Oil Search : 2020 Full Year Results Webcast Transcript

Company:	Oil Search Limited
Title:	FY20 Full Year Results
Date:	23 February 2021
Time:	11:00 AEDT
Start of Transcript

Operator: Thank you for standing by, and welcome to the Oil Search FY20 Full Year Results Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number 1 on your telephone keypad. I would now like to hand the conference over to Mr Keiran Wulff, Managing Director. Please go ahead.

Keiran Wulff: Thank you very much. Good morning and welcome to Oil Search's 2020 annual results presentation. I'm Keiran Wulff, Oil Search's Managing Director. Thank you for attending whether it be here in Sydney or over the internet.

Before I begin, respect for communities and culture holds an important place in Oil Search's DNA, and I'd like to thank by acknowledging the traditional custodians of all the lands in the regions we operate and work. We acknowledge their ongoing connections to land, sea and community, and we're very fully respectful of their culture.

In terms of the people in the audience here, I'll quickly go through the evacuation diagram. The door to my right, to your left, is the exit point. You will see the - muster go down the stairs - to the front of the building. The muster point is on the street in front of this building. There are no emergencies or alarms planned for today, so if there is an alarm it will be a real exercise, but I'm sure we'll be fine.

You may have seen from this morning's announcements we've a lot to discuss. Our results are a clear demonstration that our efforts over the last 12 months have been focused on making our Company more resilient whilst preparing the Company also to deliver on our material growth projects.

In addition to the recent announcements on the progress of Papua LNG and PNG, which shows an increase in alignment between the key stakeholders and the joint ventures, led by Total and government, to progressing this important project, we also had a number of other important announcements this week - our Company's commitment to a net zero target by 2050. As a Company, we want to be part of the energy solution focusing on Paris-aligned projects and longer-term genuine and material carbon abatement programs. It fits in well with our strategy we announced in November of Focus, Deliver and Evolve. I will talk more about that later, and I suggest you question Beth who is on our panel, who is in charge of that area.

Yesterday we also announced the formal approval by Oil Search and our partner Repsol to enter FEED on phase 1 of the Pikka oil field development which represents a key milestone for our joint venture as we progress this project targeting FID in late FY21 and our first oil in 2025.

In addition, late last week we successfully completed a hedging program for 9 million barrels of oil equivalent at a floor of $55 a barrel oil equivalent. These puts protect the downside risk whilst also ensuring access to the upside pricing.

We are simply one of the most leveraged companies to oil price both up and down, and we wanted to make sure that we made the Company more resilient. Our program today is an indication of the conservative approach to managing our downside risk whilst ensuring the capture the upside in pricing and is part of a wider capital management strategy that Steve will go through.

In addition to the operation and financial matters that will be covered today, we have also announced the appointment of two new Board members - Musje Werror, a PNG citizen and Managing Director and CEO of Ok Tedi; Musje will join the

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Board as of today filling a vacant spot - and Mike Utsler, who many of you may know, will join the Board following the AGM subject to the shareholders approving a temporary increase in Board numbers from 9 to 10 at the end of April. Both Musje and Mike's biographies are given in the release we made this morning and have been chosen due to their highly complementary experience aligned with the strategy set for the Company going forward.

In addition to our new Board members, Oil Search is also in the final stages of its CFO search, a very difficult one to replace Stephen, who will retire in May. We have undertaken a very thorough Australian and international search with Russell Reynolds to ensure we secure someone with strong capital market experience with a history of successful experience as a major public company CFO. We'll be able to announce that formally some time soon.

There is a lot to cover, so we'll get into the presentation. Today I'm joined by Rick Lee, our Chairman, Steve Gardiner, CFO, who will do a lot of the talking with me, as well as Beth White, EVP Sustainability and Technology,

Bruce Dingeman, who joins us from Alaska, and Diego Fettweis, who is EVP Commercial. All are here to answer your questions.

I'll just quickly draw your attention to our usual disclaimer. During today's presentation we will make forward-looking statements that refer to our estimates, plans and expectations. Actual results and outcomes could differ materially due to factors we note on this slide and in our ASX and POM exchange filings.

In terms of the overview, a lot has been said about the challenge faced by all of us in 2020, and Oil Search was far from immune. The combination of COVID, oil price downturn, demand uncertainty, rapidly changing societal expectations driving financing and investor sentiment were frankly catalysts for Oil Search examining every part of our business.

We have been very systematic and transparent to ensure change was sustainable, whether it be stabilising the business in the early period with our rapid COVID response in the field to protect people and operations, strengthening our liquidity, right-sizing the organisation for future, and the strategic review which was conducted with the use of a lot of external people to ensure that we challenged ourselves at every area. We're also ensuring operational discipline across the Company and reducing our cost of supply across our new and existing operations sustainably.

We're also looking at ensuring we are very clear about our ongoing priorities and strategy which has ensured that the Company is optimally placed to deliver our projects responsibly and position our Company to be able to maximise value for shareholder when conditions will inevitably turn around, which we're beginning to see now.

Leverage works in both directions, but we're not blind to downside risk as evidenced by our prudent hedging program today. Despite these uncertainties, frankly our staff across every part of our business were magnificent this year, and I'd like to thank them personally for their commitment to the Company.

What did we achieve? Despite a very strong operational performance in 2020, it was a tough year for our shareholders with a core NPAT of $22 million and a materially lower share price than what we entered the year in. But we did recover materially by the end of the year with an increasing oil price. Whilst it has been tough and our core profits modest, today we are announcing a $0.005 per share dividend, which is aligned with our dividend policy. Whilst modest, it reflects an increase in confidence in our business and the demand outlook going forward. As I said earlier, we also took the opportunity to conduct a hedging program with 9 million barrels with put options and a floor of $55 a barrel. Stephen will go into this in more detail.

In November, we announced an increase in commitment to sustainability across every part of our business, and today we're taking material steps to build on being industry-leading in terms of our commitment to community, to an equivalent focus on carbon abatement, climate and the environment. Today, we are announcing that we're building on our

30% operated emission intensity reduction targets by 2030 to target net zero by 2050. This fits in well with our

announced strategy of Focus, Deliver and Evolve. It does not remove our focus on delivering the value within our Paris-aligned growth projects, and I'll cover that in more detail later.

Consistent with our commitment sustainability, we're focusing on ensuring that these growth projects meet the

Paris Agreement. LNG will still constitute circa 70% of the Company's production and our Pikka development in Alaska is nearly 75% lower emission intensity than other comparable operations in the region.

Very pleasingly, despite the challenges of COVID in operating in some of the most challenging environments on the planet, we received the best ever Company-wide safety performance with our TRIR being 0.94 and in PNG 0.78, simply an outstanding performance in difficult circumstances.

A big part of making our Company more resilient has been our focus on costs and reducing them sustainably. Last year we were able to reduce our production costs by around $60 million, which equates to about $2.50 a barrel. I'd also like to call out Exxon's performance as operator of PNG LNG in 2020, which was exemplary. PNG operated with incredible reliability above 99% and achieved its highest annual production of 8.8 million tonnes per annum. Combined with the strong performance from our operated oil fields, we were able to achieve a 29 million barrels of oil equivalent production last year, and that was despite Hides gas field being shut down for the majority of the year due to force majeure due to the shutting of the Porgera gold mine. In Alaska, our business unit there also performed very strongly with two new discoveries and an independently certified increase in our 2C resource space up to 968 million barrels, which I'm sure will go further once we appraise.

Our Stirrup discovery was recently rated one of the top 10 global discoveries in 2020. Importantly, the team also completed and reviewed the development plan for Pikka with the aim to reduce breakeven, lower capital costs and increase IRRs without compromising full value. That's no easy feat, but along with our partner, Repsol, who now we are totally aligned with on the phased development plan that will see the first phase costing less than $3 billion, our maximum exposure at any particular period of time being our interest in about $2.4 billion, which is the maximum exposure, there is a serious extended drilling program that will be funded out of the ongoing cash flow generated by early oil. The phased facility is now looking at 80,000 barrels a day with first oil targeting 2025. Again, more of that shortly.

Before I hand over to Stephen, I'll quickly talk about our growth projects at Papua. One of the most fundamental outcomes of the strategic review last year was that we simply do not need to explore for more resources in the near-to-medium term. We have an enormous amount of 2C resources which we'll be focusing on commercialising. At

Papua LNG, the government and the Papua LNG partners have agreed to delink the LNG expansion in PNG and focus on the two-train Papua LNG project initially. The recent signing of the Fiscal Stability Agreement and the licence extension now allows the joint venture to confidently test the market and review the basis of design ahead of making a FEED decision in 2022 with first gas targeting the 2027 demand window.

The recent announcement of FEED of our Pikka project also kicks off finalising engineering, costing, financing and divestment program. More of it later. We are on track for an FID decision at the end of the year, subject to market conditions. Phase 1 alone will commercialise over 200 million barrels of oil net in Pikka, so combined our two growth programs are looking at de-risking over 500 million barrels net with clear milestones going forward.

With that, I'll hand over to Stephen to go through the financial performance.

Stephen Gardiner: Thanks very much, Keiran. Good morning, everybody. You'll hear this theme a lot, but clearly the unprecedented fall in oil and gas prices last year commencing very early in the year required an equally decisive and dramatic response, and I'm pleased to say that's what Oil Search delivered. We focused on making our operating assets more sustainable at lower oil prices with production costs reduced by almost $60 million. That's inclusive of one-off restructuring costs and ongoing COVID mitigation related expenses.

Our planned capital expenditure also were reduced to committed and essential-only work programs, resulting in a total spend down by about half on the prior year. These initiatives delivered a 20% reduction in the unit production costs and a free cash flow breakeven for last year of under $20 per barrel of oil equivalent. Our other priority was rebuilding liquidity with $700 million raised in April that was strongly supported by and only allocated to our existing shareholders. That together with the expenditure reduction initiatives, excellent production performance, as Keiran mentioned, ongoing strong support from our group of bank lenders, allowed us to finish the year with a liquidity position of $1.4 billion.

That's inclusive a reduction in our gearing by 6 percentage points to just under 30%, and also a reduction in our net debt of 20%.

Diving a little deeper into the year-on-year underlying earnings decline, the revenue drop in the chart, the biggest bar there, is explained by the collapse in commodity prices with average realised oil prices and gas prices down by 41% and 32%, respectively, on the prior year. The production costs savings in the chart reflect headcount and discretionary work program reductions, other cost reduction initiatives, and also deferral of major PNG LNG maintenance work due to COVID-imposed constraints on mobilising specialised labour.

Decline in other production costs was due to suspension of the gas purchases for the Hides gas-to-electricity project from late April, as mentioned by Keiran and the impact of low oil and gas prices on royalty and levy payments to the government and also favourable inventory adjustments. Our exploration costs expenses increased due to the unsuccessful Gobe Footwall well. However, we note that 60% of the cost of that well was incurred in 2019. We also spent some money on seismic acquisition primarily in Alaska.

Finally, costs reduced quite materially due to both record low US short-term interest rates and also lower average debt outstanding during the course of last year. Our lower taxation expense reflects the fall in pre-tax profits. In addition to that, we had the impact of $374 million of non-cash asset impairments announced at the half year, and derecognition of certain deferred tax assets in the balance sheet which resulted in an effective tax rate of just over 12% compared to about 30% in the prior year.

Turning to free cash flow and our production guidance in particular, we met our lowered production guidance achieving a result of $9.97 per barrel of oil equivalent. That's down 20% on the prior year, and that's despite about $0.70 per boe incurred on one-off and COVID-related costs last year. Our unit costs were also impacted by the suspension of the Hides gas production following the shut-in of the Porgera Mine in April. That shut-in cost us over 700,000 barrels of oil equivalent compared to the prior year. Fortunately, as Keiran mentioned, that was more than offset by record and much higher value PNG LNG production and significantly increased oil production due to excellent operational performance, including plant uptime.

Our cost reduction initiatives and production performance delivered over $400 million in operating cash flow despite the collapse in hydrocarbon prices. As already mentioned by Keiran, last year really put the spotlight on our high leverage to the oil price, and also as mentioned by Keiran, fortunately the leverage works in both directions. For every $5 increase in the oil price, our 2021 operating cash flow improves by $90 million, so massive upside to this current recovery.

Despite the recent and to be honest unexpectedly rapid recovery in oil prices, the lessons from last year are well engrained. Our 2021 capital management priorities will be built on the discipline imposed last year and focus on a number of different areas. Our 2021 CapEx program is concentrated on recommencing the Angore field development activities, progressing the major growth projects, secured and covered including Pikka following yesterday's FEED entry announcement, Papua LNG pre-FEED activities and potentially FID for the PNG biomass project later in the year.

We also continue to work on a more robust and flexible balance sheet that can cope with commodity price volatility during the next growth phase. We've commenced engagement with our relationship banks on extending and possibly