U.S. markets close in 44 minutes

Edited Transcript of 1605.T earnings conference call or presentation 12-May-20 10:59am GMT

Q1 2020 Inpex Corp Earnings Presentation

Shibuya Tokyo Jun 22, 2020 (Thomson StreetEvents) -- Edited Transcript of Inpex Corp earnings conference call or presentation Tuesday, May 12, 2020 at 10:59:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Daisuke Yamada

Inpex Corporation - Managing Exec. Officer, VP of Finance & Accounting and GM of Finance Unit Finance & Accounting Div.

* Takayuki Ueda

Inpex Corporation - CEO, President & Representative Director

================================================================================

Presentation

--------------------------------------------------------------------------------

Daisuke Yamada, Inpex Corporation - Managing Exec. Officer, VP of Finance & Accounting and GM of Finance Unit Finance & Accounting Div. [1]

--------------------------------------------------------------------------------

Thank you for the kind introduction. This is Yamada speaking, Director and Managing Executive Officer. Please open Page 4.

I would like to first explain the change in the accounting period. In our company, we have unified the end of the fiscal year to December for our company and our consolidated subsidiaries from fiscal year ended December 2019. As we changed the end of the fiscal year from March 31 to December 31 from the fiscal year ended December 2019, in today's presentation material, the Q1 of this fiscal year ending December 2020 is compared to the same period last year from January to March of 2019, which is shown on the left red box in the chart for your reference.

Please go on to the next page on Page 5. We have the highlights of the consolidated financial results. In the first quarter, the steady production start-up of Ichthys project led to an increase of natural gas production and sales volume, pushing up net sales and net income. However, average Brent of $51 or less was about 20.4% down compared to the same period last year, which had a major impact to our performance.

The following is the comparison to the same period last year. Net sales were down JPY 19.5 billion to JPY 249.6 billion. Ordinary income were down JPY 26.5 billion to JPY 107.7 billion. Net income attributable to owners of parent were down JPY 15.7 billion or 31.9% to JPY 33.5 billion, leading to a drop in net sales and net income.

In the first quarter, the impairment losses, other than those of marketable securities, are not booked. However, due to factors, including the plummeting of crude oil prices, we are currently reevaluating the total group assets. With the future oil price outlook review of the projects and others, there is a possibility that we may book impairment and other losses for some assets, mainly the projects under production. And when those may cause impact to our financial performance, we will disclose them once we recognize such possibilities.

As for the balance sheet, the investment for the Ichthys projects have peaked out. Therefore, there's no major change. Total assets are down JPY 127.2 billion compared to the end of the previous fiscal year to JPY 4.7227 trillion. Liabilities are down JPY 68.8 billion, to JPY 1.4839 trillion. Net assets are down JPY 58.4 billion to JPY 3.2387 trillion. The net production in the first quarter of December 2020 were up 16.1% compared to the same period last year to a daily production of 613,000 barrels, and we are seeing steady progress in Ichthys, Abu Dhabi and other major projects of our company.

Now on the next page, I would like to explain the net income fluctuation on Page 6. The profit and loss comparison to the same period last year is shown in the waterfall chart on Page 6. As for net sales, the increase of the sales volume of natural gas was less to offset the decline in average sell price due to the drop of crude oil prices, leading to a drop of JPY 19.5 billion.

Cost of sales due to the increased income of Ichthys increased by JPY 7.1 billion and led to drop in income. Exploration expenses and allowance for exploration went down by JPY 4.4 billion, leading to an increase in net income. SG&A were flat. Other income and expenses due to impairment of owned shares of listed companies and others went down by JPY 3.7 billion, leading to a drop in income. Extraordinary losses due to the impairment loss being absent from the previous fiscal year led to increase in the net income by JPY 5.5 billion.

Income tax payable, due to the drop in the income went down by JPY 12.3 billion, increasing the net income. Net income and loss attributable to noncontrolling interests led down the net profit by JPY 7 billion. As a result, the net income attributable to owners of parent in the first quarter were JPY 33.5 billion, which was a decline of JPY 15.7 billion compared to the same period last year.

Please go to the next page. We would like to explain the revised financial forecast. As the future oil price trend is uncertain, the assumption of oil price, with the consideration of average oil price in March, is revised from the $60 per barrel down by $30 to -- $35 or more per barrel on the full year basis. As for the ForEx, we have kept the ForEx assumption unchanged from JPY 110 to a dollar.

As oil price assumption is dropped, full year financial forecast is revised to the following: consolidated net sales is changed from the previous forecast of JPY 1.204 trillion, down JPY 494 billion or 41% to JPY 710 billion. The consolidated ordinary income is changed from the previous forecast of JPY 536 billion, down JPY 373 billion or 69.6% to JPY 163 billion. As for the net income, from the previous forecast of JPY 145 billion is revised down by JPY 135 billion or 93.1% to JPY 10 billion. So these are all revised down. As forecasting the future oil price is extremely difficult today, impairment losses are not factored in the latest revised financial forecast.

The full year profit contribution from the Ichthys project is expected to be around JPY 12 billion, a large drop from the previous forecast of JPY 105 billion.

The net income attributable to owners of parent is revised down by JPY 135 billion due to the following factors: change in oil price assumption, et cetera, leading to a drop of JPY 154 billion or more; decrease in exploration expenses, et cetera, leading to an increase of JPY 13 billion; and revised P&L of projects and others, leading to an increase of JPY 6 billion. These are the main 3 factors.

In detail, the overall cost-reduction efforts has brought a drop in operational costs and exploration investments, giving JPY 30 billion or more cost reduction on a cash flow basis, pushing up after-tax net income by JPY 20 billion or more. If we did not have these cost-reduction efforts, we would have ended with a negative net income. However, with the cost-reduction efforts, we were able to have a revised income of JPY 10 billion.

And as our CEO will mention later, our gross investment of JPY 82 billion is expected to go down, of which development investment and others is expected to drop JPY 67 billion. And together with the latest cash flow improvements, we expect our profit and loss to improve by the drop in the future depreciation costs. This is all for my explanation. Thank you very much.

--------------------------------------------------------------------------------

Takayuki Ueda, Inpex Corporation - CEO, President & Representative Director [2]

--------------------------------------------------------------------------------

Hello. My name is Ueda, President and CEO. Thank you very much for gathering despite your busy schedule today.

As you are well aware, from March this year, the oil price has fallen. And right now, the Brent is hovering around $30 range. In addition to the COVID-19 pandemic, we are faced with an extremely difficult situation of our low oil price. And I'd like to explain about our basic policy as to how we are going to deal with this type of situation.

Please look at Page 9. The weakest target for us right now is to respond to the decline in demand as well as the low oil price. We need to respond to a significant change in the market. And under the low oil price environment, we need to endeavor to engage in stable operation of our business. This is the target for now and our basic policy for this. As the first measure, we will work towards reducing investment and cost in order to respond to a falling oil price. The company as a whole will endeavor to reduce the development investment by more than 20% and exploration cost by more than 40% against the initial forecast for the company as a whole. In parallel, as the second measure, we will work towards securing sufficient liquidity and work towards further enhancement of our financial base.

On this basis, in accordance with returns policy, which is to provide stable dividend, as described in our medium-term management plan, we intend to pay out dividend.

Furthermore, as our mission, we will continue to supply energy securely by continuing operation in producing assets such as Ichthys, Abu Dhabi and also in Japan by implementing sufficient measures in response to COVID-19. I will explain each of these measures in more detail in the following slides.

Please turn to Page 10. I will first explain about our efforts to reduce investment and cost. Because of the fall in oil price, we are unable to avoid reduction in our sales revenue, but we will continue to ensure that we will secure free cash flow by reducing investment and cost. As for the target for reduction for fiscal year 2020, we will reduce the development investment by more than 20%, exploration investment by more than 40% vis-à-vis the initial forecast that we have announced for the company overall.

We will also make efforts to reduce by further improving efficiency regarding operational cost and various administrative costs. Now these targets are what we will aim to achieve now, but Inpex will aim for even higher level than these reduction goals. And we will endeavor to reduce investment cost continuously to achieve further reduction.

I'd like to talk about the expected amount of investment that embeds these reduction target. As for the development investment, we will reduce by JPY 67 billion or by 25% from JPY 268 billion to JPY 201 billion. As for exploration investment, we will reduce by 47% or by JPY 14 billion from JPY 30 billion to JPY 16 billion. The other investment will be reduced by 33% or by JPY 1 billion from JPY 3 billion to JPY 2 billion. So the total growth investment, which is addition of all these numbers, this will be reduced by 27% or by JPY 82 billion from JPY 301 billion to JPY 219 billion. Fiscal year 2020 will see a positive free cash flow, but these investment and cost reductions will be further addition to the free cash flow.

As for the specific measures for the individual projects, I'd like to give some examples. First of all, for Ichthys, we will reduce investment cost by first postponing investment by reviewing our plan or reducing the amount of investment or by reviewing our operational activities or by streamlining our logistics operations. As for Abu Dhabi, we will consider reducing drilling costs and suspending and postponing various types of work.

Eagle Ford is our shale business. Here, we will partially continue production and operation of our already producing blocks. But with regards to the new development, majority of the scheduled work will be pushed back, and we will only implement the restricted operations to minimum lease requirements. And we'll respond to changing plans flexibly in accordance with oil price, which is a feature of our shale business.

As for the exploration investment, for the areas such as Australia, Mexican Gulf, Onshore Abu Dhabi and South Iraq, we are studying a postponement of drilling of exploration wells as well as some suspension of appraisal wells. As for the new project, we will study them very carefully for now. And even if we were to make investment, we'll make the judgment after rigorous review.

Next, I would like to explain about securing sufficient liquidity as well as further enhancement of our financial base. Please turn to Page 11. Inpex, in addition to maintaining liquidity on hand by holding sufficient amount of cash at hand, we have secured sufficient amount of commitment line from our core banks. But in order to further enhance our financial base, we are scheduling to execute borrowing that utilizes a loan scheme for responding to the crisis brought about by COVID-19, which is provided by the Development Bank of Japan. In addition to these borrowing, we are also scheduling to execute borrowing from the 3 mega banks. In order to respond to contingency, we will accelerate our effort to diversify, improve quality and strengthen our funding structure.

Please turn to Page 12. I'd like to talk about the dividend. As for dividend, our basic approach is to execute stable dividend payments as shared in our medium-term management plan as our returns policy. As explained earlier, given the rapid decline in oil price, we are facing a deterioration of our business environment. As a consequence, we are expecting quite difficult results for this fiscal year. But in view of this returns policy for this fiscal year, we'd like to revise our dividend guidance to JPY 24 per share, which comprises JPY 12 per share of interim dividend and JPY 12 per share of year-end dividend.

Lastly, please turn to Page 13. I'd like to explain about stable supply of energy. As for the major projects, which form the foundation of our business, such as the Ichthys LNG project in Australia, now -- and Minami-Nagaoka Gas Field in Japan as well as the NorthWest LNG terminal, which we operate, we will steadily continue to achieve a stable operation by implementing various measures on the premise of prioritizing health and safety of our employees.

I will explain some of the specific measures we have implemented against COVID-19 infection in our operational site. At the Ichthys LNG project, work site access is restricted to operational staff only, and all staff will undergo 14-day isolation period prior to commencing work. And the number of operating staff onshore and onshore (sic) [offshore] will be minimized to reduce the risk of infection so that we are able to maintain stable operations. At domestic sites, we have implemented measures such as isolating operational staff, restricting access to nonoperational staff and securing back our staff to mitigate workforce shortage due to infection.

In addition, Inpex is continuing to contribute towards stable energy supply from the various oil and gas-producing operations that we are involved in around the world by stepping up measures to prevent COVID-19 infection.

In accordance with the fundamental policy that I have outlined, we will continue to work towards minimizing the impact, even if we see the current low oil price continue for a certain duration.

And this completes my explanation. Thank you for your attention.