Panoro Energy ASA

John Hamilton - CEO Qazi Qadeer - CFO Richard Morton - Technical Director

Teodor Nilsen - Swedbank Henrik Madsen - Arctic Securities

Thank you, Dave. Good morning everyone.

Thank you for participating in our second quarter 2016 conference call. This is John Hamilton, Chief Executive Officer of Panoro Energy ASA.

On the phone with me this morning are Qazi Qadeer, Panoro's Chief Financial Officer and Richard Morton, our Technical Director. Following this brief introduction, Rich will take through an update on the progress of our assets and we'll then turn it over to Qazi who will review our financial results for the second quarter, after which I'll make some closing comments and of course we'll open up for some Q&A as well.

As a reminder, today’s conference call contains certain statements that are or may be deemed to be forward-looking statements, which include all statements other than statements of historical fact. Forward-looking statements involve making certain assumption based on company’s experience and perception of historical trends, current conditions, expected future developments and other factors that we believe are appropriate under the circumstances.

Although we believe the expectations reflected in these forward-looking statements are reasonable, actual events or results may differ materially from those projected or implied in such forward-looking statements due to known or unknown risks, uncertainties or other factors. For your reference our results announcement was released this morning, and a copy of the press release and our second quarter and half year 2016 report are available on our website at www.panoroenergy.com.

Now I’ll turn it over to Richard, who will describe activity on our assets beginning with updating you on the recent developments at the Aje field offshore Nigeria. Richard?

Thank you, John. And good morning to everyone.

During this quarter first oil was achieved to Aje with the introduction of hydrocarbons light oil of approximately 42 degree API to the Front Puffin FPSO on the 3rd of May. The period of testing and commissioning followed and the 72 hour production test was completed and consequently the FPSO was placed on hire in mid-July.

As we earlier reported production is currently being temporarily constrained and this is due to mechanical issues with Aje-5 well and the FPSO compressor systems. To resolve the compressor issue, the gas lift system has been off-line for repair since early August and we believe it should be fully repaired and working in the near future.

The use of the compressor gas lift is a key variable in the well production. Based on recent performance with the resumed full use of the compression system, the forward-looking production guidance range is anticipated to be 7000 to 9000 barrels of oil per day prior to any remediation work with the Aje-5 well.

In the case of Aje-5, this well requires subsurface intervention to solve a mechanical issue and is currently materially restricted in its productivity. The JV is working to implement the most cost effective intervention program in order to restore the well and resolve this issue in the shortest possible time.

Meanwhile, we can report that the average gross daily production at Aje calculated from May until mid-August has been 5500 barrels of oil per day, which includes the entire testing, commissioning and approval period which completed in mid-July. We can now also report that the Nigerian regulators, the Department of Petroleum Resources has officially approved production and export sale from Aje.

The first cargo of Aje crude should be lifted during September and Glencore has been selected for its off take. We've gathered enough production data now from the existing two wells to be used to update as subsurface geologic model.

These models are now being used to determine the optimum locations for the Aje-6 and Aje-7 wells which will form phase 2 of the Cenomanian oil field development. We expected decision regarding the phase 2 drilling program will be made towards the end of 2016.

Meanwhile the Aje gas development project which as a reminder is based around 2C Turonian gross resource of 163 million barrels of oil equivalent has progressed. I guess development concept involves production of the Turonian hydrocarbons through two or more additional wells, processing and export of gas via pipeline for sale to buyers in the region.

Liquid hydrocarbons produced from the Turonian would be stored aboard the FPSO for sale. Finally, regarding expiration potential in OML 113, aside of Aje field itself, we've commissioned perspective resource review to be performed by AGR TRACS International and the summary of this report should be available later in the year.

Moving on to Gabon now, at Dussafu we continue to have discussions with potential farming partners, as well as looking at refined development plans with our partners Harvest. We're working the forward plan for the license where, alongside the already discovered contingent resources in the Ruche, Tortue, Moubenga and Walt Whitman fields, we see world-class exploration potential.

For example, within the Ruche area EEA the main prospects A and B have combined P50 of 482 million barrels of gross un-risked prospective resources. The third exploration phase of the Dussafu PSC expired on the 27 of May.

The expiration of the exploration of this phase has no effect on the discovered fields under the Exclusive Exploitation Authorization or EEA. And all expenditure commitments on this exploration phase have been completed.

That concludes the technical summary of the quarter. I'll now hand over to Qazi, our CFO to take you through the quarterly financials, Qazi?

Thanks, Richard and good morning everyone. I'm now going to discuss the second quarter results in comparison to the first quarter 2016.

It is customary to note here that the results published this morning and discussed on this call are unaudited. The Aje field had started production in May 2016 and actual commissioning of the field followed two month later in July.

As a result, the accounting for production of oil and gas assets, the recording of revenue and expense of the associated operational cost is a third quarter event and will be reported accordingly. The group has reported a net loss of $1.3 million in the second quarter from continuing operations, compared to a loss of $18.2 million in the previous quarter.

The loss for the previous quarter was impacted by a non-cash impairment charge of $17.1 million in relation to our Dussafu asset. There has been no impairment in the current quarter.

Exploration related and operator G&A cost reduce by $31,000 compared to previous quarter due to phasing of activities. General and administrative cost for the second quarter was $1 million, which was marginally higher than the previous quarter.

The small increase is due to cyclicality of expenses on a quarter-on-quarter basis. However, in the six months to June 2016 a substantial reduction of 24% has been achieved in comparison to the same period in 2015.

The net loss for the period from discontinued operations was $20,000 for the current quarter, compared to a loss of $6000 for the previous quarter. That duty is in relation to the relinquishment of licenses continue in Brazil and there is active engagement with the operator Petrobras to close matters by end of this year.

The current level of cost in Brazil is subject to fluctuations and may involve small payments of relinquishment related costs for the surrendered licenses. Moving now to the balance sheet as of 30 of June, I'm going to discuss the movement in comparison to the balance sheet as of 31st of March.

On an overall basis non-current assets amounted to $96.1 million at June 30, representing a net increase of $1.8 million in comparison to the first quarter. This is due to investment in Nigeria and Gabon licenses.

The net capitalized investment for Aje was $2.4 million and $0.2 million was capitalized for Dussafu. This was however offset by $0.8 million dollars release from non-current - other non-current assets that was transferred to the capitalized cost of Aje.

As we are now producing oil, the capitalized cost in the balance sheet for Aje has also been provisionally split to reflect the depreciative cost of Aje Armenian [ph] oil field and non-depreciable exploration cost base in the license. This information can be referred to in note 6.1 of the quarterly report.

Furthermore, $1 million of the pre-commissioning costs has also been recognized in the balance sheet. This cost will be expensed in the third quarter when revenue is recognized from the sale of Aje crude.

Current assets in total amount to $8.3 million as of June 30, in comparison to $10.5 million as at 31st of March. The current assets comprise of cash and cash equivalents cost $6.6 million and $1.7 million of receivables and prepayments.

The decline in current assets compared to previous quarters is a result of investments in licenses and partial utilization of unapplied cash in the JVs. Moving to the total equity, the amount was $97.5 million as of June 30, compared to $97.6 million as of the previous quarter.

The minor change in impacted by loss for the period and offset by a corresponding increase in the share capital due to issue of new shares. Total non-current liabilities amounted to $6.2 million and remained unchanged from March 2016.

These comprise of deferred tax and decommissioning liabilities which are expected to be reviewed and updated after commissioning of the field in the third quarter. The last item in the balance sheet is current liabilities in total amounting to $0.8 million as at June 30, having decreased by $0.2 million in comparison to the previous quarter.

The decline in many people working capital levels consistent for this period end. This concludes my review of our financials and I will now turn back the call to CEO, John Hamilton.

Thank you, Qazi. Before we open up for questions, I like to say a few words and Aje's had a subdued start.

We had delays in commissioning the FPSO and we've had mechanical issues which have temporarily impacted the initial production of field. We note the share price reaction to these events and reassure all shareholders to Panoro and joint venture are entirely focused on realizing the full potential at Aje.

This means working on solving immediate issues in front of us and planning for future developments as well. I'd like to note that the cost of repairing the compression systems which we referred to are not for the account of the joint venture partners, I'd like to be clear about that.

With Aje now on production we are looking forward to our first lifting shortly which will be the next significant milestone for the company. We expect to sell the cargo at approximately brent [ph] oil price or perhaps even a small premium and we are in discussions with traders and lenders to provide the working capital necessary to develop the - before we develop the Aje field.

We believe Aje can deliver 79,000 barrels a day once the gas lift system, the FPSO is fully working in the actual reservoir performance we see at Aje-4 gives us confidence that solving mechanical issues with Aje-5 will increase production significantly. The Aje-5 intervention program is being developed and we anticipate the cost to be around $1 million to $1.5 million dollars net to Panoro once we decide to implement that intervention.

The Aje joint venture has made efforts to reduce operating costs in the field and have had material success. We continue to look at ways to further reducing this cost.

At Dussafu, we continue planning for exploration development activities, recent corporate announcements by our operator Harvest are noted and we expect clarity on their situation and how it impacts Dussafu and Panoro during the fourth quarter. Finally, we continue to evaluate several opportunities to grow our business in West Africa.

We'll now up for questions. Dave, could you open up the line for questions, please?

Good morning, Teodor.

Good morning. And thanks for taking my question.

There is a couple of question, could you just tell us [indiscernible] what was the actual physical production in fact in a quarter?

What we've done Teodor we've referenced - we wanted to get an average production of the period. So what we've done is we've mentioned, I think you've probably seen at 5500 barrels a day from the time that we opened up the wells in early May, up until just a few days ago.

And that average production period encompasses obviously partially Q2 - the back end of Q2, if I can put it that way, the second half of Q2 and that average is probably - in the second quarter is probably still a little bit less than that. During that period we obviously were opening up the wells.

We were testing the wells. We were shutting them in.

We were shutting down the FPSO. We were working on the compressor.

We were working on the commissioning. So is it's quite a volatile period, if I can put it that way.

But we've felt that average of $5500 barrels a day was a good yardstick for you what it produced from the beginning all the way until just recently.

Okay. Understood.

And just a clarification, you mentioned $1 million to $1.5 million cost net to Panoro was that related to the repair of the gas compression system?

Yes, just to be hundred percent clear on that, the repair of the gas compression system is only an opportunity cost for us, if I can put it that way. The actual cost of repairing the system is not for our account, nor for the JVs account, that’s for the contractor's account.

The $1 million to $1.5 million estimate for the intervention at Aje-5 is the estimate of what it would cost net to Panoro to intervene at Aje-5.

Okay. And just one final question from me, could you provide an update on the Manati earn out [indiscernible] value in that process?

Teodor, this is Qazi here. Manati earn out, we continue to see it as an option value.

The exchange rates have been adverse considering the real versus dollars and the Manati field has had a program for the capital expenditures for the upgrades to enhance production in the last couple of years. So the free cash flows from the field were not enough to meet our potential.

So the Manati earn out as per our contract expires in the next couple of years and we continue to see it as an option value, and you know it will be more evident when GeoPark announces the results next year. But for 2015 there has been no earn out.

In 2016 I don't expect it that there will be an earn out or if there will be it will be a small one. I think we are looking at '17 and '18, 2016 and '17 will be the last years, but we'll find out the outcome of 2017 in the second quarter of 2018.

So there are not extra orders by end 2017?

That is correct, yes.

Okay. Thank you.

That’s all from me.

Thank you. Hello, guys.

Good morning.

Morning, Henrik.

Just a quick follow-up on the CapEx question Australia here, is there any additional CapEx that you foresee for the second half of 2016 other than the Aje-5 intervention over Q3 and Q4 basically?

No.

Great…

Obviously we don’t account this CapEx necessarily, I mean, we have ongoing cost in Gabon and things like that. But the capital expenditure, no.

Okay. Great.

And moving over to that Aje-5 intervention then, since that requires the rig, is it still an opportunity that you may take to drill a prospect at the same time when you get a rate on to the field in conjunction with that intervention?

We're looking at both options doing something just on intervention or may be combining with a joint program that we need to stars and the moon to align for that second case, but we're looking at all options in the JV.

Okay. Fair enough.

Also if we can move on to the OpEx side, could you provide some more color on the statements you made previously in July, I think it was in terms of material cost savings and what that means on Aje in relation to sort of dollar per BOE metric, the way things look now?

Sure. And I like to make a couple of points on that, I guess the first one is that we've only just started producing.

So to have a sort of steady-state, real-time actual analysis of OpEx per barrel you know, it's a little early for that. I think as an example in the pre-commissioning period, our OpEx per barrel were really pennies or small amount of dollars, it was not much at all.

Now that we're coming into the full swing of things, we're starting to establish where the budget or operating costs are coming in reality. So I'd say there is still a period of stabilization around that.

The second thing I would like to remind people is that the operating costs at Aje are predominantly fixed costs, so we have a fixed cost contracts. So to the extent that we're producing less barrels through the FPSO, than the operating cost per barrel up by that simple calculation.

But counterbalancing that have been efforts to secure reductions in both fixed and variable costs within the structure. So I think there are sailing [ph] window and swings and roundabouts on the operating costs, I think you know as a general point the operating cost is definitely going lower on a per barrel basis because of the subdued production vis-à-vis our target of rate of 9000 barrels a day, you know that that has an upward effect on it.

But I can reassure everybody that Aje generates positive operating cash flow to have a solid metric right now maybe a little bit too soon.

Fair enough. Final question for me in terms of the status on availability of debt financing and sort of the recent efforts that you guys have made there, can you some comment on that as well?

Yes, sure. I think now that we're producing oil, we can have different conversations with people.

They would be the debt finances as we said many times on these calls and prior to first production, prior to stabilize first production is always a difficult thing when you're talking to sort of senior lender, if I can put it that way. And so we get in the point now where we can have real conversations around well performance and debt structures.

So we have conversations with banks, as people are aware oil trading companies they also provide working capital facilities against oil production. So we are busy speaking to both of those parties in relation to looking at you know how some debt-financed could fund future activity of Aje.

Fair enough. That’s all from me.

Thank you.

Thanks again, Dave and thank you Teodor and Henrik for the questions. For other people listening in that have further questions they can of course email us, contact or point it on our website.

And we would like to thank you very, very much for listening into our second quarter conference call. Thank you.