Aker BP ASA

Welcome everyone to this Second Quarter 2020 Presentation by Aker BP ASA. My name is Kjetil Bakken.

I am the Head of Investor Relations in the company. And the presentation today will be given by our CEO, Karl Johnny Hersvik; and our CFO, David Tønne.

And without further ado, I leave the floor to Karl Johnny.

Thank you, Kjetil, and thank you to everyone online for joining Aker BP’s quarterly presentation this time here from Fornebu. Together with me I have CFO, David Tønne, and we will take you through the presentation and subsequently answer questions in the end.

Thank you, Karl, and good morning, everyone. Aker BP’s net production in the second quarter was 210,000 barrels per day.

This represents a new all-time high for Aker BP. With an overlift in the quarter, the sold volumes ended at 232,000 barrels per day.

Both liquids and gas prices decreased quarter-on-quarter and the realized average hydrocarbon price was approximately 38%, lower than in Q1 and ended at $27.5 per barrel of oil equivalent. Total income ended at 590 million which consisted of 584 million in petroleum revenues and 6 million in other operating income.

Now before leaving the topic of oil prices, although the average prices were low in the second quarter we have observed an improvement from April to June. The reference price for our oil sales is Platts Brent Dated and normally this price is highly correlated to the frontend Brent Contract traded in the financial market.

However, in the second quarter, Brent Dated traded at a noticeable discount which is an indication of a very weak physical market. Towards the end of the quarter, this gap closed providing a sign of normalization.

For Aker BP specifically, realized liquid prices were positively impacted by the timing of liftings with more cargoes in May and June compared to April. Using average Brent Dated for the quarter as a starting point, this timing effect was roughly $3.1 per barrel.

As noted in our first quarter presentation, we started to see differentials deteriorating across the various crude qualities and therefore indicated that differentials would turn negative on average for the second quarter. The end result is better than many feared and the negative $1.8 per barrel in differentials was more than outweighed by the positive timing effect.

The initial indication for the third quarter is that differentials are now slowly normalizing. Adjusting for NGL, Aker BP’s average liquid price was roughly $30 per barrel.

And if we add the tax adjusted contribution of our hedging program, the all-in price was equivalent to $41 per barrel. The hedging program had a positive effect in our cash flow for the quarter.

The P&L effect, however, was reflected in the first quarter as these options are recognized at fair value each quarter.

Thank you, David. Thank you for a walkthrough of the financials, as usual, and I’m sure there was a lot of interest in the tax discussions.

For those that are interested in even more details, the IR guys are of course always at your service. Now returning to the more strategic level, I must admit that the Q2 has probably been one of the more challenging events in the Aker BP history.

From the start of March through the COVID-19 situation, the rapid deployment of a lot of mitigating measures and response both on our operations and our financials, this was a very challenging event for Aker BP. However, I’m also extremely proud to say that the organization has responded forcefully, quickly and with determination.

We have kept our people safe, we have kept our operations going and we have delivered excellent operational results in the quarter both in terms of project execution, in terms of production efficiency and indeed in terms of production. And ultimately we ended the quarter with starting to realize an unprecedented opportunity for value creation for the Aker BP shareholders as to new tax changes to take hold in Norway.

This means that the hopper, the large 2C hopper, has been one of the traits in the Aker BP history has now been transformed into a fundamental and probably unique value creation opportunity. That being said, I can assure you that here in Aker BP we will continue to work diligently to maximize shareholder value.

We will continue to stay focused on our performance, to stay focused on our business and to make sure that we create all the opportunity we possibly can and turn that into value for shareholders. Let me also remind you that while – I actually went out in the organization is that Aker BP is going to come out from the COVID-19 situation as a stronger company than we were in the COVID-19 situation with.

Right now that is probably going to be true, but let me remind all of you that we’re not completely out of the woods yet. And let’s make sure that we continue to focus on our performance, continue to focus on our operations and maximize value creation.

I wish you all a safe summer wherever you are and I hope you stay safe in this rather challenging situation even as it starts to normalize here in Norway. So with that, we’ll conclude the Q2 presentation and open up for questions.

Good morning, guys. Thanks for taking my questions.

I have two, if I may. First, I’d like to tap into something that – a question by David here on his opening remarks that the differential between bonds and the prices on our screen is starting to close.

Last quarter there was a lot of talk about the demand kind of falling through in terms of demand for Northeast cargoes. Do you see anything shift in terms of physical demand outlook for crude oil, especially the crude oil that you shift yourselves?

And lastly, you have in the past been very adamant of saying that you are not going to sanction any contracts that have breakeven levels or about $35 per barrel. Just wondering has the recent COVID-19 effect adjusted that threshold somewhat and if you can give ?

Thank you.

Thank you, Anders. So when it comes to the physical market, I think the short answer is yes that we have seen the physical market improving.

As you could also see from the slide that I presented, you can see that Dated Brent and then the first forward contract pricing is sort of closing in. Also when it comes to differentials on our crude qualities, we do see a normalization and the negative differentials across our portfolio that we saw in the second quarter have now normalized into sort of mutual slightly positive environment.

On breakeven levels?

I think you’re absolutely right, Anders. We’ve been quite clear that the sanction level on the Aker BP portfolio has been set at $35.

And recently due to the temporary tax changes, we changed that down to $30. And let me remind you that this tax change doesn’t really impact all the things from the financials.

So as we’re assessing these projects, we’re continuing to assess the resource base and the risk factors and all the other parameters that are involved in the sanctioning of a project.

Very good. Thank you.

Good morning, gentlemen. I would like to ask three questions if possible.

The first one will be on the CapEx outlook. It’s clear that you have now moved away from the sanction-only scenario.

So would you mind providing some indication on next year’s capital and possibly E&S spending trends, that would be appreciated? And then the second question would be on uplift.

Thank you for signaling out the related catch-up effect from Q1 on the Q2 uplift. As we all know, halfway through the year and moving into a new semester, are you able to guide on the uplift for the second half of the year?

And then last question very quickly and you touch upon the hedging policy for tax impairment. Thank you.

Thank you, Yoann, for your questions. I’ll start and then Karl can add on.

When it comes to CapEx level, yes, as we mentioned we – back in March moved into sort of a sanction-only scenario, but with the changes in the fiscal regime we have now sanctioned Hod and we are of course also evaluating other opportunities in the portfolio to sanction. It’s a bit too early to guide on CapEx for 2021 yet, but I think an indication would be to go back to the capital markets update presentation and look at sanction-only levers and then add back the CapEx for 2021 on Hod.

And then we – as I mentioned also maturing other opportunities. So with that in total, we are probably looking at a CapEx level in the close vicinity of the updated guidance level for 2020.

When it comes to uplift, so the uplift for the remaining parts of the year would be I guess quite similar to what we have seen in Q2 isolated. I think that’s the best assumption to use.

Of course then you can also do the math looking at the CapEx spend for the second half of the year with the new updated uplift percentages. And your last question was related to --

Hedging policy, if I may, on tax impairments, do you hedge the exchange rate?

Yes. So when it comes to hedging on FX, we do have an active policy of hedging some of the currency exposure and we will be hedging the tax refunds continuously as they have been set.

Thank you. This is very clear.

Thank you. Good morning.

I’ve got a couple of questions please. So firstly on NOAKA, you announced the agreed commercial terms and given the tax changes in Norway, could you maybe talk a little bit about where you see the breakeven of that project?

And given the high equity that you have in that area, do you see yourselves carrying that level of equity through to development of the project? Secondly, could you maybe elaborate a little bit more on seizing new opportunities?

You’ve got a large resource base already, so I just wondered if you could update on your criteria for new assets given the recent tax changes. And then just finally, understandably a lot of focus on investment levels given the tax changes, but where does that leave your ambition to re-grow the dividends?

Thank you.

Yes, sure. Thank you, Michael.

So when it comes to NOAKA, I think it’s a bit early to guide on breakeven. On the afternoon when we announced the agreement, the commercial agreement, I was quoted in the Norwegian press saying that as we had a basis for our investment decision at that point in time of 35, they should expect that this also was valid for the NOAKA project which is probably a good assumption right now.

And then there is – as I also stated a continuous improvement program now in place to reduce the CapEx spend which will impact the breakeven positively. The timeline for the NOAKA project is that we’ll try to get to Phase 2 level within the end of '21 and then get to a PDO within the end of '22.

So there’s remaining quite a lot of work on the detailed cost assessment of this new development solution before we can update the breakeven probably. What we’ll try to do is to keep the market posted on that development as we progress.

Moving on to our equity, this commercial solution is basically a combination of a tariff and a CapEx contribution type of mechanism. It doesn’t directly impact our equity in the areas.

That means that the underlying equity of the different companies in the different licenses are unchanged. And right now we don’t have any divestment plans for our current NOAKA stake, quite the contrary.

We used to like having high stakes in the assets and departures that we are fond of. And then your final question around seizing additional opportunities.

When we have a look at the Aker BP 2C hopper, there are of course a lot of interesting investment opportunities in that hopper. David alluded to the fact that there might be other opportunities that we will chose to progress as 2020 progresses.

And it wouldn’t be strange if we tried to make – at least try to maximize the activity in that hopper within this temporary tax window. However, I’d also like to stress that we will not do this without regard to the execution schedule and to the risk that this has imposed both to the balance sheet and our execution model.

So this also works as ongoing as we speak. And I think we’ll revert to the market in Q3 with an updated leverage plan, including investment opportunities.

When it comes to your last question, Michael, on dividends, so I think what we can say now is that our capital allocation priorities stand firm and that means that distributing parts of value creation back to shareholders is part of that framework. And as you know, cash dividends has been the preferred method of that type of distribution and that I also expect to be an important element going forward.

When it comes to dividends for 2021 and beyond, we will have to come back to that at a later stage.

Okay. Thanks, guys.

Good morning and thanks for taking my questions. Two questions, if I may.

The first one is on the gas developments. I know that most of your portfolio is definitely oil related and that is also what you , but how do you think around gas developments in light of the very low European gas prices?

Second question is on hedging strategy going forward. You say that 80% of after tax volumes have hedged at $8 per barrel for the second half of this year.

But going into 2021, could we expect it to continue to hedge a substantial portion of your roll-ins just like you have done this year?

Yes, so let me start with the gas developments, Teodor. So you’re absolutely right.

Of course, our portfolio is now heavily weighted towards oil. I think the ratio now is roughly 80/20.

And we’re monitoring the gas market, particularly in Europe. It’s not totally unexpected to us that we’re seeing weakening of the European gas markets.

I think the level is a bit lower than we expected a few months back, but the COVID situation has basically thrown a lot of our models out of whack. And then of course it represents a duel – both an opportunity and as a challenge.

The opportunity is that there will be gas assets that will look cheap and the challenge is of course that we are quite uncertain as to when, how and to what level the European gas market will pick up. I think you should expect us to be cautious on gas developments, at least in our organic portfolio for the time being, Teodor.

Your second question, Teodor, with regards to hedging, so we do have a policy when it comes to hedging which allows us to of course hedge 18 to 24 months into the future, but this is of course not a mechanical approach. So we do sort of a holistic evaluation of the whole risk management framework and evaluate the cost benefits of that.

That being said, we do expect also to continue our hedging policy also into 2021, but the timing will of course be dependent on how the market develops and the cost benefit of that.

Okay. Thank you.

Good morning, gentlemen. Thanks for taking my questions.

Karl, just to talk a little bit strategically about what you can actually do relative to these tax changes announced in Norway. And you kind of alluded to it a little bit earlier, but I just wondered what the sort of capacity was.

You obviously got a big contingent resource base. NOAKA is a big, complicated project.

Do you have the resource to kind of develop the rest of – or several more projects in your hopper in the timeframe that you have available to you? It would be great to get some color really about how much more you can do beyond what has already been announced without, as you say, putting risk to execution or being able to find the right people.

And in that context, how should we think about your exploration plans going forward? Clearly, you suspended four, five wells earlier in this year due to the crisis, which is understandable.

Should we think that those come back and then some next year? Is the mindset that you want to drill as much as possible before 20 – end of 2021 to try and find another project on top of what you’ve already got in the hopper or are you sort of, of the view that what you’ve got on your plate at the moment is more than sufficient for the period?

Thanks, James. So first of all, I think it’s – there are a couple of avenues into that first part of your question.

How much can we actually do? So one avenue is talking about this from an execution perspective.

And right now given the fact that we have implemented the alliance model, we’re not really that impacted by capacity on the execution side. There is still a lot of capacity in the contractor market.

We still are the preferred customers for a lot of our alliance partners. So we don’t really see execution or capacity and execution to be a bit hurdle right now.

Second, I think it’s important when you get – before you get too enthusiastic or all of us get too enthusiastic, the project doesn’t really change. The cash flow is basically the same, the subsurface risk is basically the same, the technical challenges are essentially the same plan.

So the only thing that has actually changed is the way that we depreciate the CapEx. And it’s important to remember that as we start executing projects because it impacts how we think about the operational plans and how we put drilling plans and project plans together.

And this is the work that’s actually ongoing as we speak. So we’ll come back to the specifics of that, but I think you should expect that there are some more projects in that hopper that we wish to realize inside this tax window.

We’ll try to make the best of it, because in my view this is actually a pretty unique opportunity to create value from an organic hopper. The breakeven reduction from a financial perspective is in the range of $10 a barrel on a project basis which is a pretty unique opportunity.

And of course, as a management team set out to maximize shareholder value, we’ll try to find the balance between executing as many projects as we possibly can but at the same time not putting the execution model at risk and ending up with severe delays and cost overruns. And finally, I think it’s also worth noting that out of the 980 roughly 2C resources, NOAKA is roughly a third.

So with NOAKA running at full steam, a quite a lot of this is actually already in the works. Now when it comes to exploration, the updated program of 2020 is roughly four wells from an operated perspective.

And I think I don’t really – James, I don’t really see the need for a lot of additional prospects to come into this hopper. We have sufficient resources and sufficient work to do inside the existing resource hopper.

But I think you should expect going into 2020 is not at all that we’ll revert to the old exploration strategy, but you should expect that we remain cautious and focus on replacing the 2C hopper around our operated assets. And then we’ll come back as we usually do in the autumn with updated drilling programs for next year.

But don’t expect us to come back with a very ambitious drilling program for 2021.

Okay, sure thing. Thank you for that.

I appreciate the color there. Just one other one for me.

Given the extra liquidity you’re getting over the next couple of years and given that I think it feels now that a lot of the focus is organic rather than inorganic, could you argue that perhaps you have a little bit too much liquidity at this point in time and actually you could maybe trim the balance sheet down a little?

I think it’s important to look at the whole balance sheet and the timeline of the changes in the temporary fiscal regime holistically. And if you look at the illustrative chart on one of our slides in the presentation where we are showing the cumulative cash flow over time, you basically see at – in the end of the time period, you basically have the same cash flow cumulatively.

So with that being said, I think it’s natural that the robustness of the balance sheet will improve of course in the medium term when the cash flow is significantly improved, but then keeping in mind of course that the cumulative cash flow is almost the same over the whole period.

James, we’ve also been quite clear that – in terms of clarity and availability of funds, we would like to cautious and maintain a robust capital structure and that has been our strategy now since 2015 and that will be our strategy also going into the future. And if anything, this COVID-19 situation has allowed us that it actually pays to have a bit of available headroom when you have these kind of situations.

Very good. Thanks.

Yes. Good morning, guys.

Most of my questions have been asked, so it’s just a very simple question. I was wondering why you’ve not tightened up the range on 2020 production guidance.

You’ve averaged 210 in the year-to-date. I was wondering why that’s not the back of the bottom end of the range.

And I suppose the question then is, is June’s presentation of production growth in Q3 and Q4 still standing?

Thank you for that, Al. So I think the reason for not tightening up the range is of course that there is quite a lot of uncertainty when it comes to curtailments and also the ramp up of production in the second half of the year.

So that’s why we haven’t adjusted it. But as mentioned, we feel very comfortable with the range provided and then we’ll come back I guess in the third quarter with also the results from the third quarter and then probably adjusting the range accordingly.

Okay. Thank you.

With that, operator, we have time for one last question.

Hi, guys. A quick question on following up on exploration.

The Barents Sea, will we see you doing anything more than your mandatory programs or is this essentially an area where you’ll not pursue any further activity giving it for others to do the works there and should we expect into 2021 that it will be a higher than a normal proportion of near field exploration loss?

I think the last part of your question is definitely a simple yes. As you’re also following from listening I just laid out that we’ll try to maximize the value of our resource hoppers going into our operated hubs.

When it comes to the Barents Sea, I think the ingoing assumption is that we have been as an industry lot of disappointed at the lack of discoveries in the Barents Sea. And with the current portfolio, I don’t see a lot of increased opportunities at the current point in time.

Now there’s some new acreage coming out and we’ll have a look at that of course as everybody else, but I don’t think you should expect us – I think I’ll put it like this, Karl Fredrik. I think our expectations to the Barents Sea and also to our enthusiasm around the Barents Sea is somewhat muted at this point in time.

Makes sense. One other question in terms of near-field activities, which hub do you think or do you see as the most promising for being able to add more projects under the temporary tax change regime?

I think right now that would probably be Alvheim but also Skarv is showing some promise. So those two – those are probably the most interesting right now not necessarily in terms of total returns but certainly in terms of activity that can come to play within the current temporary tax changes.

Okay. Thank you.

Okay. Operator, I think we have to close off then.

So any further questions could of course be guided towards the IR department here at Aker BP. And with that, I would like to thank all of you for joining the call and also for asking questions.

And wish you all a very good summer.