Berkshire Sep 4, 2015 (Thomson StreetEvents) -- Edited Transcript of BG Group PLC earnings conference call or presentation Thursday, October 31, 2013 at 12:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Bruce Connery BG Group PLC - Head of IR * Chris Finlayson BG Group PLC - CEO * Den Jones BG Group PLC - Interim CFO ================================================================================ Conference Call Participants ================================================================================ * Jason Gammel Macquarie Research Equities - Analyst * Michael Alsford Citigroup - Analyst * Jon Rigby UBS - Analyst * Fred Lucas JPMorgan - Analyst * Theepan Jothilingam Nomura International - Analyst * Thomas Adolff Credit Suisse - Analyst * Lucas Herrmann Deutsche Bank - Analyst * Rahim Karim Barclays Capital - Analyst * Peter Hutton RBC Capital Markets - Analyst * Matthew Yates BofA Merrill Lynch - Analyst * Martijn Rats Morgan Stanley - Analyst * Iain Armstrong Brewin Dolphin Securities - Analyst * Alejandro Demichelis Exane BNP Paribas - Analyst * Shola Labinjo Tudor, Pickering, Holt & Co. Securities - Analyst * Andrew Whittock Liberum - Analyst * Michele Della Vigna Goldman Sachs - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon, and welcome to the BG Group third-quarter 2013 results conference call. Throughout today's call, all participants will be in listen-only mode, and after the discussion, there will be a question-and-answer session. And it was with great pleasure to present Bruce Connery, Head of IR. Please begin your meeting. -------------------------------------------------------------------------------- Bruce Connery, BG Group PLC - Head of IR [2] -------------------------------------------------------------------------------- Good afternoon, ladies and gentlemen, and welcome to BG Group's third-quarter results conference call. During the course of today's call, our Chief Executive, Chris Finlayson, and our Interim Chief Financial Officer, Den Jones, will take you through the quarter's key business highlights, and then Chris and Den will answer your questions. During the call, we'll focus on our business performance results, as highlighted in our results statement. We'll also be making various forward-looking statements. Factors that could cause actual results to differ materially from the results we currently expect are set out in detail in the principal risk and uncertainties section of our 2012 Annual Report and Accounts. And also, in the half-year results statement published in August. We have also produced a brief set of slides that support today's announcement, and you can find them in the results section of our website. Thank you, and now over to Chris. -------------------------------------------------------------------------------- Chris Finlayson, BG Group PLC - CEO [3] -------------------------------------------------------------------------------- Good afternoon, ladies and gentlemen, and thank you for joining us on what I know is a very busy reporting day. You'll have seen our results statement, published this morning, and in a few minutes, I'll hand over to Den to take you through the financial data. Production volumes for the quarter fell as a result of our decision to reduce activity in the USA due to low gas prices, reservoir decline in Egypt, and the impact of the planned maintenance shutdowns, primarily in the North Sea. However, we will see production recover in the fourth quarter, the completion of the shutdown program, and new projects coming on stream in Bolivia and in the UK. While LNG volumes in the quarter were impacted by disruptions in Nigeria and fewer cargoes from Egypt, the proportion of deliveries to high value Asian markets increased to over 70%. In May, I outlined our strategy to build on our strengths, focusing on areas where we have distinctive competitive advantage in exploration, and in LNG. As I said in May, we will prioritize value over volume. Our priority is execution, the delivery of our growth projects in Brazil and Australia, which over the next five years will be the key drivers for traveling the proportion of our production with cash margins of more than $50 per barrel, and also the delivery of our other 2013 milestones. So, I'd like to update you on the progress that we've made. In Australia, progress on QCLNG project continues, as we move to the construction phase into testing, commissioning and finally to operation. Following the completion of hydro testing, gas has already flowed into the collection header system, and testing of the entire export pipeline is underway. This should be complete by the end of November. We drilled 225 new wells in the quarter, taking the total to over 1,700, and of those, 457 wells have now flowed gas. Three field compression stations, along with a central processing plant in the Ruby Jo block are due to start commissioning in December. Now today, it's exactly three years since we sanctioned QCLNG, and the progress we have made across such a technically challenging and huge project has been impressive. We're on track to flow first gas to the plant around the end of the year, and to deliver first LNG in the second half of 2014 as planned, and within the announced $20.4 billion phase one budget. That will be less than four years, since we took the final investment decision. In Brazil, well performance from our pre-salt interest continues to exceed expectations. The first three FPSOs in operation produced about 160,000 barrels of oil equivalent per day, during the quarter, with each well on the second and third FPSOs producing more than 30,000 barrels of oil equivalent per day, gross. All four buoyancy supported risers required for further well hook-ups on FPSO 2 and 3 are in country. Installation of the first unit is underway, following recent adverse weather delays, and completion is expected during the final quarter, with the second BSR to follow. As a result, the connection of new producing wells on both FPSO 2 and 3 is now expected during the first quarter of 2014. The next two FPSOs, which should also be brought on stream in 2014, are making good progress, tracking to budget, and around 80% and 70% complete. Along with our consortium partners, we've also signed a letter of intent for a ninth leased FPSO that is due for start up on Carioca in 2016. In addition, we continue to improve our drilling performance offshore Brazil. Average drilling time from spud to target depth in 2013 is around 57 days, down from an average of 69 days last year, providing further cost savings over the long-term development program. We've also received approval from the regulator, the A&P to submit a Declaration of Commerciality for the [job] Iara discovery in December next year. This will allow for further appraisal and well testing of the discovery, to optimize development plans. Importantly, first oil from Iara remains 2017 as planned. We've also continue to make progress on our other 2013 milestones. During the quarter, we successfully brought two new projects on stream, with the start of Margarita Phase 2 and Bongkot Phase 3K, in Bolivia and Thailand respectively. The major planned shutdown and restart across our North Sea operations is almost complete, with only the Lomond platform left to restart in the coming weeks. The start up of the Jasmine field in the North Sea and the Itau development in Bolivia will be delivered in the final quarter. Now in Egypt, clearly the business environment remains difficult. Throughout the third quarter domestic offtake from West Delta Deep Marine development was higher than expected, averaging around 1 BCF of gas per day, which corresponds to the technical maximum of the plant. While the Egyptian LNG plant has operated continuously throughout the year, it has done so at lower than planned levels. As agreed, five Qatari LNG cargoes, with two allocated to BG Group, were listed as partial compensation for reduced export volumes, and we have seen domestic offtake in October reduced, with current rates between 700 million to 750 million standard cubic feet per day. In respect to the receivables balance, for the year-to-date, we have received payments of around $75 million more than we did in the whole of 2012. However, due to the higher domestic offtake during the quarter, the balance increased by $100 million to $1.4 billion, with the overdue balance now standing at $700 million. As such, further assurances regarding future domestic offtake and a material improvement in the outstanding debt position are required before releasing funds for the next phase of development. Elsewhere across the portfolio, we have advanced new opportunities that play to our competitive strengths of world-class exploration and our unique LNG model. In Tanzania, the Pweza 3 drill stem test demonstrated that development wells will flow at significantly higher rates than anticipated, indicating that the Pweza reservoir is the most prolific amongst our Tanzania discoveries, reducing the likely well count, and of course, development costs. We've now fully appraised and tested our acreage around the Block 4 discoveries, with results demonstrating the excellent quality of the fields, and their potential to be developed as a northern hub to feed the proposed LNG export terminal. In conjunction with the Block 2 partners in Tanzania, we have recently submitted a proposal for the LNG plant site for consideration by the government. We've also made good progress with the Lake Charles LNG export project, where we expect to lift the majority of the offtake from the proposed 15 million ton per annum project. The Department of Energy has given conditional approval for exports to non-free-trade agreement countries, and we've also signed a project development agreement with the site's owners, Energy Transfer. Finally, I look forward to welcoming Simon Lowth, who will be joining us as Chief Financial Officer and Executive Director on December 2, and before handing over to Den, I'd like to thank him personally for the hard work and invaluable contributions he has made as Interim CFO, during the last 15 months. That concludes my overview, and now, Den will take you through the key financial data. -------------------------------------------------------------------------------- Den Jones, BG Group PLC - Interim CFO [4] -------------------------------------------------------------------------------- Thank you, Chris, and good afternoon, ladies and gentlemen. Unless otherwise indicated, all of my comments relate to the third-quarter rather than the year-to-date position. As you'll have seen, the Group's total operating profit for the third quarter was down 15% to $1.8 billion, however earnings were down only 4% to $1.1 billion. As Chris said, production in the quarter was lower with around half of the volume decline due to the group's decision to scale back activities in the US, in response to low gas prices. This equated to approximately 30,000 barrels of oil per day equivalent. Other impacts included reservoir decline in Egypt and planned maintenance activities, principally in the UK. These reductions were partly offset by new developments that came on stream, and the continued ramp-up in Brazil. Upstream total operating profit for the quarter of $1.2 billion was 18% lower, reflecting a 10% reduction in volumes, together with higher operating and depreciation costs. The impact of this was partially offset by higher realized oil prices, together with the favorable change in the product mix, with a higher proportion of oil produced. E&P unit operating expenditure increased, reflecting the impact of higher lifting costs in the UK, which included the impact of planned maintenance, together with higher royalty cost for new developments in both Brazil and Bolivia. The unit depreciation charge increased due to a combination of higher cost new developments coming on stream, and the impact of minor reserve revisions. LNG Shipping & Marketing total operating profit of $602 million in the quarter was 12% lower. This was the result of fewer cargo deliveries, and reduced margins, partially offset by the hedging offsets. In the quarter there were three fewer cargoes in Nigeria, due to disruptions, and there have been two fewer liftings than expected from Egypt LNG, due to the higher levels of volumes delivered for domestic market. As I mentioned, earnings for the Group were down 4% to $1.1 billion, with the decrease in operating profit being partially offset by forecast reduction in the Group's effective tax rate for 2013 to 42%, from our previous guidance of 44%. The reduction reflects a revision to opening deferred tax balances, following changes to UK taxation rates enacted in the quarter, and a change in expected mix of profits for the full year. Cash generated from operations decreased to 25% to $2 billion, as a result of reduced operating profits and a higher working capital cash outflow. In line with our strategy of more active portfolio management, we successfully completed the disposal of our remaining 20% equity interest in the Quintero LNG facility in Chile, for $176 million. We also signed an agreement with Azure Midstream Energy for the sale of our 50% equity holdings in TGGT in the US, for $231 million. We expect this deal to complete before the end of the year. The Group's capital investment on a cash basis of $2.8 billion was broadly in line with last year, and at the end of the quarter, the Group's net debt and gearing ratio were $13 billion and 27.6%, respectively. The completion of the [Sena] transaction for the sale of certain additional interest in the QCLNG project, expected in the fourth quarter this year, will improve gearing by around 5 percentage points. Thank you very much for your attention, and both Chris and I are happy to take your questions. -------------------------------------------------------------------------------- Bruce Connery, BG Group PLC - Head of IR [5] -------------------------------------------------------------------------------- Before we go into Q&A, if we could, I would like to request that everyone limit themselves to two questions, please. There are a lot of people in the queue, and we would like to get to everyone if we can. So thank you in advance for your cooperation. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Jason Gammel, Macquarie. -------------------------------------------------------------------------------- Jason Gammel, Macquarie Research Equities - Analyst [2] -------------------------------------------------------------------------------- My question is on United States. I think you have been really very transparent about your lack of desire to drill in the current price environment, and that's actually quite understandable, and we don't really mind losing zero profitability of production. But just in terms of longer-term positioning I did note that you opted not to participate with your partner on an acquisition of incremental Haynesville well sites. That I was hoping you could just comment about why you made that decision and if you're comfortable becoming more and more short, the Henry Hub natural gas basis, as Sabine Pass comes online? -------------------------------------------------------------------------------- Chris Finlayson, BG Group PLC - CEO [3] -------------------------------------------------------------------------------- Thank you, Jason. There is several sub points there in many ways. We decided not to participate in the sale of the additional Haynesville interest because we were comfortable with the level of exposure we have there, and in fact we didn't want to build more low-margin positions. At the same time, we have, clearly, monetize where we think it makes sense, we completed the sale of TGGT this year, but at the moment we feel, in the right position, keeping some exposure to Henry Hub in the upstream, as we build our sales into this very significant offtake positioned from the USA. We will see how that moves in the longer-term, but it's not something that we wanted to move precipitously on, at a time with the market would have been very poor for those assets. And it gives us clearly some element of a natural hedge, though obviously the volumes we produced do not mount the volumes will be taking we did together our interest in Sabine Pass and Lake Charles. -------------------------------------------------------------------------------- Jason Gammel, Macquarie Research Equities - Analyst [4] -------------------------------------------------------------------------------- Okay, thank you. -------------------------------------------------------------------------------- Operator [5] -------------------------------------------------------------------------------- Michael Alsford, Citi. -------------------------------------------------------------------------------- Michael Alsford, Citigroup - Analyst [6] -------------------------------------------------------------------------------- I got actually one question on QCLNG. You mentioned you're making very good progress with the project, but could maybe you could talk a little bit about what you're seeing from initial flow rates from the wells, how the dewatering is going? And I guess confidence around how quickly you will ramp up the facility to plateau production? That would be really helpful, thank you. -------------------------------------------------------------------------------- Chris Finlayson, BG Group PLC - CEO [7] -------------------------------------------------------------------------------- Yes, I agree with you that the speed at which you ramp up is probably the more critical thing next year than the exact date that we come on stream, and to that end, we're in a very good position as we are ahead of the curve in terms of the number of wells we drilled, the distribution of deliverabilities is pretty much in line with what we expected that to be, and we're also looking at some opportunistic third-party purchases, to make sure that we have more than adequate capacity available at start up. -------------------------------------------------------------------------------- Michael Alsford, Citigroup - Analyst [8] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- Jon Rigby, UBS. -------------------------------------------------------------------------------- Jon Rigby, UBS - Analyst [10] -------------------------------------------------------------------------------- Just actually going back to QCLNG and the start-up phase. I think Martin, in reference to Egypt out the recent event that you did, talked about the kind of minimum utilization rates you can run these plants back, and I think it sounded like they were quite flexible. So I guess my question on QCLNG is at what point can you start making LNG? Do you have to be feeding the plant with one train full of gas to be actually starting manufacturing in 2014? And the second question is, just a quick picky one. On UK gas realizations, you seem to be lagging well behind spot prices, and I just wondered whether -- in terms of your realization, just wondered whether those issues around sort of legacy contracts, et cetera, or whether it's strategy or whatever. Can you just maybe explain what's going on there? Thanks. -------------------------------------------------------------------------------- Chris Finlayson, BG Group PLC - CEO [11] -------------------------------------------------------------------------------- Okay I'll take the question on QCLNG, and then we'll take the question on UK gas prices. QCLNG, the point that Martin has made I made as well, some of these, with respect to Egypt is that one of the advantages of the ConocoPhillips cascade technology, is that you can turn it down to an individual train at approximately 35% of ultimate capacity, so it does give you a lot of flexibility. Now, that said, in the case of Australia, we would anticipate in having plenty of well capacity available, so that we would not be starting at such a low level of gas availability, but we could start at a lower level. It won't, I don't believe, would be necessary. -------------------------------------------------------------------------------- Jon Rigby, UBS - Analyst [12] -------------------------------------------------------------------------------- Thanks. -------------------------------------------------------------------------------- Den Jones, BG Group PLC - Interim CFO [13] -------------------------------------------------------------------------------- Jon, on your price -- sorry, on your question regarding gas realizations, there is one long-term contract, which has low prices, so that impacted us in the quarter. -------------------------------------------------------------------------------- Jon Rigby, UBS - Analyst [14] -------------------------------------------------------------------------------- Does that -- what you say, does it still got a long time to go? So, it's going to be a feature of your realizations going forward? -------------------------------------------------------------------------------- Den Jones, BG Group PLC - Interim CFO [15] -------------------------------------------------------------------------------- No, it's not that -- it's a midterm contract I described, rather than a long-term contract. -------------------------------------------------------------------------------- Jon Rigby, UBS - Analyst [16] -------------------------------------------------------------------------------- Right, so that would mean over time we would expect your realizations to trend back towards spot? Would that be a reasonable expectation? |