Capricorn Energy PLC

Welcome everybody to the Capricorn Energy 2023 full year results presentation. Speaking today will be Jeff Probert, Chief Operating Officer, Nathan Piper, Director Commercial, and myself, Randy Neely, CEO of Capricorn. Following our presentation, we will open the floor to questions. First, I want to start out with a quick review of the year, our achievements and milestones, as well as a snapshot of what we've been working on so far in 2024. Following on the stated objectives and strategy outlined during 2023 to right-size the organization, maximize the return to shareholders, exit the non-core positions, particularly exploration commitments, et cetera, and resetting our corporate culture, I can confidently state that we have achieved these. We declared $550 million in dividends and started a $25 million share buyback. The buyback continues, and we hope if volumes improve, we will complete it as quickly as permitted. We transformed the organization through the reduction of our staffing contingent to less than 50 people. And when all of the legacy elements are worked through, which we expect to achieve this year, we'll provide for a G&A run rate of approximately 20 million, which is an 80% drop from the 2022 gross G&A costs to the organization. We have now exited all of our non-core exploration ventures in Mauritania, Suriname, and Mexico, with some administrative cleanup ongoing in Mexico to ensure a proper wind-down of those activities in order to minimize potential liabilities and maximize any recoveries. Culturally, we have taken an organization where cost was no object, including high-profile real estate, company cars, and pretty much every oil and gas software subscription available, to a culture where it's the shareholders' money. And every expense needs to be considered with that in mind. And we continue to work very closely with our JV partner, Chiron, to improve the results being achieved in our Egyptian JV. And I can report that our objectives are more and more aligned every day. And Jeff will touch on that progress as well a little later. So far in 2024, we have continued to be focused on our core objectives. returning excess capital to shareholders, including a declaration of a special dividend to be paid in Q2 of $50 million, bringing the total dividends declared since the changeover in the board last year to $600 million. I'm thrilled that both Jeff Probart and Eddie Oak agreed to join me here at Capricorn. Some of you already know them from past lives, and I'm sure our shareholders will get to know them and appreciate them as much as I do. They are a terrific complement to the already first-class leadership group and employee contingent we were able to retain through the transition, as well as the very experienced board the shareholders put into place last year. While I have the full confidence that our Egyptian business will improve both financially and operationally in the coming months, since my time at my last company, I have always run Egypt operations based on what can be afforded. In effect, if the asset can generate an adequate return and funding, then it should be invested in. Our shareholders were very clear in communications that excess funds should be returned to them and I worked to reassure the shareholders that Capricorn would not allow the uncertainty in Egypt to ultimately absorb all of the PLC funds that were received from the Indian legal settlement. As a result... There has been no transfer of PLC cash to the Egypt operations since Q2 of 2023. And Egypt has been maintaining itself solely on the funds made available through collection of Egyptian sourced revenues. Lastly, ultimately, our value in Egypt will be driven by our success in drilling for and producing hydrocarbons. And as started in 2023, we have reorganized and refocused our limited team to assist in optimizing the delivery of those objectives. Our immediate business priorities. As already stated, our priority remains to pay out excess capital to our shareholders in as timely a manner as possible, with the legacy contingent payments steadily unwinding. Our downside modeling will become less dependent on uncontrollable factors in forecasting the required company cash reserves and liquidity. A key priority for myself and the management team will be to increase investor interest in our stock. We have significant unrecognized value in the share price and I'll go into this further on the next slide. To ultimately obtain the highest value for our Egypt operations we need to be self-sustaining and a long-term payment plan or agreed or agreement needs to be achieved in some form as soon as possible. Jeff and I were just in Egypt this week meeting with representatives of both EGPC and the ministry having very constructive constructive conversations on this very topic. The collection of the company accounts receivable owed by the Egyptian government is always a priority, and regardless of the near-term payment, we will remain a very high priority for management in the UK as well as in Cairo. I'm very pleased to announce that just this week, the company received a payment of $30 million U.S., bringing collections in Q1 to a total of approximately $55 million. With the scarcity of U.S. dollars in Egypt, which existed for the entirety of 2023, combined with the company's pledge to shareholders to have Egypt operations fund Egypt investment, we had to manage our activities and US dollar commitments very carefully. This ultimately led to the company to not approve any new drilling in Egypt for the past few months, which led to the JV having to lay down all of the rigs, that is from using six in mid 2023 to currently zero rigs operating. We see this as necessary, but also temporary. Ultimately, we see the value and potential in the asset base in Egypt, and we continue to work with our partners to finalize an investment budget for 2024, which once we have the clarity of the payment program, as I just mentioned, we will expedite the approval of the budget and hopefully see the restart of activities in the very near term. An important aspect of what I think our team can bring to the partnership is experience and expertise to improve the exploitation of the existing assets, and we will work very closely with our partner to achieve this. We have been working for several months to form a joint view on how best to amend and extend the 50-50 held concessions. These discussions have been very productive, and we expect to begin direct discussions with the Egyptian Government Patrolling Company in the coming weeks, who I will also add are very keen to begin those same discussions. Last but not least, we will be working with PACE to capitalize on our competitive advantage in the UK North Sea to acquire production assets that fit a very strict set of criteria. The investment thesis. In my opinion, the stock price of Capricorn has been severely impacted by a perception in the marketplace that the Egypt business, because cash has only flowed in one direction since Capricorn bought these interests, could ultimately and perhaps quickly absorb all the company's disposable cash and liquidity. As I stated earlier, this just simply is not the case. Egypt has not received $1 of support from head office since Q2 of 2023. That means that all of the amounts advanced to the JV to sustain operations, payments made to service the reserve-based loans and the junior facility, as well as G&A costs have all been funded exclusively by cash flow provided by Egypt operations. And as I mentioned, this led to ceasing all drilling activity. As I said earlier, this is not necessarily the pathway to best value, but it is the way I believe the business should be run. Egypt must stand on its own two feet. For that matter, any investable business needs to do the same. Since inception, the company has invested over $350 million in the Egypt business. It now needs to demonstrate a return can be earned. To be crystal clear, I'm very confident in that occurring. I wouldn't have joined the company last year, and I wouldn't have convinced my two closest colleagues to join me at the company this year if I didn't. I think this graph provides a reasonable view on value. For Egypt, we add up our net working capital, deduct our debts, and add the NPV 15 of our reserves, as calculated by a third-party engineering firm, one that was not involved in any way on the original transaction. That value is almost $100 million more than the current stock price. That alone justifies a higher price than what we are trading at in the market. And this is before we add in the other value components, that excluding any potential from a Woodside payout from the Senegal contingent payment also adds up to essentially the current stock price. these two pieces add together, points to a potential value in the US dollar 500 million range, or greater than 300 million above the current market value. And this excludes the potential value generation that we can create from our UK business, and the value add that can be created in Egypt by renegotiating the existing concession agreements to expand the opportunity base in Egypt. Look, Egypt has never defaulted on its oil and gas debts, and as you're aware, Egypt has just in the past month secured over $50 billion in external financial investment and support and has already made a substantial payment to the industry in general and us specifically for overdue amounts. Recent announcements... have been a welcome sight for all companies doing business in Egypt. Those include both the investment and support announcements, but also the fiscal announcements that will hopefully allow these funds to provide a substantial, sustainable platform to improve the long-term viability of the Egyptian economy. I'll now turn you over to Nathan, who will walk us through the 2023 results and the 2024 guidance.

Thank you, Randy, and good afternoon, everyone. In the next few slides, I'll take you through the full year 2023 financial performance, the cash flows, balance sheet, and recent progress on the receivables position, along with preliminary 2024 guidance. So on to the financial performance of 2023, where our working interest production at Beko averaged around 30,000 barrels a day of oil equivalent. We continue to prioritise higher margin liquids production that represents 47% of total production in 2023, up slightly on the prior year. Revenue generated through the period was $200 million. Around 80% of that was from liquids. And average realized prices were $81 a barrel for oil and $2.60 per mcf for gas. OPEX in 2023 was a bit above $5 a barrel of oil equivalent, helped by a weaker Egyptian pound. The majority of our OPEX is in EGP. Total capex on an accruals basis was around $140 million. Egypt capex, where a meaningful component is also denominated in EGP, was around $106 million, split across 91 in development and production and 15 on exploration. The remainder of the exploration spend is largely related to the Yatso Well offshore Mexico. Gross profits in Egypt, that's revenue less OPEX, were 140 million, whilst the operating cash inflows for the period were 32 million before CAPEX, Shell Contingent Payment, RBL repayments. Although macro headwinds are rapidly easing, as outlined by Randy earlier, our current receivables position continues to reflect the period of challenge the industry faced in 2023 around the pace of payment in Egypt. Gross receivables increased from around $100 million at the end of 2022 to $178 million at the end of 2023, of which $151 million were due for payment in To the end of February, this has moved to 179 with 166 due for payment. However, as mentioned earlier, we can confirm that $30 million has been paid to us earlier this week, around 20% of the outstanding position at year end. This is in line with the recent announcements for Egypt, where 20% of the amounts outstanding to the industry were to be paid pretty much straight away. We anticipate further payments through 2024 to address the remaining balance. If we move on to the next slide, I want to detail the cash movement over the period in 23. We started the year with a net cash position of $597 million. We then returned over $560 million to shareholders through the year via two special dividends in May and September with an ongoing share buyback. Since initiating in early May, we bought back almost £19 million in stock through 2023, with around £21 million bought back in total to date. For clarity, differences compared to the headline return amounts reflect FX movements as we convert a US dollar return into a UK pound dividend. After working capital settlements, a contingent consideration of over $140 million was received in the first half in respect to the North Sea earnouts from Waldorf production. It was boosted by a further $48 million in December following a settlement agreement with them announced at the end of 2023. As a reminder, under the agreement with Waldorf, we have a further $24.5 million to be paid, well, in fact, $2 million of which we received today, and the remaining $22.5 million will be received in early January 2025, along with, subject to final completion, a 25% stake in the UK North Sea Columbus gas field. Egypt cash flows netted to a cash inflow of $32 million before exploration development capex and a $25 million contingent consideration payment to Shell. Legacy exploration capex outside Egypt was about $30 million, predominantly in Mexico, along with spending in Mauritania, UK and Suriname as we exited those exploration positions. To be clear, there will be no further international exploration spend beyond 2023. Adjusting for admin, financing, and other costs, this took us to a cash position of $190 million, and if we net the drawn debt position held at our Egypt subsidiary, we move to a net $76 million cash position at the end of 2023. For clarity, as previously disclosed, excluding depreciation, gross cash G&A for 2023 was slightly less than $70 million. Moving on to guidance for this year, as outlined in our pre-close update in January, an approved 2024 budget for activity onshore Egypt remains contingent upon the confirmation of an acceptable payment plan. Therefore, the guidance we provide today reflects our current position, where activity levels are matching the in-country funding position, with no rigs currently drilling. This means a lower year-on-year well count and, as previously outlined, production expected decline by 20% to 30% over the year to average 20,000 to 24,000 barrels of oil equivalent per day. Once we have clarity around the future-looking payment plan, hopefully very soon, we will update on our guidance position. As Geoff will detail, even with the resumption of drilling, the impact on 2024 production is likely to be modest. OPEX is expected to be a little higher than last year at $79 per barrel, oil equivalent, given lower volumes going through a largely fixed cost base. However, the number does not reflect any short-term impact of Egyptian pound devaluation. G&A through 2024 is expected to be around $20 million as we manage residual contractual positions. By year-end, though, we anticipate that business will have transitioned to a sub-$20 million run rate for G&A. For completeness, we've included the production contribution from our emerging UK business, which, as I mentioned before, is subject to completion. But I'll now hand over to our COO, Geoff Probert, to talk through our operational performance. Thank you.

Thanks, Nathan. It's a bit of a relief to be discussing our Egypt operations, having just received the first bullet payment in dollars from Egypt in quite some time. That and the positive economic signals that accompany it mean that expectations for 24 are much higher than they would have been even a few short weeks ago. I've been with the company for a little over 10 weeks now, and having spent a fair bit of my career operating across Egypt, North Africa, and the Middle East, it's a familiar look to the challenges and opportunities Capricorn have faced and continue to face to the ones they've experienced in the past. Good news? The good news is there's a pathway forward that stabilizes the business and moves us along a healthier trajectory, where development investment restarts and collections align with our in-country needs. Today, briefly, I'm just going to go through in a few minutes our 23 Egypt development activity and the operational mindset that continues into 2024. a look at year-end 23 reserves and resources, and then a reflection on what we see as the next steps for Capricorn in terms of value-add in Egypt, beyond just improving the operational performance of and through our partner. Nathan and Randy have both mentioned that a lot's changed, and this 24 investment and development program, as it currently stands, is caveated on a the absence of a payment plan beyond what we've seen so far from EGPC. But we see movement, unblocking payments, and we're working quickly now, even in the past couple of days, to realign investment with EGPC payment plan to permit a return to drilling. And then we get that, of course, we expect to come back, as Nathan said, to the market with our budget and plans for drilling. along with updated production guidance. As Nathan has alluded to, look, a return to drilling in Q2 2024 is relatively late. It takes quite a bit of while to drill and bring these wells into production. So, you know, as a bit of a spoiler, it's not going to have a materially large impact on 2024 guidance in terms of production if we start drilling, particularly later on in Q2. On to the first slide of the pack, please. So this map really is a story about focus, focus on liquid development activity in 23. There's a back story there also in preparing ourselves for future activity through the near-field exploitation wells and also nimbleness that allowed us to accelerate development where we had near-field success and scale back drilling through cutting rigs as payment shortfalls mounted. You can see here the key focus area has been drilling in Bed 2 and Bed 3 liquids, both for pure development drilling and near-field exploitation. It's a story of chasing liquids we intend to continue and expect to continue through in 2024 as we return to drilling. And we as Capricorn invested measurable technical effort into our own understanding of these fields and their potential to make sure we can improve success rates going forward. And in that vein, it's probably worth highlighting that to ensure the best outcomes for the partnership and our shareholders, we're taking the technical initiative in a number of areas now despite our nominal non-operated position. Next slide, please. This slide is really to illustrate how we've controlled rig activity in Egypt to better fit receipt of funds from EGPC. As Randy noted earlier, we've not sent any dollars to Egypt since Q2 23, so forcing a fit was a requirement. We're well aware that cessation of drilling impacts production, but our tolerance for shipping further dollars to Egypt with a line of sight on payments wore thin. and it didn't fit with our strategic objective of Egypt becoming self-funding. We're confident, and we were confident, that we'd get paid eventually, but we continue, and couldn't continue rather, keeping on increasing our investment in such an uncontrolled manner. Recent news backs up that confidence, and both Capricorn and EBC now have renewed impetus to agree a forward plan for funding on the back of the improved economic climate in Egypt. We're ready and waiting to return to drilling as soon as the go-forward alignment is reached. And, as I mentioned earlier, we put a lot of time and effort into making sure 24 drilling, when it restarts, is as effective as the land offers. Next slide. This year, we wanted to start afresh on reserves, break with the past, get an honest external assessment of our resource base from a new third party, and that was GLJ. The outcome is a mixed bag, but I take heart from the fact the resource base hasn't materially shrunk, more that what was previously classified as reserves before now look more correctly like contingent resources, resources that we may be able to reclassify in the future through improved development planning and bringing deferred wells back into the booking window in line with SPPRMS. I do want to note we've also had a closer look at the contingent resources picture, particularly those resources associated with projects that have the potential to be unlocked by increased investment incentivized by improved PSC concession terms and longer PSC durations. That's an unrest working interest best estimate of 150 million barrels contingent and 100 million barrels prospective. And that really brings me on to my final slide. I'm not going to dwell on this, as you can read it and it tells its own story. Sufficient to say, renegotiation of the PSCs, potentially merging the 50-50 concessions into a single agreement, makes perfect sense for Egypt, Capricorn, and our partner. Everyone stands to gain here, and I give nothing away by saying that our counterparties are eager to engage and move this forward. And it's been done before. It's been done in Egypt. It's been done by the team you have before you today, including Eddie, of course, who isn't with us at the moment. And the Capricorn team that remains, that comprise the technical, commercial, and finance functions, are highly motivated to make this happen, to secure running room for investment and value for EGPC and shareholders alike. With our partner, we're refining our proposals on this so we can submit them imminently to EGPC. And while much of the engagement will, by design, remain commercially confidential, we expect to keep you updated where we can on progress. I'm going to wrap up now, but with a parting note that while I talk here about operations, at the end of the day, it's about company investing to generate the best possible cash returns for our shareholders from our assets, and that's what informs our every operating decision day in, day out. Thanks for your time and attention. I'll pass it back over to Randy to wrap up.