Ithaca Energy Inc. (OTCPK:IACAF) Q1 2022 Results Conference Call May 31, 2022 8:00 AM ET
Alan Bruce – CEO
David Crawford – CFO
Conference Call Participants
Marianna Kushner – Nomura
Uli Gerhard – Insight Investment
Ella Fried – Bank Leumi
Hello all and a warm welcome to the Ithaca Energy Financial Results Call. My name is Lydia and I will be your operated today. [Operator Instructions]
It’s my pleasure to now hand you over to our host Alan Bruce, CEO. Please go ahead when you’re ready.
Thanks everyone for joining the Ithaca Energy Q1 2022 results call. So the key message from us today is that the business is running well, providing strong cash flows, which supports growing our equity value. The Siccar Point acquisition materially strengthens our reserve life and it cements our position as a leading UK independent for many years to come. I’m going to start by providing a quick reminder of our vision, capabilities and portfolio. And Dave is then going to cover financials, first quarter results, and out close with an update on projects, reserves, and emissions.
So moving to Slide 5, this page describes our vision. We’re building a company with a high quality diversified portfolio, and our focus is on low unit cost assets, which drive high margins. We’re developing low breakeven projects to ensure that we deliver competitive returns through the price cycles. Safe and environmentally responsible operations are the foundation of everything that we do. And we’re working hard to drive down emissions every day. We believe in a strong balance sheet to be able to withstand commodity price cycles and our overall plan is supported by highly capable teams.
Moving to Page 6, we highlight the Company’s capabilities, which extend across exploration, development, projects, and decommissioning. We see this as a competitive advantage for Ithaca, having a depth of experience across all elements of the EMP value chain. And moving to Slide 7, final slide in this section is a high level summary of the Company portfolio, our productions around 70,000 barrels per day before taking into consideration the Siccar Point acquisition with around 200 million barrels of 2P resource, which more than doubles when the Siccar Point assets come in.
And you can see at the end of the quarter, we’re in a comfortable position from a leverage perspective supported by our strong performance in the first quarter and the constructive macroeconomic environment.
Dave’s going to provide a bit more detail now on the first quarter results.
Good afternoon, everybody. So if we could move onto Page 9 please. We actually published the information on the website last Thursday. So the usual accounts and the presentation and the MD&A, we decided to post early last Thursday to give you guys, an opportunity to have a look through. So I hope you find that useful. And if it was that we wouldn’t intend to continue to do that wherever possible.
So in Page 9 just to highlight some of the operational financial results. So quarter one 2022, our production was up to 71,000 barrels per day and that’s compared to the full-year of 2021 of 56,000 barrels a day. So in next slide, you can see the progress that we’ve made through quarter by quarter from quarter two 2021. The good — the product production in quarter one has been held by the good uptime of all the assets within the group, and also we’ve taken the benefit from the assets that we’ve acquired from Marubeni, especially the MonArb assets, and the production has been included from the completion date of the 4 of February.
You can see in the next chart, the increased realized prices. You can see the overall prices, but you can also see the impact of the hedging loss dollar per barrel. Commodity prices are strong. They’re strong today. I think Brent’s about $123 a barrel and gas is today around 200 pence a therm. Our unit operating costs have risen slightly to $19 a barrel, part of our operating costs are also the cost of to run the platforms that we need fuel gas, which is obviously goes up in line with the gas price and diesel cost, which goes up in line with the oil price. An EBITDAX is $1 per boe at $74 a barrel and quarter one ’22 compared to $50 a barrel in 2021.
So if we could go on the next slide please, Slide 10. This slide just shows the progress that we have made through the last four quarters on production from quarter two 2021. Just to remind you that was 48,000 barrels a day. Then we moved to quarter three, which was 52, quarter four ‘21, which is 61, and quarter one 2022, which is 71,000 barrels a day. So that comes from the operations of the guys offshore the efficiency, getting things done. And it also includes having to spend money when we need to.
So it’s really important that spend the right amount of money to make sure that we are producing — the production up time is as high as possible. Captain’s the highest single contributor to these numbers. It is higher than the 18,000 per day. And in quarter one, as I mentioned, we had the benefit of the MonArb assets. Today, year-to-date, at the end of May, we’re still year to the around 70,000 barrels per day.
If you go onto Page 11 please. The EBITDAX, there’s very strong EBITDAX in quarter one $474 million compared to $477 in the end of quarter four. Running down the tar, you can see the high production 71,000 barrels compared to quarter four ’21 of 61,000, that reflect, is reflected in with the high oil prices and gas prices and the higher revenues. You can see the hedging losses that we have made in quarter one that was 186 million compared to 116 million in quarter four. And as you move on, you’ll see that the operating costs are higher at $120 million compared to $93 million in 2021, so very strong performance in quarter one.
The OpEx, as I said in the last, it’s slightly impacted by the commodity prices and you go see one line in there, which is a bit higher than normal, which is the movement in oil and gas stocks, because we have FPSOs. We have also the oil goes in by pipeline to shore and it’s lifted — it’s not necessarily lifted in line with our production. So our production volumes and our sales volumes are not necessarily the same thing. And the moving in oil and gas takes that back to basically, what we have actually sold.
So, if we can go Page 12 please. So good news on liquidity, we can tell you to deleverage on the left hand side, you can see the debt facilities, the RBL and the bond 9.25 RBL, the 6.25 bond. You can see from the September ’21 that was produced from 1,550 to 1,245. At the end of the year, we were down to 930; and the end of March, the net debt was 703. So that included 625 million for the bond. The RBL was at 150 million and then with cash, which comes off that of 72 million so that give you the net 78 million. As of May, we have completely paid down the RBL loans, so the RBLs loans are zero. We do have our normal letters of credit, which was 300 million. And we have continued to build cash, now that the RBL has been — the loan part of the RBL has been repaid.
On Page 13 hedging. You can see the average prices — the average floor prices, which is a combination of the swaps and the floor of the zero cost colors, it continues to rise. We are 55% hedged in oil and 22% and 40% in ’23. You can see in ’23, for example, the floor prices are up to over $70 barrel oil. In gas, we are 70% hedged in ’22, only 15% hedged in 2023. But again, you can see, especially in the second half of 2022, the floor prices up to 114 pence a therm then in quarter one ’23 it’s up to 170. But we will continue to add to our hedging and take advantage of our price spikes when they take place.
Now, I’ll pass back to Alan to talk about reserves.
Thank you, Dave. So the chart Page 15 reserve summary, at year end 2021, and it reflects in the impact of the Marubeni acquisition, which added 23 million boe of 2P. As a reminder, our 2021 production was 21 MMboe and we added 10 MMboe organically in 2021. So taking together, our organic and inorganic reserve replacement for 2021 was around 157%.
You move next to Slide 16, provides an update on our key projects starting with Abigail. Abigail is progressing well. We are in the process of completing the well now, and we remain on-track for first production in September. Once the rig finishes at Abigail it’s going to move on to Captain to drill a Captain EOR 2 well. All the fabrication activities for Captain are on-track and project remains on budget and schedule, again with first production we expected end of the year, early 2023.
Activities starting to ramp up on the Marigold project with a site survey planned over the next several months, and pre-feed engineering started with Repsol Sinopec Resources. The plan there is for field development towards the end of the year. And then, we’re committed to continuing bringing all the data together on Fotla. And we’re in the process of evaluating the subsurface information that was gathered as part of the exploration and appraisal campaign. We’re approaching potential hosts to understand the technical feasibility and evaluating project costs, with a view to bring it forward to our investment committee material to towards the middle of the year.
So, it’s an exciting time for us, lots of organic growth activity across the whole portfolio. But we’ve also been very active on the inorganic growth front too. And if you move to Page 17, it’s the summary of the Siccar Point acquisition. We announced in April, our intent to acquire Siccar Point Energy, which really is a transformational acquisition for the Company. Everything is progressing to plan and we’re hoping to close the transaction by the end of June. And this really brings together two very complementary portfolios. It significantly extends our resource life, and it provides line of sight to growing cash flows through the end of the decade and beyond.
Moving to Slide 18, it’s a summary of the near-term outlook, which is unchanged to what we had previously. And it’s before taking into consideration the impact of the Siccar Point acquisition and projects which are not yet approved. So, we’ll look to revise that in fullness of time as we complete the acquisition. Just as a reminder, we expected production in the 70,000 to 82,000 barrels per day range over the next several years, with OpEx relatively flat and CapEx around $400 million. Of course, once we integrate the Siccar Point assets into the portfolio and work through some of the projects approvals are talked about a second ago, we’ll look to revise that capital number accordingly.
Last section in the presentation is covers emissions reduction. And if you can move to Page 20, please, we’re showing our emissions reduction plan, which is a reminder to 25% reduction against the 2019 baseline by 2025. We’ve completed five projects to-date and those have reduced about 70,000 tons of CO2 equivalent per year, which is equivalent to around taken 40,000 cars off the road.
But we’ve not stopped there, if you move on to Slide 21. It gives a summary of the progress year-to-date. And the next thing we’re really focused on is some larger scale projects, which require more engineering and physical modifications offshore. So, we’ve kicked off the engineering work for those and we’re working to accelerate those where we can. And we’ll have a better sense of the project execution timeline for those as we work through the summer, but the next tranche of projects will be likely 2023 or 2024 execution.
So just in summary, before we take your questions, business is running really well. We’re generating strong cash flows and that’s supporting us growing our equity value. Siccar Point transaction is materially strengthening our portfolio, extending reserve life, and really cements possession of the Company as a leading UK independent for years to come.
I’ll hand back to the operator now and we’re happy to take any questions.
Thank you. [Operator Instructions] Our first question in the queue today comes from Marianna Kushner of Nomura. Please go ahead.
I was curious if you could provide some comments with respect to potential impact of the proposed tax on your operation in the near-term and going forward the additional windfall tax?
Yes. I’ll pick that up. So, yes, to call it, the Marubeni energy profits levy. So, the government knows the 26th of May, which was just last week and it’s effective from the 26th of May, 2022. And it’s in response to the government looking for to collect additional tax as you’re aware because of the cost of living increase in the UK. But the levy also incentivizes those who are prepared to invest in developments, which is something I think is prepared to do. The tax provides us as you’re probably aware 100% allowance for CapEx, but also an additional 80% uplift in the allowance.
So if I just give you an example, because as you’re aware, we can’t really provide guidance on specific numbers. But if I take say $1 billion of EBITDAX, which is a rough estimate to profits before tax. If we spend $600 million in CapEx, that is a large against the $1 billion. The additional allowance is 80% of the CapEx. So, that’s another $480 million, which comes off the profits before tax. So in total, the CapEx plus the additional allowance comes to a $180 billion.
So at not example, if you’ve got an EBITDAX roughly to a $1 billion dollars and you’re spending CapEx of $600 million, there isn’t actually any additional tax or any additional profit levy. In that case, you actually have your CapEx and allowance higher than your profits before tax already. I think to realize also in the new levy, while you’re not allowed to use past losses, which is the position of Ithaca for the other 40% tax, which the government has at the moment.
So we use that to extinguish the majority of our taxes. And here you can use your past losses, but you can within the period of when the levy is in place, you can carry back and carry you forward allowances, which you used or not allowed. For example, in that situation, if that was in 2023 and our CapEx allowance was higher than the profits before tax that 80 million credit could be carried back to 2022, and that would all set the potential, anything that would potentially be paired in 2022.
So I think as you know, Alan mentioned earlier, we are moving ahead with development such as Marigold looking at Fotla. Our CapEx is rising with Captain EOR 2, Abigail, and then we have the acquisition. So Marubeni brings MonArb field, Siccar Point brings Cambo and Rosebank; and all of these are up from capital developments, and all of these will be allowed against the new profit levy and in fact to the position of a 100% allowed plus another 80% on top.
So, it is a tax, which we believe Ithaca is in a position because of its high capital program. We will reduce that percentage of 25%, quite far down, depending on the capital profile within the year. Those depends on the obviously the profits a year and within the year. So, at the moment we are looking at a number of scenarios about moving our couple back and forth.
The other thing to bear in mind, it it’s not law yet, so it still has to be approved. So it is proposed. So, we believe it’s the end of June or July before it actually comes in enforce. But hopefully that gives you a guidance anywhere that with a company like Ithaca, who is spending a lot of money on developments that we will be able to all offset that CapEx against this new level.
Maybe just a real quick build on Dave’s comments there. Just to say that I think from a broader perspective, our position would be that really, we just would encourage you. Well, we fully understand the cost of living crisis and the impact that that’s having on people just stability in the fiscal regime, I think is very important. It’s a long cycle business. And from our perspective just having specificity on the various triggers in terms of this mechanism and then just some stability in the fiscal regime would be what we would advocate for.
Thank you. Our next question today comes from Uli Gerhard of Insight Investment. Your line is open.
I was wondering what hurdles remain outstanding with closing of Siccar Point acquisition. And could you give us some idea about how we should look at your capital structure going forward given that you’ve repaid your RBL?
Okay. Yes, maybe I take the first one and then Dave, you can take the second part. So I think the remaining piece around the closing transaction, just the North Sea transaction authority consent which we’re working through, we’ve been through that process with some of the other acquisitions we have completed recently. And so, we understand that and just working together with them on the change of control consent. And Dave, do you want take the Siccar part?
Yes, so, we’re forecasting to complete at the end of June, the 30th of June. As I said earlier, we, the RBL loan parties is totally repaid. So, we do have access at the moment to 925 million of the RBL, Siccar Point also at the Nordic bond of 200 million. We are working through the process of whether that will continue or not. And in the slide that was already presented, we talked about having cash to complete Siccar Point anyway. I mean, the 200 million, for example, that we talk about cash as of today is already in our bank. So, we have more than 200 million already today. We have the 925 with the RBL, and we may or may not continue with a Nordic bond of 200 million, that is still to be decided.
So, the capital structure going forward will be a significant part of the RBL will be used as part of the Siccar Point. And then, we’ll either use cash or the Nordic bond in the short term. But as the cast flows continues, Siccar Point brings another 8,000 barrels per day on top of our own barrels, Summit will also complete, which is another 2,000 barrels a day. So I think as we previously said, we will end the year much higher, 82,000 maybe 85,000 barrels a day. And you will come out the year end and the cash flows of the business in the second half are substantial. So, we immediately almost borrow quite a lot again in the RBL, but as we work through the year, that will start to come down pretty quickly as well.
[Operator Instructions] We have a question from Ella Fried of Bank Leumi. Please go ahead with your question.
Good afternoon. I have a follow-up question on the levy. The tax of the treasury says that they’re going to allow it for new investments? Do you see a government differentiating between any CapEx maintenance and really new investment in some new site? I think it’s just the CapEx.
Good question. So, that’s one of the reasons why we are pointed out that it hasn’t been enacted yet, because the devils in the details to be 100% clear. So, there are things which may be allowed in the deduction against the new levy that we’re not aware of. Certainly, we have read it and very much we have had some advice from external tax advisers and we have read it basically as CapEx.
I think this time by to the government obviously to alleviate some of the concern is that they’re giving incentives for new developments. And that is true. But we also read it that your current any capital expenditure will be allied against the tax. The corporation tax, the tax computation comes from the accounts, from your statutory accounts. So I think it’d be very difficult to start defining…
Exactly, it’s very hard to difficult to decide when you have maintenance drilling for instance, how do they define it?
Well, I mean, maintenance drilling would be probably all banks, but new wells suddenly would be in CapEx. So our assumption is very much that the corporation tax, well, very much follow the account. The account definition is just capital expenditure. And that would be allied against, not as the case today. So, this isn’t another investment allowance. Today, investment allowance is not just for new developments, it’s for capital expenditure.
And I have another question. I don’t know if you can relate it about the forthcoming IPO. Was delivery a game changer? Does it impact your plans? How do you see the environment? And what are the next steps about it?
Yes, sure. Well, I think in terms of your question I didn’t back in the classroom, we’re focused on running the Company as efficiently and profitably as we can. So, that will be the case regardless of the ownership structure I think, like I’ve stated previously, that’s something that they’re looking to consider. So, we’ll work through that. But really not an awful lot more to say on that at this point in time, but certainly the way in which we manage the Company and just running the assets as efficiently, safely and reliably as we can is our focus in the near-term.
Thank you. We have no further questions on the telephone line. So, we will now move to questions from the webcast. The first question on the webcast is from Sebastian Kaufmann, asking what will be the impact from the windfall tax for you in 2022 and 2023?
I’ll take that. I mean, as you aware, we can’t guide it on specific numbers in ’22 or ’23 hence our guidance is always over a number of years. In 2022, I mean, we need to as Alan was talked about, we need to look at our capital profiles, we need to look at what will not be approved between now and the end of the year and that is in ’23 because ’23 is quite important because as I said, if you overspend in ’23 against the new levy, you can carry that back against 2022.
One thing I can say is that the cash payment for anything that we may have to pay in 2022 will be in January, 2023. So, there is no cash payments in for the new levy in 2022. But to be honest, we are still working the numbers. We are looking at what we can do to optimize our capital profiles, over the next two or three years to see what can be done year-on-year.
Thank you. Our next question comes from Shay Hackman. Has asked, what’s the impact of the new UK gas tax on the operation?
I think that’s more or less same question. I mean, day-to-day operations, it doesn’t change anything. I mean, we are there to produce as much oil and gas safely as we can, which generates the high cost flow that it get benefits from. We are there to invest to go to the business. So, yes, it won’t change what we are doing. It may mean that we will change our timing of some of our capital investments. In fact, some of them, we may bring forward into the 2025 with the production coming after, but that’s the only impact that we would see. There may be some taxes that we have to pay. So, we are not saying there don’t be any taxes, but we will optimize our capital profile year-on-year to see what we can do to minimize the profits levy.
Thank you. We have two questions from your Yvette Levesque. Can you please elaborate on the predicted influence of the new energy profits levy? And have you heard from Shell about Cambo?
The first one I think we have already answered, and the second one…
Yes, I’ll take the second one. I mean, we touched on that we are working to close the transaction in June and so at that point we will be on the license. And that would be the time for us to engage with Shell. And so, no further comment on that at this point in time. But, as I say, once the transaction closes then it’s a big priority for us in terms of working through all of the projects in the Siccar Point portfolio.
Thank you. And we have a question from Vladimir David. Do your M&A agreements include any provisions that share the risk of windfall taxation with asset sellers?
I think the answer is Siccar Point [indiscernible] Summit. I think it’s about to close. Siccar Point, I think the answer is no.
Thank you. And finally, we have a question from Shylock. Is it true that the new thought exists for the first time in government to develop the Cambo and Rosebank databases?
Sorry, could you repeat that?
Yes. The question is, is it true that the new thought exists for the first time in government to develop the Cambo and Rosebank databases?
Yes, I think, I can take that one. And really question just around, political support for projects like Cambo, Rosebank, Jade and others. And, I think what we would say is that, we have been encouraged by the political support for the industry. I think the conversation has become a bit more mature in terms of thinking more broadly about security of supply and the importance of domestic resources both in terms of being able to manage security of supply and minimize the amount of imports.
We’re still going to be a net importer in this country, but try and minimize as best we can hydrocarbon imports. But also from the emissions perspective, the projects that are working through the system just now ours and those operated by others, typically lower emissions intensity than imports from overseas. And so net-net, we see that as a positive thing overall for the country. So, yes, I think, as I said stronger support over the most recent time. And as Dave mentioned, focus for us really is working through the projects that we have in the portfolio.
Thank you. So, we have no further questions on the webcast. So, this concludes today’s call. Thank you very much for joining. You may now disconnect your line.