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Edited Transcript of ENQ.L earnings conference call or presentation 5-Sep-19 8:30am GMT

Half Year 2019 EnQuest PLC Earnings Call

London Sep 18, 2019 (Thomson StreetEvents) -- Edited Transcript of EnQuest PLC earnings conference call or presentation Thursday, September 5, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Amjad Bseisu

EnQuest PLC - CEO & Executive Director

* Bob Davenport

EnQuest PLC - MD of North Sea

* Jonathan Swinney

EnQuest PLC - CFO & Executive Director

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Conference Call Participants

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* Adam Rackley

Cape Wrath Capital - Investment Director

* David Matthew Round

BMO Capital Markets Equity Research - Oil and Gas Research Analyst

* James Thompson

JP Morgan Chase & Co, Research Division - Analyst

* Mark Wilson

Jefferies LLC, Research Division - Oil and Gas Equity Analyst

* Nicholas Linnane

Sefton Place Advisors Ltd - Portfolio Manager

* Stephane Guy Patrick Foucaud

GMP Securities L.P., Research Division - MD, Institutional Research

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Presentation

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Amjad Bseisu, EnQuest PLC - CEO & Executive Director [1]

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Good morning, ladies and gentlemen, and welcome to our 2019 half year results presentation.

So along with a strong set of results today, I'm pleased to report that Martin Houston has been confirmed as our new Chair from October 1. I look forward to working with Martin who brings a wealth of experience from the industry and is very keen on our strategy.

Equally, I'd like to thank Jock for his tenure, who is with us today, and his chairmanship of the Board since 2016. Jock has been with us since the beginning of IPO, since the beginning of the company in 2010. So thank you, Jock.

So joining me today is Jonathan Swinney, our Chief Financial Officer; and Bob Davenport, our Managing Director for our North Sea Operations.

I'll first take you through a brief overview before Bob covers the operations in detail. And then Jonathan will present the financial results. And then as usual, I'll return at the end to discuss the outlook for 2019 and beyond. And then we'll take questions and answers.

Our business is founded on a strategy to enhance hydrocarbon recovery in late-life assets and undeveloped discoveries and extend the life of those assets in a profitable but responsible manner. We have a focused business model that delivers on our strategy to be the operator of choice for maturing and underdeveloped hydrocarbon assets. Our model is not exploration but development and production-led. And since our beginning of one field in the U.K. or the Don fields, we now operate 16 fields in the U.K.; we operate 8 in Malaysia and have grown to 68,500 barrels a day in the first half of 2019, a great achievement from the start. More importantly, we've done all this responsively as an operator without compromising our big priority, our major priority, which is safe results, no harm to people and respect for the environment.

So as we have reshaped our strategy to deliver, de-lever and to grow, we continue to deliver on our strategy fully. We have delivered on our production guidance. We're at 68,500 barrels a day, just above the midpoint. We have delivered on our cost control. We're at $20 a barrel of operating cost. We've continued to deliver on our capital discipline. Our 3 projects have been delivered on budget, below cost and ahead of schedule. We've de-levered our balance sheet to where we are at 1.8x net-debt-to-EBITDA, ahead of our target of 2x by the end of the year. And I'll talk a bit more about developing our asset base with the 3 exciting assets that we have: Magnus, Seligi and Kraken.

So first, we'll start with delivery. Production increased 27% to 68,500 barrels a day driven primarily by Magnus and Kraken. We completed in Magnus our DC4 program -- sorry, in Kraken, our DC4 program in the first quarter where the wells have performed ahead of expectations. We've also now completed 2 pipeline projects, again, as I mentioned, ahead of budget and schedule. So Kraken has been performing in our target, slightly above our midpoint of the target of 32,800 a day, which is -- the target is 30,000 to 35,000. And we're very pleased that things are working well there now. We've reduced our Magnus OpEx significantly from $60 a barrel in 2015 before we took over to $20 a barrel in the first half of the year. This is a truly remarkable achievement, an indicator of how EnQuest can truly make a difference for these assets. 66% decline in OpEx, it's remarkable. We've also made significant progress with Kraken, as I mentioned, coming into the guidance but also now, for the first time, sanctioning projects outside our original field development plan, with the Worcester well being sanctioned -- the Worcester wells being sanctioned for next year. We've also commenced our drilling program in Malaysia. And the Magnus campaign will start in the [fourth] quarter.

In terms of de-levering, the delivery brings the de-levering naturally. We've reduced our net debt to $1,640 million, 8% lower than end of 2018. And that's down from 2,100 -- sorry, $1,125 million of bank debt and $1 billion of bonds so almost $2.1 billion at the peak. Our net debt-to-EBITDA ratio is 1.8x, as I mentioned.

In terms of the growth, we have seen material increase over the last couple of years from Kraken, the start of Kraken in 2017, and the stabilization of Kraken, as you see, adding 23,000 barrels a day in the first half; and also Magnus, the acquisition of 75% of Magnus. At Magnus, we've instituted a new reservoir management program where we've moved from water alternating gas and -- to water injection and gas lift. So instead of alternating the water injection and gas injection, we're just injecting water and having gas lift. That's reducing the cost of the operations by saving the gas that's purchased for reinjection but also, more significantly, enhancing the performance of the reservoir which is producing above Competent Person's Report and above our purchase case. Indeed, we have already, by this month, paid the first 25% -- financed amount for the first 25% of Magnus, which is almost less than 2 years since completion. And we're making significant progress, as Jonathan will show, on payback of the 75% that we've acquired only last December.

At each of the 3 world-class assets that we have significant contingent resources, and we will continue looking at investing in other assets, Magnus, Seligi and Kraken. The cost of those investments are very attractive at $5 to $15 of equivalent -- barrel of oil equivalent. So we're starting the program in Seligi of wells which are underway. And then the Magnus program will start in the fourth quarter.

EnQuest started in 2010 with a tenet, which probably is ahead of its time, to deliver safe results, no harm to people and respect for environment. ESG is not new to EnQuest, and it's a pillar of our strategy. Indeed, our focus on safe results is plastered all over our assets. Every single asset you go to in EnQuest has safe results. And the ability for employees to act on their own if they see harm to the environment or people is, I think, a differentiated aspect in our company versus others in the industry.

Our business model is also one of supporting energy transition to cleaner energy by extending life of the assets, investing in lower emissions -- in significant lower emissions and converting gas to use for power, heat and compression. We're also working on advancing low-carbon investments and solutions to our carbon operations by looking at selective offset programs to carbon.

Our franchise is incumbent on our safety performance. Our target is to be upper quartile, and I'm happy to report that we have no outstanding improvement notices or any other notices for that matter. That's a tremendous achievement for assets with an average life of 25 years, but some up to 40 years.

We also encourage diversity through sponsorship of prominent women in engineering events and STEM scholarships for women. I, individually, sponsor almost 26 women in engineering. And the company also sponsors scholarships of women in Malaysia and outside. We also participate in the North Sea AXIS network, which improves gender balance within the energy industry.

We recognize the increasing focus on climate change and continue to review our execution of the strategy in light of introducing target for our carbon emissions to reflect a sustainable, reduced carbon future.

I will now hand over to Bob to cover our operations, production efficiency performance in more detail.

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Bob Davenport, EnQuest PLC - MD of North Sea [2]

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Thank you, Amjad, and good morning, everyone. I'll begin with a summary of the group's operational [performance] in the first half of 2019, and then I'll provide some details on each operational area.

As Amjad said earlier, the group delivered towards the top end of our guidance in the first half of the year with production at 68,548 barrels equivalent per day, and that's up 27% versus the same period in 2018. Northern North Sea production was 30,215 barrels equivalent per day. That's up around 68% compared to the same period in 2018, reflecting increased contribution from Magnus. At Central North Sea, production in the period was 6,627. That's higher by about 8%, and that was driven by higher volumes at Alma and Galia. Kraken average net production was in line with our guidance with daily average gross production at 32,776 barrels equivalent per day. And here at Kraken, we achieved marked improvements in uptimes in the second quarter along with strong performance at DC4. And finally, to Malaysia, production of 8,599 barrels equivalent per day was slightly higher than 2018. This was reflecting the higher -- reflecting a very high production efficiency again in Malaysia and the impact of the idle well program in the first half of the year.

I will now go area by area providing some more detail beginning with the Northern North Sea. So at NNS, the main factor driving the material production increase was our additional working interest at Magnus and strong performance there. Here, we continue to see strong production efficiency of around 80%. In fact, it was 90% excluding the planned shutdown which we did in May; along with further successful barrel-adding well work and plant debottlenecking. We've also seen high production efficiency, in the 80s, across all NNS fields, though this was offset by some issues at Heather with a gas compressor. These have now been fixed. It's very pleasing also to report exceptional project execution at the Dunlin bypass pipeline which now takes oil from Thistle and Dons field through Magnus and onto the Sullom Voe Terminal. There, the team safely delivered the project ahead of schedule with zero [large losses] at Thistle. And again this year, we are executing a number of partner-funded idle well abandonments to improve asset integrity and reduce [outage and recommissioning] abilities. These are progressing ahead of schedule and under budget.

At the Sullom Voe Terminal, we have continued to deliver safe and stable operations to their customers. And, of course, transforming SCT cost efficiency is fundamental to EnQuest strategy to deliver long-term value from NNS assets.

Moving on to the Central North Sea. Average production again was about 8.5% higher, reflecting, first of all, positive impact from the 3 Electric Submersible Pump replacements we did at Alma and Galia in the third quarter of 2018, although the reservoir does continue to decline as expected. Our focus here remains on production optimization, cost reduction and the preparation of detailed decommissioning plans. We also delivered high production efficiency across the area at around 90%. And again, on projects, I'm delighted to report that our team safely delivered the replacement pipeline at Scolty/Crathes ahead of schedule. We have now introduced oil to the pipeline, and initial rates are very encouraging.

At Kraken. As I said, production in the period was in line with guidance with daily average at just under 33,000 barrels a day gross. Production efficiency was strong following the resumption of 2 train operation in March, averaging about 80% production efficiency in the second quarter, which is materially higher than the first quarter average in the 50s. We successfully completed DC4 drilling in quarter 1 making -- marking, rather, the end of original field development plan. And I'm pleased to report that the DC4 area is performing ahead of expectations. And a positive reservoir and well performance continues, confirming that we have the right field development plan in place. With this and working closely with the FPSO operator to maintain high uptimes, we remain confident in achieving our full year gross production guidance of 30,000 to 35,000 barrels per day equivalent. And while that focus continues, we have firmed up plans to develop the material oil in place within the Western Flank area. The first step is the Worcester development, which I'll briefly outline in a few minutes. We're also evaluating other development options in the Western area. The Kraken development, therefore, remains a very positive, long-term value business.

And finally, to Malaysia, production was up 4.5% compared to the first half of 2018 driven by PM8/Seligi. Here, the group delivered high levels of production efficiency, well over 90%, along with continuous success and low-cost idle well reactivation. We did 10 of those in the first half of the year. And of course, these very profitable idle well campaigns have been fundamental to arresting the field decline since EnQuest assumed operatorship in 2014. And in Malaysia, we've embarked on our second 2-well drilling program with first oil expected from the first well at the end of this month.

In summary then, each operational area performed very well in the first half of the year, and each are up and higher than the same period from 2018. While we expect solid performance in the second half, volumes will be tempered slightly by planned shutdowns at many of the assets as it's typical for the late summer period.

Next, I'll provide a little more detail at both Magnus and Kraken.

Magnus, of course, is very material for us and now represents over 1/4 of the group's production. The team there have already significantly improved the asset. First of all, a focus on operational reliability and capacity has driven the production efficiency up to around 90%, and that's 80% year-to-date including the planned shutdown in May. Unit OpEx has been effectively managed down, as Amjad said earlier, from around $60 a barrel a few years back to around $20 a barrel today including savings from the optimized reservoir management scheme to reduce gas injection and also lower cost right across the supply chain. And we've increased production from drilling, [flood pensions], plant debottlenecking and optimized [well injection].

On to the future at Magnus. With high-quality of reservoir, plenty of remaining movable oil in place, strong asset performance, we look forward to creating material new value at Magnus by accessing volumes via drilling, injection management; optimizing production with well work and plant debottlenecking, and that includes low-pressure operations, increased water injection and increased water handling; and by leveraging our operating model to continue driving cost efficiency. So we're very excited about results so far at Magnus and about the significant remaining potential there. It's testament to the real value of having the right asset in the right hands.

And finally, to Kraken. Subsurface and well performance at Kraken remains strong. And as you can see from the chart at the top right of the slide, as expected, the water cutting has remained stable, so this supports, of course, stable oil production. And following another round of well testing, we are optimizing the water injection strategy there to maximize both oil rate and recovery in the reservoir. I mentioned earlier that we are now confident to proceed on to the next stage of field development. The Worcester development is the first such program, and there, we're targeting about 11 million to 19 million barrels of STOIIP within a larger area of about 100 million barrels of STOIIP in the greater Western area. We plan to drill one producer-injector pair, and we'll do that using spares lost from DC2 -- from the DC2 subsea manifold. This will help keep development cost low at around $14 a barrel and allow production to come online immediately without further high-end work. So improved uptimes, stable water cuts, ongoing optimizations and plenty of remaining development potential at Kraken, so it's a very positive story there as well.

And with that, I shall hand over to Jonathan to take you through the financials. Thank you.

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Jonathan Swinney, EnQuest PLC - CFO & Executive Director [3]

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Thank you, Bob, and good morning, ladies and gentlemen.

As you can see from this slide, we've made an excellent progress on our performance metrics in the first half of the year. The priorities of the business are to deliver, de-lever and grow, and we've delivered on all of these. The results themselves are driven by the material growth in the group's production, reflecting contributions of Magnus as well as higher realized prices. The strong performance has facilitated a significant reduction in debt during the period.

Realized oil prices for the first half of 2019 were $66.1 per barrel compared to $59.5 per barrel in the same period in 2018. In the first half of 2019, we recognized $7.6 million of hedge gains compared to $77.3 million -- sorry, $77.3 million losses realized in the first half of 2018. The realized price excluding hedges for the period was $65.4 per barrel, 4% lower than the same period in 2018 which is $68.1 per barrel. Saleable barrels were less than production mainly as a result of entitlement barrels in Malaysia being around 70% of the working interest as well as shrinkage for around 1.5%. Entitlement barrels for the year at PM8/Seligi are expected to continue to be around 70% of working interest barrels.

Revenue also included gas and condensate sales of around $80 million, mainly derived from Magnus gas sales, which included around $45 million of sales related to the resale of purchased gas no longer required for reinjection. The increase in production led to decrease in operating cost per barrel from $22.6 per barrel to $20.1 per barrel. Higher production and realized oil prices also resulted in EBITDA and cash generated from operations increasing to $526 million and $426 million, respectively. The primary differences in EBITDA and cash generation is negative working capital movements, primarily the unwind of the $50 million favorable working capital position at the end of 2018 and the timing of cargo receipts associated with Kraken oil sale of just after the half year.

Net financing costs decreased in the first half of 2019, mainly reflecting lower bank interest of $13 million as a result of the group's ongoing repayment of the senior credit facility. The cash payment associated with financing costs in the period related to $57 million on the Kraken finance lease and $48 million on the group's loan and borrowings. In addition to these payments, we paid $37 million in relation to the vendor loans associated with the acquisition of the additional equity interest in Magnus. Cash payments in the second half of 2019 will include the next installments of the Kraken finance lease and cash interest in the bank and bond debt which is expected to be higher in the second half of 2019 due to the phasing of bank interest payments. In August, we repaid the final 10 -- sorry, in August, we repaid the final $10 million outstanding on the Magnus 25% equity [Vendall] loan, and we'll repay a further $20 million on the 75% Vendall loan in the second half of the year. Given the strong performance at Magnus, the group also expect to enter into profit sharing with BP before the end of the year, and I'll cover this in a little bit more detail shortly. At the end of June 2019, our net debt has improved to $1.638 billion. Having repaid $70 million of the 2019 RCF amortizations in 2018, during the 6 months ended 30th of June 2019, the group repaid a further $160 million. An additional voluntary prepayment of $10 million was made also in July this year, and we will pay the remaining $35 million on the scheduled amortization by 1st of October. At the end of June, cash and available facilities totaled $248.5 million.

Moving to Slide 16. We have a track record of operating cost reduction and continue to look at ways in which we can limit operating cost whilst also growing production. Previous initiatives have included hub approach to logistics, maintenance and inspections along with effective supply chain management, while at SVT, significant project management efficiencies have also been realized. In 2019, having conducted rigorous trials and analysis of the impact of the historical water alternating gas reservoir strategy at Magnus, the group has determined that more effective reservoir sweep at this stage of the field development was through water injection and gas lift. This approach has resulted in the group no longer requiring to inject gas it purchases under the long-term contract from [west of] Shetland into the reservoir. As such, these gas purchases are now included in other cost of sales rather than operating expense under effectively (inaudible).

Turning now to our capital spend. Cash capital expenditure for the period amounted to $125 million. Kraken continued to be where the vast majority of the CapEx was focused, including at DC4. Approximately $34 million related to work in prior periods is settled in 2019. In the Northern North Sea, the expenses were mainly related to Dunlin bypass pipeline, which was completed in June. In the Central North Sea, most of the costs related to license-to-operate expenditure and initial expenditures on the Scolty/Crathes pipeline. We expect our cash CapEx program to be weighted towards the second half of the year with the expense relating to our drilling programs in Malaysia and at Magnus, the Scolty/Crathes pipeline and other previously agreed deferred payments with some of our contractors.

Before we turn to our net debt progress, it's important to recognize the key driver of our operating cash flow in the period has been Magnus. The improved performance of Magnus has accelerated the cash flows from the asset, meaning we now expect to enter the profit-sharing arrangement with BP later in the second half of this year. This is good news that we received $100 million of cash consideration early plus interest earlier than expected. However, as this illustrative chart shows, it also means we now expect lower net EnQuest cash receipts from Magnus in the second half of the year than in the first half.

Turning now to our net debt. As you can see, our net debt position has improved from around $1.77 billion at the beginning of the year to $1.64 billion at the end of June 2019. The significant increase in production and higher realized oil prices were partially offset by the negative working capital movements outlined earlier.

Net cash flow from operations totaled $409 million in the first half, up from $339 million in the first half of '18, and cash CapEx was $125 million. The contingent consideration repayments relate to Magnus and net financing and other costs are primarily made up of interest on our debt facilities and the FPSO lease. In order to support cash flow and our debt reduction program in the second half of the year, we have around 4.6 million barrels of oil hedged, which is around 40% of our expected production at the midpoint to our full year guidance range. Approximately 3.9 million barrels have an average floor price of $66 a barrel with a further 0.7 million barrels hedged at an average floor price of $56 per barrel. We will, of course, look to layer in further hedges as appropriate.

In terms of oil price sensitivity, if you follow our guidance and take into account the hedging, we would anticipate an increase in the oil price from $60 per barrel to $70 per barrel would increase our EBITDA in the region of around $60 million.

Turning to Slide 20. We continue to be focused on debt reduction and this slide illustrates our business is able to generate strong cash flow through operational delivery and repaid debt with around 2/3 of the 2019 amortization being repaid ahead of schedule.

Finally, before I hand back to Amjad, a quick note on our full year guidance. Following a good start to the year, we're on track to meet all of our original guidance. As Bob mentioned, we have completed shutdowns over the summer in the second half, and we continue to be comfortable with the midpoint of the production and guidance range. We now expect our operating expense forecast to be around $550 million from the $600 million previously, primarily reflecting the reclassification of Magnus purchased gas costs to other costs of sales.

With that, I will now hand back to Amjad.

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Amjad Bseisu, EnQuest PLC - CEO & Executive Director [4]

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Thank you, Jonathan. So in summary, we've had a strong first half with the prioritization of delevering. We are delivering on our targets for 2019. Production is up 27% year-on-year, above the midpoint of our guidance. Kraken is now stabilized and producing in line with expectations. Magnus continues to perform well. Unit OpEx is down 11% to $20 a barrel, driven by optimized reservoir strategy and better performance at Kraken. And we have a focused capital discipline where we've completed 3 projects ahead of target and budgets. Our priority continues to be reducing our debt, and we are now in the range of 1 to 2x, the ratio being 1.8x at the end of June, and we would like to operate in the lower end of that range.

Longer term, we have exciting future ahead and future opportunities, which we can mature in our 3 major assets: Magnus, Kraken and PM8/Seligi. Our contingent resources are not expensive to develop from $5 to $15 a barrel, a very attractive level to deploy capital, and there's about 200 million barrels of contingent resources in our assets.

In Magnus, we have 50 million. We are starting to drill end of this year, looking at 2 wells this year and 1 well next year; and we have 270 million barrels of movable oil, so a very large, target-rich environment.

In Kraken, we -- as we mentioned, this is the first time we are stepping out to the field development plan to develop the Western Flank, which has 100 million barrels of STOIIP. We also have an exciting development in the Maureen sands, which underlies the Kraken field, where 3 wells have intersected that sand.

In Malaysia, the giant PM8/Seligi development has also a large opportunity helper, and we are drilling, as we speak, 2 wells this year. We will be looking at doing 3 workovers next year. Seligi gas development is also in the horizon with a potential 3.5 Tcf of gas. And we have put in place the infrastructure to sell gas into Peninsula Malaysia.

We also continue to look for opportunities that are aligned with our strategy of late-life assets and tiebacks and developments, which fit our skill set and add to our resource base.

I wanted to thank really the team for performing on targets and a strong set of results on the assets for the first half, especially on the drilling side and the project execution side, which has been done ahead of expectations, and I think it's -- we are best-in-class in those areas.

Thank you for your time today. We'll turn to questions first here in the auditorium and then remotely after that. Thank you.

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Questions and Answers

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David Matthew Round, BMO Capital Markets Equity Research - Oil and Gas Research Analyst [1]

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It's David Round from BMO here. On Kraken, at the start of the year, your partner obviously took a different position to you around reserves. You've obviously now got a bit better data and a bit better handle on the water cut. Do you get the sense that the information you've seen in the last 6 months is compelling enough for them to change their view and be better in line with the position you took at the start of the year? And second one on Kraken. Can you maybe just talk about uptime there and any particular aspirations to improve that?

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Amjad Bseisu, EnQuest PLC - CEO & Executive Director [2]

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Okay. I'll -- I mean, I'll answer the first one. Bob can answer the second one. So in terms of reserves, I think different companies have different approaches and different assumptions, which resulted in a reserve number. We usually do the reserve audit every end of year by a third party, and I think Cairn is the same. I think the -- there were encouraging notes from an interview that Simon did with the Petroleum Economist, which said that they would be looking to possibly write-back some of the reserves. And so I will leave it to them to discuss what their decision on those reserves are.

But I think with the sanctioning of the Worcester wells and with the production being stabilized with the production efficiency being higher, then I think maybe with some of their assumptions, I think, I'm hoping that we will be more aligned in the future. But again, as far as I'm concerned, our reserve numbers are robust. We've produced 21 million barrels already. And I think we're more confident today than we were earlier this year that the water cut has stabilized and the reserves are there. Again, this is a 20-year life field, there's significant amount of oil in Kraken itself, 400 million barrels; in the Western Flank, 100 million barrels; in the Maureen, we have 3 wells which has intersected tens of millions of barrels, it could be more. So I think I'm confident, with the infrastructure there, we'll be able to exploit significant resources.

On the production efficiency?

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Bob Davenport, EnQuest PLC - MD of North Sea [3]

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Yes. So shall I talk about Kraken production efficiency? So as you remember, when we were -- sat here in March, we've been operating on a single train for most of the first couple of months of the year. There were 3 main causes for that: main -- problems with main power engines, HSP sales and crude oil coolers. As we said in March, we had plans in place and in action to fix those 3 systems, which we have done. And as a result of that, we've increased our production efficiency from the mid-50s in the first quarter to around 80% in the second quarter. So very encouraged. It's a very positive outcome, very positive result, and we're very encouraged with the continuing trend of improvement at Kraken.

So what's our aspiration? So just for some perspective, around the North Sea, all operators and all assets, the average production efficiency is 75%. Our aspiration, of course, at EnQuest is to be top quartile. And -- top quartile in the North Sea is high-80s or higher production efficiency. And most of our assets are sitting in that range. Accordingly, that's our aspiration to -- ultimately for Kraken is to get in the -- into the 80% to 90% and up into the top quartile.

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Amjad Bseisu, EnQuest PLC - CEO & Executive Director [4]

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Stephane?

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Stephane Guy Patrick Foucaud, GMP Securities L.P., Research Division - MD, Institutional Research [5]

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Yes. Two questions for me. First on KUFPEC litigation, seems to be not (inaudible) [$20 million] cost and that's year-on-year, so that's contingent (inaudible) for that. Second, where are we on the maintenance program as of to date for 2019? Is there much left to do? And are there any particular data item to focus on?

And lastly, I saw that the OpEx in H2 is a little bit -- the guidance is higher than 1H. What's that?

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Amjad Bseisu, EnQuest PLC - CEO & Executive Director [6]

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Okay. So I don't think we need to answer one. First one is, that is done. I think 2 and 3 is with Bob.

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Bob Davenport, EnQuest PLC - MD of North Sea [7]

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Yes. So on the planned maintenance shutdowns, of course in the first half we completed that, one at Magnus and Dons and that was concurrent with the work we did on the Dunlin bypass pipeline. In second half, we have some planned shutdowns in Malaysia. In fact, that one should -- just now finishing up, planned shutdown at Thistle and Heather. We have had some restrictions at the Fortis pipeline system in August, which impacted Kittiwake and Scolty/Crathes for a week or 10 days. That's also behind us now and finished. The Chevron-operated Alba asset shutdown which is ongoing at the moment. And we are evaluating the possibility of a short shutdown in Kraken. We're going to determine later in this month whether we're going to do that shutdown this year or include that work in next year's shutdown.

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Stephane Guy Patrick Foucaud, GMP Securities L.P., Research Division - MD, Institutional Research [8]

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So really what remains, the main one, I guess, is the short shutdown at Kraken, that's really what is -- could still happen in the period between now and the end of the year?

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Bob Davenport, EnQuest PLC - MD of North Sea [9]

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There's still a possibility of a brief shutdown. If we do take it, it'll be a single train outage for about 4 or 5 days for each train. So it won't be a major shutdown.

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Amjad Bseisu, EnQuest PLC - CEO & Executive Director [10]

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And the second one was the OpEx being higher in the second half than the first half?

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Bob Davenport, EnQuest PLC - MD of North Sea [11]

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Jon, do you want to...

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Jonathan Swinney, EnQuest PLC - CFO & Executive Director [12]

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Yes. I mean, a lot of that is down to just kind of phasing of work. Fundamentally, I mean, we haven't changed overall our guidance. Obviously there's the difference that we mentioned with regard to the gas injection on Magnus. But fundamentally, it's just the phasing of the work and the timing of payments as well as invoices, so we haven't fundamentally changed overall our OpEx. It just means that, that part of the work that we've done has been -- it's just slightly more in the second half than the first half, so there's nothing fundamental, but a lot of it's phasing.

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Bob Davenport, EnQuest PLC - MD of North Sea [13]

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The OpEx run rate is slightly higher when we're doing the plant shutdowns, so the planned shutdowns that we have at the assets that I mentioned, will add a little bit to the OpEx in the second half.

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Mark Wilson, Jefferies LLC, Research Division - Oil and Gas Equity Analyst [14]

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Mark Wilson from Jefferies. Just like to get your view on the market and the strategy in the North Sea at the moment. In the last few years, aside from Kraken coming onstream, has been the entry into the Magnus and the Magnus additional interest. Do we -- looking forward, do we see as an organic strategy on -- in terms of production growth for the next few years? Or do you think there's opportunities within the very active asset market in the North Sea that we may expect?

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Amjad Bseisu, EnQuest PLC - CEO & Executive Director [15]

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Okay. I mean, I think we have a target-rich environment in our existing assets with very high paybacks and low costs of development. As we mentioned, 5 to 8 in Magnus and around 15 in Kraken and probably between 10 and 15 in Seligi. So I think those will be very, very attractive, and I think we'll continue pursuing those. I think those will inflect more or increase more if -- as the prices of oil go up and our cash flows increase and inflect less or deflect if the prices are lower.

We will continue to look at opportunities. Clearly, what you've seen us do in late-life assets is differentiated. We've now -- we've taken Thistle, we've taken Heather, PM8/Seligi, we've taken Magnus, reduced costs very significantly on all the Kittiwake. So I think we would continue to look at those opportunities selectively. And this is our backyard, so we will always look at opportunities in the North Sea as our backyard.

In Malaysia, we'll be looking more organically. And we are starting now to -- because we are investing in Malaysia in the wells, we are looking to organically grow there again post the downturn.

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Adam Rackley, Cape Wrath Capital - Investment Director [16]

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Adam Rackley at Cape Wrath. With the benefit of hindsight reflecting on the development of Kraken, is there anything that you could have -- that could have been done differently in the development of the field with the FPSO that would have allowed you to have reached the original plateau production guidance? Or was that a reflection or was it too optimistic?

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Amjad Bseisu, EnQuest PLC - CEO & Executive Director [17]

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I think the -- yes, first of all, the Kraken project is a first of a kind. It's a first subsea development with high pressure, high-temperature water where we inject -- we're injecting the power fluid to operate the fields to mix oil and water. The oil is not movable, it's a very shallow reservoir. So I think it's a technical achievement in its own because it is fully subsea. We're heating water to 140 degrees 2,500 PSI, the water then emulsifies the oil and pulls it in, and then we separate the oil on the platform. We're injecting nearly 300,000 -- between 250,000 and 300,000 barrels a day of hot high-pressure water. We are separating almost 350,000 barrels a day of oil and water at the surface. And the plant capacity is almost 500,000 barrels a day of separation between 2 trains, 480,000 to be exact.

So it is a complex project. It is -- yes, we are separating oil from 70% emulsion to 48% to 10% and then to 0.5% when we sell it. So it is a quasi-refinery similar to the heavy oils that you see. So I think we probably underestimated the complexity in terms of ramp-up and the ability to ramp up. So I think that is probably correct. But I also feel very proud that we, in the U.K., have now drilled the heavy oilfields, which are cost of bitumen in terms of gravity, where others have generally done those onshore and not offshore. We drilled the longest gravel pack horizontals in the world, and this is a technical achievement.

I think we struggled with the FPSO initially. The subsea has worked perfectly well from the beginning. We did struggle with the FPSO immediately. And the hope would have been that we could have worked probably better with our contractor there. And we had -- we got into commercial issues with them early on when the FPSO did not deliver according to plan. But it's a combination of maybe being ambitious and getting too commercial with the -- between us and our contractor and having a better approach on from the subcontractor, which now we have. With the management change in Bumi, I think we're working extremely well together, and I think we're both focused on optimizing performance and that actually has made a big difference.

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Jonathan Swinney, EnQuest PLC - CFO & Executive Director [18]

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I think also we started with a budget, obviously, for the project at $3.2 billion and it was delivered at $2.3 billion. So I think an awful lot of that work was fantastically done, as you said, particularly around the drilling guys and a truly excellent job.

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Amjad Bseisu, EnQuest PLC - CEO & Executive Director [19]

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But I think this will, in the long term, be a very strong competitive advantage for EnQuest because this type of development normally is done by majors, and we've been able to do this successfully, I mean, albeit we had a rocky road to get here.

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James Thompson, JP Morgan Chase & Co, Research Division - Analyst [20]

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It's James Thompson from JPMorgan. Just a quick question really on your sort of medium-term capital allocation strategy. It sounds to me, clearly, you're committing to Worcester next year. Through the presentation, it sounds like you want to invest more in Magnus, you want to invest more in PM8/Seligi. How should we think about that in the context of the next couple of years? Should we see CapEx at the same sort of level $275 million in 2020/'21? And how does that factor into how you're thinking about the bank facilities at this point in time? Are you looking to pay back the final $440 million? Or are you trying to refinance that stub at some point next year?

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Amjad Bseisu, EnQuest PLC - CEO & Executive Director [21]

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Can you, Jonathan?

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Jonathan Swinney, EnQuest PLC - CFO & Executive Director [22]

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Yes. So in terms of investment, I mean, I think as Amjad mentioned, there is a lot of opportunity in our current asset set, drilling 2 wells in Magnus, drilling a couple of wells into Kraken as well, and we've got ongoing opportunities in those areas. I think Amjad alluded to the 2C resources that we have, that we can convert into 2P through program, which also includes PM8/Seligi. So I think at $275 million of CapEx for this year, I, certainly, think we'll be coming down materially from that, and we will still be able to deliver those wells on an ongoing basis in the next couple of years.

I think in terms of your next question on capital around refinancing, I mean, clearly, at the moment, our focus has been repaying debt, and we've been doing that consistently and successfully. We will continue to do that. Obviously, we will look at potentially refinancing in due course as we go. I think that will be always incumbent upon us to be able to do that. But at the moment, we can certainly use the current lending facility and just repay that on the current schedule. And as you've seen, we've actually been doing it ahead schedule, which just certainly meant that the -- from a banking perspective, certainly the lenders have been extremely happy with our performance around that.

So we will continue to look at that, obviously, in terms of -- if we look at the cost of that and the size of the debt that you could be able to refinance, I mean, on an ongoing basis, we will do that. And if it makes sense for us then clearly, it's something that we could execute in due course.

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James Thompson, JP Morgan Chase & Co, Research Division - Analyst [23]

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And just switching to Kraken, obviously, talking to a lot about oil in-place in terms of opportunity set there. Can you just guide us really about what sort of recovery factors you're expecting from things, I would assume?

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Amjad Bseisu, EnQuest PLC - CEO & Executive Director [24]

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So I think we've talked about STOIIP of 11 million to 19 million barrels, and I think we are talking about 3 million or 4 million barrels of recovery, so probably around the 20%, 25% range.

Any further questions from the audience here? Okay, thank you. If in that case, can we go to the remote questions?

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Operator [25]

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Your first question is coming from the line of Nick Linnane from Sefton.

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Nicholas Linnane, Sefton Place Advisors Ltd - Portfolio Manager [26]

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Can you talk a little bit about price realizations you've been getting on Kraken oil, I guess, in the first half and also just most recently because it seems like that sort of oil is attracting kind of better, increasingly good prices?

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Amjad Bseisu, EnQuest PLC - CEO & Executive Director [27]

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So can you just identify yourself please, and then Jonathan will answer the question?

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Nicholas Linnane, Sefton Place Advisors Ltd - Portfolio Manager [28]

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Yes. Nick Linnane from Sefton Place.

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Jonathan Swinney, EnQuest PLC - CFO & Executive Director [29]

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Thanks, Nick. I mean in terms of price realizations, we certainly had -- over the first half, we certainly got to the point where we were receiving premiums actually for Kraken at a premium to Brent, which is obviously a strong performance. I think you're aware that PS obviously had its fire, which actually had an effect on all of the heavy oil market, so it did decrease a little bit from that. Most recently, we've had our recent cargoes have been going for a very small discount to Brent at the moment, so that's working through. So it's still being strong. And clearly, the opportunity for us going forward is around IMO 2020, and we're certainly working with various counterparties around that to see because Kraken with a low -- as being a low sulfur oil is actually -- has real potential around IMO 2020 usage. So we'll be working on that. Obviously, goes on into next year, but it's certainly something that we're focused on.

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Operator [30]

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We have no further questions on the phone lines. Please continue.

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Amjad Bseisu, EnQuest PLC - CEO & Executive Director [31]

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Okay. Thank you very much, everyone, for attending and looking forward to seeing you next time.

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Jonathan Swinney, EnQuest PLC - CFO & Executive Director [32]

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Thank you.