EnQuest PLC

Please note that during the presentation, you can submit questions to management that will be taken at the end. You can submit these at any time during the webcast. Without further ado, I'll hand you over to Amjad Zezou, Chief Executive of Enquest PLC.

Thank you, Craig, and good morning, ladies and gentlemen, and welcome to our 2023 half-year results presentation. My name is Amjad Zezou, and I am the Chief Executive of Enquest. Joining me today At the presentation is Salman Malik, our Chief Financial Officer, as well as Richard Hall, our Chief Operating Officer. Also with us today from Inquest is Craig Baxter, Head of our Investor Relations. As usual, Salman will present the financial results and Richard cover the global operation performance. As we've seen uncertainty in the UK fiscal environment, as well as continued volatility in global financial and commodity markets, it is more important now for us as Inquest to deliver the two goals of the UK, affordable and security energy supplies, which of course incorporate the long-term transition to renewable energy. The sector faces significant challenges, as competitive option for investment is primarily now fixed to the tax regime. With the uncertainty in the tax regime, this has created a more difficult environment for the sector. While we appreciate the government's attempt to encourage investments through the ESIM, I think a timely legislative reform is required to restore confidence in the sector. We at Enquest remain committed to the UK and we continue to play an important role in making most of the resources that we have to meet the energy demand as well as the transition to low carbon economy over time, as you will hear through our presentation. For some time now, our strategy has been anchored around three pillars, deliver, deliver and grow. The slide here lays out the summary of our key areas where we progressed in the first half. With a continued focus on safety, which has our license to operate and our license to exist, I'm pleased that our lost time injury frequency remains upper quartile in the business and considerably better than the OE UK benchmark of 1.27. Following the efficient return to production at Kraken, strong production uptime at all other assets and the successful execution of our well program in the UK and Malaysia, we are very much on track to deliver on our 2023 guidance targets. Production to the end of June is towards the top end of our guidance range with an active work program planned in the second half, including shutdowns in Magnus, GKA, Golden Eagle and Malaysia. We remain optimistic about the delivery of the ongoing programs, both at Magnus and Golden Eagle. With our strong operational delivery and a quick turnaround, as Richard will mention on the Kraken downtime, we generated 140 million of free cash flow in the first half of the year. As such, our trajectory to deliver continues with net debt in the half year at $592 million, and our net debt to EBITDA target at 0.7. We move towards our stated target of 0.5x. I'm pleased also that we've put in place a terminal to cover the reduced borrowing capacity within our RBL, which was impacted by the energy profits levy. This provides us with additional liquidity and aligns our capital structure structure with no debt maturity until 2027 giving us a clear runway ahead to focus on value creative investments both organic and inorganic looking ahead our stronger balance sheet will provide a platform to balance the organic and inorganic investments further deleveraging And in due course, return to shareholders as part of our capital allocation framework, which we'll put in place in 2024. While remaining disciplined in our investment decision, we continue to assess our future organic opportunities across our business, as well as targeting value-accretive inorganic growth opportunities. We have a unique model as a transition company operating through the asset life cycles to deliver on both energy security and the decarbonization objectives. We are maximizing the life of our existing assets, acting as a late life asset company through a strong commitment to cost management and selective investment. We're also significantly reducing our emissions on all the assets that we have, driving our commitment to reach net zero by 2040. You'll hear more detail in Richard's section on our differentiated capabilities that really cut across both the upstream business, the DCOM business, as well as the new energy business. This capability remains core to our ambitions. Magnus has particularly benefited from our focus on operational improvement, as you've seen in our performance production levels, with uptime over 91% in the first half of 2023. We're well set to progress our plans to invest further at Magnus once we've completed the rig recertification program, which is planned for later this year, which will allow us to recertify the rig for five years of further operations. With regard to decarbonization, we aim to be at the forefront of the UK drive to net zero by repurposing existing infrastructure, pipelines and reservoirs to deliver material emission reductions. We're demonstrating this ambition and capability at Salon Vogue, which I will discuss a bit more shortly. Lastly, we are demonstrating a very strong capability in delivering significant decommissioning projects, following the most prolific and largest multi-asset program for plugging and abandoning in the Northern North Sea during 2022. We are well on track to complete the campaigns both on Thistle and Heather by the end of 2024, involving around 100 wells. These three complementary strands, which maximize on our skills and capabilities, see us as well placed in the transition and sustainable energy future. It's our core capabilities coupled with our tax advantage in the UK that will provide us opportunity for growth as others look to exit the UK. On the new energy front, The key to our future is the progress we make in our new energy business. We continue to develop cost-effective and capital-efficient plans to transform Salamvo, right-sizing its footprint, repurposing the site to progress decarbonization, and focusing on carbon capture and storage opportunities, as well as production of green hydrogen derivatives and electrification. The award of the carbon capture licenses presents an opportunity, an important one, to permanently store material quantities of CO2 from isolated emitters, both in the UK, Europe and further afield. The UK and Norway are the natural sites for storing carbon in Europe. This quantity of carbon storage represents a multiple of the group's existing direct emissions and points to a project which can run for decades. On hydrogen production, we're working closely with strategic partners to explore opportunities, which are at an early phase, and look at local wind power on the islands, both onshore and offshore, to produce hydrogen and its derivatives, given our existing footprint in Salamboa. We're also looking at decarbonizing local industry and to expand customer services globally by leveraging the export capabilities with the renewable power potential. Finally, we continue to progress proposals on electrification solutions with the security of a grid backup to facilitate new asset developments in the North Sea Basin. These projects will take time, but we expect to unlock these opportunities by leveraging our infrastructure and working with strategic and financial partners to move capital deployed by others in this area. In summary, we have a unique business model that's geared towards our net zero aspirations and anchored in our core competence and capabilities and infrastructure position. This will establish us as a player in a sustainable energy future. I now hand over to Salman to take you through the financial results.

Thank you, Amjad, and good morning, everyone. Let's begin with a summary of our financial performance. Turning to slide seven. During the first half of the year, we achieved revenue of $733 million, representing a 22% decrease relative to the same period last year. This decrease was primarily driven by lower commodity prices the impact of Kraken outage, and natural decline in production. Our sales barrels were lower than production barrels, following an increase in our underlift position during the first half of the year. During this period, we delivered a 13% reduction in our operating cost per barrel. This reduction was primarily driven by higher lease credits of Kraken and lower maintenance and well intervention costs at Magnus and PMX Elite. In the first half of the year, our P&L reflected a non-cash impairment charge of $96.5 million, primarily relating to a reduction in our short-term commodity price assumptions. We also recognized a tax charge of $132 million, representing an effective tax rate of 118.8%. This essentially reflects a blend of statutory corporation tax, supplementary charge, and the energy profit slip. Of the $132 million tax charge, $48 million represent non-cash items. These elements contributed towards a statutory loss position of $21 million during the first half of the year. However, cash generation during the period remained strong, with cash generated from operations of $370 million and free cash flow generation of $140 million. Accordingly, we continued deleveraging our balance sheet bringing our net debt down from $717 million at the beginning of the year to $592 million at the end of June. This performance reflects our continued focus on cost control, capital discipline, and drive to further deliver the balance sheet. Turning over to slide eight, where I'll talk about our balance sheet and hedging strategies. The red chart on the left hand side shows the key components that help deliver $125 million reduction in our net debt since the beginning of the year. We generated cash from operations of $370 million. We spent $80 million on CapEx and $29 million on decommissioning. Cash interest on our debt facilities was $49 million and lease payments mainly relating to the Kraken FPSO were $63 million. We also made a $38 million payment to BP in relation to the Magnus profit-share arrangement. Overall, we delivered a $125 million reduction in our net debt. Net debt at the end of June was $592 million, and at the end of August increased slightly to $615 million following the $50 million payment in relation to Golden Eagle contingent consideration. Now I would like to talk about the different elements of our capital structure. Starting with our reserve-based lending facility, we reduced drawings under the RBL from $400 million at the beginning of the year to $247 million by mid-year, bringing the outstanding balance well below the available borrowing base capacity under the RBL. In July, we further reduced the drawn balance under the RBL to $240 million. Concurrently, in response to the impact of the energy profits levy on the borrowing base capacity, we have strengthened our balance sheet by bolstering liquidity and extending our debt maturity profile by executing a term loan facility of $150 million with bullet maturity in 2027. Following the payment of the 111 million pound retail bond that is due in October this year, we would have effectively extended maturities on all our debt instruments to 2027. Turning now to our hedging strategy, as you may recall last year, we decided to employ a hedge strategy that protects downside, but provides exposure to higher commodity prices. We've done this through the use of put options, which now represent our entire hedge program. We've hedged 3.8 million barrels for the second half of 2023 and 3.2 million barrels for 2024 at an average floor price of $60 a barrel. Turning now to slide nine, Here I would like to articulate the implications of the energy profits levy, which remains a key challenge for our business and the wider industry. EPL was initially introduced in May last year at a rate of 25% with expiration in 2025. At that time, the government had also provided an indicative oil price trigger range of $60 to $70 a barrel. This meant that if prices were to drop below this level, EPL would fall away. However, in November last year, the government introduced several adverse changes to the EPL regime. The tax rate was increased from 25% to 35%. The duration of the levy was extended from 2025 to 2028. And the investment allowance on capital expenditures was decreased from 80% to 29%. And the reference to the oil price trigger range was removed entirely. these changes resulted in a substantial reduction in RVL borrowing capacities for the sector. The government has recently announced a dual lock price trigger under the energy security investment mechanism, where EPL will fall away if both oil and gas prices are below $71.4 a barrel and 54 pence per term respectively. While we welcome the government's desire to support the industry, the level of these thresholds and non-deductibility of significant costs, the dual block nature of this trigger has not resulted in an improvement in capital availability for the sector. The energy security investment mechanism is currently in consultation and we would encourage the government to make appropriate adjustments to this mechanism to provide fiscal certainty and improve the attractiveness of UKCS to support both energy security and decarbonization. We do not believe that current commodity prices represent a windfall price environment, especially given significant inflationary pressures witnessed by our industry. While EPL has a stated rate of 35%, non-deductibility of cost elements such as decommissioning and interest expense translate into a higher effective tax rate. As a reminder, Enquest is sheltered from the 40% corporation tax and supplementary charge payments due to our substantial tax loss position of over $2.3 billion. Several of our peers are effectively paying a marginal cash tax rate of over 80%. Consequently, several companies have declared an intent to redirect capital investments outside the UK and signaled a desire to leave the UK CS altogether. Overall, despite the challenges introduced by EPL, Enquest's fiscal competitiveness has significantly improved, whereby cash-generated assets are worth 260% in Enquest's hand compared to companies that do not have a tax loss position. This fiscal advantage, coupled with our strong operating capability in upstream decommissioning and repurposing of assets, provides a unique platform to unlock accretive M&A through win-win transactions. We've demonstrated a strong record in delivering a creative M&A with quick paybacks at Magnus, Golden Eagle, and PMH Saligi acquisitions. And we would love to build on that track record and leverage our strong competitive positioning to unlock value enhancing M&A through creative transaction structures. Organically, EPL has impacted our cash generation and the pace of the leveraging. Therefore, we're focusing on low cost, quick payback investments, such as the ongoing drilling program at Magnus. Turning now to slide 10. Here I will provide an update on progress against the key financial priorities that I outlined last year. Number one, reset of the capital structure. As I mentioned earlier, we've secured a new $150 million term loan facility to supplement the reduced borrowing base capacity under our RBL. This has helped bolster liquidity and effectively extended our debt maturities to 2027. Number two, continuing the deleveraging of our balance sheet as we drive towards our leverage target of 0.5 times net debt to EBITDA. As I mentioned before, since the beginning of the year, we've reduced our net debt from $717 million to $592 million in mid-year. Number three, exercising cost discipline and optimizing our capital program in light of the energy profits levy by focusing on low-cost, quick payback opportunities, such as the drilling program at Magnus. Number four, unlocking M&A through win-win transaction structures by leveraging our strong fiscal advantage and the depth and breadth of our business model that encompasses upstream decommissioning and repurposing of mature assets. And number five, creating a pathway to deliver shareholder returns following further deleveraging of the balance sheet. Turning now to slide 11. We're on track to deliver our guidance for 2023. We expect production to be between 42,000 and 46,000 barrels per day, following the successful restoration of full production at Kraken and the drilling program at Magnuson Golden Eagle. In terms of costs, CAPEX and decommissioning expenditure are on track at $160 million and $60 million respectively. As Richard will outline in further detail, our CAPEX program is largely focused on our drilling campaigns in the UK. Our decommissioning expenditure is predominantly focused on the well P&A campaigns at Heather and Thistle. In terms of operating expenditure, we incurred $163 million during the first half of the year, but are on track to deliver the full year guidance of $425 million. The expected increase in the second half of the year is driven by shutdown activity at Magnus, GKA, Golden Eagle, and PMH Saligi. We also expect to see limited lease credits at Kraken during the second half following the full restoration of production. Overall, we continue to focus on delivery of our targets by exercising cost control, capital discipline, and pursuing quick payback organic opportunities. We are also exploring the creative or inorganic growth options that leverage our differentiated tax position and advantage business model. I will now hand over to Richard to take you through the detailed operational performance of the group.