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Edited Transcript of AKERBP.OL earnings conference call or presentation 11-Feb-20 7:00am GMT

Q4 2019 Aker BP ASA Earnings Call

Philadelphia Feb 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Aker BP ASA earnings conference call or presentation Tuesday, February 11, 2020 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David Torvik Tønne

Aker BP ASA - CFO

* Karl Johnny Hersvik

Aker BP ASA - CEO

* Kjetil Bakken

Aker BP ASA - VP of IR

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Conference Call Participants

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* Al Stanton

RBC Capital Markets, Research Division - MD & Oil & Gas Equity Analyst

* Alwyn Thomas

Exane BNP Paribas, Research Division - Analyst of Oil and Gas

* Sasikanth Chilukuru

Morgan Stanley, Research Division - Research Associate

* Teodor Sveen-Nilsen

Sparebank 1 Markets AS, Research Division - Research Analyst

* Yoann Charenton

Societe Generale Cross Asset Research - Equity Analyst

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Presentation

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Kjetil Bakken, Aker BP ASA - VP of IR [1]

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Good morning, and welcome to this presentation of the Fourth Quarter 2019 Results for Aker BP. My name is Kjetil Bakken, and I'm Head of Investor Relations in the company. The presentations today will be given by our Chief Executive Officer, Karl Johnny Hersvik, and our Chief Financial Officer, David Tønne. After their prepared remarks, we will open up for questions and answers. Please note that Aker BP will host its annual capital markets update later today. And any questions -- in the Q&A session, we will primarily focus on Q4 related topics. And for questions related to topics covered in the capital markets update, we encourage the participants to send such questions by e-mail to ir@akerbp.com.

And with that, I hand over to our Chief Executive Officer, Karl Johnny Hersvik.

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Karl Johnny Hersvik, Aker BP ASA - CEO [2]

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Thank you, Kjetil, and welcome to this presentation of Aker BP's financial results for the fourth quarter in 2019, this time by a call, but I'm looking forward to seeing all of you later today at the capital markets update. My name is, as you know, Karl Hersvik, I'm the CEO of Aker BP and I'm also joined by David Tønne, our CFO. Well, actually, today marks his first-year anniversary as CFO of Aker BP. So congratulations, David.

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David Torvik Tønne, Aker BP ASA - CFO [3]

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Thank you.

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Karl Johnny Hersvik, Aker BP ASA - CEO [4]

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The most important event in the fourth quarter was obviously the start-up of Johan Sverdrup in October. This truly amazing asset has delivered excellent productivity so far. And facing the great work undertaken by the operator Equinor to develop this giant field in collaboration with a number of partners.

We are also very pleased to report that the Valhall Flank West started production in Q4, on schedule and within budget. The project has been delivered with a contribution from 4 of our strategic alliances, with high quality and an impeccable safety record. In fact, this project is more than 1 year accelerated according -- as we compare to the original case. The operational performance was strong in Q4 with record-high production and production regularity which I would revert to shortly.

On the business development side, I am pleased to report that there now seem to be a really constructive dialogue between the 2 operators in the NOAKA area. Significant work has been carried out to mature a joint technical concept, developing the entire area and all its resources, combining the 2 previous concepts that have been proposed for the area. And I would like to commend Equinor, who have contributed to such a solution. Their participation in these discussions have made the solution significantly more robust. We have also entered a deal with PGNiG to strengthen our position in the Skarv area, and we are increasing our interest in the recent Shrek discovery, take over as operator for the license, which has significant remaining upside in exploration. And at the same time, PGNiG becomes our partner in the Alve Nord discovery, thus enabling us to move forward with exploration activity also in that license.

Both these discoveries are located near Skarv and the transaction will enable an efficient development of these discoveries as tiebacks to the Skarv FPSO. At the same time, we also sell our 3.3% operated -- nonoperated interest in Gina Krog to PGNiG. And we receive a cash element of USD 51 million firm and another $11 million in future contingent -- contingent on a development of the Alve Nord field.

Now moving on to production overview. Our production reached 191,000 barrels of oil equivalent in Q4, which is a new record for Aker BP. This was driven, of course, by the start of Johan Sverdrup, which contributed net of 32,000 barrels of oil equivalent. But we also saw encouraging development in production from the rest of our portfolio, in particular, from Alvheim and Valhall. At Alvheim, production was restored familiar, following successful repairs of the Mid Water Arch. And at Valhall, we see contribution from new wells being brought on stream. The strong production number were also impacted by generally very strong production efficiency across our portfolio, averaging an amazing 95.8% in Q4.

For the full year, production ended at 156,000 barrels of oil equivalent, in line with our previous guidance. 2019 was also a very good exploration year for Aker BP. The net discovered volumes are estimated to be around 170 million barrels of oil equivalent or approximately 3x our 2019 production for comparison. The discoveries were concentrated around Alvheim and Skarv assets. In addition, of course, to the Liatårnet discovery in the NOAKA area. At our capital markets update later today, our Head of Exploration, Evy Glørstad, will talk more about our exploration results and our plans going forward.

And now I will hand over to David, who will walk you through the Q4 financial statements.

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David Torvik Tønne, Aker BP ASA - CFO [5]

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Thank you, Karl, and good morning, everyone. It's a pleasure to summarize our financials for 2019. And with this, also take you through the key figures for the last quarter. Q4 2019 was the first quarter ever where our income surpassed $1 billion. This was driven by an increase in production of 31% as the Johan Sverdrup field started production. We produced 191,000 barrels per day and with an underlift, the sold volumes ended at 184.5 barrels in total.

Total production for the year ended, as Karl already mentioned, at 155,900 barrels per day, in line with the guidance set out at the start of the year. Liquid prices increased throughout the quarter, while the price of gas, again, was stable. The realized average hydrocarbon price was $57.4 per barrel, which is 5.6% higher than in Q3. Average hydrocarbon price for the full year 2019 was $57.7, down from $65.5 in 2018. In total, petroleum revenues ended at $980 million, which is approximately 36% up from the third quarter.

Moving on to the income statements. Adjusting petroleum revenues for other income, which includes the insurance and settlement related to prior year's activity, we get a total income of $1.003 billion in the quarter, and $3.347 billion for the full year. Production cost of sold volumes were $154 million and the production cost related to the produced barrels amounted to $160 million equaling a cost per produced barrel of $9.1. The significant decrease in production cost per barrel in Q4 was mainly driven by the start of production on Johan Sverdrup as well as partial insurance recovery on the Alvheim Mid Water Arch repair.

For the full year 2019, production cost ended at $12.4 compared with -- to the market guidance of roughly $12.5. The cost level was positively impacted by strong performance, particularly in the latter part of the year as well as a weak Norwegian krone. Exploration expenses amounted to $85 million. $47 million was related to dry well costs. In addition, we spent roughly $38 million on seismic, G&G and field evaluation.

The exploration activity was somewhat lower than originally planned, a spud on the Nidhogg well slipped into 2020, while waiting for the Skogul well to be completed. Total spend on exploration ended at $79 million in the fourth quarter. And in total, at $501 million for the full year. This was $49 million lower than the updated guidance of $550 million given in our second quarter presentation.

Summarizing the items discussed so far gives us an EBITDA of $745 million for the quarter, up 55% from Q3. EBITDA for the full year 2019 ended at $2.286 billion.

Depreciation was $255 million or $14.5 per barrel in the quarter. For the full year 2019, depreciation per barrel was $14.3. Other operating expenses was $19 million in the quarter. The main reason for the increase from previous quarters was related to certain one-off items linked to previous year's cost allocations. Deducting depreciation and other operating expenses, we get an operating profit of $491 million for the quarter and $1.327 billion for the full year.

Net financial expenses was $67 million, and the main reason for the increase from Q3 is a reduction in capitalization of interest as a result of Johan Sverdrup coming on stream and reducing the capitalization base. Profit before tax was $424 million in the quarter and $1.084 billion for the full year, and taxes amounted to $312 million in the quarter. And of this, $347 million was the current tax arising in the quarter and $45 million was reduction in deferred tax. The effective P&L tax rate in the quarter ended at 74%. The actual tax payments in the quarter amounted to $199 million, which is $13 million below the forecast provided at Q3. Net results in the fourth quarter ended at $112 million and $141 million for the full year.

Moving on to the balance sheet. Property, plant and equipment increased by $410 million in the fourth quarter. We had additions of $632 million, where investments at Valhall, Alvheim and Johan Sverdrup made up roughly 69%. Depreciation of PP&E amounted to $223 million. On the other side of the balance sheet, equity was reduced by $76 million, which is the sum of net income and dividends. Bonds and bank debt increased by $347 million.

Tax payables increased by $166 million, giving a balance of $361 million, which can be divided into $155 million related to the income year 2019, net receivables of $15 million related to prior years and $221 million related to accrual for uncertain tax positions.

Other provisions for liabilities, including P&A, increased by $103 million, which can be divided into $149 million related to increase in long-term abandonment provision. The annual update of the decommissioning liability resulted in a decrease in the cost estimate, but this has been offset by a decreased discount rate, resulting in a higher NPV.

The increase in ARO provision has been offset by $45 million decrease related to long-term derivatives, where the main part has been reclassified to short term. In sum, total equity and liabilities amounted to $12.2 billion at the end of the quarter.

Moving on to the fourth quarter cash flows. We started the fourth quarter with cash of $5 million. During the quarter, we drew debt of $335 million. Cash flows from operations amounted to $724 million and tax payables was $199 million. Cash flows to investments was $541 million, of which the main contributors were: $490 million in investments in fixed assets including $15 million in capitalized interests, $42 million in exploration and $9 million in decomm and P&A. Lease payments amounted to $30 million of which $25 million was related to CapEx activities. Dividends amounted to $187.5 million.

Then at the end of the quarter, our cash balance was $107 million. The book value of net interest-bearing debt, excluding lease debt was roughly $3.2 billion. And we had $2.6 billion of committed undrawn capacity on our $4 billion bank facility, and our leverage ratio, net debt over EBITDAX was 1.2. Worth noting is also that we, after the quarter in January 2020, issued a new bond in 2 tranches of total $1.5 billion, which was used to further reduce drawings on our RCF. Currently, we, therefore, have in total $4 billion of committed and undrawn capacity on the bank facility.

As we have now closed the full year for 2019, we have a more precise estimate of the remaining 2019 tax installments to be paid in the first half of 2020. As previously mentioned, tax payments for Q4 was $199 million, resulting in a total tax payments for 2019 of $619 million. We have now fixed the first 3 installments for the first half of 2020 based on our 2019 actuals. Each installment would be approximately $50 million, whereof 1 installment will be paid in Q1 and 2 installments in Q2. This represent a reduction of approximately 50% compared to the first 3 installments we paid in the second half of 2019 and in line with my guidance on the -- our Q3 presentation.

To sum up 2019, I will revisit our guidance for 2019 and the associated delivery. In the first 9 months, we produced 144,000 barrels of oil equivalents on average. In the fourth quarter, we produced 191.1 barrels. Consequently, production ended at 155.9 for the full year and within the original guiding of 155,000 to 160,000 barrels per day.

In my second quarter presentation, I adjusted the CapEx guidance slightly as we shifted scope from P&A to production drilling. Q4 CapEx came in as expected, and we ended the year with a total of $1.670 billion. With the discoveries at Froskelår and Liatårnet and the addition of the Nipa and Nidhogg wells to the program, we updated the expected exploration spend to $550 million in my Q2 presentation in July. Q3 was another successful quarter with high activity and discoveries at Ørn and Shrek. And in Q4, we finished Kayak well, but the Nidhogg well slipped into 2020. Total spend was, therefore, a bit lower than planned, and we ended at $501 million for the full year, which is in line with the original guiding of $500 million.

There has been limited activity in Q4 related decommissioning and P&A and total spend ended at $109 million, in line with the reduced guiding of roughly $100 million. Production cost per produced barrel. We guided production cost per barrel at roughly $12.5 for 2019. First half was, as expected, higher than the yearly average due to the maintenance work at Valhall and Ula, including the turnarounds in June.

In the third quarter, we saw costs trending down with less maintenance work and improved productivity. In the fourth quarter, the positive trend continued. We also received insurance recovery for the Mid Water Arch incident at Alvheim and low-cost production from Johan Sverdrup ramped up.

Total cost of produced barrels ended at $706 million for the full year or $12.4 per barrel, in line with the original guiding. Lastly, we plan and paid a total of $750 million in dividends for the full year. As already mentioned, we will hold a capital markets update later today. We will come back with much more details on 2020 and the longer-term outlook. But to close off my presentation, I will summarize the main guiding parameters for 2020. We expect to increase production with roughly 36%, and the guiding for the full year is 205,000 to 220,000 barrels per day. Worth noting here is that we do expect some intra-year fluctuations. Production in the first and third quarter is expected to be within the guiding range. In the second quarter, we expect production to be roughly 20,000 to 30,000 barrels lower than the midpoint in the guiding range due to summer maintenance work. In the fourth quarter, we expect to be above the guiding range as we are gradually increasing production from new wells at Valhall and Ærfugl phase 1 will come on stream. We are reducing capital spend with roughly 4% in 2020 compared to 2019 and expect spend of $1.5 billion in CapEx, $500 million in ExpEx and $200 million in AbEx. Capital spend will be somewhat front-end loaded, with roughly 60% spent in the first 6 months of the year. We expect production cost to go down with almost 20% versus 2019, down to an average of $10 per barrel. Also here, there will be fluctuations throughout the year, mainly driven by fluctuations in production but also amplified by the fact that extra maintenance is typically conducted in the periods when the production is the lowest. And dividends are increasing by 13%, up to a proposed $850 million for the full year.

I will now hand the word over to Karl for some closing remarks.

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Karl Johnny Hersvik, Aker BP ASA - CEO [6]

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Thank you, David. As already mentioned, we will come back with more details on the priorities ahead, both on the short and long term at our capital market update. So I'll only do a few remarks here. In terms of execution, we are continuing the start-up of new wells on Valhall, in particular, and have had significant progress with the single-trip multi-frac the last few months. We also have a significant project portfolio ahead of us even if the activity in 2020 is expected to be somewhat lower than in 2019. Imminent is the start-up of the Skogul project on Alvheim and also the decision to progress on Hod. In terms of improvement, we're keeping momentum on the improvement agenda. And as you will see later today, we are progressing the value outtake of our digital projects.

Milestone in 2020 will be the implementation of our One Team operating model, which are now under development. We are also, in terms of growth, mobilizing for the NOAKA area development, which we will also come back to later today. And we are spending significant amounts and resources maturing the recent discoveries, particularly in 2019. All in all, I'm sure that 2020 will be as exciting as 2019. And with that, we'll close the Q4 presentation and open up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from Teodor Nilsen from SB1 Markets.

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Teodor Sveen-Nilsen, Sparebank 1 Markets AS, Research Division - Research Analyst [2]

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Two questions from me. First, the deal in Skarv area, will that -- or how will that impact the 2P reserves? And second question that's on 2020 OpEx guidance, that's down year-over-year, and is the key reason to expanding barrels or are there any other reasons for the expected decline in OpEx per barrel?

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Karl Johnny Hersvik, Aker BP ASA - CEO [3]

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Yes. So thank you, Teodor, and good morning. I hope we'll see you later today. When it comes to the deal in the Skarv area, this is predominantly a deal where we have done 2 key elements. So the first one is the farm down of the 100% equity in the Alvheim area, allowing us to progress with exploration activities in that area, and we plan to drill a well in the Alve Nord license a bit later this year. We have also taken over operatorship of the Shrek discovery and increased our ownership in that area by approximately 5%. Importantly, this means that we now see a maturation of a sequence of tiebacks to Skarv, which can all be operated under the alliance model with high efficiency. So first, of course, is Ærfugl, then it's Gråsel, then we may be looking at Shrek or Alve Nord, and then there are other developments also in the area. It's also probably worth noting when talking about Skarv, that we are currently drilling an exploration well called Nidhogg and expect results on that in a couple of weeks.

In terms of the OpEx guidance, David?

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David Torvik Tønne, Aker BP ASA - CFO [4]

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Yes. So, of course, getting low-cost barrels from Johan Sverdrup into the portfolio is an important part of the reduction. But we're also conducting less maintenance work at Valhall and Ula, remember back to the start of 2019 where we had flotels at both locations, also conducting extra surface maintenance work. In addition, we're also increasing production at Valhall, which is then driving down the average cost per barrel. So there are several elements into the mix, both volumes but also driving down costs.

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Karl Johnny Hersvik, Aker BP ASA - CEO [5]

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And then a specific you asked about 2P resources and reserves or 2P reserves and resources, I think if you do the math, you'll discover that the amount of reserves we carry on Gina Krog is roughly 5 million barrels. And then in terms of Alve Nord, the reduction is in the range of 4 million barrels. And then we're adding about 2 million barrels in Shrek.

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Operator [6]

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We now move on to our next question from Alwyn Thomas from Exane BNP Paribas.

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Alwyn Thomas, Exane BNP Paribas, Research Division - Analyst of Oil and Gas [7]

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A couple of quick ones for me. I just wanted to get your thoughts on the Valhall drilling, obviously, it looks like things are being quite good in the fourth quarter on the multi-frac technology. Can you -- I just wondered if you could sort of review the performance of the year, what worked and what didn't? And perhaps what the learnings are for the rest of the portfolio, where there is other technological sort of improvements you can make on the portfolio that you're putting to action this year and next?

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Karl Johnny Hersvik, Aker BP ASA - CEO [8]

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Yes. Thank you, Alwyn. And yes, you're right. And just to remind everybody, we are currently drilling on Valhall on 2 locations. So the first one is the Maersk Invincible, continuing their drilling campaign on the Valhall West Flank. We just completed well #6 and it's actually quite interesting to look at the results. We have drilled 1 producer and completed approximately every 30 day, which is significantly better performance than we assumed in the PDO. Also, the wells are significantly longer. And we've added about 19% to the reserve base as a result of that well extension in the horizontals. Also on the Valhall field center, we are still drilling. And now we are drilling sidetracks from existing producers, so that means that each of these drilling targets are -- well, ahead of that activity, is the P&A activity. So that means that these wells take a bit longer than the previous wells, which were drilled on already P&A-ed templates.

Now in terms of single-trip multi-frac. I think the last few wells that we have done has shown amazing and encouraging results. The last well we did, we typically run 4 fracs a day compared to 1 frac every second day with the conventional technology. The effect that has is twofold. First of all, we're able to utilize smaller weather windows, which means that we can be more efficient in total, particularly in the winter season. But it also, of course, gives us an ability to clear out the number of wells in terms of drilled and uncompleted or on -- not brought on production. We actually assume that by the end of 2020, we will have stimulated all the backlog on the Valhall field. So indeed, you are right. It's been a very encouraging development the last few months.

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Operator [9]

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We're now moving on to Sasikanth Chilukuru from Morgan Stanley for our next question.

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Sasikanth Chilukuru, Morgan Stanley, Research Division - Research Associate [10]

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I had a question on your production guidance. Essentially, I just wanted to understand the conditions behind this range of 205,000 to 220,000 barrels per day. Just wanted to see what your upside case included. Also, just wanted to check whether there was any major turnaround activity in 2020, like in the case of 2019? Whether -- just trying to see the phasing of the production increasing, so.

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Karl Johnny Hersvik, Aker BP ASA - CEO [11]

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Yes. So we've guided a range of 205,000 to 220,000 barrels per day, and we don't want to talk too much about an upside or a downside case scenario. I think that's a bit early to say. When it comes to turnaround activity in 2020 compared to 2019, there will be less but then we all do expect some shutdowns at particularly Alvheim related to maintenance at the pipelines. But no major shutdowns are expected. But as mentioned, there will be lower production in the second quarter due to the maintenance work.

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Operator [12]

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We now move on to Yoann Charenton from Societe Generale.

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Yoann Charenton, Societe Generale Cross Asset Research - Equity Analyst [13]

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So I'm looking forward to the CMD later this morning. And I will just have questions which are very sort of focused on numbers. And I'm not sure you said how much more of insurance recovery related to repair at Alvheim, you expect to show in product cost in 2020? In addition, on separate topic, are you able to guide on DD&A level for 2020 for -- your thought for you overall? And then maybe on CapEx. I'm just looking at understanding amounts were spent in Valhall and Skarv in 2019?

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David Torvik Tønne, Aker BP ASA - CFO [14]

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Yes. On the insurance first, so we booked roughly $17 million in the fourth quarter of insurance recovery. And when it comes to further insurance recovery in 2020, I don't want to speculate on that. We have some costs related to other, Mid Water arches that we've done preventive maintenance work on, which we -- it's too early to say if there will be insurance recovery related to. I didn't catch your second question. But your third question was related to CapEx on Skarv and Valhall during the year, if I understood correctly?

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Yoann Charenton, Societe Generale Cross Asset Research - Equity Analyst [15]

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This is correct. And for the second question, it was just about guidance on the level of depreciation for the year 2020 hitting P&L.

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David Torvik Tønne, Aker BP ASA - CFO [16]

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Okay. Yes. All right. So in terms of guidance on depreciation, I think the thing to do is to look at the average for 2019 and don't expect too big changes for 2020 per barrel, of course, per barrel. When it comes to specific CapEx...

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Operator [17]

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(Operator Instructions) We now have a question from Al Stanton from RBC Capital Markets.

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Al Stanton, RBC Capital Markets, Research Division - MD & Oil & Gas Equity Analyst [18]

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CapEx guidance for 2020 of $1.5 billion is a bit ahead of what I was expecting. And looking at what some of the rating agencies said in the fourth quarter, it seems to be ahead of what they were expecting as well. I was wondering, what's changed? And also, when you did the bond issue in January, what sort of CapEx guidance was expressed to bond investors at that time?

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David Torvik Tønne, Aker BP ASA - CFO [19]

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Yes. So when it comes to our CapEx guidance of $1.5 billion, so I think that's very much in line with what we showed in our Capital Markets Day update in 2019. So very much in line with that. I think it's important when you think about how the rating agencies view this. I don't want to speculate on their analysis, of course. But of course, they typically also refer to what we call the sanctioned portfolio, so the CapEx that's already been sanctioned. But from our side, the $1.5 billion is spot on what we showed last year and what we plan to spend.

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Operator [20]

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At this time, there appear to be no further questions.

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Karl Johnny Hersvik, Aker BP ASA - CEO [21]

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Then I think we round off this Q4 and say thank you for your participation, and welcome to the Capital Markets Day, which will open at 10 a.m. here in Oslo. So thank you, guys, and have a good day.