPSO which has been producing on this field for a while. It is a critical piece of infrastructure to Karun. And yeah, as such, it is something of a bespoke piece of infrastructure. In terms of the cost of the FPSO, obviously we're buying a vessel which is fully configured for Bona. It's not like we're buying a hull that we then need to build material onto to produce our reserves. I mean, I would go to our evaluation of the economics in this case, which point to very robust returns at this acquisition price. So I've got to say I'm very comfortable with the acquisition cost itself. As I was alluding to earlier on, it's a little difficult to compare that to the acquisition of other FPSOs, which are usually either new builds or they are redeployment FPSOs moving from one field to another, which require further CapEx to refurbish them. So, yeah, on that basis, I'm very comfortable with the price that we're paying for this.

Thank you. A question from Andrew Beck. What is the useful life expectancy of the FPSO? Is it around 15 years?

So the FPSO was deployed on the field around about 2012. And it's obviously been there for a number of years up to now. We anticipate that we should be able to see a useful life out until the late 2030s. But that will involve revitalization capex, as I've alluded to earlier on. And we see that happening in two campaigns, one in 26 to 28 and a second campaign in the early 2030s. We believe that those will allow us to extend the life of the FPSO out until the late 2030s.

There's a question from James Hood. There has been some recent press around the Brazilian regulator cracking down on offshore drilling. Can you please confirm that this won't impact the timing of the SPS88 intervention and provide us with confidence that the rig is locked in and the timing is firm with all approvals in place?

Yeah, so there is some news in the press around drilling in the equatorial margin in Brazil, which I believe is about 3,000 kilometres from our operations. And Petrobras is very keen, we know, to drill there. I recently read press reports that they are confident they will be drilling in the equatorial margin there. in the second half of this year. Obviously, that is a long way and doesn't impact our drilling or our intervention activities in the Santos Basin of Brazil, where there are many, many drilling activities currently ongoing with other operators, specifically Petrobras. Shell is currently drilling in the Campos Basin. which is just to the north. So we don't anticipate that there are any issues that would essentially come down from the equatorial margin to impact our plans in the Santos Basin.

Another one from Hazmi Hazin. For the updated fall year 25 guidance in April, which are the metrics that will most likely be changed? One for Ray.

Yeah, I'll ask Ray to address that.

I would... Depending on the transition timing on the FPSO, that potentially could accelerate some reductions in lifting per barrel if we get ahead of current plans and we can close and see some, I guess, some of the change in the O&M contractor and cut short some of the transition costs. So we may see some slight improvement in the OPEX per barrel. we would expect also DDNA rates to potentially move in favour as we also reflect on closing of the FPSO, the purchase of the FPSO and then the life review assuming or if we can complete the evaluation and modelling on the life of fields. So if we convert resources to 2P1P, then that would also mean that our depreciation base reduces. So that could also mean the DDNA rate reduces as well at the point of closing or closing and or completing the review of those resources. Does that make sense? That's probably the two I would expect.

Thanks, Ray. I think that answers it perfectly. From Gabriel Radziminski, and I think we've actually already answered this question, but given the FPSO acquisition, its future known CapEx requirements, potential for funding organic growth within the existing portfolio, and assuming the 75 million buyback obtains shareholder approval, does this mean that we can expect there'll be no acquisitions within the next three to five years?

So as I said earlier, we're fully focused at the moment on ensuring we improve the reliability and the results that we've been seeing from Boona. The acquisition is part of that. Acquisition of the FPSO is part of that. And of course, ensuring that we can then build that platform to enable us to pursue the organic growth opportunities that we have in front of us. Those are very attractive opportunities. Neon, obviously, we still have to take decisions there, but there's a large volume of oil there. in NEON and the satellites that certainly we're hopeful we can bring to value for shareholders. And as well as that, our recent discoveries at Houdat have great promise there around that whole region, which, of course, is one of the main reasons that we We took Karun into the Miocene of the Mississippi Canyon area through HUDAT. So, yeah, we're fully focused on ensuring we can do that in order to maximize value for our shareholders and deliver the sorts of returns that we intend to.

There's a question from Jason Faulkner. With the FPSO purchase, comments have been made that this will ensure confidence to convert resources to reserves. Is there any indicative timeline for converting these and any further infill drilling for Bauna to offset the declining production rates?

So we see the Bauna fields. There are three fields in Bauna overall, Petola, Bauna and Piracaba. Those three fields are really pretty much fully developed with the existing wells that we have there. We don't see much in the way of... of infill opportunity in those fields. We continue to assess that as we produce and obviously modelling the field and seeing how our models relate to the actual performance of the field is key to that understanding. And we'll continue to do that during the future period, the future years. But at this stage, we don't see infill opportunities beyond what we already did with Patola. In terms of booking the contingent resource into reserves, we will undertake an exercise this year to go through the technical and commercial steps that we have to take in order to do that. And we currently at this stage anticipate that we should be able to move a portion of those resources into reserves. And we hope to do that during 2025.

Julian, to add to your first comment, So, yeah, you need no infill drilling, but we're trying to extend the decline by, of course, optimizing the gas lift, the ESPs, and the water injection. And then you don't have massive effects, but every 100 or 200 barrels per day is a win.

Yep. Thanks. Another one from Jason Faulkner, just moving now to Houdat. Just over a year ago, there was a significant production guidance downgrade for HUDAT relating to reduction of gas production owing to prevailing prices. With gas more than doubling since this decision, what indicative Henry Hub price target does the JV turn back on this gas production at HUDAT?

So we have gas production at Houdat already. We produce gas, associated gas, and also gas in gas condensates at Houdat. And that varies between about 40 mega scuffs a day up to about 70 to 80 mega scuffs a day, depending on the wells and which ones are on at a particular time. Since the second half of last year, We have not significantly curtailed gas due to gas prices. Any gas curtailment has been due to well sequencing and bringing wells on and off in the field to maximize our liquids production in the field. That's very much the goal of the field, is optimizing our liquids production. But we haven't... taken a decision significantly to turn gas production off since the second half of last year as a result of gas pricing. Gas pricing at the moment, of course, with a cold winter in the US has been reasonably strong. And yeah, we're yet to see how that plays out as we come into the traditionally lower gas prices through the middle of the year.

Thanks for that. We've got a couple of questions on Houdat from Danny from Oxford Capital. A year on from the acquisition of Houdat, do you believe you paid the right price and it was a good acquisition for shareholders? And one from Andrew Beck, what cash flows has Houdat yielded to date for Karoon?

Yeah, so look, I think obviously it's a good question to ask when you have a production downgrade, you know, have you done the right thing? We certainly believe that the Houdat acquisition was the right acquisition. It was an acquisition that met and continues to meet our strategic criteria in that it had ongoing high quality production, very high margin production. It was an asset that was operated very safely by a reliable operator. And it had both in-field development opportunities to maintain production, as well as we felt very significant additional tieback opportunities from low risk exploration. And of course, that is what we're seeing playing out now. Any acquisition, I believe, takes some time to fully understand. And although I think we certainly put our hand up and we had a disappointing start to the Houdat ownership, I believe that the price that we paid was definitely appropriate for that asset. We're seeing very, very good results from what we expected to see, both from the development opportunities and from the exploration And I think seeing now the work with Log that we're doing on de-bottlenecking and optimizing production, that we'll continue to see long-term production beyond our acquisition expectations back in 2023. In terms of cash flow, Ray, do you want to talk about that?

Yeah, sure. So just simple cash math. You can see the EBITDAX on one of the charts in the segment results. It's about 124 million of EBITDAX from the year. We spent 22 million on the G2, G4 developments. And so the HUDAP producing licenses generated about $102 million of cash in the year. We don't have taxes payable there. And we're guiding to similar sort of capex in 2025 in the HUDAP producing licence. Separate to that, we invested $97 million in exploration licence wells. And of course, that resulted in two out of three becoming potentially value accretive discoveries. So 102 from the asset itself and then 97 invested to develop, to capture two discoveries, if that helps.

Thanks. The last question from the web is from Carl Ross. What is your thinking about further share buybacks beyond what's already been announced over the next 12 months? Are you able to do more buybacks in the future without shareholder approval?

Obviously, we have a policy that we put in place and we announced last July in terms of returns to shareholders. The board has chosen, I think rightly looking at the strength of our cash flows and our balance sheets to do not only dividend within that range of 20% to 40% of NPAT, but also to supplement that with significant additional buybacks that we currently phase out until the end of 2025, although a portion of that will be subject to shareholder approval at the AGM. So I think that we're going well against the capital returns policy that we set. Obviously, the board will assess that in terms of the future, according to our cash flows, our capacity to continue to return cash to shareholders, and management is fully focused on ensuring that the board... will be in a good position to make the right decision around that in terms of continuing cash returns or buybacks and or buybacks to shareholders.

Thanks, Jim. That's all from the web.

Hand it back to Mel. Mel, before we... Before we close, I would like to thank all of our staff and our contractors for their hard work and dedication to Karun during 2024, a year that, as I've emphasized, was a tough year for us and also for our shareholders. I'd like to thank our shareholders, of course, for the continued support of the company. And on behalf of those here this morning, thank everyone for their presentations. And we look forward to updating the market in due course. Thank you very much.

That does conclude our conference for today. Thank you for participating. You may now disconnect.