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Edited Transcript of OSH.AX earnings conference call or presentation 21-Aug-18 1:00am GMT

Half Year 2018 Oil Search Ltd Earnings Presentation

PORT MORESBY Apr 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Oil Search Ltd earnings conference call or presentation Tuesday, August 21, 2018 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ian Munro

Oil Search Limited - Executive General Manager of Gas, Marketing & Exploration

* Julian Fowles

* Peter Robert Botten

Oil Search Limited - MD & Executive Director

* Stephen W. Gardiner

Oil Search Limited - CFO & Group Secretary

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Conference Call Participants

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* Adam Martin

Morgan Stanley, Research Division - Research Analyst

* Andrew Hodge

Macquarie Research - Research Analyst

* Daniel Butcher

CLSA Limited, Research Division - Research Analyst

* James Byrne

Citigroup Inc, Research Division - Research Analyst

* Jonathan Prince

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Presentation

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Peter Robert Botten, Oil Search Limited - MD & Executive Director [1]

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Well, ladies and gentlemen, I think we're at our appointed hour and minute. Firstly, a safety briefing. We understand there are no alarms or test of alarms present for this morning's exercise. So if you do hear the whoop, whoop, whoop, the emergency exit is on the far left-hand side and we will be accompanied down to the mustering point, which is outside the building, a few steps down, unfortunately, if it happens, I'm sure it won't. But please, in the event of an appropriate alarm, we will go down and exit from the left-hand side.

I should say thank you very much for being here. There seems to be a lot on this morning from political and corporate machinations. So I appreciate -- sincerely appreciate the dedication to come along and hear an update of the Oil Search story. And today, we are going to, obviously, the disclaimer. We'll hear from myself, probably too much; Stephen Gardiner, our CFO, who will go walk through the numbers; Ian Munro will also talk about gas marketing; Julian will talk and can answer questions around some of the production and operations piece of our business. And today's format is to have about half an hour of formal presentations and then maybe half an hour or so around questions. So there's plenty of time to scrutinize the numbers, scrutinize the operations and have our people reply to those questions.

Obviously, in my view, and I've been here 25 years, the first half of 2018 really can be characterized as being one of the most challenging in the company's 89-year history. The impact of the 7.5-magnitude earthquake and numerous aftershocks resulted in production shutdowns in our operated oil fields and PNG LNG and drove lower production revenues and profits. Net profit for the first half then totaled USD 79.2 million, down around 31% on the previous corresponding period. Total revenue declined by 18% to USD 557.8 million, with lower sales volumes partly offset by higher realized oil and gas prices.

Through all this, we've seen some just outstanding work by our staff and those of our partners in addressing the impact of the earthquake on the people, our facilities and our communities in the Highlands. Our people have worked tirelessly in very difficult circumstances in relief and recovery efforts following the earthquake, providing first responder relief to hundreds of thousands of people in our local communities, being responsible for delivering almost 80% of all food aid delivered in the first month after the disaster. Along with treating thousands of patients, delivering critically needed medical and aid relief whilst rebuilding our camps and restarting our facilities, it's pleasing to note now that all our oil facilities are back online and production and will progressively return to normal production as remote fields are reconnected over the next 6 or so months.

PNG LNG has also resumed production at and indeed above pre-earthquake levels, an outstanding achievement by ExxonMobil's operating staff. Record rates of production have been achieved from PNG LNG to an equivalent of over 9 million tonnes per annum since production startup a few months ago.

We anticipate, therefore, a very strong second half performance. And I just want to make sure that we pay tribute to -- I publicly want to pay tribute to our operations and to all our staff that were associated with the rehabilitation and relief efforts around the earthquake.

Around the progressively organized mayhem of the earthquake response, other parts of our business have been powering ahead. Strong demand for our LNG has seen recent signings of midterm contracts with PetroChina and BP. Steady progress has also been made on new LNG development activities with alignment between PNG LNG and Papua LNG partners to develop 3 new trains, totaling around 8 million tonnes capacity. This is underpinned by a strong resource base in the P'nyang and Elk-Antelope fields, with an increase in 1C and 2C certified resources in the first half. Engineering activities and discussions on commercial agreements, financing and marketing are also moving ahead.

Engagement with the PNG government on finalizing the fiscal terms for the projects has also commenced, with a target of concluding these agreements by the time the APEC leaders meet in Port Moresby in November, and this, in turn, will lead to a decision on front-end engineering design. There's a lot been going on in our organization over the last 6 months or so, focused around, obviously, the earthquake and earthquake response, but also delivering on our core strategic imperatives. A lot going on, but real progress is still being made.

Obviously, other highlights include the successful appraisal of the Kimu and Barikewa fields in the PNG Forelands, adding certifiable resources needed to facilitate development options. Considerable work has also taken place to look at the remaining potential of our oil fields in the lead up to LNG expansion and production in 2024. Further high-value barrels have been identified within our oil fields, with the potential for a positive impact on cash flows over the next 3 to 5 years.

Alaska is powering ahead with recent drilling in the Pikka unit by ConocoPhillips, highlighting resource upside in this field. And we continue to build a world-class multi-talented team in Alaska as we prepare for an active drilling and testing program later this year.

We're also working cooperatively with our partners in continuing to develop ways of optimizing the value of our option to acquire the balance of Armstrong Oil's equity.

From a safety perspective, obviously, personal and process safety remains an absolute core value, very appropriate for us as a company and an operator. Frankly, it's a miracle combined with huge doses of luck that some of our several thousand people we had working in the Highlands at the time of the earthquake were not seriously injured during the initial quake and many aftershocks. I am sure that the story would have been very different if the main quake had happened during the working day. I'm pleased to say that there were no major injuries to our staff and contractors during the earthquake.

Our safety performance as measured by total recordable incident frequency rate did decline in the first half mainly due to a series of relatively minor incidents related to seismic operations in the Gulf. This is a very tough operating environment, but this performance is not acceptable, and a rigorous rectification program instituted in the second quarter has significantly reduced the incident rate over the last 3 months.

It's pleasing to note that there were no lost time incidents in the first half across our workforce and our contractor workforce, and I think that's a significant achievement given the challenges of operating and the operating environment in which we were working. There were also no loss of hydrocarbon containment as a result of the earthquake and no material environmental incidents during this period, which again attests to the robustness of the design of our facilities and their ability to stand up under pressure.

And with that in mind, I'll throw it over now to Stephen Gardiner, our CFO, to talk about our financial results in the first half.

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Stephen W. Gardiner, Oil Search Limited - CFO & Group Secretary [2]

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Thank you, Peter, and good morning, ladies and gentlemen. I'll keep this relatively brief, it's only so many times you want to hear me say that the numbers are down because of the earthquake, so let's move forward.

Thankfully, though our production sales were obviously severely impacted by the earthquake, that was moderated by continued recovery in oil and gas prices compared to the first half of 2017, with oil prices up 34% and gas and LNG prices up 18%, so quite a healthy lift that provided us a meaningful offset. And because of that, we generated some good operating cash flow during the period despite the earthquake, and I'll keep referring to that, with cash flow of about $215 million. It's a really good outcome in the context, and that was obviously supported by a rapid return to full LNG production, with record volumes achieved post the restart. And we'll go into that in a bit more detail.

Liquidity, again, impacted by the production disruption and also the cash settled acquisition of the Alaska North Slope assets earlier in the year for USD 415 million. But despite that, our liquidity position still remains at a very comfortable level. Now let me provide a little bit more color on each of those elements.

A waterfall chart that's not particularly pretty because of the large decline in revenue as I've already covered, but fortunately, our noncash charges are also largely production-based so they provide some offset to the revenue fall in terms of impact on profit. Our production cost did increase on the prior period largely because our base operating costs are fixed and even with the facility shut-in, we had little ability to actually reduce our base cost position. We also had a number of one-off costs associated with the earthquake, and including the response activities Peter referred to, our remediation work, we had higher logistics costs as some of our supply routes were closed and we had to use more expensive mechanisms to move goods and services around. We also, obviously, contributed a material amount of money in community support, over USD 5 million. Those costs also include the purchase of an LNG cargo, when the plant was shut-in to keep it cool. That really facilitated the very fast ramp-up once we recommenced production through that plant. In addition, ExxonMobil, as operator of the PNG LNG project, used the shut-in period to bring forward a major maintenance program that was scheduled for later in the year, so that also brought costs into the first half.

In terms of offsetting costs, our oil property insurers have been very supportive. In the first half already, we received about USD 40 million in insurance payments from those insurers as provisional payments. But only $6 million of that has been released to the P&L as an offset to our repair costs in the period. We'll see additional recoveries and also additional releases against our operating costs in the second half as we commence some of the major repair work on the major infrastructure that was damaged by the earthquake.

However, the PNG LNG project is yet to receive any insurance payments. We believe they're likely to receive some in the second half of the year, so all the costs they have incurred to date have been booked to OpEx, and that's again, as I said, impacted on the first half result.

Finally, our effective tax rate for the half was 34%, a little bit up on the prior period, with various one-off adjustments that are fairly minor being magnified by a lower overall pretax result.

Unit production costs, again, sort of a fairly simple story here. We've seen costs much higher than we've shown in previous years on a unit basis at about $14 a barrel of oil equivalent, both impacted, of course, by the reduced production for the period and also the one-off earthquake-related costs. With production now back to pre-earthquake levels, we'll see those unit costs are returned to normal in the second half.

All in all, despite the earthquake, we're still in a very solid financial position. We saw over $200 million of operating cash flow, as mentioned, generated in the first half, and that's really a credit also, as Peter has already mentioned, to our field operation teams for Oil Search and ExxonMobil that oversaw the production restoration activities and brought production online, so back online so quickly.

Our liquidity position remains robust, but obviously, it has been impacted by both the production impact on revenue generation and also the money paid for the acquisition of the Alaskan assets.

In the first half, we did some further capital expenditure programs, including spending about $168 million on appraisal drilling, acquisition of seismic data, our progression of the LNG expansion projects and the design of a new company-wide enterprise resource planning system, which we hope to go live with towards the end of this year.

Obviously, one of the key elements here is the robustness of the PNG LNG project itself, which was, again, highlighted during the period of the earthquake and post that. Despite the higher OpEx incurred by the project in the several weeks of lost production, our share of project cash flows was sufficient to fund not only scheduled interest and principal repayments, totaling USD 251 million, but also deliver a cash distribution to us of about $65 million in June, so an excellent result. On top of that, our committed bank loans, totaling $850 million, remain undrawn at the end of the half year, and we expect to see over the balance of this year a rebuilding of our cash balances despite having to fund an ongoing reasonably sizable CapEx program of value-adding activities.

So the key focus for me and for the management team, generally, is really the stewardship of our balance sheet and really to make sure that we can deliver financial flexibility to fund our growth projects both in Papua New Guinea and in Alaska. We regularly model and assess our medium-term liquidity position based on the latest CapEx assumptions that we have, oil price forecasts, access to additional corporate lines and other factors that drive that liquidity profile. We remain very confident that we can fund our development projects through a combination of project-specific project financing, cash, corporate funding lines and operating cash flow.

On top of that, we're also becoming more positive about the ability to gear up our projects with project finance debt. We're comfortable that we're more likely to be able to achieve gearing approaching 70% for the PNG LNG expansion projects, which is comparable to the gearing we achieved for PNG LNG foundation project. That's due really to optimization of our CapEx profiles for the 2 projects from the downstream integration and also the upstream phasing. And also, we're seeing more positive lender oil price decks coming out of the market, in line with the recovery in oil prices, and that will help in terms of assessing our ability to service the debt and therefore the amount of debt we can take into those projects.

However, if oil prices do weaken and we don't realize the anticipated more than USD 1 billion per annum of operating cash flow from our existing business during the development phase of these projects, then we can curtail several hundred million dollars of discretionary exploration spend planned over the next several years.

Now turning to full year guidance. Guidance for operating costs is unchanged, apart from a narrowing of the unit cost range. Likewise, our overall CapEx guidance is largely unchanged, with some minor adjustments to exploration and production CapEx, and that's really reflecting more certainty on some of the second half activities we're planning. Our production guidance has been upgraded though to 24 million to 26 million barrels of oil equivalent, and let me explain why.

So the production guidance really reflects, firstly, the excellent PNG LNG performance in startup, as Peter mentioned, this maintenance undertaken during the shut-in contributing to higher reliability and record production levels. So based on that and the continued ramp-up of our oil production over the second half of the year, we expect it to be at the upper end of the guidance range driven by a very strong second half production outcome. That's really also helped again by no material downtime planned for the second half for maintenance.

In terms of the PNG LNG production performance in -- recently, since the startup after the earthquake, the projects achieved 8.5 million tonnes per annum annualized in May and June of this year and as Peter mentioned, a record daily annualized rate of over 9 million tonnes on a few days, so an excellent outcome.

As Peter also mentioned, all our production facilities are now back online, with oil production continuing to ramp up as we bring on the remaining Moran and Agogo wells into production.

So on that basis, I'll hand back to Peter.

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Peter Robert Botten, Oil Search Limited - MD & Executive Director [3]

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Thanks very much, Stephen, and I'll now move into some of the detail of the -- of some of our other operating activities and I'll start with the midterm sales agreement signed with PetroChina and BP. And as we announced in the last few weeks, the signing of these transactions with PetroChina for a 3-year term and a 5-year term with BP has been very successful in underscoring the long -- or the short- and medium-term contracting strategy for the project. It highlights that our LNG is substantially sought after by the market, and it locks in what we think to be very attractive prices over the period of time leading into the expansion project starting in 2023, '24. The contracts now take us up to contracted volumes in the order of 7.5 million tonnes per annum, and that obviously adds to the foundation customers with Jera, Osaka Gas, Sinopec and CPC. We obviously see reasonable volatility in the spot market, and I'm sure Ian Munro can talk to that in a couple of slides that are coming up. But certainly, we believe there is a very strong -- we remain very well-positioned in the LNG market to continue to market our LNG and market it well, especially for expansion. But these help in the short and medium term.

Obviously, discussions are seriously advancing now on the development of new LNG capacity within Papua New Guinea. And that LNG capacity is obviously very much aligned to developing further resources in PNG LNG at Hides in the oil fields and at P'nyang, but also combining and cooperating on train development in the Port Moresby plant site area and developing cooperatively some 8 million tonnes of capacity, 2 trains supported by Papua LNG and 1 by PNG LNG, largely around the P'nyang field. This represents an outstanding technical outcome, and it simplifies a range of commercial and financial structures that we're delivering on a highly cost-competitive new development.

The -- there is ongoing work to advance the concept definition in terms of engineering. Steve's already mentioned some of the project financing issues, and the commercial agreements are also moving forward at a pace. With now the focus on negotiating the final fiscal terms for both projects with the state negotiating team and dialogue is right now underway, and we hope to meet the PNG Prime Minister's expectation of concluding these negotiations and announcing those conclusions around the time of the APEC meeting in November, which will then lead to a potential FEED decision in the short period thereafter.

Some of the positives out of, obviously, the drilling results last year and into this year has been the recertification of the P'nyang field by NSAI, and that has moved up the 1C resource from 3.5 Tcf to 3.5 Tcf, which is more than triple the number previously. And obviously, that helps support the financing and marketing activities for LNG expansion from PNG LNG. P'nyang and Elk-Antelope fields now are fully appraised, we believe, and contain around 8 Tcf or just over 8 Tcf of 1C resource and 11 Tcf of 2C resource, which is actually more than we had for the initial project back in 2009, a significant resource base, a competitive resource base to base a development optic for the next phase of LNG growth.

I'll now turn to Ian, who will walk you through some of the trends in the global LNG market and LNG demand. So over to you, Ian.

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Ian Munro, Oil Search Limited - Executive General Manager of Gas, Marketing & Exploration [4]

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Okay. Thank you, Peter. Good morning, ladies and gentlemen. So as Peter said, I'll provide a brief update on what is a buoyant LNG market currently for both our midterm and longer-term sales and provide an update on Oil Search's progress on the sale of our equity volumes from expansion. It's clearly a good time to be in the market for projects that can confidently deliver LNG by the mid-2020s. The forecast supply shortfall is moving to as early as 2021, which is now focusing LNG buyers and regulators on the need to commit to new projects by 2020 latest. Demand from Asia, and in particular, China's insatiable demand for gas, has seen spot volumes commanding almost double the price from over 12 months ago. Additionally, Korea and Taiwan are prioritizing gas over coal and nuclear, and nuclear restarts are lagging in Japan.

Over the last 6 months in the market, we've seen a clear shift from JKTC buyers looking to contract term volumes from credible new projects. It is evident to all parties that when less than 10 million tonnes has been sanctioned over the last 24 months, then new supply is urgently required. And it's important for buyers that they back those projects that can deliver. Expansion from PNG is considered to be such a project. And the size of the price for new demand by 2030 is somewhere between 135 million and 175 million tonnes a year, and this doesn't include the additional 60 million tonnes of high-value contracts that are maturing in the premium Japan and Korea markets by the mid-2020s. It is with this demand context that Oil Search has been active as a new seller in the Asian market.

I'm pleased to report that Oil Search has seen a very positive response from Northeast Asian buyers. The Japan representative office is now up and running smoothly, and we've already signed a number of confidentiality agreements with Tier 1 customers and are now discussing material term contracts for our expansion volumes. It does help the team clearly that the PNG LNG brand is first-class in the market. The combination of proven reliability and high-heating value gas deliver a very attractive product. Additionally, buyers are seeking both source and seller diversification in a market that up until now has been dominated by a dozen or so players into Northeast Asia.

So let me finish by emphasizing the following: Oil Search can offer a value package to buyers that differentiates us from our co-venturers in Papua LNG. As of today, we're the only seller that is offering point-to-point sales from Papua New Guinea, rather than from a portfolio with a wide range of LNG spec. Such certainty is highly valued by customers and even more so as the supply of rich LNG declines markedly during the 2020s. So I look forward to providing further updates as the year progresses, and back to you, Peter.

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Peter Robert Botten, Oil Search Limited - MD & Executive Director [5]

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Thanks, Ian. And I'm sure you'd be open to questions later on.

I'll now move to the oil fields and associated gas opportunities, and one of the real progress being made over the last 6 months has been actually looking at our mature oil fields and looking at how we manage not just oil production in the short term, but also gas production in the medium and long term, which will then extrapolate into how we manage these fields in terms of operating costs into the future. Over the first half, substantial work has taken place via subsurface production and development teams to identify the potential for further oil production over the next few years. And this has highlighted the potential to extend the present platform into production out to 2023, '24, when a possible increase in gas production through the AGX project will take place to support PNG LNG's third train. The work has highlighted opportunities in the Kutubu, Agogo and Moran fields, which on a most likely basis could add over 30 million barrels net to Oil Search as well as augmenting cash flows and value over this period of time.

Producing oil to -- prior to accelerating gas production through the AGX program represents optimization of value for these important fields. Increasing gas production from the Kutubu fields will deliver low-cost FEED gas to our PNG LNG expansion train and delay capital expenditure on further field development, so where we see the AGX project as being critical in the medium and long term for future optimization of what we have in our oil fields and gas fields in the Highlands. So there has been a substantial step forward in our understanding and identification of further value in these fields which cannot be ignored.

From the point of view of PNG exploration, it remains very much a very busy, busy schedule in terms of both exploration and appraisal activities in the Highlands and Forelands area. We've had 2 successful appraisal wells that came on Barikewa, and a valuation of these results is underway to determine the optimal route to commercialization. We're nearing completion of a major piece of work which identifies the possible sequence of how further LNG expansion over and above the extra train of PNG LNG and 2 trains at Papua LNG, further LNG expansion and development can take place in PNG, identifying potential gas resource locations, infrastructure and costs of delivery, all of which will allow us to prioritize exploration and appraisal and development investment into the future. That major strategic piece of work is now due for completion sometime in the second half and will impact where we go and how we carry out our 2019 programs.

What you have seen though in this -- in the last 6 months is obviously preparations for the Muruk 2 appraisal well on the Northwest Foldbelt as an expansion and a substantial step out from the Muruk 1 discovery, an 11-kilometer step out, and that's due to spud in the fourth quarter. We see expansion of our exploration portfolio in the Onshore Gulf, with a farm-in to a range of new PPLs adjacent to the Elk-Antelope field as part of our overall synergy of what we want to see in our interests across the Gulf expansion opportunities.

And we also see, obviously, a really comprehensive seismic program going on in the Onshore Gulf, which we're operating on behalf of ExxonMobil and Total, covering over 330 kilometers of data acquisition. And that will help define the attractive leads and prospects for further drilling in the area around Elk-Antelope. A busy exploration program for the whole year.

In Alaska, our business there is moving ahead on all fronts, and I'm very pleased with the progress made and the value and risk diversity that these assets bring to our portfolio.

Critical to our success will be building and continue to build a world-class team to take us through development of these assets. And I'm pleased to say we are successfully tapping into the deepest technical and engineering pool of talent in the world and the U.S. market and are building a team combining Oil Search's approach to communities, government and development with highly experienced North Slope people who come with relevant operations, subsurface drilling and completion technology expertise. It is building as a very, very good team.

We presently have around 50 people working in Anchorage and expect this to grow to around 100 by the end of the year as our field operations commence.

We've been successful in aligning our joint venture parties in supporting the 2019 programs, forming appropriate contracting and partnering strategies and setting investment priorities. We've also progressed and optimized the environmental impact submission, reflecting community sensitivities, and we remain on track for approvals of the -- of that sometime in the second half of 2019. We're very actively engaged with regional developers, such as ConocoPhillips, in discussing and defining how we can work together to optimally develop the commonly owned fields. These discussions to date have been very positive.

We're also commencing a process of how we can optimize and demonstrate value through the Armstrong option, aligning ourselves with Repsol and how equity adjustments and divestments can be achieved.

Our focus in Alaska is very much driven by 4 stages of potential growth. And the first and most important, most immediate is the optimization of the development of the Pikka Nanushuk development. We're presently integrating recent technical advances in drilling and completion techniques into our development plan and are on track for FEED entry in the second quarter of 2019, which will lead to FID sometime in mid-2020. The final scope of the development, whether it be an 80,000 to 120,000 barrel-a-day-type facility, will be determined by the results of drilling in the 2019 season.

The second focus area in the Nanushuk expansion is the Nanushuk expansion in the Horseshoe area to the south, where we see over 300 million barrels of potential resource. This will be subject to seismic reprocessing, reservoir modeling and data trades with ConocoPhillips later this year, with drilling planned in 2020.

The third focus area is exploration, and we have identified a number of material opportunities that are presently being prioritized as potential tie-in opportunities to the core development.

And obviously, the last focus area is new business and building strategic relationships, which we're obviously endeavoring to do in a reasonable time frame.

We're acutely aware that we need to walk before we can run in Alaska, and we need to get it right and not drop the ball. But things are really going well there, and we have a good team that will, I believe, deliver a safe and very productive program later in 2018 and into '19. Our focus, as I say, over the next 12 months is to successfully appraise the Pikka unit and further optimize the resource and deliverability of the reservoirs in this significant field before moving to a FEED decision in 2019. Recent drilling by ConocoPhillips at the Putu well, which you can see just below halfway down the overall field outline on this diagram, has highlighted reservoir continuity and the upside resource potential in this field. Our drilling program in the Pikka B and C, which you can see as highlighted, is the target areas for our 2019 drilling, is to deliberately design to significantly increase the 1C resources and move some of the 3C resources into the 2C resources. And we presently see significant upside potential from the 500 million barrel assumed in our acquisition case, targeting an additional 250 million barrel potential under this drilling program.

As previously discussed, we're integrating the lessons learned by ConocoPhillips on drilling and completion technologies to optimize our pre-FEED and FEED studies. Drilling should commence at the end of the year and be completed by April 2019.

If I move now, just highlighting some of the impacts of the earthquake on some of our other operations, obviously, we've mentioned that this earthquake has been a really 1 in a 100-year event and there have been over 200 aftershocks after the main earthquake in late February. Our foundation and the company provided critical first responder role using our helicopters, using our supply chain. Our acquisition of food, our delivery of food into the Highlands and then out into the villages over that last mile was world-class. And we were moving things, buying things, delivering things within 24 hours, buying them in Port Moresby, delivering them out into the village, which under UN auspices, is seen to be an outstanding achievement.

Obviously, our Moro airstrip was the only airstrip open during much of the first 2 months, and really, the only way of getting around the place was to come through Moro and utilize our network there.

There are massive -- there has been massive impact to the communities in Hela, Southern Highlands and Western Province, and there continues to be thousands of people that are dislocated without basic services. Schools are closed in certain areas, and roads still remain blocked. So there's a long-term program of us facilitating and working with the government and the relief efforts and other partners to help in the restoration process. And certainly, working with our local communities on business opportunities, on using them for road construction, reconstruction of schools is a key part of our future direction and work with our communities.

Our foundation has been leading a range of health programs in the aftermath in terms of immunization and addressing some of the communicable diseases that are prevalent in a post-disaster world. And I say there's still a lot to do on that, but fundamentally, our reputation and our ability to work with our communities has only been enhanced by what we did and how we responded to the earthquake in the immediate months after.

There's also been a significant move and a significant attention on the finalization of various agreements and landowner identification in key areas around the LNG project area, with government making substantive progress on identifying and moving a number of licenses to where we're now almost ready to distribute full benefits. There has been, as I say, strong progress on this, and the payment structures for landowner benefits distribution and relevant corporations are now in place in many licenses, with dispute resolution in the few that remain making progress with government, really focusing on this and doing a very good job. And we'll continue to support government processes to expedite the remaining resolutions that are needed so that these things can flow.

There are another -- a number of other PNG initiatives that we're working on. We're about 85% complete on a new power station to supply power into Port Moresby and should be on stream towards the end of this year. We're finalizing the fit-out of Apec Haus and are handing it over to government sometime next week as the main venue for the leaders meeting for November. We have a number of other projects, and development of our Papua New Guinea workforce and promotion of both diversity in gender and in nationalities is a clear focus for the organization as we move to the next phase of our growth.

We're supporting health programs in Hela and in Southern Highlands provinces. We're addressing some of the massive issue of gender-based violence that we see across PNG and the frightening examples that still unfortunately continue by a range of projects directly as a company and through our foundation as well as using rugby league to also promote women's empowerment. Again, something that's new in PNG, women playing rugby league at a national and international level, represents an opportunity to demonstrate their skills and to promote, as I say, women's empowerment.

Our climate change report, which involved substantive modeling in accordance with TCFD guidelines, has been well received by the investment community. More importantly though, it does demonstrate that our current and growth assets have a long-term resilience under many of climate scenarios, including a 2-degree C pathway. So we have a series of robust projects that can be managed well into a very active climate change debate and address the core issue of climate change as a whole. So I think we're well positioned in that respect to position ourselves, not just with the investment community, but to do our bit for climate change.

In summary then, we see a very strong recovery following the devastating earthquake in PNG in February. We see a very strong second half in terms of production and a positive production outlook for the second half of the year, with profitability supported by higher oil and LNG prices. We are making progress on the 3-train development concept. It represents an excellent technical, commercial and financial outcome. And we're targeting -- finalizing our fiscal regime towards the end of the year, leading to a FEED decision immediately following the closeout of those terms. Engagement with the government is ongoing and meaningful.

Global LNG demand represents a significant opportunity for PNG LNG and Papua LNG to fill an ever-growing gap between supply and demand. It is a competitive environment though, and we recognize that we would need and want to be at the front of the queue rather than the back of the queue. So the focus not just on the project participants, but also on government, is to move these things forward quickly and in a timely way.

In Alaska, we see a significant uplift potential in value since the initial investment driven by recent drilling results and hopefully, underscored by our drilling program in 2018, '19, ahead of a FEED decision for the development of the Pikka unit and in 2019. We obviously have -- are building a very capable team there.

As Stephen has said, we've got a strong balance sheet despite the impact of the earthquake. We have good, excellent cash flow generation from our operations, and we're really, really mindful of managing our balance sheet and investment priorities really well.

So ladies and gentlemen, thank you very much for listening. Now I'll throw it open to questions.

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Questions and Answers

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James Byrne, Citigroup Inc, Research Division - Research Analyst [1]

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James Byrne from Citigroup. Firstly, I just wanted to understand a little bit more about the oil production, adding opportunities in PNG. I mean, can you describe some of the risks around your aspiration there, both on the technical side, whether the JV partners are online? And the $1 billion per annum of operating cash flow that you're talking about needing ahead of CapEx on the LNG growth, like is that premised on successful delivery of the oil-adding opportunities?

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Peter Robert Botten, Oil Search Limited - MD & Executive Director [2]

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No, it's not, but I'll let Julian talk to the oil business and the risks associated with that.

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Julian Fowles, [3]

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Yes, thanks, Peter. Good morning, James. Yes, we have a number of opportunities we've been working for several years, in fact, around and within our oil fields. The oil fields are still highly profitable, and we believe that we can extend the oil production plateau across those fields, including all of our major fields, the Kutubu fields as well as the Agogo and Moran fields, by, in some cases, simple workovers of existing wells to complete in different zones, in some areas, also doing sidetracks of existing wells, where we've identified opportunities, if you like, in different directions from the current wellbore, and then existing opportunities that we've recognized for a while, which now the current oil price, of course, supports more, which we can get after, they're in very close proximity to existing wells and really close to our existing facilities. These have the potential to add quite substantial volumes which are not currently booked in our portfolio. They exist within our current licenses within the current fields. And the joint venture partners, they're aware, obviously, of the opportunity set that we've got. We're working through the prioritization of those, and that will certainly depend obviously on how we manage capital, which is -- obviously, my role is bringing forward the opportunities and discussing those in terms of what we can prioritize and actually afford to get after. But the opportunity set is substantial, the profitability is also very high for those, and yes, it will be a question of how we allocate capital. So I'll hand over to Steve for that.

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Stephen W. Gardiner, Oil Search Limited - CFO & Group Secretary [4]

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Yes. So as Peter mentioned, that this cash flow generation from these opportunities is not included in that $1 billion I spoke to. That $1 billion is actually based on an oil price that's below where we are currently and probably also doesn't capture the upside we're now seeing from the PNG LNG project in terms of enhanced production following the work that's been done. So I think $1 billion, assuming the oil price behaves itself, is a very achievable annual cash flow opportunity for us to rely on.

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James Byrne, Citigroup Inc, Research Division - Research Analyst [5]

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Got it. Moving to Alaska. If there was a continuation of that reservoir across licenses, what are some of the commercial outcomes with those adjacent licenses? Could there be unitization, for example?

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Peter Robert Botten, Oil Search Limited - MD & Executive Director [6]

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Unitization is not typically done on the Alaska North Slope, but clearly cooperation is. And we are having, I think, very productive discussions with ConocoPhillips around not just how we would look at developing the field, but also the use of what may be common infrastructure and cooperation about how the fields will be potentially developed. And although there is some further work to go, to date, the discussions with the -- with them and others has been really productive. And I think we've got -- are developing a very strong relationship with them and a real strong willingness to actually work together without -- yes, a strong willingness to actually make sure that this makes sense.

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James Byrne, Citigroup Inc, Research Division - Research Analyst [7]

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Sure. And then maybe just one final very quick question, just on the LNG marketing efforts for LNG growth. How mature would you describe those discussions? I mean are we already talking about volume and tenor, presumably not price?

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Ian Munro, Oil Search Limited - Executive General Manager of Gas, Marketing & Exploration [8]

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Yes, I mean the -- as we move forward for discussions, clearly, the CA is the last to exchange information on the project. We also need to understand what the buyers' demands are in terms of timing, what new projects, receiving facilities, et cetera. So yes, you're correct, there's strong appetite in the market for term contracts, which we're working very closely with Stephen, which we're confident will lift the project financing. There seems to be a strong appetite for oil pricing, certainly, into the Northeast Asia, which is pleasing. But of course, pricing will come through time. And the reason I say that is we need to be very confident on the fiscals of the project, so we're going to need to see those gas agreements mature over the next sort of a couple of months before we feel comfortable to table any sort of price range to the customers.

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Andrew Hodge, Macquarie Research - Research Analyst [9]

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Andrew Hodge, from Macquarie. Peter, just 3 hopefully quick questions. First was I'd seen that Philippe had left from PNG last week and a new head of Total had taken over. I just wanted to check to see whether or not you think there has been -- that's had any kind of influence in terms of timing on the project, just kind of one of the comments you made about the Prime Minister's time line?

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Peter Robert Botten, Oil Search Limited - MD & Executive Director [10]

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Look, I have not met the new country manager for PNG for Total yet. I was in town, he was in town, but we were both very busy last week in PNG, not unsurprisingly. I understand he's got a very, very strong background in development, and I can only see that as being a positive and a positive commitment by Total to the Papua LNG, and everything they're doing and saying is -- emphasizes their commitment. The Prime Minister continues to say he wants a material announcement around the APEC conference, and that's replicated in our discussions with the state negotiating team around the fiscals. So look, we're -- how fast or slow this goes is depending on -- it's like all good commercial discussions and negotiations, it can go quickly or it can go slowly, or it could go nowhere at all. But I think the intent very firmly by all sides around this is to get this done and come out with a very balanced developer, government, landowner and rest of the country fiscal regime, which is fit for purpose and fair for all. And that attitude is actually very, very pervasive on all sides of this discussion. So look, it's engaging, let's put it that way, and we'll undoubtedly suck up substantive time in the second half. Certainly, myself and our management team are very much involved in facilitating the process and moving it forward.

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Andrew Hodge, Macquarie Research - Research Analyst [11]

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And on the gas negotiating committee, it seemed Isaac, the head of committee, made a comment there could be potentially different gas contracts for -- sorry, fiscal terms for P'nyang as well as for Elk-Antelope. Do you think that's likely to happen? Or do you think there will be sort of similar-ish ones?

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Peter Robert Botten, Oil Search Limited - MD & Executive Director [12]

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Well, one thing I absolutely am not going to do is engage in negotiation and public negotiation around terms and conditions in a public sense. What goes on in the negotiation at the moment stays in the negotiation room at the moment. And so, sorry.

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Andrew Hodge, Macquarie Research - Research Analyst [13]

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And then last question was just on Alaska. It's kind of a double-barrel question. The 250 million barrel potential upside, is that sort of based on the results that have come in from Conoco from their drilling campaign this year? Or is that even more potential upside, I guess, we could potentially see more than that just from your appraisal drilling?

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Peter Robert Botten, Oil Search Limited - MD & Executive Director [14]

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Well, certainly, we -- that number is a compilation of new information that we've received and new drilling information that we clearly have seen from drilling, including Putu. And we have also done a lot more work in terms of reservoir evaluation and continuity. So I think we're very comfortable that there is upside and the upside will be addressed in the wells that we're drilling. And clearly, we see the opportunity to move a lot of 3C into 1C and 2C by these wells and importantly also, the testing program that follows. So look, I think we're very comfortable with what we see there and a very -- hopefully, that comfort level and the results of the drilling program will represent value added to the option that we have to acquire that -- the other 50% of the Armstrong Oil equity. I'm absolutely certain though, if we wanted to give the option back, young Bill Armstrong would take it off our hands very, very quickly.

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Andrew Hodge, Macquarie Research - Research Analyst [15]

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And I mean on that, the second part of the question, was just the process with Repsol. Do you guys still -- I think you mentioned previously about the percentage of ownership you wanted within the project. Is that still the same sort of longer-term? Or how long do you expect kind of the process to go before the option is executed?

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Peter Robert Botten, Oil Search Limited - MD & Executive Director [16]

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Well, I -- as I think it says on one of the slides that we're already preparing data rooms and other things. I think we've got alignment about what our desired equity will be, and certainly, that's in the 30 percent-ish long term. So we have the capability with Repsol and ourselves and the option to introduce other major parties that could bring value to the whole joint venture, and that's clearly a focus for us over the next 6, 9 months. No more questions? Anything from the phone? Ah, there is one. Thanks.

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Unidentified Analyst, [17]

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[Rohan Vikanda] from Westpac. Just a question on the fiscal discussions which are happening with the government. Is the option, which the government has, to take any participation in the Elk-Antelope project, is it still being discussed with the joint venture partners? And has there been any discussions around how the government is looking to fund the equity stake if they do happen to take that?

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Peter Robert Botten, Oil Search Limited - MD & Executive Director [18]

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Well, again, lad, look, I think it's under the Oil and Gas Act in Papua New Guinea, the government has an ability to back into a project at a certain period of time for 22.5% equity. I believe it's the government's intent to endeavor to do that, and obviously, a core part of that will be an appropriate financing structure to allow them to support that equity. So I believe that that's ongoing and is part of a broader discussion, not necessarily inside the state negotiating team, but certainly outside.

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Jonathan Prince, [19]

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Jonathan Prince, Peter, from Westpac PNG. Could you make a brief comment on relations with the landowners, specifically negotiations around the expansion and ongoing relations within PNG LNG?

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Peter Robert Botten, Oil Search Limited - MD & Executive Director [20]

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Look, I think, frankly, the relationships -- it's been a challenging time in the fallout from the earthquake, it's been a challenging time for a lot of people on the ground, and that inevitably has caused some tensions in certain parts of the project and project area, not necessarily directed at the project, but around the project area as a whole. Look, I think the government's actually done an outstanding job in the last 6 months in addressing the remaining issues that are impediments to benefits flowing to project area landowners, and I think there's been a responsible approach, generally speaking, by the landowners themselves to address and get these things done. I know from our side, from our oil projects, we've had a lot of engagement with our landowners over the last few months, so building on the platform of the relations that we had prior to the earthquake, but also in a post-earthquake world. As one of the landowner leaders said to me, he said, "Peter, we remember the people who come and help us in our time of need, but we remember more the people who don't." So in reality, I think this has been a catalyst to start a very constructive discussion around addressing remaining project area benefits and how they can get out there. I know in our own circumstance, I'll use one example, we have a -- our refinery in the Highlands was damaged by the earthquake, and we're actively discussing with landowners how they may or may not participate in future activities and future refinery opportunities as well as a potential power project at Kutubu and so that those -- these groups can get a revenue stream outside a simple project development revenue stream and give them a broader base of economic involvement in the area. So look, there's a very -- it's a very, very busy time. Frankly, Sydney is a bit of an outlier for me and many of our team at the moment, and there's lots going on in PNG to keep us busy. But part of that is absolutely bringing those guys along and addressing some of the operating security issues that clearly have been, in many ways, exacerbated by the earthquake.

So I think we've got -- no, we have another hand.

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Daniel Butcher, CLSA Limited, Research Division - Research Analyst [21]

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Daniel Butcher from CLSA. I was just wondering, at the November acquisition on the Alaska briefing, you gave some helpful guidance on CapEx, and obviously, here, you've just slightly elaborated on your latest thoughts on what the possible resource size could be with appraisal drilling. Do you have any further thoughts on what the Capex might be, where it's moved from that initial estimate?

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Peter Robert Botten, Oil Search Limited - MD & Executive Director [22]

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I don't think it's moved materially from that initial estimate. Obviously, it depends a lot on whether the size and shape of the development itself, whether it be at the lower end of the production scale or at the upper end of the production scale. But broadly speaking, our focus has been very strongly on ensuring that the drilling program and program of testing this in the coming 5, 6 months is going to be -- give us the right information to optimize that development. And our discussions with our neighbors and owners allow us to, again, optimize what's on the ground, optimize potential use of facilities that are already there and actually come out with a smart development, and I think that's progressing. So at this stage, I wouldn't be moving that guidance too much, but all I can say is there's a lot of work going on to develop a very accurate and optimal story about how that development can take place. If you note -- if you've seen ConocoPhillips' presentations recently, they've got a massive development going on to the west of us, and they see Alaska as being an absolutely core opportunity to grow their business. But I'm not putting words in their mouth, that's straight out of there analyst presentations that they gave in July. And obviously, for some of you who will be heading to Alaska sometime in October, you'll see some of that yourself. I think there's some calls on the phone, over to you.

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Operator [23]

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(Operator Instructions) Your first question comes from Adam Martin from Morgan Stanley.

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Adam Martin, Morgan Stanley, Research Division - Research Analyst [24]

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Just back on Alaska. Can you just provide a bit of detail on that sort of 3C to 2C move of the 250 million, sort of what you need to do in terms of drilling, mapping? Just give us some idea there, please?

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Peter Robert Botten, Oil Search Limited - MD & Executive Director [25]

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Well, as we presently see, we've taken a pretty conservative view around the existing -- about the volume that we have accessing and seeing around existing holes. So if you are able to drill those 2 holes, inevitably, you will move some of -- and you see oil in communication, which according to the seismic would indicate that we should be in the similar reservoir and according to drilling, not just by Armstrong, also ConocoPhillips. We are after reservoir continuity, and those 2 wells will address that continuity question. And if they are successful, that will add material reserves into our 2C and 1C resource. So our present estimates are heavily weighted to the 3C, where we are away from wells. However, around the wells, we're taking a reasonably conservative area of influence and contribution. The 2 wells are designed to spread that information base and are situated to add that sort of level of resource potential.

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Adam Martin, Morgan Stanley, Research Division - Research Analyst [26]

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Okay. And just a follow-up question on just some gas that you found recently at Kimu 2 and Barikewa. What's your sort of initial thinking on commercialization there? How are you sort of thinking about that?

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Peter Robert Botten, Oil Search Limited - MD & Executive Director [27]

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Well, there are a number of ways of commercializing that from gas feed into the existing facilities for LNG or various small-scale LNG or power or other things that might be dealt with as part of any other in-country gas development. As I say, I think we'll be rolling out later this year a broader strategy around how we see the evolution of gas. We have plenty of gas in Papua New Guinea. The trick now for us at least is to decide where that gas is, what's the cost of delivery of that gas into infrastructure and where it might go in terms of LNG expansion versus LNG backfill and where we're close to concluding those -- that analysis. And therefore, from that analysis, we'll prioritize where we go and spend our exploration and appraisal dollar. Inevitably, I think the focus of exploration will progressively move from the Highlands into the Gulf, both Onshore and Offshore. But I think more details of that and the commercialization opportunities we have for our gas, where we should go, is subject to work that we can roll out to in the investor community later this year.

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Operator [28]

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There are no further telephone questions at this time. I'll now hand back for closing remarks.

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Peter Robert Botten, Oil Search Limited - MD & Executive Director [29]

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Well, thank you very much, everybody. I understand it's a busy time of year, and there's lots going on in the real world outside also. So thank you for your attendance today and virtually. And we look forward to providing updates in what is an extremely busy and dynamic environment, certainly, for the rest of the year. So thank you very much.