Valeura Energy Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 12, 2023

There are 3 speakers on the call.

Operator

Hi, everyone.

Speaker 1

Thanks for joining us today for this Valeura Energy webcast to discuss our Q1 2023 results, which were released earlier today. I'm Robin Martin, Vice President, Communications and Investor Relations. And here with me in our Calgary office is Sean Guest, our CEO and Kelvin Tang, our EVP, Corporate General Counsel and Corporate Secretary. Heather Campbell, our incumbent CFO is on the call too, just connected by audio. This event is being streamed live and is being recorded today, May 12, and link a replay available on our website later today.

Speaker 1

So all lines will be in a listen only mode for the duration of the event today. And in a moment, I'm going to hand over to Sean, who will take you through some slides that are going to be shown on the screen if you're joining through MS Teams. And if you're joining by dial up, they're available on our website. So after that, we'll take any questions you might have. For questions, you can submit them either through the Teams app, the button at the top that says Q and A, or you can e mail them to us using irvaluraenergy.com.

Speaker 1

Just give me a second to switch back to the presentation here. So before we get started, And I hand over to Sean, I'll just draw your attention to Slide 2 in the deck, which are our disclaimers about the materials we'll share today. In particular, please note the cautionary language around forward looking information. So with that, over to you, Sean.

Operator

Thank you very much, Robin, and thank you, Irvin, for joining us here today. So just before the end of Q1, we completed the acquisition of the Mubadala Gulf of Thailand assets. So the Q1 financials that we sent out today really show the transformation of the company as we bring together Valeura, the KrisEnergy Gulf of Thailand assets and the Mubadala Gulf of Thailand assets. What's really not shown is the operational performance, And that's because picking up the assets at the end of the quarter, there isn't the revenue there. So the focus is really on this being A balance sheet matter, and as we go through the year in Q2 and others, that's when you'll really start to see the cash flow and the numbers coming in from operations.

Operator

So what I'd like to really get people to focus on today is a couple of points. 1, the level of transformation that you're seeing here in the company and from a company that had $30,000,000 in assets a year ago to now $900,000,000 in assets through this transformation. The other point being, as you look at the purchase price allocation in the financials, Valeura and its shareholders ended up with a bargain purchase gain of about US200 $1,000,000 for this acquisition. The second point is that all of the assets are performing as we'd expected. The production is good.

Operator

The assets are good. We're delivering on the financials, and the Donna and Nongyao growth projects are online to deliver increased production throughout the year. And thirdly, as we're bringing the companies together and we're Transitioning the companies, we now have an extremely strong full business unit operating in Thailand to deliver those results, and we're transitioning the executive to a Southeast Asian executive with significant experience of delivering results in the region as well as new business growth. So those are the key points really to focus on for this year for this presentation. So as we look at the slide that's kind of in front of you now, quite simply, as we put out before, Q1, the assets produced 20,500.

Operator

We had good safety performance, and the capital spending was about $34,000,000 Now looking at that in a little more detail, the first 4 months of the year, we're really dedicated towards operations on the Jasmine field, right, so that we had a rig that arrived there near the 1st January and departed around the end of April, so 4 months of activity. During that time, 8 wells were abandoned that were no longer economic, 8 new development wells were drilled and another delineationappraisal well was drilled and a workover. Now 7 of those 8 development wells were successful and have been brought on stream, and that's really led through this 4 months of activity increase of production to what we're seeing for May, an average about 11,000 barrels a day as opposed to the 8,500 barrels a day that we had in December prior to starting these activities. Now all that's very good and very successful, increasing at about 30%. But now what we'll see as we move the rig to other areas, the field will start natural decline and that will decrease as we go through the year.

Operator

So the other point I want to note on Jasmine is we expect next week that that field will produce it's 90th,000,000 barrel. Now, obviously, it's Valeura. We can't take credit for that having just done the acquisition, but it really brings up 3 points that I'd like to highlight. 1st, the field was sanctioned 18 years ago and brought online to recover 7,000,000 barrels of oil. The expected ultimate recovery now of the Jasmine field is over 100,000,000 barrels.

Operator

And this is really the message we've been trying to get out to people about the Gulf of Thailand assets and how they can keep delivering this type of reserve growth, production growth over time. The second point is while Valeura can't take credit for the 90,000,000 barrels, the team in Thailand can, and this is now our team. This is the team that has been developing these fields, drilling these wells, maintaining these assets and delivering the results that we've seen. It is now our team and I congratulate the team there for the delivery that they've had on taking this field up to this level of 90,000,000 barrels recoverable. And the last point I'll just make is, it does point to the stability of the fiscal terms in Thailand.

Operator

What we can say as an operator in Thailand, when we make business decisions, we know what our fiscal terms are, and they're stable. And for anyone who's on the call, whether in Canada or in the U. K, you can appreciate that difference as you deal with some other regimes, I mean, like in the U. K, where there's much more risk on fiscal stability. So for us, it's really a low country risk environment given that type of stability you see.

Operator

So the last point I just want to make on this slide is the operating costs for the quarter were about $38,000,000 and that comes in at about $21 a barrel. Now The guidance we put out, we've had just under $30 a barrel for the full year. We do expect that this OpEx will go up. Wusan is now on production, so those OpEx costs will come in. As well as later in the year, as we go into the Nanyao development, we're likely to pick up increased OpEx costs there.

Operator

So while this is a really strong number, we'll have to see as we progress through the year, but we do see the potential trying to bring that OpEx down as we bring these companies together. Okay. Going on to the next slide, Robin. So just summarizing the Valeura financials. At the end of the quarter, cash and cash equivalents, dollars 268,000,000 But when you work through the additions of inventory receivables, but then take off tax and other payables, now you end up with about $104,000,000 in working capital at the end of the quarter, which is very positive.

Operator

Now when the acquisition completed, and I talked about that purchase price allocation, which you'll find in the financials, we end up with a purchase price gain of over US200 $1,000,000 right? Now that comes on to the income for the quarter. And therefore, if you look in the finances, you're seeing we're just getting about just under CAD3 share income for the quarter. Obviously, this is a one off event at this time, but I think we closed trading yesterday at about $2.18 a share. And then looking at the last point there, during the quarter, we did complete the acquisition of the 12.5% interest in Valeura Energy Asia.

Operator

And what's this done besides being value accretive to the shareholders, the deal also cleans up our corporate structure so that now all of our are 100% wholly owned, which just increases our ability to operate and our commercial flexibility. Next slide. It also kind of I wanted to highlight as we look at some of the subsequent events. When we announced the deal to acquire Mubadala's assets in December. A lot of the questions we've had since that time is, well, what other deals do you have coming?

Operator

And what we've said is we do have a lot of what we'll Expect smaller deals, equity consolidation and those types of matters, and that's what we've been seeing. So we've cleaned up the SPV buying the 12.5 percent interest, we've increased our working interest in the Wassana field to 100% just as we brought that field back online. And then also on our announcement, we saw that we've actually exited the G6 block with the Rossakon field, but have taken a royalty going forward on that. And a lot of these, as we talked about, is just really trying to clean up our ability to operate and to work commercially and get the most value out of these assets. The other point in the subsequent Development here is we brought on the Wassana oilfield that came on in April 28, and it's been averaging about 2,600 barrels a day for the past 10 days.

Operator

Now they are still bringing that field up to speed slowly. We expect those production numbers keep increasing back to the levels we've talked about before, about 3,500 barrels a day and can even be higher. But those operations They're ongoing and it's continuing to produce. We're just trying to make sure we optimize that as we go forward. Okay.

Operator

So the guidance we put out several weeks ago, and that guidance remains for this point in time largely unchanged. I touched on the operating costs, which we really hope we can see She's there to bring that down. But the main point I wanted to talk about on this slide was the capital spending. Now we put out the range of $180,000,000 to $200,000,000 We do hope to see synergies on that. They can bring that number down as we bring the companies together in Thailand this year.

Operator

But the main point to make there is that there is a Split there between what we would consider to be normal maintenance spending and what is growth spending. So as we look historically at the 3 fields we've by Mubadala. Generally, the spend per year there has been in the $70,000,000 to $85,000,000 range, and that's kept the production in what you've looked at in the slides we put out before the 7,500,000 to 9,000,000 barrels of production. So we now do add Wassana in there, But a lot of that CapEx, just under half, is likely focused on the Nong Yaoci development, which will increase production there to over about 50%. So we're looking at an average just from that field in 2024 of approximately 11,000 barrels a day.

Operator

And also the Wassana field, where we're looking at that 5 horizontal well campaign in Q3 into Q4, which should increase the production from that field approximately 50%. So it's really indicating that it is an enormously high year on this, But this, we expect to deliver production in 2024 above the levels that we're currently producing at now in these assets. So just the next slide, Robin. So finally, just summarizing around on the leadership team and the changes that we had there. So when we've talked about the acquisition of Mubadala assets, and we've also really highlighted that we're really buying a full business unit there, And we said that the only person who's been leaving that business unit has been the Emirati country manager who stayed with Mubadala and returned to Abu Dhabi.

Operator

We've now brought on Doctor. Ian Warlow, who will take that role, and he's on seat currently in Thailand. So Ian and my career passed each other as we worked in Shell and Woodside early in our career. But recently, Ian has been working in Mubadala, where he was the country manager of Indonesia, oversaw the development of gas field there. And more importantly, he had the senior leadership role in the Thailand business unit here.

Operator

He is well known to the team. He knows the team. He knows the assets. He knows the regulator. And it's just he's moving into a role there where we see that business unit now is now fully set up to deliver the operational results we need.

Operator

Now if we step up to the executive team, a key point to note is the executive team will be moving over to Southeast Asia. It is just too hard to run a Southeast Asian business, to grow a Southeast Asian business from Calgary. It's just too remote. I've been living over in the region most of the time for the past year. And with these changes, we've actually brought on Yassine van Myriam, who will be the Chief Financial Officer.

Operator

Yacine has been working with us now for almost 2 years and really led the acquisitions in 2022 of KrisEnergy and the Mubadala assets. So he's a well known entity, and he has a backing this background in investment banking in the region, has done a number of deals that also brings both financial acumen in the area, but also a lot of new business success. The other role in joining me in Calgary here today is Calvin Tang, as EVP Corporate. Calvin is a lawyer by background, but Calvin has been intimately involved in the assets that we've just acquired right from the blocks originally being acquired through the development of these blocks and many commercial deals throughout Thailand. So he's got that strong experience of how to operate, how to work legally and commercially within Thailand and the region and as well as has done new business in the region.

Operator

So we now believe we're getting the team in place that can deliver the operational that we're looking for in Southeast Asia as we move forward. So really just bringing to a conclusion there, the key point is the financials this quarter demonstrate the transformation of the company that we've been promising you. The assets are performing extremely well, and the company is really getting positioned as we move to 2023 to bring these companies together and look for savings and delivering strong cash flow in 'twenty three and 'twenty four. So at that point, thank you very much. And I'll hand back over to Robin for any questions.

Speaker 1

Okay. Thanks, John. Just as a reminder, all lines are going to stay in a listen only mode for this call. So if you would like to ask a question, you can either do that through the Teams app. There's a button there that says Q and A, probably at the top of your screen.

Speaker 1

Or you can e mail questions to us, and we'll see them on our screen here. Just give us a moment to sort through the questions here. So Sean, first question, you ended on production note there? And specifically, what do you anticipate production will be in about December of this year?

Operator

Well, in December of this year, we expect production to be likely around the guidance number that we've put out in that midrange. And the main reason for this is that as you get into Q4, the rig is going to be working on the development of Dong Yao Si and not other maintenance activities. So Nongyao will have been declining through that period, and it's really as we hit Q1 next year and you bring on that facility that you're going to see the jump up to probably more than 25,000 barrels a day and above as you get towards the end of Q1 or Q2 next year in 2024.

Speaker 1

Okay. And speaking of changes in the portfolio toward the end of year. We've had a few questions on operating costs. And I think you addressed much of this in your prepared remarks. But Perhaps you can just rehash for the few people who've been asking this question.

Speaker 1

We've presented in these results a number of $21 per barrel for OpEx in the first quarter, which obviously compares very favorably to our guidance number of $30 per barrel thereabouts. Can you comment on why such a difference between what we observed in Q1 and what we're anticipating for the full year?

Operator

Yes. So a few things in that is obviously the OpEx that we built out, Put up in guidance is you still have 2 companies that are operating. As we move through 2023, we will look at how the synergies that exist and how we can use Vista to kind of bring down some of those costs. So the guidance numbers though are really based on looking at the 2 companies and building them up separately. And we do expect synergies as we move forward.

Operator

But the main point is that Q1 did not include the OpEx for Wassana. And Q4, we expect Nongyao OpEx to come in at a higher level as you're paying some lease costs on the equipment that's installed and yet you don't you won't have brought that production on.

Speaker 1

Okay. A couple of questions on CapEx as well. And again, I know in your prepared remarks, you went through some explanation of the split between what's to be considered maintenance and what's growth. And specifically, the question is, when we're talking about growth CapEx and that approximately 50% of the capital budget we've got for you per year, Are you talking about growth in reserves? Or are you talking about growth that's just oriented toward production?

Operator

Yes. So the key point is we've shown to people and it's been in Other slides is that the reserves that we have largely remain unchanged each year because the amount of production tends to be replaced with about 100% reserve replacement each year. And we do expect a similar result this year. So you are talking really about more it's the production that you're actually yielding with that. And as we noted, we do expect the average production in Q4 to be above the levels that we're currently producing at, which is just over 23,000 barrels a day.

Operator

Okay.

Speaker 1

Okay. A question on reserves while we're on the topic. One of our investors has noted in our reserves report that we published earlier in the year, there were a couple of the 1P reserves values that were negative. Can you comment on this? And do you believe that the future outlook of our assets is being misinterpreted by the reserves evaluator?

Operator

Yes. And it's not so much that I would put it down to the putting blame on the reserves evaluator at this point in time. But it's back to that slide I was referring to a moment ago, which shows, especially as you look in those slides, the 1P each year remains largely unchanged. So that's one of the key points is that, okay, yes, the 1P for a couple of fields is looking like it could be just borderline economic, but the number doesn't change each year. And that's going back 6 years.

Operator

We've demonstrated that. And then the other key point to really bring up is the 1P always just assumes its drop in production. The abandonment comes very quickly and the 1P is fully burdened with the abandonment costs. So it's really not Surprising that if you only have the 1P, you accelerate the abandonment forward and you burden the 1P with the full abandonment cost. That's why you see that kind of number.

Operator

But again, I'd ask you to refer back to the presentation we showed before, which is 100% reserve replacement ratio on the 1P.

Speaker 1

Okay. Okay. A couple of questions on taxes as well. And Specific question, what can we expect for taxes in 2023, either as an effective rate for kind of general expectation on applying tax pools. And the investor has noted here that when we announced the Chris Energy deal, we did mention that there were tax losses involved.

Speaker 1

What should we expect is the question? And Heather, perhaps you could take that one, if you don't mind coming.

Speaker 2

Yes, no problem. So for 2023, you can expect, as we've said before, Any Wassana is fully tax shielded. The Mubadala assets are not at this point in time. However, work is progressing on that reorganization to allow those tax pools from Lozano to be shared across more assets and that will but that will take several months.

Speaker 1

Okay. Thanks, Heather. While we've got you, a couple of questions, More balance sheet related things, special remuneratory benefit or SRB, which is Thailand's effective windfall tax. The investor is asking how much of that SRB is included in the payables that we have on our balance sheet, which are about $173,000,000 in total.

Speaker 2

Right. So about half of those are SRB. SRB will be in the range of about $80,000,000 and it will be paid actually this later this month.

Operator

And that SRB is really related to 2022, right, with the period of high oil prices that existed there and that's why there is this high level for the payment that's now due?

Speaker 2

Correct. Yes. That's all related to 2022 and that's over $100 oil price we've had in the middle of the year.

Speaker 1

Okay. Also a couple of questions have come in on decommissioning. And Specific question, are payments for decommissioning deductible for tax purposes in Thailand?

Speaker 2

They are deductible when The expenditure is made. So I think we've described before about the securitization of that with the government. That is just Putting in place letters of credit or deposits, that's not tax deductible. But when the expenditures are made, they are.

Speaker 1

Okay. And another question on DECOM, has the undiscounted estimate for total decommissioning costs changed? Or are is the number that we're seeing on the balance sheet really just the discounted value?

Speaker 2

Yes, the number on the Balance sheet, so the undiscounted, uninflated value has not changed. The amount on the balance sheet is the present value.

Speaker 1

Okay. Just a couple more questions. And just a reminder, you can use the Teams app and those pop up in front of us. Just trying to sift through the last few of them here. Our favorite question, dividends, any plan to start paying a dividend?

Speaker 1

Look,

Operator

at this point in time, not immediately. Obviously, our key focus this year is on demonstrating that we have the cash flow from these assets and starting to really put in place that kind of cash cushion as we go forward. We expect the Board again to kind of look at this dividend policy and whether there might be a dividend introduced in the future. But really at this point in time, as we've kind of tried to emphasize, we do believe in growth and we can actually put money into growth to deliver good value as we did last year and as we hope we can do as we go forward in the coming years. Now just to reiterate, again, if we find a few years Now that we're getting strong cash flow from the assets, we're not seeing good accretive opportunities for growth, then I would expect the Board to look much more as to how you return those funds to shareholders.

Speaker 1

Okay. We've had A few comments from investors here saying to the effect of why is the share price still so low? And maybe just to sort of bundle that with a Slightly more specific question, one of our investors is asking, your Q1 earnings are nearly $3 a share, which is obviously well above your current share price. So clearly, the company looks very undervalued. What are you doing attract investors and in particular long hold institutions into our stock?

Operator

Yes. So that's a really good question because Obviously, we believe, like the investor does, that the share price is currently well undervalued. When you look at the metrics relative to other companies. When you look at the cash flows and that, it just in our view, it just doesn't make sense at this point in time. So we appreciate the question coming forward.

Operator

It is a focus now as we kind of get the company operating stable to find the executive, yes, we are going to start to look at marketing more. We're going to be as we get the assets fully understood, we'll be looking at a Capital Markets Day because we really think it's important to have the time with the investors to explain the story. It is really a bit of a different story and it takes a bit of thought, but we really see the potential for growth in the share price continuing. Last year, we were obviously, I think, number 2 on the Toronto Stock Exchange and Venture for return to shareholders at 3 75%, and we see more of that this year.

Speaker 1

So Sean, maybe I'll just add another comment to that. It bears mentioning that for much of last year. And in fact, the last 2 years, we were in a blackout phase, which prevents us as insiders from buying and selling shares, also prevents us from being in the market and actively marketing the story. We're beyond that now. We're out there on the road and doing just as much We can't to meet with investors.

Speaker 1

We've had a very good reception, both in the UK and North America. And that work is continuing As soon as next week, we'll be back on the road.

Operator

Yes, Robin. And maybe another point on that is just to say now where we have got to with our Board and executive holding, I believe it's over 10% of the shareholding in the company at approximately that level. So we remain heavily invested in the success of this business.

Speaker 1

And speaking of investors that are heavily invested, we've had a couple of questions here about our largest shareholder, Baillie Gifford. And right off the bat, obviously, we can't speak for their intent and what they might be doing. You'd have to ask them themselves. But the question is, did Bailly Gifford sell down in large volumes in April? And do we know They're looking to exit.

Speaker 1

And the one thing that I'll mention is Bailey Gifford is very good about publishing the transactions that it does when it crosses through the statutory thresholds. So on SEDAR, you can see their reports as to what they've sold and when they've sold it. Beyond that, yes, you'd need to ask them what their intent is, but we believe them still to be a very significant shareholder of the business.

Operator

That's correct. We would have had to have seen on SEDAR that they would have made a filing if there had been a large change. And all I can say is we do remain in communication with them.

Speaker 1

Good. It looks like, Sean, that's all for questions. So With that?

Operator

So maybe just before we kind of sign off, I just really want to thank Heather. As the company is moving over to Southeast Asia given mobility issues, Heather has decided to remain in Canada and seek other opportunities. So I really wanted to thank her for her time with Valeura and to really financial oversight as the CFO over the past number of years. So again, thank you specifically for that, Heather.

Speaker 2

Thanks, Sean. It's been a great ride and wish everybody all the best.

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Valeura Energy Q1 2023
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