Earnings Transcript for AKRBP.OL - Q1 Fiscal Year 2021

Kjetil Bakken: Good morning and welcome to Aker BP's First Quarter 2021 Presentation. My name is Kjetil Bakken, and I'm heading Investor Relations in Aker BP. Speakers today are CEO, Karl Hersvik; and CFO, David Tønne. And when they have delivered their prepared remarks, we will have a Q&A session. If you have further questions or queries about the first quarter report or about Aker BP in general, the IR team is always at your service. I assume that you're all familiar with our standard disclaimer. So now, let's get started. Karl, I leave the floor to you.

Karl Hersvik: Thank you, David . That was -- thank you, Kjetil. And a very good morning to all of you who are following us on web or on the phone. First quarter of 2021 was a quarter that, in my mind, once again demonstrated the core quality, at least some of the core qualities of this company. We maintained a high production level from the previous quarters and we delivered this with high safety, low-cost and a low CO2 footprint.

David Tønne: Thank you, Karl and good morning, everyone. Aker BP's net production in the first quarter was 222,000 barrels of oil equivalents. Due to a small overlift the sold volumes ended at 223,000 or 20.1 million barrels in total for the quarter, up roughly 2% from Q4. The realized crude price ended at $61.1 per barrel in line with the average Brent dated in the period. Adjusting for NGL, Aker BP's average liquids price was $60.1 per barrel, up 36% from Q4. If we include gas, the realized average hydrocarbon price was up approximately 34% and consequently, we report a record high total income of $1.133 billion in the first quarter, up 36% from Q4. Production costs related to oil and gas sold in the quarter amounted to $176 million. The increase from Q4 is mainly driven by adjustment for over underlift, the last two quarters. The cost of produced volumes has been quite stable over the period with a small uptick, mainly driven by an increase in well maintenance activity at Valhall in Q1 compared to Q4. Production cost per produced unit amounted to $8.6 per barrel of oil equivalents in line with the full year guidance of $8.5 to $9 per barrel. If we take a look at the other main items in the P&L. Substracting production cost and other operating expenses of $8 million from total income, we get an EBITDAX of $949 million. Exploration expenses amounted to $71 million, where $41 million was field evaluation costs, mainly related to NOAKA studies, as the project is maturing as planned towards concept selection later this year. In addition, we had $12 million in dry well costs, mainly related to the Lundin-operated Bask well. This gives an EBITDA of $878 million, up 41% from the last quarter. Depreciation was $258 million or $12.9 per barrel. The decrease in depreciation rate from Q4 is mainly driven by year-end reserve updates and decreased estimates for future abandonment costs on some fields. In the first quarter, we also recorded an impairment amounting to net $30 million, driven by Ula/Tambar and partly offset by a reversal of previous impairments on Ivar Aasen. The main reasons for the impairment charge are the effect of updated phasing of production and cost profiles on Ula, offset by the increase in short-term prices.

Karl Hersvik: Thank you David. Solid delivery and solid results as usual. So before we open up for questions, let me round off this presentation with reiterating our key priorities as they stand at the end of Q1 as I usually do. So let's start. Operational excellence is, of course, the fundament for everything we do. And this means running our assets with the highest safety standards and the highest possible efficiency. And this is always the number one priority for Aker BP. With a high activity level on the field development side is also extremely important to make sure that we're doing the right things right. Flawless project execution means delivering our projects on time and on budget, which is essential to ensure we generate the desired returns on our investments. I have not mentioned our new operating model in today's presentation, but the implementation of this model is a key priority in order to further improve operational efficiency and drive down cost in our operations. The other main improvement theme is the digital project execution model, which I touched upon in connection with the NOAKA project. This will be the full -- first full-scale implementation ever on a fully digitally integrated project execution and we aim to launch this in connection with the DG2 decision on NOAKA later this year. Continuing on NOAKA it is, of course, a key component of our growth story. And the key priority right now is to land the development concept that is both technically, economically and environmentally robust. And that can be ready for FID within the deadline of the temporary tax system. And as communicated previously, I am confident that we will be able to do this. Alongside NOAKA, we are running full speed ahead with a dozen or so projects that will all contribute to continued growth and value creation for Aker BP and its stakeholders. This concludes our pre-prepared remarks and we're now open for questions.

Operator: Thank you. Our first question today comes from Teodor Nilsen from SB1 Markets. Please go ahead.

Teodor Nilsen: Hey, good morning and thanks for taking my questions. And thank you for the update. I have three quick questions. First of all on Sverdrup, it's good to see that still good performance there. What should one expect production from Sverdrup going forward? Is it fair to assume around 60,000 barrels per day flattish until Q4 2022, or should we expect some maintenance work this summer? Second question is on Ula/Tambar, what's the value after impairment? And my last question is on exploration. What's the commercial threshold for the strong Trell & Trine well and also Shenzhou well in the balance sheet compared to the pre-divestment that you presented on the slides?

Karl Hersvik: Yes. Thanks, Teodor. So regarding the Johan Sverdrup, we haven't normally disclosed the forward prediction on the individual fields. But there will, of course, be some discussions and possible interruption related to the installation of the new process platform. But I don't think you're too far off with your estimations. Then with regards to remaining asset value on Ula/Tambar, I refer you to the note. So the book value recoverable amount is roughly $600 million. And then, I think, it's worth noting that that does not then include the asset and retirement obligations and tax -- deferred taxes. And then your question for commercial threshold, that will of course depend on phase and reservoir quality in addition to volumes. But I think it would be fair to say, that if this ends up at a stand-alone field development, volumes significantly lower than around 150 million barrels, is probably difficult to do on a stand-alone field development, depending on reservoir qualities in the reservoir, probably be equal both for Shenzhou and for Stangnestind.

Teodor Nilsen: Okay. Thank you. That’s great.

Operator: Thank you. We move on to our next questioner, Yoann Charenton from Societe Generale. Please, go ahead.

Yoann Charenton: Good morning, everyone and thank you for the update this morning. I would just like to go back on a few details, if you don't mind. And first on the phasing of CapEx throughout the year, is that possible to provide just an update on the level of mining offshore, when it comes to personnel, that is currently involved offshore, that would be great. Second point will be on production. You say that in the second quarter we should expect lower output from the company overall. Are you able to provide just a bit more granularity, what sort of asset is impacted by lower production levels? And then the last question will be more about business development. You have signaled this agreement with Eni in the UK North Sea. Are you able just to provide a few more comments on potential work ongoing in the second half of the year in the UK North Sea? Thank you.

Karl Hersvik: Okay. Do you want to start phasing on CapEx David?

David Tønne: Yes. So I think, the comment there is that we would expect CapEx to pick up, as mentioned, throughout the year. And increase gradually with drilling both on Valhall and also the Hod project towards the end of the year. And with regards to manning, specifically offshore, I don't know, Karl, if you have any sort of commentary on that?

Karl Hersvik: So the phasing -- the majority of the personnel offshore is OpEx personnel, or related to drillings. I think on the operations side, it's around 380 in total, which is pretty normal for this kind of situation. And we are currently operating two -- three rigs, which would probably amount about 100 per rig. So you probably end up in rate 750-ish. But that's not really the reason why we have a different phasing in the CapEx profile.

David Tønne: Then when it comes to production in Q2, as we already indicated also at the capital markets, there will be variations throughout the year. And as mentioned, as we move into maintenance season now, production in the second quarter will be slightly lower towards the lower end I guess of the guiding range, before picking up again, as mentioned, towards the end of the summer and not to go into any more specific details on that.

Karl Hersvik: And then, regarding the entry into UK as a partner alongside Eni, I don't intend to comment on possible future activities, both in -- neither in the license, nor in other possible activities. But I can provide you with a little bit of insight into how this came about. So as you may be aware, we have spent quite a lot of time mapping the subsurface in the greater Alvheim area, with particular focus on injectites and particularly the net in the Heimdal formation. And that has led us to be aware of an opportunity which we have now captured both on the Norwegian side and on the U.K. side. I don't think -- I think you can draw the conclusion that we are continuing to work with potential in this area. But I'm not going to comment on specifics to this regard.

Yoann Charenton: Great. Thank you for your time.

Operator: Thank you. We now move on to Anders Holte from Kepler for our next question. Please go ahead.

Anders Holte: Can you hear me?

Kjetil Bakken: Yes, we can now. Please go ahead.

Anders Holte: Okay, very good. Thank you for taking my questions. I actually just have two small ones asking maybe something that's covered already. Just if you could Karl, is there anything more you could share with us on the progress of NOAKA? More specific on the time lines and how comfortable you can make me by making the clearly all important deadline handing the plan for development towards end of next year? And then also looking at your slide number 9 here, I know you just touched comment on future business development ideas or endeavors there, but clearly when you look at the Rumpetroll and the Froskelår discoveries they both spill over to the U.K. site, is it not -- is it a farfetched thought that you will expand your presence on the U.K. continental shelf just given your, I guess, given your exposure on the Norwegian side of those specific discoveries? Thank you.

Karl Hersvik: So when it comes to NOAKA, maybe I should have been more direct in my comments in the presentation. So first of all, I've personally spent quite a lot of time now diving into the concept, the cost estimates, the time line et cetera, following Easter. And I must say I'm really impressed by the team who has been working on this in the alliance, I think. In a very short period of time, they have been able to mature the major technical solutions to a level that at least I haven't seen at this stage in a project before. So on that basis I'm extremely confident that we will be able to deliver the NOAKA project according to the timelines we have previously announced. And just to reiterate what those are we plan -- do plan for formal DG2 in Q3. And right now and probably even before summer the main technical elements will be locked in place, which means that there will only be costing on mid items and that work remaining. And since this is an alliance project and we don't have to work on competitive feed and tender processes following DG2. The technical teams will immediately after making the concept selection, technical concept selection progress with maturity into the detailed engineering phase. So we're actually also saving about six months compared to a normal project execution, which increases robustness in this time line. So in total Anders this is not on the top of my worry list for the moment. When it comes to the U.K. yeah, of course, there are reasons for us expanding into the U.K. and it's mostly as I commented on Johan's question related to the injectite expanding across the border. And then if you put that as a basis for answering your question, it's of course clear that the system does not expand infinitely on the U.K. continental shelf. So this is a stand-alone effort to continue tracking a system that we have been successful exploiting on the Norwegian continental shelf and do not constitute a strategic change, or our bigger strategic effort on the U.K. side.

Anders Holte: Thank you.

Operator: Thank you. We go to our next question from Al Stanton from RBC. Please go ahead.

Al Stanton: Yes. Good morning guys. I get that Aker BP's a technology-led company with very focused on efficiency. And at four kilos your emissions are very good and leading. But it strikes me that net-zero doesn't get much attention. I'm just wondering why Karl it's not perhaps more prominent on your worry list. 2050 seems to be some way off given particularly in the last month everyone has been fighting to bring the date as far forward as possible. And yet it doesn't feature in Aker BP's schedule that prominently.

Karl Hersvik: Thanks Al. Yes the first part of your question is very correct. We -- I don't know if we are tech-led, but we are at least driven by performance and trying our best to lead in terms of performance in every major segment. When it comes to net-zero, I think the way we think about that Aker BP is that we will do our best and do everything we can to reduce the emissions that we are directly impacting on the climate, right? Which means that we have power from Skarv, we have Ivar Aasen, which will reduce emissions. We are continually working with smaller, I would say, more continuous energy efficiency improvement activities. This year will probably be around 10,000 to 15,000 tonnes again from the same base in terms of reduction. And then we try to focus on the things we can in fact impact and then by minimizing our footprint, by maximizing our performance. We're paying back to both society and stakeholders, which can of course decide to invest on negative CO2 measures, which they are probably better at position on executing than we are. So you won't really find Aker BP working very hard to develop offset mechanism to further reduce the scope, if it doesn't directly impact how we operate our units. So we do believe that our shareholders are better positioned to allocate that kind of funds than we are as a company.

Al Stanton: Okay. That’s very clear. Thank you.

Operator: We now move on to James Hosie from Barclays for our next questions. Please go ahead.

James Hosie: Hi, good morning. A couple of questions from me. Just your comments on the debt profiles, are you actually planning to refinance the 2024 notes when they become callable in a few months? And then on your comments about being able to respond quickly to acquisition opportunities. Is it still challenging to find compelling deals in Norwegian asset market? That's something you've mentioned previously. And then just – I mean what's the likelihood next material transaction fees Aker BP export successful business model to a new geography not just referring to the UK. Thank you.

David Tønne: Maybe I'll start with the refinancing Karl then you do the M&A questions?

Karl Hersvik: Yes.

David Tønne: So I think what I can say on this is that this is – the 2024 bond is something that we are of course evaluating currently. And of course we can't go into specifics on that but it's of course natural to evaluate, given that it's the last of the callable bonds that we have. And also when we look at the economics of that but that will be – the decision will be taken in due time.

Karl Hersvik: And then moving on to M&A and starting with the Norwegian continental shelf. I think the key issue we have and we have to ask ourselves and are continually asking ourselves and the management team is what will create the most value for Aker BP shareholders? There are a number of transaction opportunities on the Norwegian continental shelf that are either coming to the market or ongoing at the moment. But the key issue for us is to understand how that is value-accretive to the story we have. I think there are basically two lines of thought here, right? The first one is to acquire production, which seems to be quite expensive and it's very hard to find that's value-accretive to our shareholders. And the other one is to acquire more CapEx. And we are going to invest quite a lot into the organic hopper. And we don't normally see a need to further deepen that hopper. That being said, there might be opportunities – combined opportunities that we will find attractive but we'll come back to that as we progress these discussions. When it comes to the, let's say exporting the Aker BP model, it's a question I get quite regularly. I would say both from the main – the main expertise in other basins, national oil companies, et cetera, et cetera. And my answer too has always been that our main focus for this period is to deliver on the project execution scope, deliver on a cost reduction we have planned and the emissions reduction. So right now there are no plans to export as you stated it James to other regions for the moment. I think we have plenty on our plate.

James Hosie: Thanks very much.

Operator: Thank you. At this time we have no further questions in the queue gentlemen.

Kjetil Bakken: Okay. I guess then we can cash in those 10 minutes that we have allocated and wish you all a continued fantastic day, wherever you are. Hope you all stay safe and that I know that many of you have already got your vaccines and that's good and we look forward to meet you all in person in the not-too-distant future. So with that, we thank you all. And please if you have any follow-up questions you know where to find us.