Harbour Energy (LSE:HBR) — Investor Presentation

0:01 Good morning, and welcome to the HARBOUR ENERGY PLC Investor Presentation. Throughout this recorded meeting, investors will be in listen only mode. Questions are encouraged and can be submitted at any time by the Q and A tab situated in the right hand corner of your screen. Just simply type in your question and press send. Company may not be in a position to answer every question received during the meeting itself. However, the company can review all questions submitted today, and we'll publish responses where appropriate to do so. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Elizabeth Brooks, SVP of Investor Relations at HARBOUR ENERGY. Good morning.

0:31 Morning, Paul, and, thank you for the introduction. And thank you to all of those who have dialed in and are taking the time to learn about, HARBOUR ENERGY. I'm really excited to be here talking to you about our company. So for those of you that don't know you don't know us, we're one of the newer players. We were founded by US private equity firm EIG in 2014 with what was an ambitious and contrarian strategy at that time, which was to build a global independent oil and gas company largely through the acquisition of cash generative producing assets outside of North America. And this was at a time that everyone was focused on US shale. We were disciplined and patient. We could easily have bought 10,000 barrels a day or 15,000 barrels a day of production, but it was important to us, to have a clear route to scale.

1:20 Then in 2017, we started seeing the majors exiting The UK North Sea as they were looking to reallocate their capital to North America. And we made our first acquisition buying a package of assets off Shell for $3,000,000,000. The UK is a well established basin with lots of oil and gas infrastructure in place. And by investing in the acquired assets, we were able to improve our operating efficiency, increase production, add reserves, and extend field life. We then followed the Shell acquisition up with the acquisition of ConocoPhillips in 2019. This acquisition provided us with additional scale in The UK, making us the largest oil and gas producer in the country, which we still are today. It also gave us operatorship of certain key production hubs, which in turn allowed us to increase our operating capabilities and enabled us to realize operational, synergies.

2:15 The Conoco acquisition was followed by Premier Oil, a UK listed oil and gas company with some interesting international assets. Premier had a complementary UK position. They had $4,000,000,000 of UK tax losses, plus some high quality assets in Mexico and Indonesia, which provided a starting point for future diversification. It was always, after all, our intention, never to be just a UK only player. Initially, we thought we would take Premier private, but we saw the storm clouds gathering around oil and gas companies trying to IPO. And we took the opportunity to reverse merge into Premier's listing with that transaction completing in 2021. Since since completing Premier in 2021, we've continued to invest in our portfolio and then also in some of those organic growth opportunities which came along with that merger, further building our development capabilities and project execution skills.

3:17 However, we need to get to where we wanted to, and we would have to execute further m and a, for which we had a very clear criteria. That was to establish material production in at least one other region outside The UK by buying cash generative producing assets, which were accretive to our reserve life, accretive to our margins, and accretive to our free cash flow. Our thinking was that this in turn would improve our credit quality and support competitive shareholder returns over the longer run. We looked at multiple things, and in December 2023, announced the acquisition of a portfolio of assets from Vinciardere for $11,200,000,000, marking our fourth and most transformational acquisition yet. That acquisition completed in September, ahead of schedule, and the asset assets are since safely transferred to HARBOUR.

4:10 While we're only a couple of months in, I would say that integration is progressing as planned, and the expanded portfolio is performing well. Next slide. So this slide takes a look at what our portfolio now looks like having completed the Vinciadera acquisition. Today, we're producing close to 500,000 barrels a day from a number of different countries. The single biggest component of our portfolio in terms of production is Norway. With its low unit operating costs and GHG emissions, stable fiscal regime, and supportive oil and gas business environment, we've long aspired to have a material position in the country, ever since starting HARBOUR, but we struggled to see how we could compete successfully with the incumbent without overpaying.

4:56 However, as a result of how we structured the Vinciadera acquisition and by finding solutions to the various complexities of the deal, we've been able to to secure this Norwegian position in a privately negotiated transaction. We're especially pleased about this as we know that these assets have been coveted by several other companies. And my next largest geography is The UK, which today now accounts for around a third of our production versus 95% before the acquisition. However, it remains a core part of our portfolio and is generating good cash flow. Then in Argentina, where we're partnered with Total, we're producing around 60,000 barrels a day, pretty much all gas, which we're currently selling into the local market. The balance of our production is then coming from Germany, Egypt, Mexico, and Indonesia.

5:46 In addition, I should note that the acquisition also expanded our already strong carbon capture and storage position into new European markets, adding storage licenses of leading positions across UK, Denmark, and Norway. As well as geographical diversification, we have a good mix of liquids and gas with around 40% of our production, in liquids, 40% is European gas, and 20% is non European gas in Argentina, North Africa, and Indonesia. Our liquids are exposed to Brent, which is currently trading at around 70, $70 a barrel, and that compares to European gas prices, which are currently up at around $14 a scuff or $85 a barrel, so materially above where oil prices are today.

6:35 This with OpEx of 13 to $14 a barrel means our margins are robust, we're generating good cash flow. We also have an extensive 2p reserve base of 1,500,000,000 barrels. This includes a pipeline of approved high return short cycle capital projects close to our existing infrastructure, which supports near term production and helps to offset decline. With production up at around 500,000 barrels a day, this translates to around eight years reserve life, which, while an improvement compared to where our reserve life was pre acquisition, it is still a little lower compared to where we'd like like to be. The good news, however, is that we now have a broad and diverse set of potential organic investment opportunities with a 1,800,000,000 boroughs of two c resource.

7:24 This includes high value near infrastructure opportunities in Norway, conventional offshore growth projects in Mexico and Indonesia, and unconventional scalable opportunities in the Vaca Muerta onshore Argentina. And I'll say a bit more about these in a few moments. We're also financially strong. It is not often that you get to complete a multibillion dollar transaction multiple times your market cap and emerge with higher credit ratings, but that's what happened in this case. This is because of the high quality cash generative portfolio required and also because of how we structured the acquisition, which is we reported $4,900,000,000 of investment grade bonds. There was a cash consideration component, which was largely funded from the cash flow generated from the target portfolio between the effective date and the completion date.

8:15 And we issued, equity at a at a 60% premium to where our share price was trading at the time. As a result, we emerged from the acquisition with investment grade credit ratings. Our increased financial strength and visibility, into our cash flow gave us the confidence, at the time of announcement to also announce an increase in our annual dividend from 200,000,000 to 455,000,000 in the year, and we have reconfirmed that post completing the acquisition. At today's share price, that 455,000,000 annual dividend equates to around a 9% yield, so competitive. Turning to the next slide. This slide says a little bit more about our, Tusi resource portfolio.

9:01 So as I said, HARBOUR today has a large and diverse set of growth options through our 1,800,000,000 barriers berries of Tusi resource. That can be broadly categorized into three buckets. Roughly 45% of that two c resource is in high value near infrastructure opportunities in Norway, UK, Germany, and Argentina. It's probably worth highlighting Norway in particular, where we have a really strong track record of exploration and appraisal in and around our existing hubs, and then maturing those two c resource into two p reserves in order to sustain production and cash flow. The new Norway 2c on this chart represents the next wave of those subsea tie in projects coming through the pipeline, and which will help us support production from Norway.

9:50 Then next, around 30% of our 2c resource is in conventional offshore growth projects in Mexico and in Indonesia. In Mexico, we have a 32% interest in the large Zama oil field where we are currently undertaking FEED. Once we completed FEED, we'll then look to tender the major contracts to secure refreshed cost estimates and schedule estimates ahead of taking a potential final investment decision. With net resource to HARBOUR of around a 180,000,000 barrels, Zama has the potential to replace reserves equivalent to over a year's worth of our production. To the south of Zama, we have a 70 operated interest in the Cannes discovery, which we're currently appraising, and we should have the results of that well around the end of this year.

10:41 At a 100,000,000 barrels gross, can once booked has the potential to add almost six months of production to our reserve life. Moving east, in Indonesia, we have just finished off a multi well exploration and appraisal campaign confirming a significant gas play across our Andaman Sea acreage. We'll now take some time together with our partners, McBardland BP, to evaluate the drilling results and options for further exploration and appraisal. In parallel, we'll be working, with our partners to undertake, early phase studies around potential development concepts, including looking at, development concepts targeting the domestic market and pipeline export to Singapore or Malaysia, for example. Finally, around 25% of our two sea resource is in the onshore Vaca Muerta unconventional shale play in Argentina, which is the world's second largest shale gas play and is analogous to the Permian Basin in The US.

11:40 We see huge potent potential here. Through our two licenses, Aguada Petrana Este and Sanroquet, we have around 400,000,000 barrels of net two c booked for the Vaca Muerta as at yet as at year end 2023 with an estimated 240 square kilometers, net to harbor of drillable acreage. The opportunity here is really to accelerate the development of our Vaca Muerta position, which is currently constrained by domestic market capacity, by establishing an export line and accessing global LNG markets.

12:16 So in summary, we have significant organic, opportunities within our portfolio, but we'll continue to be very disciplined in how we allocate our capital, prioritizing those projects which further strengthen and enhance our portfolio and support our strategic objectives, such as expanding our reserve life, improving our margins, supporting our credit ratings, while also balancing our other other capital allocation priorities. And with that, let's sort of take a look at our our capital allocation priorities. I think capital allocation is critical for how oil and gas companies create value. We are currently in the midst of preparing our 2025 budget and long range plan with a particular focus on capital allocation.

13:02 And while we'll say more about this at our capital markets event in the first half of next year, at the highest level, our priorities are unchanged. That is, first and foremost, is safeguarding our balance sheet and maintaining our investment grade credit quality. Achieving investment grade has long been the goal of ours ever since we founded the company back in 2014, and we've worked hard to get here. We believe that it's only going to get harder for oil and gas companies to access financing, and being investment grade somewhat future proofs our strategy, allowing us stable access to debt markets and more flexible financing terms. Second, we'll continue to invest in our asset base to ensure we have a robust and resilient portfolio. We now have a much wider set of organic investment opportunities, which should enable high grading of our portfolio with investment opportunities in UK having to compete for capital with opportunities in Norway and Argentina, for example.

14:01 In addition, m and a continues to be a core part of our strategy as we look to further strengthen and enhance the portfolio. Instead of relying on m and a, which is where we started from and have done in the past, it will likely now be a combination of both m and a and progressing our organic investment opportunities. At the same time, we'll continue to actively manage our portfolio, divesting assets which have become noncore to ensure that our capital and resources are deployed in line with our strategy.

14:29 And finally, our third capital allocation priority is shareholder returns. Well, further detail of our shareholder returns policy will be provided as at our CMD. At the highest level, our approach is unchanged. That is we'll look to set our dividend at a level that is competitive and sustainable through the price cycle, and that will form the foundation of our shareholder returns policy. Then, like we have done in the past, we'll look to return any excess cash to shareholders via share buybacks. And we have a good track record when it comes to capital allocation. Since 2021, when we first listed HARBOUR through the completion of the Premier acquisition, we have continued to invest in our portfolio. We've returned over $1,000,000,000 to shareholders, including buying back 17% of our issued share capital, and we have paid down $2,900,000,000 of debt, which allowed us the flexibility to announce the transformational venture there acquisition at the end of last year.

15:29 This next slide summarizes, a performance year to date as per our November trading update and also sets out the guidance we have given to the market. 2024 is a little bit of a strange year as in terms of financial reporting, our numbers will reflect twelve months of legacy HARBOUR and four months contribution from the Vintageldea portfolio. And it is on this basis, a reported basis, that we have also provided guidance for 2024. However, we also show here on this slide what the pro form a equivalent metrics would be, have the acquisition completed at the start of twenty twenty four in order to give you a sense of the potential of the portfolio. Turning to production first, at our trading update earlier this month, we were able to narrow guidance for the full, for the full year upwards to 255 to 265,000

16:24 barrels a day, and this followed the completion of significant maintenance programs in The UK and in Norway, and also having brought on stream, new wells and projects, including in The UK and also in Argentina, where we started up production from the Phoenix project. Operating costs averaged $19.5 a barrel to the end of September, and we reiterated full year guidance of 16 to $17 a barrel, with the reduction reflecting materially higher UK volumes in the fourth quarter and the addition of the lower cost Vinciardea portfolio. As you can see, full year operating costs on a pro form a basis is expected to be in the range of 13 to $14 a barrel. In terms of, total capital expenditure, again, on a reported basis, so twelve months legacy HARBOUR, four months VINCIAR DEA portfolio, we're expecting capital expenditure to be around $1,800,000,000 for 2024, which on a pro form a basis equates to 2,700,000,000.

17:27 The 2,700,000,000 of CapEx simply reflects the adding together the two portfolio of the two portfolios. When it comes to setting CapEx for next year, we would hope that it would be lower than this year's reflecting some high grading of the portfolio. The final thing to note on this slide is that the expanded portfolio is generating material free cash flow. Pro form a free cash flow to the end of September was $1,100,000,000. This is before shareholder distributions and one off related acquisition costs.

17:59 And turning to what I think is my my last slide. As a result of the acquisition of the VINCI Adair portfolio, HARBOUR has entered a new peer group, which includes some of the long established US independent oil and gas companies as well as the larger Norwegian independents. However, as a large scale but more global producer with a balance of oil and gas and organic growth options, but also a core competency in executing value, accretive m and a, and a strong track record in returning to capital returning capital to shareholders, we believe we present something of a unique investment proposition to our investors. So to wrap up, the expanded portfolio is performing well, achieving production rates of up to half a million barrels a day in October and generating material free cash flow.

18:46 We have a strong pipeline of high value, short cycle infrastructure led developments to help offset natural decline, while at the same time, a significant and diverse set of organic growth options within our 1,800,000,000

19:00 barrels of 2C resource, which will help support future production and reserves replacement. All of this, together with our continued disciplined capital allocation and investment grade and commitment to investment grade credit ratings means that we're well positioned and excited for the future. And with that, I think I'll hand back to you, Paul, for for q and Thank you very much indeed for the presentation. Ladies and gentlemen, do please continue to submit your questions just using that Q and A tab situated in the right hand corner of your screen. But just now the team take a few moments to review those questions. So Mr. A, I'd like to remind you the recording of the presentation along with a copy of the slides and the published Q and A can be accessed via investor dashboard. Elizabeth, if I may just pop back your camera on. Bear with me one second. There we go. Lovely. Thank you very much indeed.

19:47 As you can see, we have received a number of questions both pre submitted and throughout today's presentation. And thank you to all the investors who've submitted those. Perhaps I may start with the first one here is I need to touch on the presentation. Can you tell us how the integration of the Vinters Ordea business is going? Yep. Sure, Paul. No no problem. So we only completed the Vinciadere acquisition in September. So it's only been a couple of months. But so far, integration is going well and is progressing as planned. It's probably worth noting that the structure of the acquisition also lends it how we structure the acquisition also lends itself to a a smooth integration process, if you like, and that is it was a carve out acquisition. So we were buying the business units from and not the corporate headquarters. So the business units were rewired from headquarters into the HARBOUR ENERGY headquarters here in London.

20:47 And what that means is that we've got an organization in place already, set up for for the future. We don't have to do any rationalization. And the other thing to note is that there is very little overlap between the HARBOUR portfolio and the VINCI Adaire portfolio, which again, makes itself, lends itself to an easier process. I mean, there is a huge amount of work going on, in the background as you can imagine, and as a result of not, taking on the sort of the corporate function if you like from VINCI Adaire portfolio. We do have some transition services agreements in place, with to provide support to to our business going forward. And I think the other thing to note is that we have a really good experienced team here within HARBOUR to help us with who are leading the integration.

21:36 So Philip Whitaker, who headed it up,

21:40 was on the integration team when we did the Shell and Condeco and indeed Premier deals. So, yeah, so far it is going well, and there's been been no no surprises. Fantastic. Thank you very much indeed. We've had a number of questions on m and a, which is, I guess, not a surprise, but let me just take one of them, for example, kind of encapsulates most of them. What's next for HARBOUR? Further m and a opportunities and are there any areas you plan to exit? Yeah. I mean, I guess sort of m and a is in our in our DNA. It's how we got to where we are today, and it remains a core part of our our strategy. I think with each acquisition that that we have done, the strategic criteria that we're looking for when it comes to m and a evolves and changes slightly.

22:30 So, up until the point of the Vinciardea acquisition, key for us was getting some scale and diversity into our portfolio and also strengthening, our balance sheet and getting to to investment grade credit rating. Arguably, we now have some sufficient scale and and geographical diversity, and, also, we're committed now to to protecting that investment grade. So anything we do has got to be supportive of that that credit rating. But as I say, we probably got sufficient scale and diversity now, so it's more about looking to strengthen and enhance our portfolio by adding high quality assets to address perhaps some of the soft spots, in our business today. So where are those?

23:15 I think it's probably reserve life. We'll look to m and a to, further enhance our reserve life. Perhaps a bit more of a balance of oil and gas Pre today, we're about 60% gas, 40% liquids. Might, at least in the near term, prefer to be a bit more fifty fifty oil gas. We'd also like a little bit more operational control. Perhaps one of the sort of boxes that the venture there acquisition didn't check was operational control, it being a largely non operated portfolio. So any sort of acquisition we do in the future might look to add more operational control to our portfolio. And, again, as I said, any acquisition we do has to be sort of supportive of our investment grade quality and and protect our margins. And I'd also say that we do now have a significant and diverse set of organic growth options.

24:08 And so a key priority really for us at the moment is to get after that inventory of undeveloped resource and to get that into two p reserves, to further strengthen and and enhance our portfolio. So instead of it just being sort of m and a led growth, which is where we come from, I think it's going to be a bit more, a combination of of both m and a and, organic, investment opportunities going forward. Fantastic. Thank you. Oh, sorry. Well, you had another one about any areas which you plan to exit. Yeah. I was gonna say just just going through that. Yeah. If you if you could build on that as well, I know it's something that you've talked about as far as the strategy, but if there is anything you can say, can appreciate you're probably, you know, tied in some areas. But if you could could give a little bit more color, that'll be great.

24:56 Yeah. I mean, I think, you know, we are in a number of geographies today, probably, I think, to 10 different countries. Mean, I what is important for us is that we have we're either at scale in the countries and where we're active, or we can see a clear route to getting to scale. And where we don't see that, then we'll look to exit. So for example, we've got an ongoing process at the moment to sell our Vietnam business. And while so Vietnam is still producing around 5,000 barrels a day, is generating cash flow. It's no longer material in our portfolio, and we see no route to getting to scale either through organic investment or through m and a. So Vietnam, for example, is one of the areas that we look to exit. But that that actually came from the legacy HARBOUR portfolio in terms of the the Vintage Sardea portfolio.

25:47 We'll take our time to go through the various different, sort of business units and and cut sort of assets. I think if you if you look at the portfolio as a whole, you could, you know, sort of you could look at some of the countries in in North Africa and say that we're not sort of producing at scale there. For example, Algeria, is producing sort of less than 10,000 barrels a day. However, Algeria is a country that is very supportive of of of oil and gas, we're seeing the major starting to return to Algeria, and we see they're having their first, licensing round early next year. So we'll take our time to decide whether or not that's a place we want to be, going forward. Fantastic. And I guess the next question kind of follows on that theme really, and we've had a couple of similar vein really. Are you gonna stay in The UK given that the tax regime and that we're currently under?

26:41 Yeah. I think so as I said earlier today, you know, as a result of the Vinciadero acquisition, The U you know, our UK has gone from accounting from over 95% of our production to a third of our production today. But that said, it still remains a core part of our portfolio and is generating, good cash flow. What is apparent is now that it is now part of a much broader portfolio, a global portfolio, and it's going to have to compete for capital with opportunities elsewhere, and in opportunities in con with and with opportunities in countries which have more supportive and stable fiscal regimes. I think in terms of the changes to The UK and fiscal regimes for oil and gas, yes, it's been very unstable. I think we've had five changes to it in the last couple of years.

27:34 But most recently in the autumn budget, I would say that it was probably the least worst outcome, and we had already positioned the portfolio for for that. So, yeah, I think as it's that and and how we position the portfolio is that we've accelerated CapEx into 2024, where we had some certainty over the fiscal stability and we've, fiscal terms, and we've also got good flexibility into our supply chain. So in summary, yeah, going going forward, you know, The UK remains a core part of our business, but it is going to have to compete for capital with opportunities elsewhere in the portfolio. Fantastic. We've got a number of questions here, Mark, Ash, Barry. Thank you for those as well.

28:19 All along the same thing, so I'll I'll just cut it to a very short statement. Do you have plans for a US listing? This this is something, that perhaps won't surprise you that we get asked in every single investor meeting that we have. The short answer is is no. Today, 75% of our production comes from Europe. The UK is still accounting for a third of our production, and that our view is that, well, our center of gravity is in Europe. It makes sense to be listed, in The UK. Today, we have no presence in The US, and so our view our view is that a US listing wouldn't wouldn't make sense right now. I mean, we see the numbers and the difference in valuations and the higher multiples that US companies, US oil and gas companies, obtained compared to UK oil and gas companies, but we don't think just moving, our listing from The UK to The US would be would be the silver bullet.

29:18 Fantastic. And perhaps one last question, if I may. You've mentioned Argentina as a material opportunity. Can you give us a bit more color on the operations there? Yeah. Of course. I mean, today, we're producing around 60,000 barrels a day from Argentina, pretty much all gas. We're one of the country's largest producers, and we're and we're partnered with Total. We have three licenses there. We have an interest in the conventional off shore CMA one license to the south offshore Tierra Del Fuego, and that that's currently producing around 50,000 barrels a day net to harbor and account for around 15% of Argentina's natural gas. As mentioned, production from the Phoenix field, which is a platform and multi wide type a multi well tie back to existing infrastructure started up in September ahead of schedule, helping to increase production from that CMA one license. And we also see significant running room in and around that license for further, subsea tiebacks and and development.

30:25 We then have two onshore licenses in the Nekken Province to the north, The Aguada Pichana SD license, which is today producing around 13,000 barrels a day of gas net to harbor from the unconventional Vaca Muerta play. And since 2017, we've bought on around 70 wells on production, and we're just about to start another multi pad 10 well program there. We also have an interest in the Sanroque, license, which is in the oil window. That's producing around 3,000 barrels a day, but from the conventional concession, while we look to align with our partners ahead of developing the unconventional resource there.

31:15 I think so as I mentioned, we we see we do see huge potential in the Vaca Muerta. It's the second largest shale gas resource, and it's competitive on a global stage and analogous to the Permian Basin. At the moment, all of our vacuum water gas is sold into local markets, and we're constrained by the so the offtake there and the limitations of of that market being pretty much saturated. So the opportunity as we see it is if we can access global LNG markets and realize international prices for our gas rather than than domestic prices. And probably, it's also worth noting that in terms of the macro and and political environment, it's all all going in the right direction under Malay.

32:01 The new government is supportive of foreign investment and has the ambition to become, a net oil and gas exporter. They recently, they also recently passed some new legislation, in the summer known as RIGI, which provides fiscal and regulatory incentives to, large oil and gas projects. I think so so in summary, we're we're excited about the potential of Argentina, but we're trying not to get too far ahead of ourselves, while keeping our eye on the price. Fantastic. Thank you, Elizabeth, for answering those questions from investors. And, of course, the company can review all questions submitted today, we're published responses where appropriate to do so on the investor meet company platform. Just before redirecting investors to provide you their feedback, particularly important to you and the company, Elizabeth, may I just ask you for a few closing comments, please?

32:53 Yep. Sure. I mean, in in summary, as I said, our our expanded global portfolio is performing well. We achieved production rates of over 500,000 $1,000,000,000 $500,000 per day in October, generating material cash flow. And we have multiple high return organic investment opportunities. I think these together with our disciplined capital allocation and investment grade credit ratings mean we're well positioned and and excited for the future. In terms of our next update to the market, we have a trading update scheduled for January. We'll be looking to provide guidance for 2025, and then we'll be holding a capital markets event at some point in the first half of next year. Fantastic.

33:39 Elizabeth, thanks again for updating investors today. Can I please ask investors not to close the session as we automatically redirected to provide your feedback in order the team can better understand your views and expectations? This will only take a few moments to complete, and I know it's greatly valued by the company. On behalf of Elizabeth and HARBOUR ENERGY PLC, we'd like to thank you for attending today's presentation. That concludes today's session, and good morning to you all.