Oil Search : 2021 Half Year Results Presentation Transcript

Company: Oil Search Limited

Title: 2021 Half Year Results

Date: 24 August 2021

Time: 11:00 AEST

Start of Transcript

Operator: Thank you for standing by and welcome to the Oil Search Limited 2021 half year results conference call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number 1 on your telephone keypad. I would now like to hand the conference over to Mr Peter Fredricson, Acting CEO. Please go ahead.

Peter Fredricson: Good morning, and welcome to everyone. Thank you for taking the time to hear our presentation and to look at Oil Search's 2021 half-year results. For those of you who don't know me, I'm Peter Fredricson, the Acting Chief Executive Officer of Oil Search. I joined the Company in March of this year as Chief Financial Officer and was asked by the Board to step into the Acting CEO role when Keiran Wulff stepped down in mid-July. I'm pleased to present to you today alongside my colleagues a solid set of results reflecting our focus, strategy, and resilient operations.

Before I commence with today's presentation, I would like to draw your attention to the disclaimer. I would just mention that all dollar amounts referred to in this presentation are US dollars unless noted otherwise.

Today I have a number of Oil Search executive leadership team here with me, and I'm pleased that Beth White, Diego Fettweis, and Bruce Dingeman will all have a chance to present to you this morning. I'm sure that amongst what is a very well-aligned team with in excess of 150 years of experience in the oil and gas sector, we should be able to handle the vast majority of questions that might arise through the presentation.

I'll start with an overview of recent events and results. Firstly, on the status of the non-binding indicative merger proposal that we are currently working through with Santos. Teams from both sides are working through extensive due diligence of the information that each entity has loaded into their respective data rooms. With the consideration to be received by Oil Search shareholders being Santos shares, we have to assess the value of that consideration so that we can appropriately advise our Board and shareholders in respect of the proposal. You'll be aware that Kevin provided some timing updates last week and I'm pleased to say that we are fully aligned on that expected timing.

We have Macquarie Bank, Goldman Sachs, and Allens advising us on the proposal alongside a number of other technical advisors. Grant Samuel & Associates have been engaged to provide an independent experts' report. We are working towards a scheme of arrangement under the PNG Companies Act. We are working with Santos on the necessary merger implementation deed with the expectation that Oil Search shareholders will be asked to vote on the transaction prior to the end of the year. As noted when the proposal was announced, Oil Search's directors intend on unanimously recommending the proposal if the independent experts conclude that it is in the best interests of Oil Search shareholders and in the absence of a superior proposal.

Whilst there have been a number of changes at Oil Search in 2021, one thing has not changed: our purpose of delivering low-cost,high-value energy that meets society needs is front and centre for all of our people. In that regard, we have delivered some 13.5 million barrels of oil equivalent in production in the first half, exceeding our internal expectations, at a unit production cost of S$10.63 per barrel of oil equivalent, well within our target range of $10.50 to $11.50.

DISCLAIMER: This transcript has been prepared by a third party for Orient Capital Pty Ltd. It may not be accurate or complete and should be verified directly with the issuer. Orient Capital Pty Ltd is not responsible for any consequences of the use you make of the information contained in this transcript, including any loss or damage you or a third party might suffer as a result of that use.

Notwithstanding the half year that saw significantly more COVID-19 disruption in Papua New Guinea than was experienced here in Australia during that time, we had a very successful production outcome across our operated oilfields and within the PNG LNG project which we own 29% of. Those production numbers aligned with significantly improved oil prices to deliver a strong financial outcome for the half, revenues up 7% on the previous corresponding period, with the lag effect we experience in LNG pricing to be further reflected in second half '21 revenue.

We actually had a strong first quarter from LNG pricing perspective in FY20 compared with a weaker first quarter in FY21 as the lower prices from the later part of 2020 flowed through into the first quarter of this year. The good news is that we do have that lag effect in LNG pricing flowing into a strong third quarter in FY21, so with around 70% of revenue coming from PNG LNG, we continue to have confidence about a strong full-year result in FY21.

Earnings and cash flow are all up significantly over the previous corresponding period, with the increase in cash flow in particular allowing us to maintain ongoing reduction in gearing and a return to paying dividends with $0.033 per security dividend representing a payout ratio of 49%, towards the top end of our 35% to 50% of net profit after tax policy range.

Most importantly, our safety performance in the first half 2021 is significantly improved at a TRIR of 1.02, with ongoing performance into July and August of the current year showing that outcome at less than 1.0 on a year to today's date basis.

Again, notwithstanding a number of changes and the challenge of a heightened COVID-19 operating environment, in FY21 we have continued to execute on the strategy we rolled out in November 2020. Our focus, deliver, evolve strategy is one that provides all stakeholders with clear visibility on what we are doing, how we are doing it, and where we are going. Our focus this year has been on safety and running the business to deliver increased cash flows, increased production, and reduced costs. Everything you will see from us today shows what that focus has delivered in the result that we're announcing. The focus on increased production and achieving a 40% reduction in underlying operating costs by 2023 will remain front and centre for us for the remainder of 2021 and into 2022 and 2023.

We will continue to deliver on the projects that are already contributing from a financial results perspective whilst also looking to deliver on Papua LNG FEED in 2022 and working towards completion of the Pikka FEED process to put us in a position to deliver FID off the back of an acceptable funding structure for that project. With the recent announcement by the PNG Government and Exxon that they intend to reengage on the P'nyang gas project. We look forward to contributing to the delivery of that project in the fullness of time.

What you will see later in this presentation is where Oil Search evolves to over the latter part of this decade on the back of these growth projects that we already have available to us, projects that will deliver us significant cash flow to ensure we can meet our net zero by 2050 ambitions through appropriate energy transition and carbon abatement programs in the field.

That focus on operating costs continues to deliver Oil Search strong EBITDAX margins that surpass the average of our industry peers. Indeed, at 73% of the first half of 2021 we can see even greater benefit of the cost focus exercise that we implemented through the very challenging low price oil market conditions experienced throughout 2020. Absent the extra costs that we are incurring in the field to ensure a COVID-19 safe environment for our workforce and continued generally uninterrupted operations, our operating costs continue to fall and continue to contribute to that increasing operating margin. All in all, what we are seeing in this half year is the result of high-quality assets, a focused workforce, and an ongoing commitment to delivering value for all shareholders and other stakeholders.

The strategy, our strong portfolio of world-class assets, our strong production and financial results are all underpinned by our commitment to and support for the communities within which we work. In both Papua New Guinea and Alaska, we are very proud of both our economic and social contributions to the respective communities. In PNG, we are the operator of all the producing oilfields there, operating across a million hectares of land and five provinces. We contributed in excess of $450 million in socioeconomic benefits to PNG in 2020. Most importantly, our PNG team

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comprised of close to 90% PNG citizens and work in close partnership with government and community agencies to not only operate these fields safely, reliably, and sustainably, but through the Oil Search Foundation contribute to better health, education, and gender equality outcomes for PNG.

In Alaska, 75% of our team have been hired from within Alaska itself. We are the second largest oil and gas leaseholder in Alaska, and phase 1 of our Pikka project is expected to deliver in the order of $7 billion in taxes and royalties to the state and native landowner companies over time. More than 60 environmental studies informed the Pikka project design and this has assisted in positioning the project in the lowest quartile of greenhouse gas intensity oil projects around the world today.

With that, I'll hand over to the team to take you through the financial and operational aspects of today's results, and I will come back to finish off with a look-forward at the end. Beth, over to you.

Beth White: Thanks very much, Peter. Good morning, everybody. In the first half of 2021 we successfully delivered significant earnings growth compared to the first half 2020, delivering a net profit after tax of $139 million. This was driven by a 7% gain in revenue, reflecting an increase in oil and condensate pricing over the half and strong production volumes despite the impact from a five-week planned maintenance shutdown at PNG LNG.

Oil and condensate price recovery has boosted calendar year first half revenue to $668 million but while we saw an increase in realised oil and condensate prices of over 80% from first half 2020, approximately 70% of the Group's revenue is derived from LNG and gas, which saw a decline of 5% of the average realised LNG and gas price on the prior corresponding period, reflecting the lag effect of realised prices.

Our commitment to lower costs saw a 6% reduction in production cost from the first half of '20, including the cost impacts from COVID-19 and other one-off costs of approximately $19 million, which contributed to the total production cost of $143.1 million. As a result of our strategy to focus on our core assets, we saw a 90% reduction in exploration cost expensed, while we incurred $7.4 million of hedging cost in the half.

As previously disclosed, we introduced a level of commodity price hedging into our strategy to reduce the downside exposure to oil price volatility, and in the half, we were able to participate in the oil price upside from our hedged floor price of $55 per barrel. Finance costs were also down due to our reduced debt position after we repaid some $290 million in debt and due to the lower costs of borrowing generally.

Accompanying these solid financial results is the highest level of free cash flow achieved by Oil Search since before the 2018 PNG earthquake. We achieved strong free cash flow of $284 million in the first half of 2021 and delivered a free cash flow breakeven price of approximately $20 per boe in the same period. This has assisted us in reducing our net debt position by $254 million to $2.12 billion in the latest six months from approximately $2.4 billion six months earlier.

We maintained a solid cash position at 30 June 2021 of just over $500 million, which together with undrawn facilities provides us with total liquidity of $1.2 billion at the end of the period. During the first half, Oil Search repaid $191 million of PNG LNG debt and $100 million of corporate debt. As a result of net debt reduction, our gearing decreased from 29.9% at the end of December 2020 to 27.2% at 30 June 2021. Overall disciplined capital management has bolstered the Company's balance sheet and we remain focused on improving our financial strength to deliver on our various expansion and growth projects in PNG and Alaska.

Oil Search has an ongoing focus on balance sheet strength. As we have noted previously and per the graphs of debt repayment and facility expiry, we expect the non-recourse PNG LNG debt to be repaid by the end of 2026. At 30 June 2021, Oil Search had $900 million of committed bank facilities with approximately $200 million drawn. The $600 million syndicated facility, which expires in June 2022, was undrawn at 30 June 2021 and subject to final approvals, will be refinanced in the second half to push the expiry date out to December 2026.

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During the six months to 30 June 2021, total liquidity decreased by $235 million, mainly as a result of the repayment and cancellation of $300 million of short-term facilities. Strong operating cash flows of $354 million generated during the period were principally used to fund debt repayment of $291 million. Oil Search continues to work on a more robust and flexible balance sheet that acknowledges and counters commodity price volatility during our upcoming growth phase.

We are committed to a sustainable future and in this respect the last six months has been amongst the busiest for the Company as we strive to ensure all operations are managed safely and the wellbeing of our employees, contractors, and communities are maintained even though the pandemic has imposed restrictions on the movement of people and resources. Our commitment to sustainability and transparency has been reinforced with the release of an updated HSES policy and management standard, the launch of our human rights and sustainable communities policies, and registration of our first modern slavery statement.

Oil Search has an ambition to be net zero by 2050, and while we don't have all of the answers today, we are working diligently toward a roadmap to meet that ambition. Work on our carbon abatement program in the PNG business unit continue, including the planned return to service of the thermal oxidiser at our Gobi facility in the second half.

More initiatives are planned for the remainder of 2021, and while these projects may seem small they are important to making our existing production facilities the best they can be and will contribute toward our commitment to reduce our operated GHG intensity by 30% by 2030.

I will now hand over to Diego to take through activities in PNG.

Diego Fettweis: Thank you, Beth, and good morning, everyone. The strong results presented by Beth and Peter were reflected through the fantastic business we've got in PNG. Starting with operated assets, we are delivering against our safety, production and cost targets. Total oil production in the first half of the year was 1.42 million barrels, up 3% versus the same period last year.

Maintaining our strict focus on safety is critical to the wellbeing of our people and operation and in the context of COVID we have shown extraordinary resilience and have managed to avoid impact from COVID on our production. It is fair to say that Oil Search has been an industry leader in establishing a system to allow staff to fly in and fly out of PNG from Australia.

We have also continued the good work on cost reduction efforts which has enabled us to keep our costs broadly flat despite incremental cost related to COVID, including quarantine allowance, emergency response, critical manpower redundancy, medical staff, delay of activities, among many challenges. More broadly, we have progressed our operational excellence initiatives resulting in improvements to process safety, maintenance, and reliability.

Moving on to PNG LNG where production has averaged 8.24 million tonnes per annum for the first half of the year, approximately 20% above the original nameplate capacity of the project. This was achieved despite planned maintenance work which the operator was able to complete one week ahead of the schedule. With increased oil prices we have also realised higher LNG prices under our mid and long-term SPAs in the second quarter and this trend will continue to strengthen in the next quarter due to oil price lags in our contracts.

Overall, our strategic performance across both operated and non-operated business has resulted in production of 13.5 million barrels of oil equivalent for the first half of this year at a unit production cost of $10.63 per barrel of oil equivalent. Average LNG price for the first half was $7.85 million Btu and most notably, realised oil and condensate prices have rebounded from $35.95 in the first half of 2020 to $64.56 in the first half of this year.

Regarding our key growth project in PNG, we also continue to make significant progress on Papua LNG and we now have a clear line of site to FEED entry in the first half next year. Having performed very strongly to date, PNG LNG is also well positioned to continue to do so over the coming decade. The joint venture recently made a final investment

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decision on Angore and the project is now progressing towards first gas in 2024. This is expected to contribute to maintaining plateau production until 2027.

Moreover, as we are also looking at firming up supply options beyond 2027, the joint venture has approved the budget for the initial stage for the Associated Gas fields optimisation project. This Oil Search operated project consists of increased gas export out of the central processing facilities and gas export out of the global processing facilities, APF where all the Associated Gas is currently being reinjected.

It is worth highlighting the importance of Oil Search operated Associated Gas production to the PNG LNG project, given Oil Search operations are anticipated to contribute almost 25% of the total gas supply to PNG LNG by 2028. Looking further ahead, the combination of Hides, Angore, and the Associated Gas fields is expected to provide a sufficient resource base to maintain the high utilisation rate of the LNG trains beyond 2030.

In addition, we are already working towards adding optionality to backfill PNG LNG into 2030. Firstly, we are supporting the P'nyang operator in their efforts to reengage with the government to progress discussions on the P'nyang gas agreement. Besides P'nyang, we also plan to mature additional backfill options, one of which is the Hides footwall. This is a highly attractive new field for opportunity which we see being appraised after the Angore well campaign is completed.

Moving to an update of the flagship Papua LNG project. The outlook is positive and we are encouraged by the progress made this year. As you can see in the table on the left, the steps completed so far show a steady march towards FEED entry in 2022 and we flag the importance of government support and joint venture alignment. A revised budget for pre- FEED activities was recently approved and this will allow for contracting activities, updated engineering, and basis of design studies ahead of FEED entry in the first half 2022.

Both downstream and upstream project teams are being remobilised, and a key focus area of this phase is to continue to drive costs down and optimise integration with PNG LNG infrastructure. In that respect, I am pleased to report the negotiation of the integration agreement between PNG LNG and Papua joint ventures have now recommenced.

Finally, let me conclude with a few observations of the LNG market. We continue to see growing direct customer interest for rich LNG out of PNG expansion as it provides exactly what buyers are looking for, namely a new low-cost brownfield expansion within the Asia Pacific region that is also a diversification of an already highly reliable LNG project operated by a world-class operator.

Recently, benchmark spot LNG prices have reached multiyear highs in Asia and Europe. These high spot prices combined with a lower liquefaction utilisation rate at some LNG projects which curtailed production just when the market was at its most needy has been a useful reminder to all players that long-termoil-linked LNG contracts will provide a foundation for a growing market going forward.

We continue to observe multiple signposts pointing to a doubling of LNG demand by 2040. Asia is a key driver behind this growth. In 2021 China became the world number 1 LNG consumer and overtook Japan as the largest single LNG importer. As countries reaffirm their net zero ambitions to move their economies toward an energy transition to lower- carbon use, we view LNG and gas as key basal fuels that are entirely complementary to renewables. Therefore, we have confidence that the future of LNG and gas is unambiguously positive.

I look forward to sharing further updates with you on one of the most promising LNG projects in the future. Thank you and I'll now hand over to Bruce for an update on our Alaska activities.

Bruce Dingeman: Thank you, Diego. I'm pleased to share an update on our Alaska business and Pikka project. Our core landholding lies on the north slope of Alaska and is situated near a regulated pipeline with good takeaway capacity. We're situated in a mega-basin underpinned by three world-class source rocks. Key stakeholders, including the state of

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