Company: Oil Search Limited
Title: FY20 Half Year Result
Date: 11AM AEST
Time: 25 August 2020
Start of Transcript
Keiran Wulff: Okay, well, good morning, everyone, and welcome to Oil Search's 2020 interim results presentation. As per usual, we'll start this morning with our disclaimer important notice, and I recommend each of you take the time to read that at your leisure. Steve Gardiner and I will go through the presentation today, and I'll start off with the first half overview, and Steve will come through with the finances, and then I'll finish off with a detailed summary on our projects.
Firstly, 2020, it's a very difficult period for oil companies, as companies across the globe have managed their ways through the challenges associated with the confluence of COVID and its impact on global economy, the lack of mobility of personnel and equipment, as well as the financial, personal and mental stresses that it creates for many of our staff. Combined with the precipitous decline in oil prices and the structural changes that are occurring in our sector related to climate change, well, it's been an interesting six months, to say the least, especially for a new CEO. But importantly, it's also been one of opportunity for us, and with the support of staff, we're coming through this challenge a winner, more focussed, disciplined and better positioned to advance our growth projects with lower breakevens going forward.
Leading into this downturn, we were very focussed on fully advancing our world-class growth projects in P&G and Alaska, which would have had a material impact on the size and shape of the Company. As a result, we entered this rapid downturn probably less well prepared than others with stronger balance sheets but less transformational growth. Whilst we've been one of the companies that have most exposed to the downturn in oil price, we'll also be one of those companies most impacted by the upturn when it inevitably occurs. With a $30 billion drop in capital investments across the industry, a cut in production lowering inventory levels, we're now seeing prices recover from lows of around $11 a barrel in March to over $44 a barrel today.
Whilst we are confident that prices will return to high levels to support investments, we're not relying on it. We're really driving performance and decreasing our breakeven costs across the business. To protect our growth and enhance our resilience to lower oil prices, we've been really focussed on sustainably driving efficiency, lower operating costs, prioritising our activities and enhancing our liquidity and driving our capital discipline. We have been incredibly systemic in looking at every single part of our business to drive down these costs and also looking at innovative ways to ensure that the Company is well positioned to support its investments in our world-class growth projects going forward.
In relation to the operational performance and results, we'll go through those in detail in the upcoming slides, but I just want to talk about the key actions that we undertook to really position the Company in the strongest position as possible. Oil Search took decisive action very early to stabilise the Company. We recognised that COVID was going to be a challenge to all companies going forward, and with our experience in infectious diseases in Papua New Guinea, we identified much earlier than most the importance of getting ready.
We also reduced our capital expenditure very quickly by 40% to non-discretionary activity and reviewed our priorities for 2021. It was clear to us that we needed to bolster our balance sheet with a $700 million capital raising, which was well supported by the market. An important point about that capital raising was just how focussed we were on ensuring that every single share went to our existing shareholders. We recognised the pain and the challenges that our existing shareholders had gone through. We wanted to make sure that we minimised the dilution but also gave them the benefit of the inevitable rise that would occur post the equity raise.
DISCLAIMER: This transcript has been prepared by a third party for Orient Capital Pty Ltd. It may not be accurate or complete and should be verified directly with the issuer. Orient Capital Pty Ltd is not responsible for any consequences of the use you make of the information contained in this transcript, including any loss or damage you or a third party might suffer as a result of that use.
We have sustainably cut costs in every part of our business, and we're continuing to do that, and that's one of the pleasing things. We've done that without compromising our performance or quality to safety. Sadly, we had a 34% reduction in our staff numbers, but that was done with a great degree of sensitivity, and we made sure that the staff who left us were well supported through post-employment training programs, supporting their continuing health and medical benefits, but also through some education processes.
We've also had a very highly successful program in Alaska, which I'll talk about in detail, and most excitingly, we've also had some very exciting advances in redefining our development projects in Alaska, resulting in major reductions in breakeven and upfront CapEx. Fundamentally, we've worked to ensure that there's a resilience within the Company to a prolonged period of low oil prices, but we've also positioned the Company to be able to progress our growth despite the lower oil prices.
One of the pleasing aspects, COVID has been an incredibly challenging period for oil companies around the globe, but when you operate in some of the most challenging environments on the planet, in the jungles of Papua New Guinea and on the frozen tundra on the North Slope, these take on a new dimension, very different to most. What we've most been pleased about is that we've absolutely focussed on our performance in the safety and the wellbeing of our people, and as of the middle of the year, our recordable incident rate, our TRIR, was our lowest that we've had since we've actually taken over operatorship from Chevron, back in the early 2000s. We're seeing about 1.3. As of yesterday, we're just above 1, so we're really driving that performance very, very hard.
The other pleasing area of our safety performance, we've had no - zero - tier 1 or tier 2 safety incidences, and that's something, again, that's very proud, and we remain focussed on continuing that trend.
I talked briefly about COVID before, and I can't go through this without talking about just how well prepared we are. One of the most common questions I get from our shareholders are maintaining our production and the reliability of our operations in PNG. Well, Oil Search has operated in PNG for a long time, and we're very experienced in regard to managing infectious diseases. As early as January and February this year, we began a task force looking about how - a multifunctional task force about how we maintain operational excellence in our field and protect our people in the event of a cascading series of levels or serious threats to our business.
And as a result of that, we focussed on three key areas. We focussed on quarantining our zones of operation to make sure that we develop cocoons around those areas to protect our staff and local communities, to make sure there was no cross-contamination between both. We also brought in a number of additional people in country to make sure that if the country was locked down, we were able to manage fatigue and the like, to make sure people were able to have a rest. Now that it appears that COVID's with us for a little bit longer, we will also be looking about extending our support to our rotators' families to make sure that they're also supported during these periods, with their partners away for extended periods.
What we've also looked at is working very closely with the PNG government in its efforts to combat COVID. Clearly, the health services in Papua New Guinea are challenged to manage a major outbreak, but the PNG government has actually managed it very well by shutting their boundaries very early and the industry is in close support with the PNG government and the controller to make sure that every step is made to manage COVID in the area. But we have really set the Company up to be able to manage an extended period of COVID and an escalation of COVID to ensure safe operations.
One of the - that the outstanding performances is really Exxon continued to operate the PNG LNG production project incredibly well. This year, we - or for the first half, we averaged just over $8.7 million tonnes per annum equivalent in regard to the production. There was a delay in some turbine maintenance, which will be deferred until next year, but the important point is that PNG LNG continues to outperform expectations, and Exxon have continued to do a fantastic job. Our unit production cost, all in, exclusive of fuel and flare, are about $6.60 per barrel of oil equivalent, and it remains to be one of the most robust and competitive LNG projects on the planet. Exxon have managed the COVID very well.
They have a lot smaller - relatively smaller - footprint than we do, and we are in close cooperation with Exxon in terms of ensuring that production out of PNG continues. But PNG LNG continues to be an incredibly strong performer in our portfolio.
In regard to our grand old oil assets, this is probably one of the most pleasing areas, and a real focus for us, to ensure that we not only drive our costs low but we actually maximise production, and our production this year for the first half of this year is higher than at any point leading up to the PNG earthquake, back in 2018. We were looking at being substantially above budget in regard to our operator production, but Hides Gas to Electricity was - operations at that plant were suspended due to the force majeure event that was imposed on us by the closure of the Porgera gold mine, so that was a loss of 3300 barrels of oil equivalent.
We have assumed that there will be no assumption in our forecast going forward or return to operations for the gas to electricity project in 2020, and that contract actually expires in late 2021, and we're already in discussions with government about how to manage the progression of that project going forward. But our operations in PNG have really done incredibly well in terms of being well above budget, aside from the force majeure event at Hides Gas to Electricity. It's really a result of a between of years of focussing on increasing core capabilities, driving efficiencies, and we've had a very successful increase in our facility's uptime.
I'm going to hand it over to Steve Gardiner, who will go through the first half year financials, and I'll finish off later.
Steve Gardiner: Thank you. Thank you, Keiran, and good morning, everybody. I'll take you on a quick tour of the financials for the first half, and as Keiran said, it's been a very interesting time. Summary for the half year has a lot of ups and downs. Keiran's already highlighted the very solid production performance for the first half, which was very pleasing. As mentioned, though, we have been impacted of course by the loss of production with the shut in of our Hides Gas to Electricity facility. Our sales volumes were not quite as high as our production increase. That really was due to a timing issue with an increased number of cargos in transit for the PLNG LNG project at the end of June. There's a higher storage of LNG, as well, so that will correct in the second half.
Realised LNG and gas prices are only down 15% on the prior first half due to the three-month lag in oil prices as they flow through to our LNG term contract cargo pricing, so on that basis, they materially outperformed our realised price, which is down 45% on the prior year. In the second half, we'll see a rehearsal of that position, with the softer oil prices in the second quarter then flowing through into our LNG prices in the second half, and with Brent, as Keiran's already mentioned, now trading at about 25% higher than the first half average that we achieved.
Revenue held up then very well due to the higher-priced LNG, representing almost 80% of our total sales volumes, plus obviously as Keiran's mentioned, the recovery in our oil production. Our unit production costs were down 20% on the prior period, and I'll cover that in a lot more detail shortly. Unfortunately, we had a statutory loss of US$266 million due primarily to a $260 million post-tax impairment of non-core expiration assets and de-recognition of some deferred tax assets.
We had no impairment of any producing assets apart from the Hides Gas to Electricity asset, which was a modest $10 million impairment, despite our revised oil price outlook, and as Keiran mentioned, that really reflects the quality of our producing assets. The Board's decided not to declare an interim dividend for the first half in the context of the challenges we've been through. We'll consider our final dividend once the full year results are known.
Just looking at a bit more detail with our core profit for the half, comparing it to the prior first half of 2019. The waterfall graph shows the material decline in core profit was really driven by obviously the fall in oil prices. As Keiran has mentioned, we've highly leveraged movements in oil prices on the downside, but the good news, we're equally leveraged to recovery in our earnings as oil prices recover. Our production costs in absolute terms were down 17% in the prior first half, due to the suspension of well work overactivity, which wasn't going to give us value in the near term given the lower oil prices and the initial savings from major cost-out initiatives.
Exploration cost expense was US$70 million higher than the prior period, due primarily to the unsuccessful Gobe Footwall well and fairly large acquisition campaigns for seismic in both - on both the Alaskan North Slope and in PNG. We saw a US$12 million reduction in our finance charges due to lower base interest rates. Finally, our effective tax rate, excluding the one-off adjustments that came out of the impairment process were in line with the PNG corporate tax rate of 30%.
As Keiran's also noted, ensuring that our producing assets are as cost competitive as possible has been a real priority since Keiran took over activity and we responded to the collapse in oil prices. For our operated assets, the first focus areas were curtailing discretionary spend on work programs that didn't contribute to safe and reliable operations, and then rolling out a more efficient organisational structure, with employee and contractor headcount reduced by over 30% across the Group.
The PNG LNG project has also been very focussed on driving cost efficiencies with, as Keiran mentioned, the performance in the first half also helped by the deferral of some major maintenance work at the LNG plant site, which is likely now to occur in 2021. Equally important in driving down unit costs was the second-best half year production performance ever, with due credit to both our and Exxon's operations team in delivering that result. The challenge they faced in maintaining reliable operations, given the major COVID-related logistics and risk management challenges are really impressive in terms of the results that they've managed to deliver.
When taking into account one-off restructuring and COVID mitigation costs that impacted on the first half, we saw a 36% reduction in our unit costs for our operated assets and a 12% reduction for the PNG LNG project, a very noteworthy outcome, and we'll see more to come as highlighted with a reduction in our guidance range for the full year for our unit costs. On that basis, in the second half, we'll see a full year benefit of the measures already undertaken to lower our cost base, plus the initial capture of other cost savings that we're now focussed on, particularly in the areas of supply chain management and third-party spend.
Turning to liquidity, which obviously has been a key focus of mine over the last six months. At the end of June, we had liquidity of US$1.67 billion, inclusive of $830 million of cash. That was of course bolstered by the US$700 million equity raise but also US$320 million was contributed from operating cash flow and the curtailment of discretionary and uncommitted CapEx. During the period, we also funded a 2019 final dividend of $69 million, and we made net borrowing repayments of US$216 million. So the steps taken immediately in response to the collapse in the oil price, including the capital raise, the reduction in planned capital spend and cost-cutting measures have delivered also to the financial resilience now to cope with any prolonged period of weak oil prices, plus giving us the flexibility to focus on our expansion projects.
Turning to net debt, we finished the half year with net debt of US$2.33 billion. That's our lowest level since 2012, when the PNG LNG project was under construction. Likewise, our gearing at 30 June was 29%, again, the lowest since 2011, so we're in a very healthy position compared to where we have been over the last several years. US$136 million of PNG LNG non-recourse project debt was repaid in June, bringing the outstanding balance of that debt down to $2.8 billion, and this facility will be fully repaid by mid-2026. About half the proceeds from the equity raise were dedicated to repay drawings under our revolving credit facilities, and also to improve our midterm liquidity position and in a recognition of the delay in the planned selldown of equity in Alaska. Due both to market conditions and also the focus on further improving the economics of the Pikka development, we arranged with our bank providers to extend US$300 million of bank credit lines that were due to expire in the third quarter of this year to be pushed out to mid-2021 to give us further flexibility.
Finally, on the debt front, we have just issued our semi-annual covenant compliance reporting to our banks, and at 30 June, we had significant headroom across all our financial tests. Also, I'd like to note that we have seen very positive support from our bank group, as we've worked through some of the implications over the last several months from the oil price collapse. Whoops.
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