Harbour Energy plc

Good morning. Thanks to everyone for joining Harbor's 2023 Full Year Results Call. With me this morning is our CFO, Alexander Crane. Turning to our agenda, I'll start by taking you through our 2023 operational performance, and then Alexander will cover the financial results. Then it's back to me to update on the Winner's Shaw Day acquisition. And we'll leave plenty of time for Q&A. Starting with our highlights, 2023 was a year of significant strategic delivery for the company. We continued to maximize the value of our producing portfolio while generating material free cash flow. Most importantly, we did this while achieving a top quartile safety performance. We also progressed our growth projects that'll help to diversify the business over time. We materially grew our international 2C resources and hit key milestones for our UK CCS projects. Our disciplined capital allocation enabled us once again to deliver shareholder returns over and above our base dividend while retaining the flexibility for meaningful M&A, meaning that at the end of last year, we were able to announce the acquisition of the Wintershaw Daya asset portfolio for $11.2 billion, marking our fourth major acquisition since 2017 and the most transformational step yet in our journey. Since then, we've made great progress advancing the transaction towards completion, which remains on track for the fourth quarter of this year. More about that later. Critical to our strategy is being a safe and responsible operator. 2023 saw us reduce our total recordable injury rate to 0.7 per million hours worked, which was down from 0.8 in 2022 and from 1.3 in 2021. Across our operated assets, we also achieved two firsts for Harbor, about which I am hugely proud. Zero lost time injuries and zero serious process safety events. This follows the rollout in 2022 of our Back to Basics campaign, which is now embedded across the organizations. and reflects the strong safety culture we've worked so hard to build over the last three years. Another key aspect of our strategy is the critical role we have to play in the energy transition, producing oil and gas responsibly and utilizing our skills and existing infrastructure to deliver CO2 capture and storage projects, or CCS. Through investments in projects to reduce emissions and improve efficiency, We remained on track to meet our scope one and two emissions reductions target of 50% by 2030 versus our 2018 baseline. In 2023, we were already down 30%. We also continued a steady stream, a steady program of expenditure to decommission wells and infrastructure no longer in service. In 2023, that included the removal of 5,500 tons of subsea infrastructure with a 97% recycle or reuse rate. And we made good progress with Viking CCS, which I'll say more about later. Turning to production, we averaged 186,000 barrels per day in 2023. Our UK-operated hubs continued to perform well, with higher production for the third consecutive year from the J area, which was supported by new wells. And both Jay Area and Greater Britannia delivered top quartile production efficiency of around 90% in 2023, resulting in production efficiency across our operated assets being materially above the UK average. This strong performance was offset by the deferral of drilling at our partner-operated hubs and also by extended shutdowns in the second half of the year, in particular at East Irish Sea. Finally, we continue to have a good balance of oil and gas, and our predominantly operated portfolio enables us to drive efficiencies and cost savings. We do continue to actively manage our cost base, leveraging our scale in the UK and taking action to simplify our organization and systems to help maintain healthy margins and prepare the company for future growth. This included a review of our UK organization in 2023, in response to the energy profits levy, the outcome of which will be to deliver about $50 million in annual cost savings. In addition, we continue to rationalize our UK portfolio of suppliers and contractors and in key areas entering into larger strategic supply chain partnerships. These cover key services from drilling and logistics to aviation and operations and maintenance services. This reduces complexity and should lead to further cost savings as we go forward. Testament to our ability to control costs is that we've been able to keep our absolute operating costs broadly stable year on year, despite persistent inflationary pressure. As a result, our unit OPEX averaged $16 per barrel in 2023 and continues to rank materially below the UK average. While the impact of the energy profits levy on our cash flow and the ongoing political and fiscal uncertainty in the UK has caused us to scale back investment plans in the country, we have continued to invest selectively in high return short cycle opportunities to support production. We recently completed development drilling at Talbot, a three-well subsea tieback to Judy, which is expected on stream around the end of this year. adding to J area production. We also see the opportunity to improve recovery from several of our J area fields, including the Judy Chalk, where we've approved plans to drill a well this year, and also to add gas lift to three existing wells. At Greater Britannia, we're returning to drilling at Calanish with the F6 well, which sputted last month, while at the Ailey Hub, we're preparing to drill the Northwest Seymour well, which has the potential to extend our modest producing life beyond 2030. This compares to the scheduled decommissioning date of 2018 when we acquired the asset from Shell in 2017. As you can see from the chart on the left, we've invested about $600 million excluding decommissioning in the UK in 2023 in support of such opportunities and have plans to spend slightly more in 2024 which will help underpin future production and cash flow. These capital projects typically have very low break-evens, below $40 per barrel and 40 pence per therm, and high rates of return, well in excess of 50% at today's market prices. Our production guidance for 2024 has been set at 150,000 to 165,000 barrels per day, This reflects the every 10-year extended shutdowns of the Katz and Sage pipelines, which impact J area and Barrel, among other fields. In addition, we have our regular three-yearly significant maintenance campaign at Greater Britannia. 2024 production also reflects the decision by other operators to divert some drilling and the fact that many of the wells coming on stream this year only do so in the second half of the year. We'll see the benefit of this investment then in 2025, with the volumes from new wells coming on stream almost double that compared to 2024. This, along with a more normal maintenance schedule, means that 2025 production is expected to be similar to 2024. As a result, over the years 2023 to 2025, we're seeing an approximately 10% managed average annual decline rate. in line with what we would expect given our level of investment. The next page summarizes our reserves and resources. Starting with the chart on the left, reserve additions at our largest UK operated hubs offset almost a third of our production during the year. This continues our track record of adding reserves to the assets acquired. As shown in the top right-hand chart, we have increased the reserves that came through the Shell, Conoco, and Premier acquisitions by more than 25%. We've also materially grown our international 2C resource base with exploration success in both Mexico and Indonesia. As a result, our international 2C resource base now accounts for over 60% of the total, underpinning future potential reserve replacement and diversification. Ultimately, however, it's through M&A that we look to grow reserves, and the Wintershaw Day acquisition does that, almost tripling our reserves and lengthening our reserves' life. It will also transform the geographic diversity of our asset base, with the UK accounting for a quarter of the pro forma company's 2P reserves, compared to 95% of harbors stand alone today. Before I turn it over to Alexander, maybe a few words about our organic growth projects and Mexico or Zama project reached a major milestone with the unit development plan being approved by the regulator in June. Feed is planned to begin shortly and marks the last phase before a potential final investment decision. A positive decision would result in about 75 million barrels of 2C resources moving into proved reserves. replacing the equivalent of over a year's worth of Harbour's current production. Southwest of Zama, in Block 30, we made a significant oil discovery with the Kaan 1 well in April, with appraisal planned for the second half of this year. As a result of the winter Chaldea acquisition, Harbour's interest in both Zama and Kaan will increase and will become the operator at Kaan. In Norway, we made a small gas discovery at our operated amethyst well, and drilling at Ringhorn is ongoing. We look forward to adding these to the substantial Wintershadea position in the country. With its low unit operating costs, low emissions intensity, stable fiscal regime, and supportive business environment, we're excited about entering Norway in a material way. Moving to Indonesia, progress on our tuna project continues to be impacted by sanctions with which affect our ability to work with the Russian partner. But we're hopeful that a solution will be found shortly so that work can restart at that important project. And finally, turning to the Andaman Sea in Indonesia, following the discovery at Timpan on the Andaman II license, we initiated a multi-well exploration campaign in 2023 and late in the year announced another significant gas discovery at the Lyuran I well, on the Mabatala-operated South Andaman license. The rig then moved back to the Andaman II license, where Timpan is located, at the turn of the year for the next two wells, where we're just wrapping up operations. The Halwa I well was unsuccessful, while a small gas discovery was made at Gayo. Next, the rig returns to South Andaman to drill the shallower Tinkulu prospect to the south of Lyran and a possible fifth well as we look to continue to test the numerous large prospects across these licenses. Once this campaign is complete, we'll work to incorporate the new data into our regional models. Based on what we've seen so far, we remain optimistic about the potential for a new gas development in the region, which is so close to multiple growing natural gas markets. Finally, CCS, tremendous progress was made on our two UK projects during 2023, with both the harbour-led Viking project and ACORN being awarded Track 2 status by the UK government. This marked a significant milestone, enabling the projects to mature into the feed phase and to start government due diligence and discussions over the terms of the economic licence. ahead of a potential final investment decision. Viking is targeting CO2 transportation and storage of up to 10 million tonnes per annum by 2030, subject to government progress on discussions with emitters. The project allows for scalable transportation and storage of CO2 emissions from the Umber, the UK's most industrial region, and also for shipped CO2 emissions from emitters both in the UK and in continental Europe. providing the potential for additional revenue and improved returns. And now over to Alexander for the financials.

Great. Thank you, Linda. And good morning to everyone that has dialed in this morning. Now, before I talk about our 2023 financials, a few points for me first around how, since becoming a public company in 2021, We've continued to deliver against our three capital allocation priorities of maintaining a robust balance sheet, ensuring a robust and resilient portfolio, and delivering competitive shareholder returns. Of course, it's the operational delivery that you just heard about from Linda, along with prudent risk management and a disciplined approach to capital allocation that underpins our strong cash flow generation and has enabled us to deliver against these priorities. 2023 marks our third consecutive year of delivering significant free cash flow. Since 2021, we have generated just shy of 4 billion of free cash flow. And this is after a material capital program targeting goods, high return organic opportunities, both in the UK and internationally to support future production. This strong free cash flow generation has enabled us to repay 2.7 billion of debt, leaving us with only 0.2 billion of debt at year end. We've also returned 1 billion to our shareholders through dividends and buybacks. And this year, again, we are able to deliver annual dividend per share growth of 9%, thanks to our buyback program. Now, in fact, over the last few years, we bought back 17% of our share capital. And we have done all of this while retaining the financial flexibility to, at the end of last year, agree the transformational acquisition of the Vindes Aldea asset portfolio. Now that context, let's move to the next slide and to our income statement for 2023. We delivered strong operating margins in 2023, albeit a significant reduction from last year. This reduction was primarily driven by lower revenue of 3.8 billion, reflecting lower realised UK gas prices of 54 pence per term and also lower production. Cost of operations were up slightly, reflecting the inclusion of redundancy costs from our UK reorganisation. Otherwise, absolute operating costs were broadly flat year on year, demonstrating good cost control in an inflationary environment. On a unit of production basis, operating costs were higher at $16 per BOE due to lower production. Our cost of sales included a net movement in underlift position of 0.2 billion as a result of lower invoiced liftings sitting up in revenue. Our EBITDAX was 2.7 billion compared to 4 billion in 2022 with this reduction driven by changes in revenue as I just described. There are a few one-off items from this period I would just like to note. First, we had a total impairment charge of 239 million. Approximately half of this is due to an increase in our estimates for decommissioning costs associated with certain non-producing assets. This increase reflects higher non-rig related costs, including increased duration of activities and sub-CWL rates. Since there is no asset to book the increased decommissioning estimate against, this flows immediately into the P&L causing an impairment charge. In addition, there were two UK North Sea producing assets which had asset impairments. One was due to the lower forward gas price curve and another as we flagged at half year due to a revised estimate in the commissioning costs. And finally, we have an impairment in respect of the Vietnam assets and goodwill as a result of the divestment agreed signed in Q3 2023. Exploration write-off expense includes the IX well on block 30 in Mexico and the JDE well in Norway, which have both been plugged and abandoned. We also had some expenses related to license relinquishments as part of regular portfolio reviews and management. Other charges here includes our pre-development UK CCS costs on our Viking and Acorn projects. Following the award of feed contract for Viking earlier this year, associated costs will from now on be capitalized rather than expensed. G&A costs of 149 million includes base and corporate overheads of approximately 75 million and non-cash depreciation of non-oil and gas assets of 35 million. We also incurred fees of approximately 33 million related to M&A activities, both in relation to the Vintes Aldea transaction and other opportunities we were evaluating. In addition, we have some period-specific items making up the balance, including net redundancy costs after allocations. As a result of these items, our operating profits was 0.9 billion compared to 2.5 billion in 2022. Net financing costs were relatively flat at 0.3 billion. Here, higher interest rates led to a higher interest charge for the unwinding expense of the commissioning provisions. But this was offset by lower interest payable as a result of repaying our RBL facility. Our RBL was undrawn at year-end. Our tax charge was 0.6 billion, reflecting a continued high effective tax rate of 95%, above the UK statutory tax rate of 75%. This was due to the value of costs which are not fully deductible at UK oil tax rates, which outweighs the benefits of investment allowances and favorable re-measurements in deferred tax in the period. Earnings per share were four cents per share, supported by a share buyback program, resulting in a lower number of shares in issue. Now, let's move to the balance sheets on slide 18. The first thing to notice on the balance sheet is the significant reduction in total assets. Perhaps unsurprisingly, the biggest contributor to this is in tax. we have moved from a net deferred tax asset position of 1 billion to a net deferred tax liability position of 1.3 billion, driven in large part by the associated movement in our derivative position. We saw a significant reduction in the net financial liabilities we carry on our balance sheet for commodity hedges. We have moved from 3.3 billion at year end 2022 to almost nil at 31 December 2023, reflecting a significant unwinding of our hedge positions and the reduction in forward UK gas price curve. Our property, plant and equipment balances reduced to 4.7 billion from 5.7 billion at the end of 2022. This reflects the fact that total DD&A in impairments were higher than the capital investment additions. The lower balance also takes into account a 0.1 billion reclassification of the Vietnam asset from fixed asset to a current asset held for sale. We have continued deleveraging with net debt of 0.2 billion at year end. The net debt balance consists of our bonds of 0.5 billion netted by cash of 0.3 billion. Our RBL facility was fully repaid in the year and undrawn at year end. The final point I will touch on is total equity. Shareholders' equity has increased to 1.5 billion from 1 billion, mainly because of the favorable substantial movement on unrealized commodity derivatives reflected in other comprehensive income. This was just partly offset by shareholder returns from the share buybacks and dividends. We continue to have significant distributable reserves on the balance sheet, which supports our annual dividend policy of $200 million. Next, on slide 19, we have illustrated the cash flow generation throughout the year. On the left-hand side of this slide, we've illustrated the cash flow generation in the year. Gross operating cash flow for the year was 2.9 billion. Then during the year, we spent 1 billion on capital expenditure, comprising 0.7 billion of capital investment and 0.3 billion of decommissioning spent. Financing costs included interest and lease payments amounted to 0.4 billion, while tax payments were 0.4 billion, and shareholders were also returned a total of 0.4 billion. During the year, we successfully amended and extended our RBL, extending the maturity to 2029. As at year end, we had available liquidity of 1.6 billion, comprising the 1.3 billion undrawn RBL facility and 0.3 billion of cash. Finally, let's have a look at our guidance for the year. We are not making any changes to the guidance we issued in January. For 2024, we expect production to average between 150 and 165,000 barrels of oil equivalent per day. This reduction in production compared to 2023 reflects a number of things, as Linda has already outlined, namely unusually high level of planned shutdowns, coinciding with third-party pipeline outages, the impact of deferred partner operated wells, and the sale of our Vietnam business. While absolute operating costs will be broadly flat year on year, lower volumes mean we are guiding to higher unit operating costs of approximately $18 per BOE. After both the higher planned capital investment programme in 2023 and 2024, which will support our future production, approximately 1 billion of cash tax payments, we expect to be marginally free cash flow positive for the year, using commodity price assumptions of $85 per barrel and 70 pence per tonne. The previous sensitivity we provided in our January trading and operations update reflected $85 per barrel and 100 pence per term. As such, we see a 20 pence per term change in gas price, resulting in approximately 100 million change in our free cash flow. and an approximate $10 per barrel change in oil prices resulting in $110 million change in free cash flow, as set out in a slide in the appendix. Higher tax payments reflect the anticipated full utilization of our available UK corporate tax losses during 2024, as well as the resulting change in the phasing of our EPL payments. Specifically, the residual 2023 EPL liability to be paid in 2024 amounts to just over 400 million, the majority of which relates to EPL not payable by installments. There's a slide in the appendix that covers this topic as well. Looking further ahead to 2025, we anticipate production remaining broadly stable with fewer plant shutdowns and increased volumes from new wells and projects, substantially offsetting the natural decline. Our total capital expenditure is forecast to be materially lower. As a result, along with a more attractive hedge book, we expect to generate significantly higher free cash flow in 2025 compared to 2024, and to build a net cash position over the year. In the upper right-hand corner, we've illustrated our hedged volumes. Now, I talked about the very significant effects we've seen in our financial statements on the unrealized mark-to-market position. we are now back closer to zero in terms of unrealized hedges. For 2024, we've hedged just over one third of our production using swaps for both oil and gas, helping provide some certainty around forward cash flows. For 2025, we are significantly less hedged and we're using a mix of swaps and colors for gas. Our gas colors have an average floor price of 112 pence and a ceiling of 263 pence. For 2026, we are currently putting more hedges in place. As you can see, we had only a small portion of gas hedges in place at the beginning of the year, something we are now actively adding more to. We are also adding some oil swaps to 2026 now. Finally, just a reminder that the guidance provided on this slide relates to Harbour on a standalone basis before any contribution from the Vintas Aldea acquisition. I will now hand over to Linda to take you through the details and impact of the acquisition and to give some closing remarks. Thank you.

Thanks, Alexander. As he said, while we haven't included the impact of the Venture Salda acquisition in our guidance, it will have quite a material effect on the business from its expected close in the fourth quarter. The acquisition will transform Harbor into one of the world's largest, most geographically diverse independent oil and gas companies with material positions in Norway, Germany, Argentina, and Mexico. As a reminder, the $11.2 billion consideration will be funded through first the porting of about $4.9 billion of low-cost investment-grade bonds, $2.15 billion of cash, a significant proportion of which will be met from cash generated from the target portfolio being acquired during the period between the effective date of mid-2023 and completion. And finally, $4.15 billion of equity, which was valued at 360 pence per share. The quality of the portfolio, together with the way we've structured the acquisition, means that we expect to receive investment-grade credit ratings upon completion. The acquisition takes our production to nearing 500,000 barrels per day, adds about a billion barrels to our 2P resources, and increases our reserves life to eight years, an important priority for us. The acquisition enhances our margins, reducing unit operating costs by over 25%. It also advances our energy transition goals, significantly lowering our greenhouse gas emissions and expanding our already strong CCS portfolio. Importantly, the acquisition is expected to be accretive across all key metrics, including free cash flow, which was another important criteria for us. All of this supports an increase in our dividend and underpins our commitment to competitive and sustainable shareholder returns over the long run. We've already committed to a 5% increase in our dividend per share following completion, signaling our confidence in the future cashflow generation of the business. We showed this next slide in December, so I won't dwell on it here other than just to say that with the acquisition, we moved significantly to the left, placing ourselves in a new peer group, which in addition to the large Norwegians will include some large US listed independence, well-known companies like Apache and Murphy, We're mainly focused in North America. I think this page makes the point about the unique investment opportunity Harbor presents, a new large-scale global independent with a diverse and high-quality portfolio of mostly conventional offshore assets with very competitive margins and low emissions intensity. It also makes clear the progress we made since founding Harbor a few years ago, and the opportunity we have to continue playing a material role in the world's energy sector going forward. Since the announcement only a couple months ago, we've made good progress on the various approvals and work streams required for completion of the acquisition. Last month, we successfully completed a bondholder vote to amend certain terms and conditions of Wintershaw Day's $4.9 billion investment-grade bonds. for which we received significant bondholder support. We also successfully completed the syndication of the $3 billion revolving credit facility and $1.5 billion bridge facility, which were both oversubscribed. The margin on the new RCF facility will be approximately half that of our existing RBL facility. Further evidence of the material financial synergies this transaction delivers. We're on track to publish the circular and prospectus and to hold the harbor shareholder vote in the second quarter, where a simple majority of those voting is required to approve the acquisition. Typically about 70% of our share register votes. So with 35% of our issued share capital already subject to irrevocable undertakings to vote in favor of the transaction, we're feeling good about this important approval. We've also made really good progress on all the regulatory antitrust and foreign direct investment approval processes with substantially all necessary filings required having been submitted, including those in the UK and Germany. These are all progressing as expected. And in fact, we've already received the approvals required in a couple of countries. Given this progress, we're confident that we're on track to complete the acquisition during the fourth quarter of this year. Moving to our final slide, and just to sum up before we open the call to questions, 2023 has been a year in which we have materially advanced our strategy. We continue to invest in attractive, organic opportunities to support production and cash flow, and at the same time, progressed our international growth and CCS projects. Our strong financial position, cash flow generation, and capital discipline has enabled us to deliver the shareholder returns over and above our base dividend while allowing the flexibility to pursue the Venture Saldea transaction. And in the two months since the deal's announcement, we've made great progress and look forward to completing the transaction before the end of this year. We'll now open the call for questions.