Capricorn Energy PLC

Okay. Good morning, everybody, and welcome to Cairn's Half Yearly Results Presentation.

I'm Simon Thomson, Chief Executive. With me are James Smith, CFO; Paul Mayland, COO, and I'm delighted to say for the first time in these presentations, Eric Hathon, Exploration Director.

So as in the usual way, we've got a presentation to run through with you this morning, and we'd be very happy to take questions at the end. It's being webcast, so there will be microphones available for any questions that you have.

And just a point of housekeeping before going through the presentation, there is no scheduled fire alarm. So if an alarm should sound, I'm sure you've been here before, but the exits are that door there, and more easily, that door there, and the muster point is out in the square.

So turning to first slide. Cairn strategy for value creation remains consistent and straightforward.

We seek to create, add, and at the right time, the time of our choosing, realize value for shareholders all against the backdrop of financial flexibility and disciplined capital allocation. And in support of that strategy, really, there are three core pillars.

The first are production and future development plans; the second, the significant exploration growth opportunities that we have within our portfolio; and the third, our ongoing funding flexibility. And I'll touch on each of these pillars in a little bit of detail before handing over to the team.

In terms of the first, and the production side of things, as you know, Kraken is now well into ramp-up. And Catcher is making excellent progress towards first oil at the end of this year.

And together, they're on track to provide production of 25,000 barrels a day in 2018, which obviously help fund our sustainable business model. In addition, Skarfjell is set for FID decision at the beginning of 2018.

And Senegal, which obviously will be a main part of this presentation, which Paul will cover in some detail, is making excellent progress. We've confirmed the details today of the phased development, the first phase of the SNE development.

We've confirmed that the resource number has increased to 2C independently audited number to 560 million barrels. And in addition, today, we've confirmed we have in excess of a Tcf of gas non-associated.

So everything is moving forward as we planned. The exploitation plan, as it's called, effectively development plan, will be submitted in the first half of next year.

And we are targeting FID for Senegal in the back end of 2018. And a lot of activity ongoing in terms of transition work with Woodside which Paul will touch on.

And I guess importantly, when you look at that production and development set, Cairn can and will provide sustainable cash flow generation for all of its business needs from within assets that are currently in the current portfolio. So the timing of Kraken and Catcher declines will be met by first oil in Skarfjell and Senegal, ensuring that ongoing sustainability of cash generation.

We look at the second pillar, our expanding exploration portfolio, we believe offers significant upside potential. We've obviously just come to the end of a safe and successful five well program in Senegal.

And the last well of that was SNE North. And as Eric will touch on, that showed us additional potential in the northern part of the Sangomar block.

And that, together with the ongoing work looking at the shallow water Rufisque acreage, may provide potential prospects for drilling in a further phase. In addition, we built a relatively extensive acreage position in the Porcupine Basin, a number of different plays and prospects.

And right now, we're acquiring a 3D survey. So we do see the potential for significant additional activity there over the coming years.

In the U.K. Norway, after a period of build and acreage acquisition and honing of the portfolio, we will quite soon commence a program of up to 10 wells.

And that program will target in excess of 1 billion barrels of oil equivalent acquisition. And so I guess for us, this is coming to fruition of our strategy in U.K., Norway of creating a material drilling program at significant equity positions and some of those wells will also be operated.

We're obviously delighted to be awarded Blocks 7 and 9 in Mexico. We see that as a prolific hydrocarbon basin, and we're very excited to get exactly what we wanted.

It was obviously highly competitive. We are looking at additional acreage opportunities in Mexico, and I'd like to think that it will form a core part of our portfolio in the coming years.

Obviously, we're targeting, as we said, drilling there from 2019 onwards. In addition, we continue to actively assess further new venture opportunities to bring into the portfolio.

And that really links with the last point, the last pillar of funding flexibility. So as we said, we've got over $250 million of cash.

Our debt facility currently remains undrawn. We've obviously got imminent cash flows coming from the North Sea.

So we are well funded, fully funded in terms of all of our commitments and plans within the current portfolio. But in addition, we have the flexibility to add further opportunities whether on the exploration side or otherwise that meet our strict investment criteria and that we feel can offer value within the portfolio.

And on that funding point, I'll hand over to James. James?

Thanks, Simon, and good morning, everyone. So in the next few slides, I'll run through the current funding position, which Simon has described, provide an update on cash flows in the first half and the outlook for remaining spend for the second half of the year before moving on to give some updated guidance on SNE development assumptions and project economics, and then I'll hand over to Paul, who'll talk about those developments in some more operational detail.

So on Slide 6, as you can see, the balance sheet continues to be in a strong position with cash in the bank and current debt facilities remain undrawn. And in terms of existing sources of funding in the second half of the year, net cash at the midyear of $254 million.

Expected debt capacity -- debt availability, I should say, during the second half of $210 million. Together with the Norwegian tax receivable is the total sources of funding in the second half of approximately $500 million.

And when we compare that to the near-term uses of capital, the second half CapEx forecast is about $260 million, in line with previous guidance, and I'll come to a breakdown of that in a moment. So as you can see, we expect to exit 2017 with significant funding headroom, and that will obviously be taking us into the strong cash flow generation phase of the business from the U.K.

assets into 2018. Final point to make on this slide, just as a reminder, clearly, that means that the business plan remains fully funded independently of what we expect to be a positive outcome of the Indian dispute next year.

That dispute is now well advanced in the international arbitration forum that we are fighting it. And as you know, that is an award claim of at least $1 billion, now actually something in excess of that, that we anticipate to be awarded in our favor next year.

So just looking at the first half cash flows. Exploration spend in the first half was $86 million, principally on the first part of the five well Senegal program that has now completed.

Development spend in the first half, $71 million across Kraken bringing it on stream; and Catcher, the Dyas carry in our favor on the Catcher project was fulfilled during Q1. Cash inflows during the period, we drew on our exploration financing facility, $22 million.

That's effectively working capital funding on the tax rebate for exploration spend in Norway. And we also completed the previously announced royalty transaction with FlowStream during the first half as well, which took us to a closing cash position of $254 million.

If we look forward to the second half of the year now in terms of projected capital spend, $110 million on development spend, again across Catcher and Kraken, bringing Catcher towards first oil. That's in line with previous guidance.

And the exploration spend, $150 million, again principally that's Senegal, so the completion of that five-well exploration and appraisal program, Ireland, the Druid and Drombeg well in the second half, along with entry costs into Mexico and exploration activity in the U.K. and Norway, principally in Norway.

So all of that, together with the first half, puts us in line with the guidance we gave at the beginning of the year of CapEx for the full year of approximately $400 million. So if we just take a step back for a minute and look at the overall portfolio and perhaps think about the longer-term funding plan and capital allocation strategy.

Starting in the top left, clearly, the producing asset base is now on-stream and ramping up. And we expect that to reach capacity production net to Cairn of 25,000 barrels a day by the middle of 2018.

And that obviously represents, as Simon mentioned, the culmination of a five-year portfolio rebuild to take us into that balanced model of cash flow-generating assets, ongoing development and exploration. Clearly, as I've mentioned throughout that rebuild, we've retained the balance sheet flexibility to support our ongoing investment plans.

And indeed, we will exit this year with significant funding headroom in place. So if we look at that sort of steady state, if you like, as it were 25,000 barrels a day, we expect that to generate, as I've mentioned before, it's low-cost production once on-stream from Catcher and Kraken.

We'd expect it to generate about $300 million a year of operating cash flow at capacity at 25,000 barrels a day net to Cairn. And in terms of the allocation and reinvestment of those proceeds, approximately half of that on an ongoing basis, we expect to reinvest in the producing asset base.

So there will be ongoing drilling in Catcher and Kraken next year. And as mentioned, Skarfjell is coming up for FID next year, we'd spend starting in 2019 to sustain that production base.

And the other half of that operating cash flow is available to invest in exploration activity and new ventures activities, although, as we say, only to the extent we can secure opportunities that meet our investment criteria, which is principally driven by low breakeven opportunities. So as you can see, we have in front of us a solid, balanced portfolio model that's sustainable and fully funded.

It's performed through the cycle. We continue to invest dollars only where they generate breakeven, low breakeven returns, and we're well positioned to continue investing as we go into 2018.

So moving on now to look at development assumptions for SNE. As Simon has mentioned, we expect that SNE will be a phased development plan with the first phase of development underpinned by the highest quality S500 sands taking us through to first production in the early 2020s in the range of 75,000 to 125,000 barrels a day.

We are obviously still at a relatively early stage in determining precise cost estimates for that development, but we are already engaging with the contractor community prior to tendering key contracts later this year and moving on to feed in 2018. So on that basis, our current estimates of full cycle development costs for the SNE field are in the region of $12 a barrel.

And if we look at that in terms of the gross CapEx that's required to take us through to first oil, the current estimate is $2.3 billion from FID threw to first production. We've already commenced work on project financing of that development activity.

And so as broad guidance, if we take that gross $2.3 billion, net it down to Cairn's participation, current participation in the project and conservatively assume that we 50% debt fund the project, then the net equity check to Cairn would be approximately $450 million over, say, three years to first oil commencing in 2019. The right hand side of the slide here gives a reminder of the fiscal terms.

We'll be developing this project within a stable production sharing contract with pretty solid fiscal terms that will commensurate with the frontier nature of the block when we made the discoveries back in 2014. And as a reminder, the government as well as through the fiscal take participate directly in the project with a 10% stake through Petrosen currently, which they have the right to increase 18% of FID.

And all of our resource, net resource and economic assumptions are stated net of that assumption if they increase to 18%. So the final slide here really provides the economic output of those assumptions in terms of project value and project return at various different oil prices.

And you can see the numbers on the screen. But I guess the key message here is really that this is a compellingly low breakeven project with pretty significant value even at today's oil prices, and actually in terms of meeting our threshold returns would do so even with Brent in the mid-30s.

So just to conclude on SNE before I hand over to Paul. It's becoming increasingly well defined as a development project.

It's very robust at current oil prices. We are well placed to fund the development of our current equity stakes.

But clearly, as we've always said, we remain true to our track record, which is to be active managers of our portfolio. And clearly, if the opportunity arises to change our priority stake in the project, we will do that if it maximizes returns.

So on that, I'll hand over to Paul to talk a little bit more about SNE and then Kraken and Catcher.

Many thanks, James. Good morning, everyone.

2017 has been a busy year for Cairn operationally. We've been very pleased that the Senegal exploration and appraisal program has been executed in a timely, safe and incident-free manner with the Stena DrillMax drillship.

And we're also pleased that the Catcher FPSO in Singapore, shown in this picture here, has recently passed 10 million man-hours without a loss time incident and has received an external safety award in Singapore. So that's credit to all involved, particularly the operator, the FPSO contractor and the yard.

On to the proposed SNE development. And really three words that capture our overall philosophy.

First, phased and fast. So SNE will be the first offshore oil development in Senegal.

So we want to ensure that it's designed, constructed and operated in a responsible way, meeting both international and local requirements, there will be a phased development with an initial focus, as both Simon and James have outlined, on the higher quality, lower reservoirs, and this gives us the most direct line to first oil. And we would as a joint venture like to move forward quickly to capture the opportunities within the current contract market.

And we believe that the Senegal stakeholders will also share this vision, a vision which is illustrated on the right-hand side. I will now go on to describe the phasing, the characterization of the field, reservoir and the oil and the time lines.

So we have sought expressions of interest from a list of a high-graded contractors within the parameter shown on the slide. And really, the basis for that is to bring all potential opportunities to the fore, such that we can consider them in an appropriate manner.

So the oil processing capacity is quite wide at 75,000 to 125,000 barrels of oil a day. Likewise, the storage capacity between 1 million and 2 million barrels, which can take you from a Suezmax vessel through to a VLCC.

And we remain open to conversions, newbuilds or, indeed, redeployment of existing vessels. Phase 1 will focus on the lower reservoirs in a more confined area, but with a component of upper reservoir development.

We would envisage developing up to 240 million barrels of 2C resources in this phase. And for those of you that are focused on classification, it's that quantity of 2C resources that we would envisage moving to 2P reserves on final investment decision.

And although this is the primary focus of the joint venture at present, the exploitation plan, which Simon mentioned, is a life of field plan. And that will include and envisage further phases of development, both oil and potentially further with gas.

So the joint venture has concluded. That appraisal was complete on the SNE field, and we have recently released the rig.

We've also completed an environmental baseline survey across the field this summer. By the end of 2017, we will have completed the geotechnical survey and gathered further metocean data.

So consequently, we believe we've gathered all the required subsurface, seabed and surface data to adequately characterize the field in the manner in which we intend to develop it. As the diagram illustrates on the right, the S500 or lower reservoirs, which constitute around 30% to 40% of the overall resource base is contained with a much more confined area.

Whereas the S400 lower reservoirs extend over a much larger area, and that in itself also leads to the phased approach. On to the reservoir and oil quality.

So as you're aware, this year, we've completed 3 further reservoir penetrations of the SNE field during 2017, the VR-1, which also had an exploration component to it; the SNE-5 and the SNE-6 wells, and the latter two were drilled with the specific purpose of interference testing in a more complex upper S400 reservoirs. The results demonstrated connectivity in a clearly preferred north-south orientation along the so-called described sediment waves, which is entirely consistent with our geological model.

More limited communication was evident over several kilometers in the east-west direction based on pressure monitoring and limited perturbation at the SNE-3 and 4 wells. Our independent resource estimates have also increased by almost 20% at the 2C level.

All of this increases within the S400 reservoirs, and a significant proportion is in the northern part of the field. Both the S500 and the S400 reservoirs will be developed by water flooding.

And in terms of the oil, the low viscosity, light nature 32 API and low sulfur less than 1% leads us to believe that we will attract international markets and good pricing probably close to parity to Brent. Finally, in terms of the time line.

So our time line remains on track with previous guidance. We now have Woodside working very closely with us.

And we aim to finalize the evaluation report, commence front-end engineering and design in 2018 and submit the exploitation plan with the aim of taking a final investment decision on the first phase of the development by the end of next year. Once we have better definition of the development plan, but particularly the selected contractors, we will be positioned to reassess the first oil window.

But at this stage, it remains 2021 to 2023. Clearly, we are motivated to achieve first oil earlier rather than later.

We move on to our North Sea projects, Kraken and Catcher. As Simon mentioned, both projects are making steady progress.

Firstly, on Kraken, we were pleased to reach the first oil milestone towards the end of the second quarter, following the hookup of the FPSO. And during this quarter, we've been testing the wells and commissioning the first processing train.

The well is tested to date predominantly from Drill Center 1, performed as per our expectation, with a range of individual well capacities up to 10,000 barrels of oil a day. The hydraulic submersible pumps and the subsea production system are functioning as per design.

We aim to produce multiple wells through the first train. And we'd anticipate that during the remainder of 2017, we'll ramp-up production in a staged manner.

There have been some normal commissioning challenges, which both the operator and the FPSO contractor are working to resolve. And we're confident that we'll be a plateau rate during 2018 when further wells will be added from Drill Centers 2, 3 and potentially 4.

On Catcher, as Simon said and as the picture showed, the FPSO is essentially mechanically complete and undergoing final commissioning in Singapore. We'd anticipate that it will depart from North West Europe imminently.

12 wells have been drilled, and drilling continues on Catcher, Burgman and Varadero accumulations, with expectations in terms of deliverability above what we'd previously assumed. We remain on track for hookup on first oil by the end of the year.

But we'd anticipate a similar period of ramp-up on Catcher as we've seen and anticipate on Kraken and a similar level of plateau production rate of 50,000 barrels of oil a day, 10,000 net to Cairn, although the opportunity to increase that further following some of the well results is under investigation and reviewed by the operator. So both projects in the North Sea are progressing well.

We're very happy to have concluded appraisal in SNE. And at this point, it's appropriate to hand over to Eric to talk you through the exploration.

Thank you, Paul, and good morning, everyone. Well, it's been about five months since I assumed the role of Exploration Director at Cairn.

And I have to say, I'm really pleased I've joined an outstanding team. So this morning, I want to talk a little bit about our significant success we've had in Senegal and elsewhere as well as our growing set of additional exploration opportunities we're adding to the portfolio.

We have a number of diverse plays in a variety of water depths across the risk spectrum. We have acreage in mature basins, which are the basins that are lower risk, typically deliver very solid return projects and often have shorter cycle time.

We're also focused in emerging basins, which have this great balance between risk and reward and often have significant running room you can exploit with success. And then finally, frontier basins, which while higher risk, they offer that opportunity for world-class discoveries and the returns are often commensurate with that risk.

And Senegal is a great example where Cairn took a basin that was a frontier basin and has moved it to an emerging basin. So what I'll tell you is how vital it is that we create a portfolio of opportunities across that broad spectrum of risk and reward in order to maximize the chance of commercial success.

And what we have is a rigorous criteria of evaluation and a proven workflow, and I'll think you'll see that from our upcoming opportunities, which should build the portfolio, which will deliver impact value for our shareholders. Look, in the current environment, you cannot just drill acceptable projects.

We must focus on the very best projects, which, in aggregate, will deliver material returns over time. And remember, we cannot rely on any one prospect to deliver value.

It's a portfolio of opportunities which will generate success. So we've had a very active 2017, exciting program coming up ahead.

I'll just walk you through that briefly. First of all, in Senegal, as you've heard, we just completed our third phase of drilling, including a significant exploration program.

And again, I want to emphasize, every well was delivered under time, under budget and safely. It's an outstanding accomplishment.

So the VR-1 well, we tested the carbonate play directly under the SNE field. We did it very economically on what we call a tail to an appraisal well, as Paul said.

And while it was not commercially successful, we did recover oil, and we learned a lot of important information. The FAN South well, we returned to the basinal play, which was discovered by the FAN-1 well.

Again, we found oil, but the net pay in that reservoir were not quite up to our expectations. And finally, the last well in the program was SNE North, which had the most significant result being a separate accumulation that found oil below the oil-water contact in SNE field.

And that will set us up for opportunities in the future. So what's next in Senegal?

It's certainly very mature from an exploration standpoint, but believe me, there are still more to be done. And Cairn will continue to operate the exploration phase here doing what we do best.

So the SNE North result demonstrates additional potential north of the well and deeper than the current oil-water contact in the field, and we are currently evaluating future appraisal options there. The results from the FAN and FAN South discoveries in the basinal area are being integrated together.

And we're again looking at appraisal options there and the potential for commerciality. And finally, the Rufisque offshore and Sangomar offshore blocks, which are here and here, have potential to be significant value generators because they're in shallow water, and we're working towards drilling decisions there in 2018.

And the Capitaine prospect, you can see right here, is currently the most promising. And we continue to evaluate maturities on newly reprocessed seismic data.

Now we'll move away from Senegal to one of our frontier areas in Ireland. Ireland is an area where we built a significant acreage position through both bid rounds and farm-ins and right now, we're participating in the 53/6 well with Providence as operator in the 2/14 concession.

We've already drilled through the Druid target in this well, and while we found good high-quality reservoir, it was water wet. And we're currently drilling down towards the Drombeg target, and we'll have those results in the days ahead.

Look, what I really like about this position and what it demonstrates about our strategy is, we built a large exploration position, we have multiple play types to exploit and we have the ability to quickly follow-up on exploration results whether they're ours or somebody else's. And again, the fiscal terms are commensurate with the risk.

And that really defines our approach to frontier exploration. Now we'll move to U.K., Norway.

And here, as Simon said, we built a very strong portfolio of prospects. We've honed this basket of opportunities and really gotten it down to where we have a number of attractive targets to chase.

And as he said, we plan to participate in up to 10 wells through 2019, including 2 wells this year here in the Norwegian North Sea, one called Tethys, and one called Raudåsen. So we're starting in the second half of this year.

And again, subject to partner approval, we'll have drilled up to 10 wells, targeting over 1 billion barrels of gross unrisked resource. Again, this demonstrates our strategy.

We grow in a region, we core up our acreage, we mature our evaluations, we drill the very best prospects and then we're positioned for follow-on success. Tethys is a good example.

If that well is successful, we have over 250 million barrels of gross unrisked resource to chase in acreage we control in the immediate vicinity. And we continue to consolidate our position in U.K.

and Norway, both in terms of improving our working interest position and gaining operatorship. And some of that will become apparent in the weeks and months ahead.

And finally, I'm going to come to something I'm really excited about, which is our latest new country entry into the offshore Sureste basin, offshore Mexico. And this geology reminds me of when I worked in the U.S.

Gulf of Mexico over 20 years ago, where once again, you're seeing very large structures which have direct hydrocarbon indicators on them as defined by seismic. And in fact, we're already seeing companies that are replicating the success we're seeing in the U.S.

portion of the Gulf here in Mexico. And our congratulations go out to Premier and their partners for the Zama discovery.

So in the latest bid round, we captured two blocks, Block 7 and Block 9 with our partners, Eni and Citla. Eni is already an operator in Mexico and Citla is a Mexican-focused exploration company.

And we're very excited to be working with both of them. It was our excellent technical work which identified this potential ahead of the drilling of the Zama well.

So really, the results of that world-class discovery simply add further validation to our evaluation efforts. So the Zama well is here, and you can see just off the eastern border of our Block 9.

And as Simon said, Mexico will be one of the cornerstones of our exploration portfolio going forward. So I hope I've given you a snapshot of our success this year on what I think are our really exciting plans for exploration in the years to come.

We continue to grow our portfolio across the risk spectrum, and in aggregate, that should continue to deliver consistent success. And in addition, this outstanding team of people continue to evaluate new opportunities globally, which fit our rigorous criteria, our critical success factors and should add more high-value impact opportunities to our portfolio.

And with that, I'll turn back over to Simon for the conclusion.

Okay. Thanks, Eric.

So in summary, as you've seen and as you've heard, Cairn continues to offer significant activity and catalyst across the portfolio in the near term. We're looking forward to having Catcher and Kraken producing a plateau production of 25,000 barrels a day in 2018, and they're on track to do that.

We're looking forward to the FID of Skarfjell in the first part of 2018 and to the FID of the SNE field in the end of 2019. And as I said, together, those projects offer continuous, sustainable cash flow generation for Cairn leading out a number of years.

And on the exploration side, as you just heard from Eric, we remain very excited about what we built in the portfolio. Great results of Ireland, and we look forward to progressing other plays and prospects in our Irish acreage position.

We're looking forward to an extensive and enlarged U.K., Norway drilling program over the next two years. We believe that we'll be able to add more prospectivity in Senegal.

Mexico is obviously very exciting. And in addition, there are number of new venture opportunities that we're actively considering to add into the portfolio, provided they meet our investment criteria.

As a management team, we remain absolutely focused on these three pillars, and really all they're doing is supporting our ambition to create, add and realize value for shareholders against that backdrop of financial flexibility and disciplined capital allocation. Thank you.

That's the end of the presentation.