U.S. Markets open in 3 hrs 31 mins

Edited Transcript of TETY.ST earnings conference call or presentation 13-Aug-19 8:00am GMT

Q2 2019 Tethys Oil AB Earnings Call

Stockholm Sep 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Tethys Oil AB earnings conference call or presentation Tuesday, August 13, 2019 at 8:00:00am GMT

TEXT version of Transcript

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

Corporate Participants

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

* Magnus Nordin

Tethys Oil AB (publ) - Founder, CEO, MD & Director

* William Peter Holland

Tethys Oil AB (publ) - CFO

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

Conference Call Participants

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

* Johan G. Spetz

Pareto Securities, Research Division - Analyst

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

Presentation

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

Operator [1]

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

Hello, and welcome to the Tethys Oil Q2 Earnings Report 2019. (Operator Instructions) Today, I'm pleased to present Managing Director, Magnus Nordin; and CFO, William Holland. Please begin your meeting.

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

Magnus Nordin, Tethys Oil AB (publ) - Founder, CEO, MD & Director [2]

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

Thank you very much, ladies and gentlemen. Welcome to Tethys Oil Q2 report. We are very happy to have you with us both because it's a, we think, quite a good report that we're presenting, and also this is Will Holland's first stint as a -- doing a conference call for Tethys Oil as CFO. So do be gentle with him once we get on to the question section there. But on to the 2Q highlights.

Good revenue, $41.3 million, oil price, but of course, also [production.] EBITDA at $27.9 million, well in line with the strongest quarters we've had in the past. Good operating result, $16.4 million. Of course, a good oil price, $67.80 for the quarter, compares quite favorably with most quarters, except the end of 2018.

OpEx, in line, I should say. Q1 '19 stands out now as an anomaly, which we were hopeful it would be, and we also suggested in the first quarter that this was overstated, and OpEx per barrel coming down to $10.20 for the second quarter. And of course, production at the highest we've seen in, well, ever or I think, more or less. Certainly the highest quarter on record here.

So needless to say, then, with all indicators and all numbers pointing in the right direction, we have a very strong financial result for the second quarter, including record production and taking advantage of the higher oil price but also the decreased OpEx.

And of course, the production -- producing assets, it's not everything. Exploration activity continues. We are quite active in Blocks 3&4 and also in our operating Block 49. And of course, we stick to distributing cash back to shareholders. And we made a large payment, more than $25 million to shareholders in May and June, and we have another dividend coming in November. So all in all, a strong quarter for what I must say is a strong company.

Highlights on the operations side. The facilities upgrade at the Ulfa EPF has contributed massively to the record production. This, of course, also caused the delay and the higher OpEx in the first quarter. Now fully up and running. We've seen production increase and costs come down. And we maintain -- we stand by our production guidance. It's somewhere between 12,000 and 13,000 barrels on average per day on average for the year. And we'll be happy to note that we are currently in the higher end of that guidance band.

Feel for exploration. We have spudded the use of one well, quite interesting, of course, it's in a new -- newly acquired 3D area to the left side of the Farha field. If it works, it will actually be quite significant for us to be in that area, apart from its own merits. We continue the appraisal/production of the newly discovered fields in this field -- place the Samha fields and completed a successful well there.

Block 49 operations gearing up. We have the seismic. We are currently interpreting, and we hope to get back to you in the course of the third quarter with an update on where we stand on drilling plans and also what we have possibly to find in the block. Maturation of leads continues at all blocks, and we are quite confident we have a lot to drill over the next years.

And still, even after distributing $25 million to our shareholders in second quarter, our cash position at the end of June was a healthy $62 million.

A quick summary of the cash distribution to shareholders we have enacted since 2015. We have an ordinary dividend, which we doubled between 2017, 2018 to SEK 2 per share. And then we done an extraordinary distribution, which in effect reflects how we look upon the company's cash situation and the oil price situation and then anything else that would be important. So for 2019, SEK 8 have been authorized, which gives us actually a yield of about 11% at the present price yesterday, which I think is one of the highest of any oil company, including the majors.

So moving on to what we are and what we are really all about: Tethys Oil. Our main asset is Oman. That's a core area. We have 2 blocks: the operated Block 3 and the nonoperated Blocks 3&4, operated via CC Energy with partners Mitsui. And then we have 100% of Block 49 in the Southeastern part of Oman, where we are the operator. Blocks 3&4, of course, are in production with reserves and have been for close to 10 years now. Block 49 is an exploration block, where we are getting close to, hopefully, drilling our first well.

Great. And on that note, I would actually like to yield the floor to our new CFO, Will, who will run you through and highlight what's most important about the financial numbers for the quarter. Will, please.

(technical difficulty)

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

William Peter Holland, Tethys Oil AB (publ) - CFO [3]

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

Sorry about that. Slight technical glitch. I'll start again on Slide 6. First of all, thank you, Magnus. And it's a pleasure to be part of the Tethys Oil. And it's a great company. We've had a great quarter.

Starting on production for Blocks 3&4. We've achieved a record average daily production of 12,881 barrels of oil per day, which is up 8% on the prior quarter. And if we look at the chart on Slide 6, on the right-hand side, you'll see that our production -- total production has been 1.17 million barrels. So a very strong production quarter.

Here on Slide 7. This has been accompanied by sensing oil prices over the quarter, where we have achieved an average selling price of $67.80 per barrel. We do forward-sell our oil. So it is a reflection on the past prices. Oil prices have fallen back a little bit from those levels. And they seem to be stabilizing at about $60 a barrel at the moment. But for the quarter, we did achieve $67.80.

Move on to Slide 8. That resulted in a -- revenue and other income of over $40 million, which is up 26% on the prior quarter. So a very strong revenue quarter for us. If you look at the other quarters 3 and 4, where we produced over $40 million of revenue as well, you'll see that, that was a result of very high oil prices, significantly higher oil price than we have at the moment. So we getting over $40 million for this quarter is a result of our strong production, which we're very pleased about.

Moving on to Slide 9 on expenses. As Magnus said in his introduction, the OpEx that we saw in the end of Q1, which was also a bit of a -- had a carryover from the end of Q4, is an outlier, and we return to normal OpEx levels. You'll note that this is higher than Q2 and Q3 of '18, but that's as to be expected because we have brought on the extra facilities in Ulfa, which has allowed us to produce more oil during the quarter. So this is to be expected, and it's perfectly normal as we produce more oil, the operating cost to increase.

If we go to Slide 10. The benefit of having -- adding the extra operating facilities is producing more oil. You'll see that this has brought our operating cost per barrel down, and operating cost per barrel for the quarter is at $10.20 per barrel.

So we've come down significantly from the prior quarter. And we're actually more in line with -- if you look at Q2 '18, it was slightly below Q2 '18. Now that we have these facilities in place and operating with -- [keys there] would provide some guidance in the range of $11 per barrel operating costs for the remainder of 2019.

If we move on to Slide 11. You'll see our EBITDA here and our Q2 EBITDA of $27.9 million. Again, I think the best comparison here to try and remove the effect of the high oil price in Q3 and Q4 is comparing it to Q2 '18. So if we look at Q2 '18 to Q2 '19, production for the quarter is up about 10%. So we produced 1.07 million in '18 and 1.17 million in this quarter.

Oil price is slightly up but comparable $65.60 in Q2 '18 versus $67.80. Revenue is up well from $36 million to $41 million. And importantly, OpEx per barrel, $10.40 to $10.20. So that's giving us this higher EBITDA quarter than compared to Q2 '18, which we're pleased about.

So moving on to Slide 12. You will see a very healthy balance sheet. Magnus did highlight we're getting $62 (sic) [$62 million] of cash on the balance sheet, very good. No debt. So we are in a strong position there.

Slide 13. Oil and gas investments on Blocks 3&4 and 49. This has remained relatively stable for the year. The quarter is no different. We spent $12.5 million in the quarter, slightly up from the prior quarter. Most of that or the vast majority of that has been in Blocks 3&4, whereas Block 49, we continue to do our in-house desktop work. Our investment guide remains the same for the year at $50 million to $55 million.

So what are we spending that money on? Slide 14. We continue to operate 3 drilling rigs and 1 workover rig. The chart on the right side here looks a bit lumpy, but this is purely a product of scheduling. We only record a well as complete once it is actually complete. So depending on when those wells are finished -- this month, not as many wells will be finished, but those rigs have been active, and they will continue to be so for the rest of the year.

And with that, thank you very much. I'll pass over to Mr. Nordin.

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

Magnus Nordin, Tethys Oil AB (publ) - Founder, CEO, MD & Director [4]

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

Thank you very much, Will. So let us turn this even to the next slide, where we summarize our operations.

A map of the bolt-ons of Oman with the licensed areas where Tethys has increased, Blocks 3&4 and Block 49. And this is actually noticeable. We do cover a fair amount of Oman. And we do believe that the areas are quite prospective also for future growth.

In Blocks 3&4, we have plenty of time, license runs until 2040. And Block 49, in the exploration period, we have 3 plus 3 years. So we're about half -- just over halfway through the first exploration period.

Continuing on Block 49. We successfully completed a seismic campaign there in late 2018. We collected 253 square kilometers of 3D data and 299 kilometers of 2D data. In an area that we have identified from legacy data, more than 15,000 square kilometers are seismic, and currently 10 wells have been drilled on the block, and that was the reason why we actually entered the block in the first place. We had some ideas what we think we could go after. And the new seismic was to better define and understand what could be there.

So, so far, we are on track. The seismic has been processed and delivered to us. And we are currently about 2/3 of the way through the interpretation. So we are hopeful that we will come up with a better understanding of drilling in that particular area. And we are making preparations for drilling an exploration well, and we are in that process. And I expect that we'll be able to get back to you with more details as the third quarter unfolds as to how the exploration work of Block 49 moves on.

Turning back to our star performer, Blocks 3&4, on Slide 17. We have the net production development. Of the steep prices in previous years, it's been reasonably flat to around a 12,000 barrel per day level as is evident here, up until the Ulfa EPF was fully commissioned and the start-up issues dealt with, and we saw a jump of almost 1,000 barrels a day from high 11,000s to the high 12,000s. And we've been reasonably stable there for April, May and June and also confirmed in July. So we are happy to see that we're now entrenched in the higher end of our production guidance for 2019 for 4 quarters -- for 4 months in a row.

The production, of course, comes from our reserves and resources. That's nothing new here. This is where we were at, at 31st December 2018 in our most recent reserve audit with 25 million barrels of 2P reserves, 35 million 3P and additional contingent resources. And these contingent resources relate primarily to the 2017 discoveries: the Ulfa, Erfan and Samha fields.

And the Ulfa -- they're both -- all fields are now in production. And we expect to see continued appraisal work and, hopefully, be able to move more of those Cs into the P category as the appraisal work continues.

But that's by no means the end of the 3&4 story, as Slide 19 -- the geological -- so the block suggests. The blue areas are where we have 3D seismic. And the large -- the dark blue area is where we've recently completed 3D seismic. And as you can see, we have a large number of leads all over the areas we haven't dealt with so far.

Production still comes from the Farha South field, the Shahd and the Saiwan East fields, complemented with the Erfan, Ulfa and Samha discoveries from 2017. And we are currently firming up leads into prospects and drilling exploration wells. Yusr-1 is northeast of the Farha field. It's currently drilling. It's in a new seismic area. It's obviously closed to producing fields. So we are eagerly awaiting the results we have in progress and will, of course, keep you posted as to what happens.

And we expect to dig another 2 wells before the end of the year. And additional seismic is being acquired. And the seismic from last year is being interpreted. So we expect to have a lot of exploration activity for several years to come to underpin our current production from Blocks 3&4.

A few more details on the Yusr well on Slide 20. We spudded late in the second quarter and still very much in progress. It's the first well to be drilled in that area with the new 3D seismic. And as I mentioned, it's adjacent close to the Farha South field. So it's in the region where oil -- where we know there's a function system. It's sort of a near-field exploration well, and we are awaiting the results.

What we hope to do is, of course, see if we can move the Buah and Khufai targets further north into this area. Buah and Khufai are the main producers outside of the Farha South barrier fields. And the further north we can move them, of course, the more interesting that area will become.

It's a reasonably deep well, 4,450 meters, almost 1,500 meters longer -- deeper than the previous production wells. So apart from hopefully finding more, we also hope to get a lot of interesting seismographic data to further evaluate this interesting part of the block.

Appraisal activity. Samha-5 drilled in the northern part of the Samha structure. Came in nicely, a little bit above expectations. And we are still fine with the impressive work of the Samha discovery and Samha field, I should say.

So just to remind you, on Slide 22, we have had very strong reserve replacement ratio in the past. We've actually not had a single year where we have not found more oil than we have produced. And of course, we are hopeful that, that trend will continue, so that even with increased production, we'll continue to add to our reserve base. And our large inventory of prospects and leads and the ongoing exploration program is, of course, the -- what should bring that hope into fruition later this year.

So turning to the continuation of the third quarter and 2019. Of course, one highlight is the exploration with Yusr, which is currently in progress. 49 gearing up for exploration drilling and very busy maturing leads, which will also mature on 3&4. So we are steady by our production guidance, 12,000 to 13,000 barrels of oil per day for the year. And we are happy to note that we are now moving in the higher end of that guidance. And further spuds, we expect another 2 -- at least another 2 exploration wells to be drilled in 2019 on Blocks 3&4.

So on that note, I'd just like to reiterate that we sincerely hope you will stay tuned to what we are doing. We have a lot of activity going forward. And we have to continue growing the company for some time to come. But I'm sure there are some questions that we can answer to further clarify what we're all about. So questions, please.

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

Questions and Answers

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

Operator [1]

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

(Operator Instructions) Our first question comes from the line of Johan Spetz from Pareto Securities.

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

Johan G. Spetz, Pareto Securities, Research Division - Analyst [2]

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

So clearly a very strong quarter, in particular, in terms of the cash distributions that you're able to offer back to shareholders here. I noted in the report that, in addition to the cash dividend and the buyback of the redemption shares, you also bought back a fair amount of ordinary shares in the market. USD 2.1 million, I believe, was spent on that during Q2. Any guidance on that item going forward? And would be interested to hear a bit on how you think about those type of buybacks going forward here.

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

Magnus Nordin, Tethys Oil AB (publ) - Founder, CEO, MD & Director [3]

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

Thank you, Johan. Certainly a relevant question. As you noted, we were quite active in the market. We have been active from time to time. And we don't really have a -- I mean obviously we have a mandate. And I think we can buy an additional 5% in the market without counting what we've already bought.

And I'm just going to say that, that we will continue to be active from time to time in the market. And I mean, this is one of the tools we employ for distributing the capital back to shareholders. And in the past, we have been active from time to time, and I'd like us to be active from time to time in the future also and without necessarily having a clearly communicated strategy as to how those buybacks will be facilitated. So I mean I can't really give you -- give much more color on that, but that we certainly consider it an important tool to complement our cash distributions.

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

Johan G. Spetz, Pareto Securities, Research Division - Analyst [4]

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

Sure, sure. And just as a other quick follow-up there. My interpretation, then, is perhaps that it could be a bit opportunistic depending on market circumstances. Is that fair?

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

Magnus Nordin, Tethys Oil AB (publ) - Founder, CEO, MD & Director [5]

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

I think, historically, we haven't really been all that opportunistic. We have been more, shall we say, designed to be intermittent from time to time. But I mean, all is fair, and again, let me reiterate that we do consider it an important tool, and we try to use it carefully to -- in everybody's best interest.

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

Operator [6]

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

(Operator Instructions) And as there are no further questions, I'll hand it back to the speakers.

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

Magnus Nordin, Tethys Oil AB (publ) - Founder, CEO, MD & Director [7]

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

Well, in that case, no further questions, we're happy to note that the report seemed to be well received. And we thank you very much for listening. We sincerely hope you will stay tuned to what else we are up to, and we look forward, if not before, to speak to you again in about 3 months' time. Thank you very much.

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

William Peter Holland, Tethys Oil AB (publ) - CFO [8]

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

Thank you.

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

Operator [9]

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

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.