Panoro Energy ASA

This is John Hamilton, and welcome to our Trading and Financial Update for the first quarter of 2021. I'm joined today by my colleagues, Richard Morton, our Technical Director, Nigel McKim, our Projects Director, Qazi Qadir, our CFO, to take us through some slides following which will be open for some Q&A. As a reminder, today's conference call contains certain statements that are or may be deemed to be forward-looking statements, which include all statements other than statements of historical fact. Forward-looking statements involve making certain assumptions based on the company's experience, perception of historical trends, current conditions, expected future developments, and other factors that we believe are appropriate to make under the circumstances. Although we believe the expectations reflected in these forward-looking statements are reasonable, actual events or results may differ materially from those projected or implied in such forward-looking statements. uncertainties and other factors. So the current slide you're seeing is the way in which you can ask questions either during the slide presentation, which case we'll pick them up if you write them in, or you can raise your hand using the hand icon and we'll try and take your verbal questions as well. Next slide, please. So a quick overview of the company. We believe this is our most important quarter ever in the history of Panora. We completed the acquisitions from Tullo in Equatorial Guinea and increasing our stake in Gabon. That transaction should close soon in Gabon. And what we have now is what we believe to be truly a full cycle EMP company. We have operations from the north of Africa right down to the tip. In South Africa, we have production diversified across three different countries. We have 2P and 2C resource number in excess of 70 million barrels. We have a long reserve life on our assets, and we hope to be producing somewhere in the range of around 9,000 barrels a day during the course of this year. So we believe through these transactions and over the past couple of years, we have built a very sustainable business in EMP in Africa. I'm very proud of that. Next slide, please. So some of the key messages we want to get across in terms of the equity story here are three key messages. One is that we're in production growth mode. We have organic production growth in our portfolio. We hope to be producing around 9,000 barrels a day this year on average. We've grown five new production wells still this year, three in Equatorial Guinea and two in Le Bon to be brought on stream. We hope to have an exit rate in excess of 9,500 barrels a day at the end of the year, and we're on target. produce in excess of 12,000 barrels a day during the course of 2023. So we have, within the portfolio, production growth. We also have near-term triggers. We have an exploration well in Gabon, which is north. We have an exploration well in South Africa, which we hope to build by the end of the year. And we also have the Petronor dividend, the dividend of Petronor shares, which we hope to complete that transaction in the near future. And on a cash flow basis, we can start being judged now on a cash flow basis. We have very strong free cash flow in this business. We are fully financed for the growth that we have announced, and we're well positioned to pay dividends in 2023. These are the key messages we want to get across. Next slide, please. So, on a pro forma basis, our 2021 first quarter highlights, we obviously announced the transformational acquisitions Our group net production was 8,000 barrels a day on a pro forma basis. By pro forma, we mean including the effect of the increased stake in Gabon and the new asset in Equatorial Guinea. We have production growth activities across the portfolio, which I'll touch on. We had a big quarter in terms of liftings. We had three crude liftings, one in Tunisia, one in Gabon, and a big one in EG, a $59 million cargo in EG. Although it gets kind of repetitive to talk about these days, we still are working in a COVID environment, and we're pleased to say that our systems, our health and safety record, and our protocols have proved, again, resilient in the quarter. On the financial side, you can see the effect on a pro forma basis of our revenue line and also our EBITDA. which is $25 million that's been reduced by $31 million simply on an accounting basis, given the over-lift position in Equatorial Guinea when we lifted that cargo. So that will unwind during the course of the year. So it's hard to look at it on a quarterly basis because of that over-lift-under-lift, but it gives you a feeling on the EBDA side about the strength of this business now with very strong numbers coming through, which you'll see. Again, that overlooked position from the county perspective on one, that $31 million recovered back in through EPTA. And again, we have a lot going on our balance sheet at the end of the quarter. It's kind of hard to describe it because we have all the movements around the completion of the acquisitions and drawdowns of debts and all that. And we also have this huge receivable, $59 million from the cargo we lifted in EG. We received the cash for that now in April. So the balance sheet is quite different as well. Next slide, please. Here are the financials in some more detail. I won't go into them in a huge level of detail here, but as you can see, what we're doing is we're reporting our IFRS reporting in one column, showing the effect of the pro forma, the acquisitions, and on the pro forma basis, showing the financials, where, again, you can see $77 million of pro forma revenue, EBITDA of $25 million, you know, and recognizing the $31 million of over lift that comes through. So we're in a very, very strong position financially. Next slide, please. So what we'd like to do is take you through at a high level each of the assets we have now. Equatorial Guinea, we produced net to Bonoro 4,300 barrels a day. On a gross basis, this is 30,000 barrels a day, which is exactly on target from what we anticipated. Equatorial Guinea now represents more than 50% of our production. So this is now our most important asset by far in terms of production. And what's quite exciting about Equatorial Guinea, we believe, is that we're really on the cusp of the operator finally drilling new wells and trying to boost production here. So the past three years, the operator, Trident, bought this asset three years ago, and they spent those three years upgrading the facilities. They've not drilled any new wells, and in fact, there have been no new wells drilled in Equatorial Guinea since 2015. So the real task from when they bought the asset from Hess was to improve the infrastructure and work on de-bottlenecking, sort of, if I can put it this way, kind of boring stuff, arresting decline on wells, looking to do things smarter and better. And so now it's the harvest time. And the first of those will be three wells to be drilled this year. The first will start in June in the Elon field. And again, these are the first wells to be drilled since 2015. I mentioned the cargo that we've already lifted, which was brilliant. So we had a $59 million cargo one week after completing the transaction where we paid $88 million for this asset. So again, you can show at these oil prices how cash generated this can be for Panora. The Akume upgrade project is nearing completion. There's additional power, water injection, gasoline capacity being installed. So again, things that are improving production and the operations. We also have commenced the second phase of the ESP program there. So we're going to start seeing production growth in those assets during the course of this year. And perhaps just as importantly, the JV is very focused on production growth in 2022 and beyond. So we're really, again, at the point here where the joint venture is now focused on boosting production, having spent three years investing in this asset. Next slide, please. In Gabon, on a pro forma basis, we produced 2,380 barrels during the quarter, so that concludes the effect of the additional 10% from Tullow. This is production from four wells. As those of you who follow us will know, we are busy now drilling the Tortue production well, DTM7, which is the well that's ongoing now, and we plan to hook that well up and DTM6H, which is the well we drilled right at the time COVID really hit, and bring those online during the end of the third quarter, probably, at Tortue. So we should see production growth coming in towards the back end of the year in Gabon. We did lift one lifting in that 56,000 barrels during the quarter. That does not – that number does not include the effect of the TELO 10%, but just a pure panora one. And hibiscus roof development, first of all, is now targeted for the fourth quarter of 2022. BW Energy, the operator, announced their results last week and – The good news here that we've moved up the first oil target from that development from the first quarter of 2023 down to the fourth quarter of 2022. So there's been some very good news, very good progress on that particular project, which will see production get towards the FPSO capacity of 45,000 barrels a day or more. We're going to be drilling the Hibiscus North prospect in the third quarter. So we have another exploration trigger in there. The hibiscus extension well we drilled in May did not encounter hydrocarbons. And lastly, we're expecting the closing of the tillow acquisition during the second quarter. So in other words, in the next couple of weeks. So we look to complete that one soon. The bond now represents approximately 35% of our production. Tunisia. Next slide, please. Tunisia, we produce a little over 1,300 barrels a day net to Panoro, 4,500 barrels a day gross. Production is frequently in excess of 5,000 barrels a day. So over a period of a quarter, you get certain shut-ins of wells or temporary shutdowns that might impact the average over a quarter. But it's fair to say that production is frequently in excess of 5,000 barrels a day. I think it really demonstrates what we've done since we've taken over the asset where we've managed to boost production by 30% or 40% from the time that we bought it from Olympia. So, again, we're very, very happy with our Tunisian asset and the production growth we've managed to achieve. We also had a lifting in the quarter for about 96,000 barrels at about $60 a barrel. And we continue with the production growth story in Tunisia with workovers planned in Al Ain and Sarsina are the ones that are right in front of us now. So we hope to be able to continue the production growth story in Tunisia as we go. We're also looking at the long-term potential of the asset, working with ETAP, our partner, to update the subsurface models and plan further developments in some of the fields, including, most importantly, probably the Goubiba field, although this is true for all of the fields in Tunisia as well. Next slide, please. So in South Africa, we recently announced the completion of that transaction. We got the ministerial consent there, which is good. It took a little while to come. The focus is now really on getting after the well and procuring a rig for the Gazania 1 well, which we hope to spot by the end of the year. This is a very significant prospect. It's an existing discovery, an AJ1 discovery made back in 1988, back in apartheid times. And what we're trying to do here with this well is to come up-dip of that, targeting two different geological prospects within this basin. It's coming up-dip from the discovery. The success case has the potential to be in excess of 300 billion barrels gross in terms of prospective resource. So it's a very meaningful well, and again, we hope to spot that well by the end of this year. So we have a very interesting exploration figure later this year in South Africa. Next slide, please. So this is our guidance. This is unchanged from what we provided at the time of our February Q4, our 2020 results. We haven't changed anything here. The production around 9,000 barrels a day, again, benefiting from the fact that we have diversified production from three different assets here. We've not changed our production guidance. On the capital expenditure side, we've not changed this number. In particular, Gabon is a little susceptible to exact timing differences because the Hibiscus Rouge development is an 18-month project, basically. So exactly when CAPEX gets spent, whether it's in December 2021 or January 2022, you might find some differences in these numbers. But overall, over the next couple of years, I think we've provided good guidance on the CAPEX on that. But we've not amended our CAPEX guidance. A number of liftings, we've also not done that. We had three liftings in this quarter. In the second quarter, we will have two liftings in Gabon and one in Tunisia. And then the fourth quarter is when we probably have another EG lifting. That's probably a 650,000-barrel lifting probably in the fourth quarter as well. So as one can see with our petroglyph lifting that we've just had, those are quite lumpy affairs. When they come, they're big numbers. And when they fall exactly in the quarter, we recognize revenue. at the time of lifting. So you could see on a quarterly basis quite some difference, but the important thing is to look out over a period of a financial year. Next slide, please. So here's a summary of the near-term triggers that we have and everything going on in the company. Again, in Gabon, we're drilling the DTM-7 well, hooking up DTM-6. That all happened probably towards the end of the third quarter. We are drilling an exploration well on Hibiscus North. We plan to drill wells every year in Gabon. The Hibiscus North prospect is unaffected by what happened in Hibiscus. It's a very robust structure and we're looking forward to drilling that one. In Equatorial Guinea, as I mentioned, the first three infill wells are being drilled this year. We will see this trend, we believe, continue into 2022. Those additional wells in EG have not been sanctioned yet by the joint venture. That typically happens in the third quarter, but we would fully expect to see a number of production wells being drilled every year in Equatorial Guinea, trying to, again, increase production there. In Tunisia, we continue with our well workover activity, so it could be some new flow there coming through on the production side. We have the Petronor dividend, which we intend to distribute to our shareholders upon completion of that transaction. And we have the exploration well in South Africa. So we have a busy year ahead of us. Next slide, please. And just a comment on where we are currently in terms of our market cap, which is obviously taking a bit of a hit on the hibiscus extension well, the strengthening of the NOC, perhaps some other factors as well in there. But our market cap is... has come down quite a bit from where it was prior to drilling that well, which is surprising to us. What we've done here on this slide is to kind of just take some of the analyst projections, take an average of where we see the analysts pointing and trying to compare that against our market cap. And what you can see here is on an operating cash flow basis, a $60 grant will be generating over the next three years $260 million, according to the analysts' assumptions, again, an average of them. and $450 million in operating cash flow over the next five years. If we look at free cash flow, which the only difference between the two really is its capital expenditure, we're obviously spending quite a bit of money in Gabon at the moment for the Biscuit Rouge development. So you'll see in the next three years that we'll be generating about $150 million in free cash, and then if you look over the next five years, considerably more. And when you compare that against our market cap, we would argue that – This is quite a compelling valuation story. I don't think you'll find many other companies with this kind of cash flow versus market cap dynamic. The analysts are estimating free cash flow yields between 20% and 40% over the next four years as we go forward. Again, the important part is we have free cash flow really starts taking off in 2023 as we get through APEX period in the Viscous Rouge development. So we're going to become a very, very strong free cash flow generating company. And beyond the cash flow in that period, we obviously have – we're planning to pay dividends. We're fully financed. We have a reserve life that is well in excess of 10 years here. We've got 33 million barrels of 2C resources, which are not included in any of these assumptions. So we don't include any contingent resource in our production assumptions, in our cash flow assumptions. Those are things that have not yet been sanctioned to be produced, and most of those reside within Equatorial Guinea. We can come back to that perhaps in the Q&A. So, there's considerable upside here from these numbers. And on top of that, we have other triggers every year. We have exploration wells each year. We have a growth strategy to complement the return of cash to shareholders. So, I think we have quite a dynamic company that's going to be a significant cash flow generator with many other triggers on it against a rather what we believe is a modest market capitalization. So with that, I'm finishing up, and I will open up to questions. Cassie is going to chair the questioning. So again, as a reminder, you can either raise your hand using the icon, or you can type in a question to the question panel. We're happy to take questions, and my colleagues may join in some of those as well.

Thank you, John. We have a question from Stéphane Fouchard. I'm going to open the line. Stéphane, you may speak now, please. Yes, hi, guys.

Morning. I have two questions for me. First, an accounting one. The $67 million current payable, I assume that refers to the expected payments of Gabon and closing. It's my first question. My second question around Equestrian Guinea. And I was wondering whether one, the three wells that would be drilled in 2021 would have an impact on reserve, particularly whether some of the 2C are being targeted. And related to EG, how do you see the potential reserve, additional reserve booking moving forward with those 2C conversion? Is it a progressive affair? Would you see a point where you would be starting sanctioning a hefty adjoining program that would suddenly boost the 2P reserves? Thank you.