Transcript

Neptune Energy Q3 2021 Results

Thursday, 18th November 2021

Neptune Energy Q3 2021 Results	Thursday, 18th November 2021

Introduction

Sam Laidlaw

Executive Chairman, Neptune Energy

Welcome

Good morning everybody and welcome to our earnings call for the third quarter ended 30th September 2021.

Thank you all for joining us and we hope that you and your families are healthy and well.

Disclaimer

I would like to draw your attention to the disclaimer on slide two of the presentation, regarding forward-looking statements.

Q3 2021 overview

Summary

Neptune delivered a strong operational and financial performance in the third quarter, driven by higher production and commodity prices.

Our key HSE metrics also showed improvement, returning to target despite a high level of activity across the group. We continue to target further improvements as we implement initiatives to reinforce a high-performing safety culture.

In August, we successfully brought onstream the Duva project. This is our third new start-up this year, adding more than 27,000 barrels a day in aggregate, with all three fields continuing to perform well and delivered to schedule and budget.

Touat, in Algeria, has also performed well, since restarting operations in July, with the plant returning to full export capacity in September.

Our stronger financial performance in the third quarter was driven by a combination of higher production, good cost control and a further strengthening of commodity prices, in particular natural gas.

Gas markets in the period tightened considerably as strong international demand for LNG, lower gas storage levels and weaker renewable energy output combined to drive European gas prices and spot LNG process to record highs.

While the impact on Neptune from these higher prices was offset partially by our hedging activities, we still delivered a significant increase in EBITDAX and cash flow in the third quarter and we expect materially higher cash flow in the fourth quarter.

Although current gas prices are unlikely to be sustained in the medium-to-long term, the value of natural gas is being increasingly recognised, across Europe, as an essential

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component of the energy transition and the importance of indigenous supplies as a vital element of energy security.

Neptune is already well positioned, being around 70% gas-weighted and having a significantly lower carbon intensity than the industry average.

In the near term, we have responded to market conditions by optimising production from key assets. But new sources of supply require significant investment and therefore a stable regulatory and fiscal environment.

There is more governments can do to provide certainty, which can be delivered alongside the energy transition to attract investment and minimise the risk of price shocks to consumers and the economy.

Neptune is fully aligned with the aims of COP 26 and our new energy strategy continues to progress as we evaluate additional opportunities to integrate wind, electrification, hydrogen and CCS into our existing operations to reduce carbon emissions and extend the life of key infrastructure.

These projects, as well as others with our peers, demonstrate the unique capabilities of the oil and gas industry and how crucial it is to the energy transition and meeting society's broader needs.

Our commitment to improve our ESG performance is underlined by our recent endorsement of the World Bank's Zero Routine Flaring initiative and our award of a gold standard for our reporting to the Oil & Gas Methane Partnership 2.0 framework. This demonstrates our robust plans to report and reduce methane emissions.

Finally, in November, we announced the disposal of a portfolio of non-core minority interests in Norway for an initial consideration of $34 million. The transaction enables us to focus more resources, targeting growth around our core assets at Gjøa, Gudrun, Snøhvit and Njord. And also transfers decommissioning liabilities totalling around $100 million.

With that, I will hand you over to Jim, who will take you through the operational details before Armand takes you through the financial highlights.

Operational Update

Jim House

CEO, Neptune Energy

Opening remarks

Thank you Sam and good morning to you all. I would also like to echo Sam's comments at the start of the call and hope that you, your family and friends have been safe and well.

Strong Q3 2021 performance

I will turn first to our third quarter highlights on slide six.

As Sam mentioned, Neptune delivered a strong operational performance in the third quarter of 2021. During the period, our total recordable injury rate improved, moving down to 1.5 events per million working hours from 1.6 in the previous quarter on a 12-month rolling

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basis. While this is slightly better than our annual target, we continue to pursue further improvements in our safety performance across our operations.

In September, we achieved 12 months without a recordable incident at our German operations, following a similar achievement in Norway during June.

Our process safety event metric rate improved down to 2.4 events per million working hours in the third quarter of 2021, from a level of three in the second quarter and is now in line with our annual target. This is also measured on a 12-month rolling average type basis.

Production in the third quarter 2021 averaged 135,300 barrels of oil equivalent per day, which was in line with our guidance and significantly higher than the second quarter, which was impacted by planned shutdowns at several of our major producing fields.

Production in the third quarter benefited from a full contribution from the Gjøa P1 and Merakes fields, plus the start up of Duva and the restart of production and export operations from Touat, in Algeria.

Business interruption insurance income average the equivalent of 25,300 barrels equivalent per day of production in the third quarter, reflecting the outages at both Snøvit and Touat and increasing total economic production to 160,600 barrels equivalent per day. This compares with 133,700 in the second quarter.

With Touat now back up and running, group production before the benefit of business interruption insurance is now exceeding 150,000 barrels of oil equivalent per day.

At Snøhvit, as part of the Hammerfest LNG facility, repairs are progressing, with the operator still guiding restart by the end of the first quarter in 2022.

Production efficiency at our operated assets improved to 84% in the third quarter, with gains seen in Norway, the UK and Germany. Production efficiency declined in the Netherlands during the quarter, reflecting seasonal maintenance activities, however, this was higher than the year before, demonstrating the progress we have been able to make with our enhanced maintenance and integrity management programmes.

An increase in activity across the sector for drilling services and logistics, together with higher prices for steel, chemicals and fuel, are leading to modest cost inflation across our supply chain.

In the short term, we have minimised this impact but may see further inflationary pressures on certain supplies in the medium term.

Higher Q3 production driven by new projects

I will now turn to slide seven, for a review of our production performance and outlook for the fourth quarter.

Production in the third quarter increased materially, reflecting the return to production of fields following planned shutdowns in the second quarter, along with higher contributions from our new projects and the restart of production from Touat.

In Norway, as mentioned, we successfully brought onstream the Duva field in August, adding around 8,000 barrels of oil equivalent per day of new net production. Duva, along with the

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Gjøa P1 development, which are both tied back to our operated host Gjøa platform, continue to perform very well.

Output gains in Norway were offset partially by lower production from Gudrun, following a planned shutdown for heavy lift operations.

In the UK, production was higher, as fewer third-party export restrictions and blending constraints improved production delivery. Temporary blending arrangements with the National Grid were successfully utilised until mid-July.

The permanent change to gas entry specifications could be legislated in late 2022, substantially reducing blend requirements for the Cygnus field.

We have suggested to the UK government that the proposed permanent changes to gas entry specifications could be implemented immediately to ease gas markets and lower the risk of supply disruption.

In Indonesia, production increased as we maintained output at close to the capacity of the Jangkrik FPU. The new Merakes field continues to perform well, however, the Merakes 7 completion has been compromised, possibly by sand production and is temporarily shut in. We expect to mobilise a well intervention vessel before year end, to replace a blocked flow module, before recommencing production operations.

With good production capacity from the remaining wells at both Jangkrik and Merakes, we expect the overall impact on volumes to be minimal in the short term.

In Algeria, the performance of the Touat processing plant was good and production increased back up to plant export capacity volumes during September. We continue to monitor the plant performance closely and are evaluating options to further improve the robustness of the facility.

Output in Germany and Egypt was broadly unchanged, quarter on quarter, while production from the Netherlands was slightly down due to planned maintenance activities.

In the fourth quarter, we expect production to average more than 150,000 barrels per day, as we benefit from a full quarter's production from Duva and further improvements in production availability in the UK, plus the end of seasonal maintenance activities in the Netherlands, as well as the start up of the new well in Egypt.

As a result, we leave our full-year production guidance unchanged at ranging between 130,000-135,000 barrels of oil equivalent per day.

Guidance, including economic production from insurance income, is narrowed slightly to range between 145,000-155,000 barrels of oil equivalent per day. This reflects revenue recognition that we received in the third quarter.

Progress on projects, new energy and exploration

I will turn now to our upstream projects, new energy initiatives and exploration and appraisal activities, on slide eight.

In 2021, as already mentioned we have safely and successfully brought onstream three new major developments, contributing to material production growth for the group, which we can now see coming through in the third and fourth quarters.

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