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Edited Transcript of NOG.L earnings conference call or presentation 19-May-20 1:00pm GMT

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Q1 2020 Nostrum Oil & Gas PLC Earnings Call Amsterdam Jul 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Nostrum Oil & Gas PLC earnings conference call or presentation Tuesday, May 19, 2020 at 1:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Kaat Van Hecke Nostrum Oil & Gas PLC - CEO & Director * Martin Robert Cocker Nostrum Oil & Gas PLC - Interim CFO & Director ================================================================================ Conference Call Participants ================================================================================ * Colin Saville Smith Panmure Gordon (UK) Limited, Research Division - Oil and Gas Analyst * Egor Fedorov ING Groep N.V., Research Division - Senior Credit Analyst of Russia and CIS ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the Nostrum Oil & Gas Q1 Financial Results. (Operator Instructions) I must advise you that the call is being recorded today on Tuesday, the 19th of May 2020. And your first speaker for today is Martin Cocker. Please go ahead, sir. -------------------------------------------------------------------------------- Martin Robert Cocker, Nostrum Oil & Gas PLC - Interim CFO & Director [2] -------------------------------------------------------------------------------- Thank you, Jody. Good afternoon, everyone, and welcome to this call to present the Quarter 1 2020 Financial Results of Nostrum Oil & Gas. Thank you very much for joining us. My name is Martin Cocker, and I am the Chief Financial Officer of Nostrum. I'm joined on the call today by Kaat Van Hecke, who's our Chief Executive Officer, who's based in Uralsk. We will be following the quarter 1 2020 financial results presentation that's available on our website or through the link in the press release. And throughout the presentation, we refer to the page numbers that appear in the bottom right-hand page of each of the presentation. At the end of the presentation, Kaat and I will be available for any questions relating to the results. I would like to request at this time that all media inquiries go through our PR advisers, Instinctif Partners. And in addition, we'll be making some statements during our presentation covering the restructuring of our bonds, but we won't be answering any further questions on that topic other than what mentioned in the presentation. Should you have any further quarters following the call, then please contact Kirsty, in our Investor Relations department, whose contact details are also in the press release and on our website. Okay. Turning to Page 2 of the presentation, the summary page. I'm starting with the financial results. Our revenue for the quarter was slightly over $60 million, which represented an average daily sales volume of just under 23,000 barrels of oil equivalent, which equates to approximately 2.1 million barrels of oil equivalents sales in the quarter. This compares to revenues of over $95 million for quarter 1 '29 -- 2019, sorry, which represented a daily sales volume of slightly over 31,600 barrels of oil equivalent or approximately 3.8 million barrels. The difference in the revenues is a combination of reduction in volumes available for sales versus 2019 and also a reduction in the oil price. Average sales oil price of quarter 1 2019 was $63 -- in quarter 1 -- sorry, in quarter 1 2019, it was $63; in quarter 1 2020, it was closer to $50. Having said that, our gas prices held up in this quarter at around $114 per thousand cubic meters, which is slightly higher than we achieved in quarter 1 2019, which was around about 110,000 -- $110 per thousand cubic meters. Reduction in revenues is the main contributor to the reduction in EBITDA. However, the impact of the fall in revenues has been mitigated by reductions in costs across the board, as we start to move our cost base from a pure E&P company into a midstream processing operation. Cash at the end of the quarter was $66 million, and the conservative oil and gas prices for the remainder 2020, excluding financing cost, synergy costs with debt restructuring, we expect to be cash positive at the end of 2020. On the topic of possible restructuring our debt, you'll be aware that we have appointed Rothschild & Co, as our financial adviser and White & Case, as our legal counsel. We've engaged in preliminary discussions with the Ural Oil & Gas through their financial advisers. However, as you might imagine, those discussions are at an early stage. No further course of action has yet been decided and so any outcome is uncertain. Therefore, we can't share any further information about the process at this time, except to say that the company is committed to preserving value for all stakeholders involved and the restructuring will be driven by this objective. However, we do expect to share more updates on the process as soon as it's practical to do so, of course, having required to disclosure and any other legal obligations. Okay. To cover of the operation and strategic aspects of this summary, I'd like to hand over to Kaat. Kaat? -------------------------------------------------------------------------------- Kaat Van Hecke, Nostrum Oil & Gas PLC - CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Martin. Good afternoon, everyone. This is Kaat speaking from West Kazakhstan. So let me start from an operational point of view from a health and safety point of view of our staff and to ensure also the continuity of our operations. We took here several appropriate measures to prevent COVID-19 into our organization. We have in Uralsk, as per today, 330 COVID-19 patients. Today -- until to date, we have not seen material impact from COVID-19 on our operations. Only some logistical supply disruptions and mainly limitations to people traveling within Kazakhstan and in and out of their country. We also believe that we have the plans in place to manage the situation in case the corona situation escalates. From a production point of view, our Q1 average production was just above 24,000 barrels of oil equivalent, and our sales volume was just below 23,000 barrels of oil equivalent. Sales volumes in April are also around 23,000 barrels. Our production performance is in line with expectation, and we stick to our full year 2020 average sales volume guidance that we have given in the beginning of the year of 19,000 barrels. As you all know, we decided to post our drilling activities for 2020. We have, however, one workover rig active in the field to support our production levels. We had a significant headcount reduction by over 200 employees during late 2019, following the commissioning activities of our gas treatment plant and due to the post of our drilling. The headcount and cost optimization efforts are continuing during 2020. Strategically, as you all know, we announced in March, the end of the formal sales process as we saw no merit in prolonging this process. Our strategy now explicitly say that we want to commercialize the spare gas processing capacity that we have here in our world-class gas processing plant by utilizing third-party volumes. We have already one signed commercial agreement in place with Ural Oil & Gas. However, the start-up of their gas supply is delayed. UOG is currently working on a new timetable for delivery of gas to Nostrum. Despite the delay, UOG management expressed to us the full commitment to deliver the gas before any penalties arise under their existing agreements they have with us, which would require that their gas is being delivered before April 2023. Given the low oil price environment we are currently in, we continue to look for cost savings wherever possible, as we really want to become a very lean, midstream processing company. I repeat myself here again, but the acquisition of Positive Invest, which holds the subsoil user rights of Stepnoy Leopard field, has been put on hold, also given the current oil price environment and the constraints on our liquidity. Let me now move to Slide #3, where you see the trend of our production and sales figures over the years 2018, '19 and the first quarter of 2020. Our field production has been impacted by, one, higher-than-anticipated decline rate, but second, also by the suspension now of drilling activities for 2020. I will not repeat, I quoted already the 2020 figures for Q1. The difference between the high figures and the lower free cash that we called here in volumes is because of our own fuel gas consumption. For the full year, our forecast is in line with the guidance that we provided at the beginning of the year, and we stick to these figures of 20,000 barrels for production and 19,000 barrels for sales volume. I would now like to hand over back to Martin to talk about the cost. Martin? -------------------------------------------------------------------------------- Martin Robert Cocker, Nostrum Oil & Gas PLC - Interim CFO & Director [4] -------------------------------------------------------------------------------- Thanks, Kaat. First of all, I need to draw your attention to changing the way that we present cost per barrel. Previously, we view sales volumes to calculate the cost per barrel for each of operating costs and G&A. However, after the review, we decided that using production figures for operating costs and G&A cost per barrel is more appropriate. Operating costs also now exclude the inventory adjustment, which is an accounting adjustment and doesn't reflect any cash expenditure. Eliminating this adjustment, we believe, gives a better view of our actual cash cost. Selling and transportation costs, the barrel of oil equivalent continue to be calculated as in previous periods using sales volumes and excluding depreciation. You can see from the graph that the cost of barrel of oil equivalent of our main cost of OpEx selling and transportation and G&A are holding just slightly lower than those for financial year 2019 as a whole. This is in spite of the reduction in production in sales in the quarter and reflects that we are managing to control our costs even as production and sales decline. Expenditure on an accrued basis, excluding depreciation and any adjustment to the hydrocarbon inventory is lower in all categories in quarter 1 2020 versus quarter 1 2019. Okay. Turning to Page 4. Clear message here is that we continue to rigorously review all costs and change discussion with spend to ensure that our cost base moves towards one that fits the purpose for midstream processing operation. As we reported on our year-end investor call, we're taking a hard look at all our expenditures, and as Kaat noted, around 200 people released at the end of 2019 and further 20 in the year-to-date. We've also looked at larger third-party contracts, and where possible, we negotiated, but also we've terminated them. As an example, transport services at the field and run the head office in Uralsk has been reduced in scope. We negotiated and certain large IT support contracts have been terminated and discretionary consulting spend removed from budgets. And I think that we've seen the benefit come through in the quarter from the measures that we've taken and these should also reflect in the numbers for the rest of the year. Therefore, we have confidence that we can achieve our target OpEx for 2020 of below $45 million. And the G&A target below $15 million, of course, excluding any cost of restructuring the debt. Turning to cash. As we've already stated, our cash balance at the end of the quarter was $66 million. Also as I already stated, average and the conservative oil and gas prices for the remainder of 2020 and excluding financing costs with any cost of debt restructuring, we'll remain cash positive at the end of 2020. Our net debt at the end of March, and sorry, there's a typo in our presentation, it is the end of March and not the end of December this year, was just over $1 billion. As already commented and as we reported on the year-end investor call in April, and as Kaat has alluded to, our capital expenditures being paid back. Our cash outflow in quarter 1 2020 was due to overhangings from the completion of GTU3 that we paid in 2020. And the drilling program that we terminated at the start of 2020. We're now operating our well #20 program only under strict commitment criteria. In short, we continue to do what we need to do to protect production and liquidity whilst maintaining safe operations. Okay. Kaat, I'll hand back to you to take us through Slide 5. -------------------------------------------------------------------------------- Kaat Van Hecke, Nostrum Oil & Gas PLC - CEO & Director [5] -------------------------------------------------------------------------------- Thank you, Martin. Like I said, with the reduced production from our own field, we are looking to monetize the value of our facilities as really an infrastructure help here in West Kazakhstan. Our facilities are really situated in an area with many hydrocarbons around us. And we are talking with third parties around us to secure additional volumes to fill the spare capacity at our gas treatment facilities. Moving to number 6 -- Slide #6 with the key focus areas for the company. I can really say that the #1 priority for the company, and also for me, personally, where I spent really most of my time on, is to discuss with the third parties to utilize our gas infrastructure. I can say the weekly discussions and meetings are taking place with third-party people to discuss many issues that we -- that are dealt with. You'll have to appreciate we are talking here about big volumes, different gas compositions, and we want to fill as much as possible our facilities. Each of the fields have their own specific risks and opportunities. And besides discussing several technical issues, as we want to maximize as much as possible the cake for everyone, we also need to address later on a lot of economic and commercial issues. So that is certainly our first focus area and priority of the company. Before I hand over back to Martin for the liquidity, I'm not going to repeat more on safety and sustainability. However, I want to emphasize that we keep a strong focus on HSE and sustainability on all the topics that I've mentioned here. Martin, I hand over to you. -------------------------------------------------------------------------------- Martin Robert Cocker, Nostrum Oil & Gas PLC - Interim CFO & Director [6] -------------------------------------------------------------------------------- Thanks, Kaat. Then just to pull this presentation to a conclusion, I will talk about liquidity management. I think that probably covers all of the topics that are on this slide. We are looking to cut costs across all parts of the business. We're looking to restructure the cost base towards a midstream infrastructure company. And as I've noted, we will seek to engage with bondholders through appointed financial legal advisers towards a successful conclusion that preserves the value for all the stakeholders involved. And with that, thank you for your attention and I conclude the presentation. Now happy to take questions, but please note that we'll not be answering further questions on the restructuring of our bonds. Thank you very much. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) The first question is from Egor Fedorov from ING Bank. -------------------------------------------------------------------------------- Egor Fedorov, ING Groep N.V., Research Division - Senior Credit Analyst of Russia and CIS [2] -------------------------------------------------------------------------------- Actually, I would like to thank you for keeping these presentations in very high -- in very challenging environment. I have 2 questions actually regarding monetization of your facilities. Do you have any understanding of when it might be started? When you will receive any cash flow from your facilities, from GTU3 unit? And what will be the amount of this? Of course, you have some projections, but just can you give us some light on this? And second, regarding restructuring things. Is there any an understanding from the management point, what will be the potential -- satisfiable -- maybe, well, convenient haircut for the Board on the bond outstanding or what actually your priorities here in the bond restructuring process? -------------------------------------------------------------------------------- Martin Robert Cocker, Nostrum Oil & Gas PLC - Interim CFO & Director [3] -------------------------------------------------------------------------------- Thank you, Egor. Kaat, do you want to take the monetization of the facilities? -------------------------------------------------------------------------------- Kaat Van Hecke, Nostrum Oil & Gas PLC - CEO & Director [4] -------------------------------------------------------------------------------- Yes, I take the first one. You, perhaps, the second one, if we can handle them that way. -------------------------------------------------------------------------------- Martin Robert Cocker, Nostrum Oil & Gas PLC - Interim CFO & Director [5] -------------------------------------------------------------------------------- I will take the second. Yes, sure. -------------------------------------------------------------------------------- Kaat Van Hecke, Nostrum Oil & Gas PLC - CEO & Director [6] -------------------------------------------------------------------------------- So on the GTU3 utilization and when cash flows would come in, I would say, first, we have the GTU, We have a signed agreement and there, we expect, like I said, is -- at the latest, before April 2023, that cash flow will come in from that deal on that one. That is one. You will have -- on the second -- on the other third-party opportunities that we discussed, I have to park likely that question, I cannot say it. We are working towards something concrete, but I cannot say a lot more details on this one on how to do it. Let us work through over the coming months, and then it will become clearer. Martin, I hand over to you. -------------------------------------------------------------------------------- Martin Robert Cocker, Nostrum Oil & Gas PLC - Interim CFO & Director [7] -------------------------------------------------------------------------------- Yes, thank you. I think just to finish up on the monetization of the facilities. We obviously have internal cash flows that we're running at times on various cases. But the negotiations are complex. Negotiations are confidential. And really, we're not in a position where we can and where we would want to share any information about the likely outcome of any future contracts to monetize the GTU3. So sorry about that. But I'm going to try and park it. In terms of the restructuring, I'm going to park that as well. I think you better address that towards the bond closings rather than the management. Because it's going to be very their call and not ours. We'll work towards preserving value for all the stakeholders, that's the bondholders and the shareholders. But any talk about potential haircut at this time is premature, and I would suggest directed at the wrong parties. So thank you for your question. And sorry that we weren't able to give a more full answer. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- (Operator Instructions) The next is from Colin Smith from Panmure Gordon. -------------------------------------------------------------------------------- Colin Saville Smith, Panmure Gordon (UK) Limited, Research Division - Oil and Gas Analyst [9] -------------------------------------------------------------------------------- I just appreciate you can't talk about specific third-party discussions, but could you talk a little bit more about exactly what other potential for third-party gas that might be? Because from the graphic in your annual report, it only looks like the Stepnoy fields and the Trident fields plus the UOG, the only resources actually available to come through the plant. So that's my first question. And my second question was really to do with what would trigger any change to the going concern status? And also whether you think management should have flagged the fact that there was no opinion from the auditors on the 2019 accounts in any of the materials, apart from the annual report itself? -------------------------------------------------------------------------------- Martin Robert Cocker, Nostrum Oil & Gas PLC - Interim CFO & Director [10] -------------------------------------------------------------------------------- Okay. Colin, thank you very much for that question. Again, Kaat, would you like to take the first one on the other sources of third-party gas for the GTU? -------------------------------------------------------------------------------- Kaat Van Hecke, Nostrum Oil & Gas PLC - CEO & Director [11] -------------------------------------------------------------------------------- Yes, very good, Martin. So I would actually like to refer you to Slide #5 where you have a drawing. And where I would say is there are -- we are in a very rich hydrocarbon region, and we look really 360 degrees around us. We look in a circle, more than 100 kilometers away from us. And I just want to say there are more fields than the ones that you quoted. More I am not going to say, but there is more opportunities than the ones you just listed. Martin, the rest is for you, I think. -------------------------------------------------------------------------------- Martin Robert Cocker, Nostrum Oil & Gas PLC - Interim CFO & Director [12] -------------------------------------------------------------------------------- Yes. Great. Thanks, Kaat. In terms of flagging the disclaimer opinion, no, I don't think we should reflect the disclaimer opinion. An auditor's opinion is an auditor's opinion. It's there for everyone to read. And we make full disclosure of the challenges faced in the company's insurance statement, the viability statement, the going concern statement, the basis of preparation of the financial statement. So there was enough light. The auditor's opinion is for the auditors and not for the directors of the company to comment on. And that was our opinion, and that's what we stood by. Does that cover the question, Colin? -------------------------------------------------------------------------------- Colin Saville Smith, Panmure Gordon (UK) Limited, Research Division - Oil and Gas Analyst [13] -------------------------------------------------------------------------------- Well, I think it was -- there was also a further question about what may trigger a change to the going concern status? I mean, at least, on my numbers, and I think you've indicated this, not in this conference call so much, but in the last one that you are probably not going to be in a position to make the third quarter coupon payments if oil prices stayed around about the $30 a barrel level. -------------------------------------------------------------------------------- Martin Robert Cocker, Nostrum Oil & Gas PLC - Interim CFO & Director [14] -------------------------------------------------------------------------------- Okay. Yes. All right. I'm sorry for missing that part. The obligation on the directors of the company, as you all know, is that there was reasonable expectation that the company continues as a going concern. Should we look and decide that the company cannot continue as a going concern and then we will, of course, make a decision at that time. I think that negotiations with the bondholders are at a very early stage, then I think it would be premature at this stage to start listing the circumstances in which we might take a different view. And so at this time, it's too early to say what all the circumstances would be. And it's probably too lengthy a call and I will probably miss the one. That's the issue. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- Are there any further questions, ladies and gentlemen? No questions that are coming through. I'll hand back to yourself, Martin. -------------------------------------------------------------------------------- Martin Robert Cocker, Nostrum Oil & Gas PLC - Interim CFO & Director [16] -------------------------------------------------------------------------------- Okay. Thank you. If there's no further questions then, well, thank you, once again, for joining in the call. And I wish you all keep safe, keep well. And we'll speak hopefully at the Q2 results in August. Thank you very much for your time, and goodbye. -------------------------------------------------------------------------------- Kaat Van Hecke, Nostrum Oil & Gas PLC - CEO & Director [17] -------------------------------------------------------------------------------- Good bye. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- Ladies and gentlemen, that does conclude the call. Thank you all for joining. You may now disconnect.