Capricorn Energy PLC

Good morning, everyone. Welcome to Capricorn's results presentation. I'm Simon Thompson, CEO, and with me are James Smith, CFO, Paul Malin, COO, and Eric Hatham, Exploration Director. As an usual way, we've got a presentation to run through with you this morning, following which we would be very happy to take questions. Before moving on to the slides, I'd like to take a few moments to update you on our proposed merger with Tullow. The Board continues to believe that the proposed merger can deliver significant long-term value for shareholders through creating a leading Africa-focused energy company. The Board is also mindful of the impact of external factors and market conditions and is, as always, assessing all options to maximise value for shareholders. The company is exploring a number of expressions of interest relating to alternative transactions and is engaging with those parties expressing interest to evaluate potential outcomes. Now, we will provide you further updates as appropriate. And in the meantime, as I'm sure you'll appreciate, are limited in anything further we can say. And the focus of today's presentation will be on the company's current position and operational performance. So turning to the first slide, and in terms of the underlying business, as a team, we remain focused on the consistent delivery of our long-term strategic goals of sustainability, returns, and growth. In terms of sustainability, our balance sheet strength and continued fiscal discipline affords us the financial flexibility to deliver our growth strategy. We have demonstrable milestones and targets mapping out a clear pathway to net zero by 2040, and Paul will touch on that more in this presentation. And continuing our track record of safe and responsible operations remains at the heart of our business activities. Looking at returns, in the first half of this year, we returned a further $500 million through a tender offer plus additional buybacks, bringing total shareholder returns to in excess of $5 billion over the last 15 years, an amount considerably in excess of any of our peer companies and clearly differentiating our investment proposition. And in terms of growth, I've already touched on our proposed merger, which, as we have previously outlined, in our view, offers significant organic growth potential alongside further inorganic consolidation opportunities. In the meantime, as the business sits today, we are focused on progressing organic growth in Egypt through a combination of near field and infill production opportunities and an expansive exploration program. Now, like other companies active in the region, we have experienced some delays in securing people and equipment, which has had an impact on the pace of our planned production ramp up. But as Paul will outline, we have a redefined plan to target that production growth point forward and into 2023. In summary, therefore, our intention and focus is to ensure that we retain the financial flexibility to balance the responsible delivery of sustainable growth with the generation of further shareholder returns as we seek to create further value for shareholders. With that, I'll hand over to James.

Thank you, Simon, and good morning. So in the next few slides, I'll take you through the half-year cash flows and current balance sheet position, then an overview of the current financial and operational performance, and an update on the near-term outlook. The headline numbers in the mid-year financials reflect the major milestone that we reached earlier this year. Receipt of the $1.06 billion tax refund in India marked the conclusion of a long-running chapter in the company's history, and it enabled us to make a further substantial cash return to shareholders of more than half a billion dollars. And it also leaves us still in a strong net cash position with the financial flexibility to enable us to continue to deliver value growth for our shareholders. Looking at cash flows over the first half of the year, we started with net cash of $133 million. The India tax refund was received, and approximately half of those proceeds were returned to shareholders. Cash inflow from the UK North Sea earn out was $77 million, and operating cash inflows in Egypt were $50 million. And I'll talk more about both of those in the next couple of slides. Contingent consideration payable to Shell, together with working capital adjustments in respect of the Egypt acquisition, totaled $35 million. Producing asset capex in Egypt was $23 million in cash terms, and total expiration capex across the portfolio was $58 million. And I'll provide an update of the full year capital program in a moment. So adjusting for admin and other costs, that took us to a 30 June net cash position of $631 million, being $809 million gross cash and 178 million drawings on the Egyptian reserve-based lending facility. Looking now at operational performance, production in the first half averaged 35,500 barrels of oil equivalent a day. This is below expectations for the period, principally due to logistical delays in getting new rigs in the field and operational. However, we have been able to prioritise higher margin liquids targets for those wells drilled to date, and as a consequence, liquids production has grown about 6% from levels at the time of acquiring the assets. although this has been offset by a decline in gas production of around about 7% over the period due to that slower operational ramp-up and underlying natural decline rates. So as a consequence of that, liquids now represents over 40% of total production, and therefore revenues in the period were $137 million, off average realized prices of $111 a barrel for liquids and $2.90 in MCF for gas. Gross profits for Egypt in the first half, i.e. that's just revenue, less OPEX, were $105 million, whilst actual operating cash inflows during the period were $50 million, due to an increase in receivables of approximately $50 million. The total receivables position in Egypt at mid-year stood at $114 million, of which $61 million was due for payment. We have had good engagement with the state oil company, EGBC, on the receivables issue and plans to stabilize it, and obviously we continue to monitor that very closely. Looking to the full year, that operational delay in being able to accelerate the pace of drilling has led to a revision to the full year production guidance to a range of 33,000 to 36,000 barrels of oil equivalent a day. And we expect full year OPEX to be approximately $6 a BOE, partly because of the reduced volumes, but partly because of the increased percentage of liquids production, which has higher processing costs than gas, but obviously also higher margins. This slide is somewhat by way of a reminder and just sets out the value that sits in various contingent payments, both due to us and payable by us. So firstly, in the UK, we completed the sale last year of our 20% stake in the capture field and 29.5% stake in the Kraken field toward our production. As part of the terms of that transaction, further consideration is potentially due to us for each of the years 2021 to 2025 linked to oil price and production levels. The detailed terms of that are set out on the slide. They're already in the public domain, but just by way of reminder. And the consideration of $77 million in respect of 2021 was received in the first half of this year. In Senegal, we completed the sale of our interest in the Sangamar project to Woodside in late 2020, and under the terms of that sale, up to $100 million will be payable to us six months following first oil from the project if startup is in 2023, reducing to $50 million if project startup is in 2024. Woodside is currently still targeting first oil within 2023. And then in Egypt, as part of the acquisition terms, we agreed to pay Shell up to $25 million a year over 2021 to 2024, linked to oil price, with a maximum payout due when Brent averages over $75 a barrel in any year. And further consideration of $0.20 a barrel is also due on any discovered commercial reserves in the first nine exploration wells. So then finally, just an update on capex expectations for this year. As I mentioned, our central case production guidance is down about 15% for the year due to a slower ramp up in drilling activity. As a result, some drilling spend originally scheduled for this year will be deferred into next year. So the producing asset capex guidance for 2022 is also reduced by about 15%. Expiration capex in aggregate terms remains in line with our prior guidance, with UK drilling now complete, one well remaining in Mexico, and exploration drilling expected to commence in Egypt later this year. And on that note, I'll hand over to Paul to provide more detail on the operational update.

Thank you, James. Good morning, everyone. We're pleased to report three key elements of our production investment plans in Egypt during the first half of 2022. Firstly, we've fully transitioned the asset base from Shell and started the increased investment in Egypt in our first full year as asset owners. Secondly, we've kept safety and environmental performance at the forefront of our minds. And thirdly, we've refined our investment plans to direct capital to the best value opportunities in light of the prevailing prices and available rig capacity, recognising some challenges have emerged. On the first point, Chiron are now firmly in the seat as operator. We both have secondees within the operating company, Bepetco, and we are working together with Chiron and Bepetco, including their new chairperson, to best develop the forward investment plan for the benefit of our companies and EGPC, the national oil company. On oil and condensate working interest production, we are up approximately 6% at 14,600 barrels of oil per day in the first half versus the fourth quarter of 2021, but we're down around 7% on gas to 117 million standard cubic feet a day. July and August monthly average working interest liquids have grown further to 15,500 barrels of oil per day as we continue to divert capital to our liquids-rich opportunities. Secondly, as you can see, we've had no lost time injuries or Tier 1 process safety events at either of the two main oil and gas processing facilities. And finally, we face some challenges associated with the delivery of the overall investment program, which other operators have also faced in Egypt and reported in some of their earnings calls, most notably Apache. Specifically, we've experienced some delays and inefficiencies as we scale our rig count from two to five or potentially six. These include longer expected times to import staff and commission rigs, extended times for new rigs, particularly rig moves between locations, and increased tie-in times for new well drilling and completion. We believe these are mostly short term and we should have them overcome by the year end. The consequence, however, is that we've been unable been unable to deploy capital at the pace we had hoped in 2022, and therefore we are revising both our capital and production guidance downwards by approximately 15%, as already outlined by James. However, the Egypt development and production opportunity set remains strong, is growing, and our decarbonisation plans remain on track, both of which I will describe in the following slides. In terms of new investments, during the first half we've drilled 14 new wells, 10 are producing or injecting, 2 were awaiting hook-up and 2 were plugged and abandoned. Well results have generally been within expectation, with stronger results on the oil front, particularly at Bed and Citra. This has been offset by a couple of below-expectation gas wells at the CARAM and BTE fields and the higher natural decline at the ASEAL field. The combination of the latter has resulted in a deficit of around 3,000 barrels of oil per day equivalent of gas production versus planned, which we are looking to better understand and address with further investment, possibly re-perforating, fracking or sidetracking those wells. The outlook remains positive, however. Hook-up times are improving, and with the additional rig capacity becoming available in the second half of the year, we expect an increase in well count and total well tie-ins. We are currently drilling several water injectors to improve pressure support and water flood recovery and the benefit of those wells won't be truly seen in production terms until into 2023. Five work-over rigs remain active on completing new wells and optimising the existing well stock. And the bed additional compression should become operational by year end, and the teen gas condensate project is underway. Additional compression is being evaluated for the Obead area as part of a wider enhancement plan for the field, which potentially includes further drilling and deployment of new well technology to access flanks of the field. We've not forgotten about the large gas potential, and we're building an opportunity set in and around the Obeid and Tin gas condensate fields with possible execution in 2023. At present, however, the drilling capacity we have is being deployed at Bed and Citra light oil and water flood opportunities, Karim light oil reservoirs, and oil and water flood optimization at Baga and Niag. and two opportunities recently executed give an illustration of our field extension well results. The Bed 15C21 well, shown in the middle plot here, was drilled and completed in approximately 30 days, hooked up within a month at a total cost of around $3.5 million, and brought online at rates in excess of 1,000 barrels of oil a day, giving an expected payback of less than 12 months and a rate of return in excess of 50%. The well, Citra C33-1 on the right, was drilled in 24 days, hooked up within 16 days, at a total cost of $3 million, and brought online at rates in excess of 10 million standard cubic feet a day and 1,000 barrels of condensate, giving an expected payback of less than 18 months and a rate of return in excess of 50%. And our team continues to identify in high-grade opportunities in conjunction with Chiron and Bepetco. We recognise that we have a role to play in meeting the energy needs in Egypt, and this includes both oil and gas, and we will therefore work constructively with EGPC and the Ministry to help deliver an investment plan that benefits all stakeholders. We have been particularly encouraged by recent modernisation initiatives in Egypt that has seen simplified and consolidated concessions, improved PSE terms and a recognition that fixed gas prices may not unlock the full potential of the western desert basins. Last but not least are decarbonisation plans which are ongoing in 2022 and wherever possible we will help contribute towards Egypt's 2030 vision. We inherited a baseline from 2019 conducted by Shell but there is further work to do to reflect how the plant is operated today. And consequently, we aim to complete a new and improved baseline survey for greenhouse gas emissions in 2022, our first year as full asset owners. This has not, however, held us back from making immediate improvements and building on the good work that Shell and Bepetco had already put in place. Energy consumption is forecast to be down slightly year on year across the fields and our fuel substitution, power centralisation and electrification project has already resulted in change out of 30 diesel generators. This helps cut operating costs longer term, reduces greenhouse gas emissions and provides improved power reliability with the likelihood of prolonged ESP run times. We are also looking to integrate solar power into the mix, particularly for remote well sites where extending the power grid may not be economically viable. And with these initiatives underway, we expect to cut current levels of emissions by at least 15% by 2025. Longer term we remain committed to eliminating routine flaring in our flare gas to power project and we are also trying to tackle process emissions through CO2 storage. Success on these fronts would take a further 15% out and potentially more depending on scale by 2030 or earlier. And for our more difficult to abate emissions, we have and will look to invest in the highest qualified, verified carbon offsets, especially where they have a broader societal benefit. And on this positive note, with an exciting set of investment opportunities ahead of us, I'll hand over to Eric to talk through our exploration activity and results.