Sable Offshore Q2 2026 Earnings Call Transcript

Quartr
Provided by Quartr
August 11, 2026

Key Takeaways

  • Positive Sentiment: Sable reported a second-quarter exit-rate oil sales volume of approximately 40,000 barrels per day after restarting Platform Heritage, with Platform Hondo targeted for restart by the end of September 2026. Management said well performance remains strong and expects production to become largely unconstrained in the fourth quarter as pumping, gas-compression, and handling issues are addressed.
  • Positive Sentiment: The company completed a refinancing that replaced the ExxonMobil seller note with a $675 million senior secured term loan and approximately $345 million of 6.5% convertible notes, reducing its weighted-average debt cost and adding flexibility. Management plans further balance-sheet optimization after a full 3P reserve report, with a long-term target of one-times net debt to EBITDA.
  • Positive Sentiment: At a $75-per-barrel Brent assumption, Sable projects approximately $152 million of unlevered free cash flow in the second half of 2026 and into 2027, and more than $500 million over that period. Management believes the stock is materially undervalued based on its projected 2027 free cash flow, although these estimates depend on achieving the production ramp and resolving marketing constraints.
  • Negative Sentiment: Near-term crude marketing constraints, sulfur penalties, transportation costs, and demurrage reduced realized pricing by as much as $30 per barrel. Management expects these impacts to remain elevated through the third quarter, improve in the fourth quarter, and settle near a roughly $20-per-barrel discount thereafter, subject to refinery and pipeline capacity.
  • Neutral Sentiment: The company is pursuing additional outlets, including a potential offshore sales buoy near Platform Harmony, but the project remains dependent on regulatory approvals and would likely require engineering and procurement before a potential 2028 installation. Sable also continues to await developments in its federal court proceedings and a possible California Strategic Petroleum Reserve designation.
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Earnings Conference Call
Sable Offshore Q2 2026
00:00 / 00:00

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Operator

Hello, and welcome to the Sable Offshore Corp Investor Update Call. All participants will be in listen only during the prepared remarks. We will then go into a Q&A session. Also, as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. Harrison Breaud, you may begin.

Harrison Breaud
Harrison Breaud
VP of Finance and Investor Relations at Sable Offshore Corp

Thank you, Alice. Good morning, everyone, and welcome to our second quarter 2026 earnings conference call. Joining me today to discuss our results are Jim Flores, Chairman and Chief Executive Officer, Caldwell Flores, President and Chief Operating Officer, Gregory Patrinely, Executive Vice President and Chief Financial Officer, and Anthony Duenner, Executive Vice President, General Counsel, and Secretary, as well as various other members of the Sable team. Please refer to our website to download a copy of our new investor presentation posted yesterday, as well as our recently filed financial statements, which will both be discussed today. We will actively display the presentation on this webcast and reference certain items by page number, and then proceed to Q&A. We will also be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions and are subject to risk and uncertainties.

Harrison Breaud
Harrison Breaud
VP of Finance and Investor Relations at Sable Offshore Corp

Actual results could differ materially from those described in the forward-looking statements because of factors discussed in our earnings release, in our investor presentation, in the comments made during this conference call, in our most recent Form 10-K, Forms 10-Q, and other reports and filings with the SEC. We do not undertake any duty to update any forward-looking statements. With that, I will turn it over to Jim Flores to begin going through the investor presentation. Jim?

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

Thanks, Harrison, and good morning, everyone. As promised, we said we'd have a conference call at some point in time. This is our first conference call for earnings from Sable Offshore, so welcome, everyone. After looking at page three of the presentation, it's more of the summary stuff you've seen before, but page four is the milestones achieved, the next steps. We've listed them all since the beginning of this saga in 2025. Then the three updated ones, restarting production with Platform Heritage in April 2026, refinance the senior secured term note July of 2026, and commence the commodity hedging program July 2026. The next steps are restart production at Platform Hondo, which is expected at the end of September 2026.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

We get a full fourth quarter, and establish full 3P reserve report expected first quarter 2027. Then we refinance the Senior Secured Term Loan B note and convertible senior unsecured notes, and potentially install a full sales buoy at Santa Ynez unit and continue to legally protect Sable's vested interest and pursue all monetary damages. Those are five big milestones ahead of us, and we expect the next 12 months to achieve those. On page five, which is our corporate update, our operations we're going to go through extensively today. The second quarter 2026 exit rate oil sales of 40,000 bpd represents a huge growth into what our oil sales have been prior to that.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

We've kicked off a wireline campaign now that we have all the wells open or potentially open to mitigate water influx and really try to trim up our production to wherever it is efficiently as possible. We're working feverishly on Platform Hondo. Platform Hondo is a 45-year-old platform. It's in bad need of restoration. That's probably the best word for it. But we're doing great work there. We've got a great team and so forth, and we're just hoping we can hit that timing in September. Then we're working with the refineries and the downstream. We brought in a large quantity of oil for the California onshore refinery market, and we're working our way through that process of making sure everybody's getting comfortable with our oil, the quality of it, and also the volume of it. We'll go into detail on that in another slide.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

For regulatory and legal, we continue to wait on the U.S. District Court for their findings and also the Ninth Circuit, as we've been side by side with the U.S. federal government, working along with the Justice Department to be in a situation where all the federal regulations that we're adhering to at Sable Offshore are being recognized through the courts. We'll continue to update that as go, but there's no update today from that standpoint. On the finance side, we completed the refinancing of July 2nd, 2026. Proceeds were to retire the former ExxonMobil senior term note. That was really key because there are a lot of restrictions, the ExxonMobil senior term note that we now have a little more flexibility with the current financial structure. It's not optimal for us at this point, but it was a big step for us.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

The commodity hedging program, one of the things we put in place, you'll see we've got some floor protection for a significant portion of our production. Just in case all the volatility goes the wrong direction, we'll be protected. We'll look at further balance sheet optimization in 2027, once all our wells are on and our reserve port's out there and we're at full power. On page four, Gregory, I'm going to turn it over to you and let you take us through the financing overview we did and a couple of other financial slides.

Gregory Patrinely
Gregory Patrinely
EVP and CFO at Sable Offshore Corp

Yeah. Sure. Thanks, Jim. Page six, the refinancing overview, like Jim just mentioned, we completed our bridge refinancing in early July that fully satisfied and took out the ExxonMobil seller note, seller financing, the prior Senior Secured Term Loan. We did so with a series of transactions, starting with the $675 million Senior Secured Term Loan B. This Term Loan B has a maturity of December 15, 2028, and it was structured as a fully amortizing loan through the maturity of the security itself. So that is fully amortizing through a mandatory amortization of 2.5% per quarter in the back half of this year, stepping up to 5% per quarter beginning in 2027.

Gregory Patrinely
Gregory Patrinely
EVP and CFO at Sable Offshore Corp

It also includes a 100% excess cash flow sweep feature, which could potentially accelerate that amortization depending on the prevailing commodity prices. It does have a 1.25x MOIC minimum takeout, and we will certainly be looking to de-lever on the amortization front and the excess cash flow sweep front. But as Jim mentioned, when we achieve our additional milestones and get a full 3P reserve report, we will be pursuing phase two of the refinancing efforts.

Gregory Patrinely
Gregory Patrinely
EVP and CFO at Sable Offshore Corp

I think we are very happy to complete this bridge financing, satisfy our obligations with the seller note, ExxonMobil, but we certainly have room to improve on the interest rate front, interest rate reduction, and we look forward to approaching the market here in 2027. In addition to the $675 million Senior Secured Term Loan B, we issued about $345 million of convertible senior unsecured notes. Those notes, the five-year notes, July 1, 2031 maturity, 6.5% coupon with a $4 per share initial conversion price. Overall, we lowered our weighted average cost to debt, but we certainly have a room to improve and looking forward to further optimizing the balance sheet.

Gregory Patrinely
Gregory Patrinely
EVP and CFO at Sable Offshore Corp

In conjunction with those debt securities, we put in place a zero borrowing base, $500 million revolving credit facility that was designed to allow us to commence that hedging program and fulfill our obligations under the term loan deed, meet those minimum hedging requirements by hedging 100% of our Netherland, Sewell & Associates, Inc. projected PDP production. We have the ability to hedge beyond those minimums, and we are currently evaluating adding additional volumes, which we will get into.

Gregory Patrinely
Gregory Patrinely
EVP and CFO at Sable Offshore Corp

Slide seven is a brief overview of our updated financial guidance, which includes our sales and cost guidance. Like Jim mentioned, we do have slightly elevated short-term marketing and GP&T deducts reflected here for the back half of 2026. We will get into why we think these issues will be alleviated here in the near term, but it is part and parcel of the California energy market with all the regulatory headwinds and constraints.

Gregory Patrinely
Gregory Patrinely
EVP and CFO at Sable Offshore Corp

Our capital structure, as we illustrated on the prior page, an enterprise value of $1.9 billion, equity value of $911 million at the $4.75 share price as of August 7th. Our financial objectives, as we mentioned, we fully plan to de-lever under the terms of the new Senior Secured Term Loan B and/or refinance and take out that paper as soon as possible after we issue the full 3P reserve report where we get credit for all the PDP reserves that we will bring online at Hondo here in September.

Gregory Patrinely
Gregory Patrinely
EVP and CFO at Sable Offshore Corp

Also all of our PUD locations, which were not included in the prior interim Netherland, Sewell & Associates report. We will continue to optimize the balance sheet with the phase two of our refinancing, lower our cost of debt, and increase our maturity runway beyond 2028. We will certainly opportunistically manage the convertible notes to minimize any potential dilution there.

Gregory Patrinely
Gregory Patrinely
EVP and CFO at Sable Offshore Corp

We have the ability to do that with cash. We will progress our rating agency discussions in advance of this phase two global refinancing of the balance sheet, and look forward to continuing those discussions as well. Long-term, we still have a one times net debt EBITDA leverage target. We fully plan to hit that metric. Like I mentioned, we are going to advance the hedging strategy by adding additional floor pricing protection, likely in the $65-$70 per barrel range, to protect the downside relative to our current volumes. Then long-term, post call it phase two of the global refinancing, we plan to implement our shareholder return program and focus on reducing the share count with share repurchases and instituting a dividend at the appropriate time. Slide eight is our unlevered free cash flow guidance at strip pricing.

Gregory Patrinely
Gregory Patrinely
EVP and CFO at Sable Offshore Corp

We are basically walking through and doing a little bit of math for you here, which leads into the following slide and the value proposition that Sable Offshore creates with the free cash flow profile today. Even with all of the marketing and crude quality constraints, near term constraints, we are still projected to generate a midpoint of $152 million of unlevered free cash flow for the back half of 2026 and into 2027 based on a Brent oil price of $75 a barrel. We are projected to generate over $500 million of unlevered free cash flow. Slide nine. We believe that the current trading valuation of Sable doesn't fully reflect the projected earnings power, the cash flow profile, and the capital allocation of the company. We think this analysis on slide nine illustrates that.

Gregory Patrinely
Gregory Patrinely
EVP and CFO at Sable Offshore Corp

When you take a look at our levered free cash flow per share on the top left here for estimated 2027 levered free cash flow per share of $2.19, and you compare that to our pure free cash flow yield of relatively 14%, it is implying a share price of over $15 a share, and that represents a 220% premium to our share price as of August 7th. It is about $4.75. We think, on a basic outstanding share count basis, and even on a fully diluted share count basis, which includes all of the potential shares from the convertible notes, which we believe would be unrealistic, you still have 125% premium to today's price.

Gregory Patrinely
Gregory Patrinely
EVP and CFO at Sable Offshore Corp

We think the value proposition on our shares is real, and we look forward to moving forward as we ramp up this asset, because remember, restarting an asset of this quality and in this scale, the toughest part is, it is like flying a plane. The hardest parts are takeoff and landing. Right now, we are on the ascent, and we are very much looking forward to getting into the fourth quarter and into 2027, cruising in altitude and attacking our financial objectives that are all laid out in front of us. Slide 10. This is our current hedging program. We have layered in costless collars, which we were required to place five days after the closing of the refinancing on July 2nd, 2026.

Gregory Patrinely
Gregory Patrinely
EVP and CFO at Sable Offshore Corp

For the third quarter of 2026, we have got collars hedged about 26,000 bpd, growing to 29,000 bpd in the fourth quarter, all with $65 floor pricing. In the back half of this year, our ceiling is about $89.39 on Brent. In 2027, recall, these are 100% PDP hedged volumes. We have got 25,000 bpd, and in 2028, 21,000 bpd. We were required to layer in that 100% of PDP volumes per the Term Loan B through maturity. That is why we have layered in these collars. We think they give us solid floor pricing protection to the downside, but also allow us to participate on the upside, and certainly with the unhedged volumes as well.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

Great, Greg. On the midstream of Brent crude marketing overview on page 11, a lot of moving parts here with the California market. More importantly for us, at SYU, we do not have Platform Hondo on, which is our easternmost platform. If you look at the field from west to east, the higher sulfur contents are to the west and the lower sulfur contents to the east. Once we get all the wells on and so forth, we should be able to mitigate most of the sulfur deducts that we got hit with here in the second quarter and we will also be dealing with in the third quarter. Plus some chemical things we are trying as well that should work out well. We really appreciate all the refiners working with us because of the magnitude of the flows out of our field.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

They were surprised and from the upside, but we had to make a lot of movements around there. Chevron has been over backwards trying to help us get all the crude moved. With that, we have a plan to debottleneck that with Chevron starting in September, as well as two other refineries that are looking at taking our crude and so forth. We will have ample output in the Los Angeles refining basin going through the Plains Line 2000. Additionally, there are additional pipelines that we are looking at going north. The San Pablo Bay Pipeline looks like it is going to be in service. Thanks to California Resources. We will look at being a third-party customer to those guys as well as another outlet for excess crude. We have got to solve those situations for us to put driller rigs out here and start increasing production.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

We want to do that sooner rather than later. We want as many multiple outlets as possible when we hit capacity in certain areas like going south of Line 2000. Finally, we are moving along with our legal strategy toward getting an offshore buoy off of Platform Harmony and SYU. It is premature to discuss the ins and outs of that, but that is still hot on our deal and looking forward to some good work out of Washington, D.C. to get that in a position where we can start working on that and get it built and funded here in 2027 for 2028 as a long-term potential safety valve to make sure we have the best marketing for you. All that is in progress.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

We are working hard on it and so forth. We feel like here in the third quarter, it is going to be kind of a low point on the marketing, all the demurrage charges and things of that nature. Then fourth quarter one, we should be improving slowly going into 2027. The same thing we are hearing from our refining partners as well. On page 12, I mentioned the buoy. We have an illustration where it is sitting off a Platform Harmony. This is more of a cartoon at this point in time, but you can see the aspect. It gives us a lot of flexibility bypassing the onshore market if we have to and give us a better marketing opportunities here with waterborne crude and the captured California market. Page 13 is just to remind everybody the significance of this asset. The asset has not changed. Prices have changed.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

Marketing has changed. Legal has changed, but this has not changed. Santa Ynez Unit is still the number one field in the United States based on estimated recovered reserves and cumulative production. It ranks number four. Page 14, one of the aspects we are working on is our total reserves out here. We have got a tremendous reservoir that has only had 25% of the proved reserves ultimate recovery taken out of the 671,000,000 bbl, or 4.3% of the total barrels produced to date. We think we have about 10% remaining barrels, about double that amount, which gets up to about 1,000,000,517, which is 899 of the primary forecast. Our heavy oil forecast below 13 gravity oil, 9 to 13 gravity, another 618,000,000 bbl. We have a lot of oil to get out of the ground. We are glad we are getting started finally on it.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

Page 15 is our operating development plan going forward. You see it is very light on capital because of all the wireline work and so forth. Caldwell and his team have commenced a wireline work where we are doing a lot of water mitigation on Harmony and Heritage. Some wells with a high water cut, we either slide sleeves on them or put through tubing plugs, trying to shut off some of the water from the lowest zone and allow the upper zone oil to flow better. We are in the middle of that program and look forward to some really good results. Also it helped relieve a lot of our handling capacity issues, so we get 100% of the wells on production by the fourth quarter.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

Right now, we're constrained because of pump size at Heritage. Also, we're not making enough gas at Harmony and Heritage to run all the compressors. We have to get all the wells on. It's a chicken and egg deal. If we shut off some of the water that we want to process onshore, then we'll have room for these wells to bring on more gas to get all the compressors on and with the new pumps, be able to pump it out. The field is coming on spectacularly. We're still seeing no decline in our production volumes. The wells are very strong and so forth. It's just getting consistent top side and unrestrained top side throughput, which is the main goal going forward.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

On page 16, we talked about the previous Perf Adds and so forth that we've done at about 600 bpd per Perf Add. We've got several of those planned for 2026 and also for 2027 that are coming on. We're accelerating that, and we look forward to having a lot of those behind us and enjoying that production starting in 2027. On page 17 is an illustration of the massive reservoir we have covering 77,000 acres. There's over 1,400 ft of pay and many places the Upper Siliceous hadn't even been perforated, and that's the easy stuff we're going for, as well as the massive chert's got tremendous reserves based on development drilling. Then the heavy oil stuff we haven't touched yet, and that's for down the road. On page 18 is our initial drilling inventory just in the Upper Siliceous.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

You think about it, you have these 500,000,00 bbl oil fields sitting on top of each other. There's three of them, with the Upper Siliceous, the massive chert, and the heavy oil and so forth. We're just in the next 20 years will just be drilling wells for the Upper Siliceous, who have a long inventory, multi-decade inventory to drill and produce. But we need to make sure everything's running top side in first-class shape. Page 19, you see the investment highlights. We transitioned to federal oversight successfully. We've grown it for low-cost production growth, so forth. We're able to control our costs. You can see that in what our CapEx looks like going forward and our ability to maintain production, if not grow it, here in the near term. We have a large development inventory.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

Once we get our marketing de-bottlenecked and so forth, we'll be looking at putting some rigs out there and be able to develop that with our large production base, shallow decline. Therefore, our maintenance CapEx is very low. High operational control, we own it 100%, and control and operate everything. Then linking our crude sales to Brent is important. We've just got to get rid of the discounts. Our safety and stewardship is outstanding. We continue to pride ourself there and have continued to get rewarded for that going forward. We're going to continue a conservative financial policy by amortizing our debt until we refinance it. Everything else is in the appendix. Happy to take questions. Harrison, I'll turn it over to you guys, and we'll get some questions and make sure we have a little bit going on.

Harrison Breaud
Harrison Breaud
VP of Finance and Investor Relations at Sable Offshore Corp

Sure. Thank you, Jim. At this time, we will now answer questions from analysts. Please use the raise hand feature in the webcast. I will pause a moment while the queue forms.

Operator

Thank you.

Harrison Breaud
Harrison Breaud
VP of Finance and Investor Relations at Sable Offshore Corp

Alice, please proceed with Q&A.

Operator

Thanks, Harrison. As a reminder, at this time, if you would like to ask a question, please click on the raise hand button, which can be found on the black bar at the bottom of your screen. When it is your turn, you will receive a message on your screen from the host allowing you to talk, and then you will hear your name called. Please accept, unmute your audio, and ask your question. We will wait one moment to allow the queue to form. Our first question will come from Lloyd Byrne at Jefferies. Please unmute your line and ask your question.

Lloyd Byrne
Lloyd Byrne
Analyst at Jefferies

Hey, good morning. Thank you for all the information, guys. Can you just walk through the discounts a little bit more, and then what happens, what the discount looks like when you can blend the sulfur? Maybe Jim also, what are the other options for lowering that discount going forward, and does the SPR play into that? Just how do we think about those on a going concern basis? I have one quick follow-up.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

Well, with the sulfur and the demurrage and also the differential and the transportation totals up to $30 a barrel discount. The sulfur is about $10 out of it, and the sulfur and demurrage is about $10 out of it. We see that being mitigated, as I said, as we bring on Platform Hondo to get our field-wide production down below our penalty level, as well as some of the chemical stuff we are doing. As well as the demurrage, basically, we had to cover Chevron's costs as they turned tankers around and to take our productions as quick as they did. We have one more of those to do in the third quarter. I think you are in the second and third quarter, those costs are going to be pretty steady.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

Going forward in the fourth quarter, that is when we will see the release from the demurrage and also the sulfur get back down to around $20 a barrel. That is what is reflected in the guidance. The $20 a barrel is going to be market driven because you have $3 of transportation and $17 worth of dips at the refinery. We are going to continue to work with the refiners to see if we cannot mitigate that, but we are not forecasting any change at this point in time.

Lloyd Byrne
Lloyd Byrne
Analyst at Jefferies

Okay. All right, thanks. Can you just talk a little bit about what 2028's capital program looks like? Obviously, you lowered the capital spent this year, and then raised it a little bit in 2027. How does 2028 look and kind of the trajectory going forward there?

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

It's page 15, Lloyd. Assuming we don't refinance the debt, page 15, the 2028 capital look a lot like 2027 and 2026, so forth. It would strictly be well ad work and so forth. If we're able to successfully refinance, then we'd be looking at putting some rigs out there and growing production and accelerating our rig program. But it all depends on where we are financially and what our balance sheet looks like. Gregory?

Gregory Patrinely
Gregory Patrinely
EVP and CFO at Sable Offshore Corp

Yeah, Lloyd, great question. Remember, we have capital governors for 2027 and 2028 per the new Senior Secured Term Loan B of $100 million a year. So beyond 2026, we're capped out absent some waiver at $100 million for 2027 and 2028. And like Jim mentioned, we go refinance that, we'll have some freedom to adjust the capital budget.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

That'd be a good reason to do it. Also, we have a carve out of $150 million for a buoy if we get in a position to build that.

Gregory Patrinely
Gregory Patrinely
EVP and CFO at Sable Offshore Corp

Correct.

Lloyd Byrne
Lloyd Byrne
Analyst at Jefferies

Okay, awesome. Thank you, guys.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

Sure.

Operator

Our next question comes from Michael Furrow at Pickering Energy Partners. You may now unmute your audio and ask your question.

Michael Furrow
Michael Furrow
Analyst at Pickering Energy Partners

Good morning to the Sable team. Can you hear me okay?

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

Yes, we can.

Gregory Patrinely
Gregory Patrinely
EVP and CFO at Sable Offshore Corp

Morning, Michael.

Michael Furrow
Michael Furrow
Analyst at Pickering Energy Partners

Great. All right, thanks for the confirmation. Look, I think it's safe to say it's been a pretty eventful second quarter. Maybe we can just start with the production ramp. We recognize there's no guidebook to restarting an asset like the Santa Ynez unit, and this is the first for the Sable team as well. The production ramp does seem to be going a little slower than expectations, at least versus our expectations. So I think what we and others would like is just more confirmation and clarity on what the economics and cash flows are going to look like when the asset reaches its plateau.

Michael Furrow
Michael Furrow
Analyst at Pickering Energy Partners

We appreciate the guidance update, and we can kind of piece through the math, but just how confident are you in achieving the run rate operating costs of roughly $160 million and $190 million next year after operating costs for nearly $95 million, before considering the demurrage charges in 2Q? Maybe it's just something as simple as having fewer employees and less work on the platforms once reaching a steady state. Anything you could provide detail-wise on the operations that would increase confidence in margin guidance going forward would be helpful.

Gregory Patrinely
Gregory Patrinely
EVP and CFO at Sable Offshore Corp

Yeah. Michael, great question. I think the key point here is it's not a production issue, right? There are third-party sales constraints that have not allowed us to sell all of the barrels that we produced. The wells are performing outstanding, like Jim laid out, and I think you've seen that detailed in our earnings materials. We've been filling inventory in our 540,000 bbl storage tanks at Las Flores Canyon and trying to deplete that inventory and have run into short-term throughput constraints due to third parties. That's part of it. I feel very, very comfortable about our ability to hit our production targets.

Gregory Patrinely
Gregory Patrinely
EVP and CFO at Sable Offshore Corp

As these short-term constraints, on the throughput side, both on midstream and the downstream, get alleviated here, in the short term, as in the next several weeks to months, or month, by September, we feel like there won't be a disconnect between our ability to produce barrels and our ability to sell the barrels that we produce. That's one thing. The second item is on the operating cost front. Remember, we have a tremendous amount of contract labor and other labor dedicated to restarting these three platforms, which we're still in the process of in terms of Platform Hondo, right? We won't be in the restart phase forever, and what we're projecting here is we start coming out of that restart phase, in the fourth quarter.

Gregory Patrinely
Gregory Patrinely
EVP and CFO at Sable Offshore Corp

The reason why we provided the 2027 guidance was to give you a look at what fully ramped production and sales would look like with a more of a steady state operating cost posture. I would say, 2027 is a great look. What 2027 doesn't include, importantly, is any type of waterborne marketing optionality, any type of additional marketing leverage. It doesn't include potential chemical solutions that we're looking at to reduce our sulfur content, which right now we think could potentially, for every dollar you spend on the chemical, could yield a $4 cost savings. None of that is included in our guidance. We think there's a lot of upside ahead. Like I mentioned, we're on the ascent of this takeoff, and this is an asset of the size and the scale that we're going to do it right.

Gregory Patrinely
Gregory Patrinely
EVP and CFO at Sable Offshore Corp

We're not managing this business for the next several months. We've got a 50+ year reserve life asset that we're going to take care of and make sure that we spend the capital to be safe, all the capital. What you've seen in the capital reduction between our June guidance and now here in August, is we've deferred any and all capital that's not related to producing more barrel, producing and selling more barrels, maintaining safe operations, and attacking our restart at Platform Hondo.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

Right, Gregory. I'll just add a little bit more to that. The aspect of unintended consequences with the volume of the wells basically double than what we expect and so forth, it's overrun some of the pump capacity and the platforms. We've got new pumps on order to increase that. These are all great problems to have, but at the same point in time, you can't get all the wells on that you want because you can't handle all the production through the pipeline. We're going through that whole process and there's also another constraint we have is it's a lot more oil than gas. The gas production's low, therefore getting all the compressors for the gas lift restarted are a challenge. We're working through all those and there's solutions for it all, but these are all great problems to have.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

That's why we pointed everybody during the financing to the fourth quarter of this year, we'll be up, all our marketing contracts, our marketing bottlenecks would be behind us. We have line of sight to that right now here in August, what we're saying about fourth quarter. All our production will be unconstrained and so forth, and we'll probably have some well line results as well from there. We're like everybody else. It's going to be a long, hot summer the rest of the summer, but we're looking at the fourth quarter and certainly into 2027, really be able to show the asset we have.

Michael Furrow
Michael Furrow
Analyst at Pickering Energy Partners

All right. That's great. I appreciate the clarification and detailed response. Maybe we can just follow up on that point on the waterborne marketing angle, Gregory. When do you think the company would be in a position to move forward with that decision to install a sales buoy? I understand it's maybe a bit premature to discuss, but ultimately, you'd want to try to avoid moving forward with that capital spend if the midstream constraints are going to alleviate themselves. Of course, there's other considerations when going down that route. What market signals are you looking for over the next six months, and when do you think you would need to make the decision to move forward with the buoy path for a year-end 2028 installation?

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

It is really regulatory. It is not market signals. The market signals are there. It is about at least a 50% improvement in this and so forth, and just having the flexibility out there. We are looking at the regulatory aspect that we have got a lot of things, conversations with a lot of federal authorities on what we need to have and get done and so forth.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

They look at this as an important part of the security of the offshore barrels staying offshore. We will wait to hear on all that. We did not get anything done by the August recess, but this fall is going to be very active. Once we get that, then we will have about four to six months of engineering, another six to nine months of procurement. It will be every bit of summer 2028 getting it installed and getting it put on there. I guess that is going to be hard to move that up at all. But under our timeline, we are right on that schedule right now.

Michael Furrow
Michael Furrow
Analyst at Pickering Energy Partners

All right. Thanks for your time.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

Sure.

Operator

Our next question comes from Leo Mariani at ROTH. You may now unmute your audio and ask your question.

Leo Mariani
Leo Mariani
Analyst at ROTH

Yeah. Good morning, guys. Why don't you just follow up on where do you think things stand these days with the potential SPR declaration in California? Is that something you think is moving forward at a good pace here?

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

Yeah, Leo, I think it's getting widespread support. CIPA came out with a big 12-page report, California Independent Producers, and it just debottlenecks the whole California energy onshore market pipelines and so forth. It definitely needs to happen. It's going to benefit all the producers and all the refiners and so forth, keep them in business. Connect more pipes, more flexibility. We haven't heard any headwinds in D.C. from it. We're just here about mechanics, and we're looking forward to seeing some resolution on that this fall.

Leo Mariani
Leo Mariani
Analyst at ROTH

Okay. Appreciate that. Also wanted to just touch base on this $500 million kind of no borrowing base working capital, I guess, facility put in place for the hedging. Do you see potential for there eventually to be some borrowing base and some ability for Sable to draw on that? Is that something that's restricted until perhaps you guys can refinance the existing term loan and/or the convert? Just trying to get a sense of when you might be able to get in more of a regular way, sort of a working capital facility.

Gregory Patrinely
Gregory Patrinely
EVP and CFO at Sable Offshore Corp

Yeah, Leo, this is Gregory. Great question. I think the way to think about increasing the borrowing base would be post pay down of the term loan, the new Senior Secured Term Loan B. So we hope to de-lever as quickly as possible and refinance and take that out, open up the borrowing capacity. Also, once we bring Platform Hondo online, like I mentioned, we'll get additional PDP credit and then our PUD credit as well with the development program that we have. Once the Term Loan B capital governors are alleviated.

Leo Mariani
Leo Mariani
Analyst at ROTH

Okay, I appreciate that. I guess just on the more fulsome refi in 2027, which you guys certainly spoke to post the reserve report here, could you maybe give us a little bit more color on what the current thinking would be after that happens, if it is all successful, in terms of trying to return capital to shareholders? Do you guys try to get a buyback going first, then maybe a dividend comes down the road if you guys are able to reduce the share count? I just want to get management's current thinking on how that could proceed.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

Yeah, all of the above. The aspects, I think initially, will be some type of dividend, and then, depending on what oil prices are on the stock buyback, is where the board's thinking at this point in time. But right now it is getting our balance sheet in good shape, and that is why amortizing the debt with the cash flows is successful at this point in time. We have got the real capital light program to keep our production maintained and so forth, and all the improvements are within our control. I think next year too is making sure that getting the balance sheet in a regular way situation where we can have those options. But right now, there is obviously going to be no cash leaving the system until we get the balance sheet under control.

Leo Mariani
Leo Mariani
Analyst at ROTH

Okay. Thank you, guys.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

Sure.

Operator

Our last question comes from Charles Meade at Johnson Rice. You may now unmute your audio and ask your question.

Charles Meade
Charles Meade
Analyst at Johnson Rice

Yes. Good morning, Jim and Gregory, and to the rest of the Sable team there. Jim, I'd like to go back to Leo's question on the SPR. If I heard you correctly, you said you expect some kind of resolution this fall on that, and that you've got some enthusiasm not just from other producers, but also pipeline and refinery operators in California. What solution that you're looking for, what form is that going to take? Has there been any evolution, either on your side or on the government side, of what the designation will look like in terms of assets for that SPR effort?

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

Well, Charles, you were breaking up and I think you were talking about the designation. First, it has to be designated an SPR, and then you have the power of condemnation by the Department of Energy that can condemn whatever acreage or whatever assets they want for the purpose of supporting the SPR. That gives it a lot of flexibility, plus also be able to connect pipes that are right now artificially not connected and be able to relieve a lot of marketing constraints for everybody. You want to have as much oil going into the SPR as you want to have much oil going out of the SPR into the refinery.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

It gives the federal government broad powers to make sure that the California energy sector will start being efficient and be able to maintain its current production levels and also, more importantly for us, maintain the refineries. That's the big thing, is support the refineries that are there. Now, will that restart of Valero Benicia? I don't know. There's a lot of entrepreneurs around here looking at it here in Houston and stuff, but it could add refineries, but for sure at least keep the ones that are there in business. We got broad support from that from everybody. I say we, the Department of Energy does. Hopefully, we'll get that across the line sometime this fall.

Charles Meade
Charles Meade
Analyst at Johnson Rice

Okay. Can you guys still hear me or am I gone?

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

Yeah. You are good now.

Charles Meade
Charles Meade
Analyst at Johnson Rice

Okay, great.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

You are better now.

Charles Meade
Charles Meade
Analyst at Johnson Rice

Thank you. Jim, a follow-up question on the declines you are seeing or maybe the lack of declines you are seeing. Are you seeing any change in the flowing pressure of the wells? I am curious what impact you foresee this will have on your updated 3P report that is coming in. I am specifically wondering, how much history are the reserve engineers going to want to see before they give you credit for a lower decline? Are they going to give it to you just on the wells that you have been able to produce, or do you think they are going to give it to you more on a field-wide basis?

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

Yeah. We flowed all the wells, Charles, I mean, the aspect of that, and we will have enough production history on everything whether they will be able to do it on a field-wide basis. Yeah. We are seeing no decline in the field, so it is a massive field. I am sure we will all coalesce around a 6% or 7% field-wide decline going forward, which has been this historical. It has made 671,000,000 bbl with a 7% decline. Eventually, it will revert to that, and that is where the physics is going to be. We are certainly enjoying the production with no decline rate, but at some point in time, when you get that pressure drop a little bit and the GOR goes up, we will be making more gas. We got to run our compressors.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

We will actually be able to effectively bring on more production on some wells that have high water cut that we cannot bring on right now because of the lack of gas. So the field will actually run a little better, and probably we see a 10%-15% increase in production volumes and also some gas sales at that point in time. So, there is a pool, whether it is going to be this year or next year, as whether the fields start to decline, but it will at some point in time. So you can use that 7% field-wide decline, and that is what we have been steady in all of our projections.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

I think the Netherland, Sewell & Associates pre-production decline rates on their report are like 21% and 16% the first two years, which is just protection for everybody and themselves, investors and so forth, and they fully recognize the way the field is performing and looking forward to next year, we all coalesce around that field-wide decline.

Charles Meade
Charles Meade
Analyst at Johnson Rice

That's great detail. Thank you, Jim.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

Sure.

Operator

Our last question comes from Noel Parks at Tuohy Brothers Investment Research. You may now unmute your audio and ask your question.

Noel Parks
Analyst at Tuohy Brothers Investment Research

Hi. Good morning. I just wondered, with Platform Hondo, you mentioned that it's in a process of restoration. Could you just talk a bit more about what's entailed in that and if any of it is in addition to what you originally anticipated the work is that you'd have to do?

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

Well, we originally anticipated a lot of work at Platform Hondo, like a 45-year-old platform, but the amount of work did surprise us. We've had probably about 50% more work than we expected. A lot of the structural work that we didn't expect and so forth, that the platform was in dire need. It wasn't near in the good a shape as Harmony and Heritage. It's just older and maybe less maintained from that standpoint. So we've taken it upon ourselves to basically rebuild that platform in place, and we're going to have a first-class facility. It'd probably be the most sought-after site in the whole field with that new living course, new everything from that standpoint. But also, the controls had to be completely changed out, where the Harmony and Heritage controls just had to be updated and so forth.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

So it's going to be a brand-new platform when we finish with it. We're looking forward to that. Also, our gas sales go through that platform as well, so we had to make sure that was in good shape. The guys, again, have done a magical job there. We've got so many people and contractors there. We're moving logistics and people from other platforms, staying at other platforms to that platform to do work every day. We continue to be safe and real impressed with the work that Caldwell and Trent and those guys and their group has done.

Noel Parks
Analyst at Tuohy Brothers Investment Research

Great, thanks. I was thinking about in terms of geological work, just what's first on the agenda for further testing of the Upper Siliceous and what's the most economical way to go about that? I assume it's maybe re-completion and uphold, and what sort of cost would that be and what sort of data are you looking for next there?

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

Yeah. The Upper Siliceous is going to be our main target for all of our re-perfs, our Perf Add, basically going up whole like we show on the illustration on page 17, and also talk about in 15 and 16. The big thing on Upper Siliceous is once we're out there and we're in a position to grow volumes with driller rigs, that's going to be our main target. That showed up on page 18, which is our location. We have over 100, 125 locations just in the Upper Siliceous. We got another 50 locations, 50-75 in the Massive Chert. That's been the main producer just in the [inaudible] location. Then we got to redrill the whole field again for the heavy oil.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

The Upper Siliceous is, over the next decade, is going to be one of the key development deals, and several of the most recent wells they drilled in 2015, I think two of them in the Upper Siliceous is some of the more prolific producers at this point in time. We're just waiting to get our hands on it. We're certainly not going to put rigs out there till we have our marketing, our pipeline, debottlenecks, and all this stuff done, and refiners all in good shape and want to take more oil. Then we actually can grow production with the two driller rigs that we're going to put out there. But we're looking forward to that time and then just taking these steps to get there very deliberately and looking forward to achieving full cash flow and full production in 2027. We got some options.

Noel Parks
Analyst at Tuohy Brothers Investment Research

Great. Thanks a lot.

Operator

There are no further questions on the line. This concludes today's Q&A.

Jim Flores
Jim Flores
Chairman and CEO at Sable Offshore Corp

Thank you everyone for your participation in today's earnings call. We appreciate it. Goodbye.

Operator

Thank you for joining the Sable Offshore Corp investor update call. You may now disconnect.

Executives
    • Harrison Breaud
      Harrison Breaud
      VP of Finance and Investor Relations
    • Jim Flores
      Jim Flores
      Chairman and CEO
    • Gregory Patrinely
      Gregory Patrinely
      EVP and CFO
Analysts
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