Harbour Energy (LSE:HBR) — Update following Half Year Results

0:01 Good morning, and welcome to the HARBOUR ENERGY PLC investor update following the half year results. Throughout this recorded meeting, investors will be in listen only mode. Questions are encouraged, they can be submitted at any time by the q and a tab situated on your screen. Simply type in your questions and press send. The company may not be in a position to answer every question received in the meeting itself, but the company can view all the questions submitted today and publish responses, but it's appropriate to do so. Before we begin, I'd like to make the following poll. I'd now like to run a short video before we begin. Since 2014, HARBOUR ENERGY has built one of the world's largest and most geographically diverse independent oil and gas companies. We've driven our growth through a strong focus, aiming high and delivering value for all our stakeholders.

0:56 From fueling transport, powering industry, and for heating our homes, our products provide the energy the world needs safely, efficiently, and responsibly. We're passionate about what we do, and we'll keep driving progress. We rise to the challenge and use our deep industry expertise to make technological advances. We care for our communities and are committed to managing the environmental impact of our operations. We're also involved in several European c o two transportation and storage projects, which could help reduce carbon emissions. And we will continue strengthening and enhancing our portfolio. From The Americas to North Africa and Europe to Southeast Asia, we work together to help fuel the world.

1:57 I'd now like to hand you over to head of investor relations, Elizabeth Brooks. Good morning. Great. Thanks, Alessandro, and good morning, everybody. It's great to be here today presenting to you all. So HARBOUR ENERGY, we're a relatively new company, so you may not all be familiar with us. We were founded, by US private equity firm EIG back in 2014. And since then, we've grown rapidly largely through m and a. And as a result of that, today, we're one of the world's largest global independent oil and gas companies. In terms of peers, we compare ourselves to likes of APA, Murphy, AKABOUR and Woodside. And as you can see from the chart, yep, here, we completed the venture acquisition just over a year ago.

2:51 So that marked our fourth and most transformational transaction to date. It added scale, taking our production from around a 160,000 barrels a day to over 450,000 barrels. It also added material diversification, including large production and development, assets in Norway. With its low operating costs, low GHG intensity, established infrastructure, significant but undeveloped TC resource base, and a supportive and stable fiscal and regulatory environment, Norway is a country that we've long aspired to, enter into in a material way. And through the Vinciardea acquisition, we were able to achieve this. The Vinciardero acquisition also added material growth opportunities in Argentina and Mexico.

3:38 And as a result, today, we have around 3,000,000,000 barrels of two p reserves and two c resources underpinning long term cash flow well beyond 2030. The Vinci Adair acquisition also extended our reserve life. It's improved our margins, and it strengthened our financial position, which resulted in us achieving investment grade credit ratings, which is another long term, held goal of ours. And all of this, in turn, supported increased shareholder returns, which is a key focus for us here at HARBOUR. If we turn to the next slide, please. So where where are we today? As I said, it's a little over a year ago since we completed the Vintage Addera acquisition. And since then, integration has gone extremely smoothly.

4:24 This, along with the expanded portfolio performing well and excellent operational execution, was reflected in a strong set of half year results that we announced last month. In particular, we improved our 2025 production guidance to 460,000 to 475,000 barrels a day, and we lowered our 2025 OpEx outlook to $13.5 a bury. And with Brent and European gas prices around $65 a bury today, our operating margins are strong. We also announced in our half year results that our capital program was in on track, including our operated Norwegian projects. And we've also matured our growth projects in Mexico and Argentina.

5:10 As well as this, in the first half, we further strengthened our financial position, prefunding all of our maturities through to 2028, and we materially reduced our net debt by $900,000,000. In addition, we were able to upgrade our 2025 free cash flow outlook by a $100,000,000 to $1,000,000,000. This progress and strong performance meant that we were confident to announce a $100,000,000 buyback building on our track record of returning excess cash flow to shareholders. So if you take into account our 455,000,000 annual dividend, which forms the foundation of our shareholder returns policy, then our total expected total shareholder returns in 2025 is around $555,000,000.

5:57 So another way of thinking of it is we expect to generate around a billion dollars of free cash flow this year. A little over half of that, we're returning to shareholders, with the remaining half going towards debt reduction. If we turn to the next slide, please. Well, we have a global portfolio today with a presence in 10 countries. It's really four countries that drive our results, The UK, Norway, Argentina, and Mexico. As you can see from the chart there on the left, these four countries account for 80% of our company, whichever way you cut it. So production, cash flow, reserves, or resources. And I think over the next few slides, we'll now dig into each of these countries in turn.

6:42 So turning to The UK first on the next slide. So The UK today is an important part of our portfolio. It accounts for a third of our production and is generating material cash flow. Here, we're doing everything we can in what is a difficult fiscal environment to keep free cash flow positive for as long as possible. And the team are doing a great job at improving operating efficiency, driving down costs, and executing short payback opportunities in and around our existed existing operated hubs. A really good example of this is at Jarea, which is our largest UK hub. It's now producing at rates not seen since 2013, and that's largely driven by the strong performance from the new wells that we have brought on stream.

7:30 This includes the Joslyn South well, which came online in March, just three months after discovery. The UK team also delivered best in class drilling performance at J area. And this is all against, as I said, a very challenging fiscal and regulatory environment, which is making it increasingly difficult for opportunities in The UK to compete for capital within our global portfolio. And as a result, we do expect our investment in The UK to reduce over time, which will result in a managed decline rate of around 10 to 15% per annum. Although our team are working really hard to try and shallow that. If we turn to the next slide, which takes a look at our portfolio in Norway.

8:16 So here, Norway produced a 170,000 barrels a day in the first half and is our largest producing country today, albeit it's getting healthy competition from The UK. Here in Norway, the team have a strong track record of infrastructure led exploration and development of discoveries through subsea tiebacks, and this is really what our business model is in Norway. In the first half, we bought onstream Maria phase two, which which is a four well tieback to existing infrastructure in the Maria field. And we also have another five developments underway, three of which are due onstream next year, including our operator Davalen North development, and two are due on stream in 2027. We also have a number of early stage projects behind these, which are targeting a final investment decision in the 2026, 2027 time frame.

9:07 In addition, we continue to explore in Norway, and we've got two exploration well plat two exploration wells planned for the second half of this year, including our operators Camilla North operated exploration well, which in the success case could be tied back to the Vega Goya infrastructure. And overall, we have a really good exploration track record in Norway, which we're proud of. We were recently ranked number one explorer in the country over the past five years. So in summary, in Norway, we have a pipeline of projects, which together with infill drilling campaigns, help support material production and free cash flow through to the end of the decade.

9:49 Turning to the next slide, Argentina. So from the most northern part of our portfolio to the southernmost part of our portfolio, we're currently producing between seventy and eighty thousand barrels a day from Argentina. Most of that is coming from our conventional offshore gas fields in our CMA one license in the South in the Tierra del Fregu province. We recently completed the Phoenix project here, and that's supporting production from this license. In addition, we have a series of predevelopments behind Phoenix, which we think can keep the plant at capacity, so producing over 40,000 barrels a day through to twenty forty. However, perhaps the most exciting part of our Argentina portfolio is that we have a significant position in the huge world class unconventional Vaca Muerta play to the north.

10:38 Specifically, we have around a 24% interest in two of the largest licenses in the Vaca Muerta, Sanroque, which is in the oil window, and the Guada Pucana Este or Ape as we call it, which is in the gas window. At Sanroque, following the completion of a four well pilot program, we're in the process of applying for the unconventional license. This will allow us to start developing the unconventional oil play towards the end of next year. At APA, we're currently producing around 20,000 barrels a day from 80 wells, and we've booked around 500,000,000 barrels of two p reserves and two c resource. However, with line of sight to 1,300 locations, we see the potential to book an additional 500,000,000 barrels of resource not already on our books.

11:26 At the moment, production is constrained by market offtake. What we really need to accelerate the development of our position in the Vaca Muerta is access to international gas markets. And this is why we're participating in the Southern LNG project, which is a 6,000,000 tonne per annum phased LNG project. We, along with our partners, took final investment decision on this project in the first half. We have a 15% participation interest in the project, and we're partnered with Golar who are providing the FLNG vessels and also local partners, Pan America, Pampa, and YPF. Our share of the total CapEx is around a $100,000,000, and our gas supply is estimated to be around 30,000 barrels a day once the project is at capacity.

12:15 We are expecting the project to start up from the first vessel towards the end of twenty twenty seven with production from the second vessel targeted for around the end of twenty twenty eight. So very exciting opportunity in Argentina. If we turn to to Mexico, so the fourth key country. In Mexico, production today is around 10,000 barrels a day. So the real price lies in our interest in two large oil discoveries, Zama and Can. 750,000,000 barrels, Zama is Mexico's largest undeveloped discovery and has been declared a project of national and strategic importance. In Mexico, they have a target of meeting 1,800,000 barrels a day of oil production, something that they're waifly short of today. So Zama is a really important project to Mexico, and it's also an important project to HARBOUR.

13:14 We have a 32% interest in Zama, and we're working together with our partners, including the operator Pemex, to accelerate the timeline to a final investment decision and to first oil. This includes looking into the potential for a phased development involving an FPSO. Then at Cannes, which is to the Southwest of Zama, we have a operated 70% interest. We recently successfully appraised the Cannes oil field, which resulted in us upgrading our resource estimates by 50 to a 150,000,000 barrels gross or a 100,000,000 barrels net HARBOUR share. We're now working as efficiently as possible through concept selection with a view to entering FEED in the first quarter of next year and taking a final investment decision on CAN as early as the end of twenty twenty six.

14:05 Together, Zama and CAN could yield two p reserves equivalent to over two years worth of our current production. So it's a really big opportunity for HARBOUR. If we turn to the next slide now, please. This slide sets out our CapEx profile. At our half year results in August, we reiterated our 2025 CapEx guidance of 2.4 to $2,500,000,000. Now the bulk of this CapEx today is being allocated to high value short cycle opportunities, converting our 2P reserves into production and cash flow. Looking ahead, and as you can see from this chart, we expect our total CapEx to be materially lower from 2026. Indeed, we think 1,700,000,000 to $2,000,000,000 of CapEx is a good target to have given the opportunity set we have. Although with 3,000,000,000 boroughs of two p reserves and two c resources, we're not opportunity constrained.

15:04 Rather, it's more about being disciplined in our capital allocation and forcing us to high grade our investment choices and focus on our most competitive projects as we look to increase our free cash flow margins over time. Indeed, we can't do everything, and we will continue to actively manage our portfolio. If we turn again to the next slide, please. As you can see here, the acquisitions of Wintershall DARE portfolio not only resulted in a step up in the scale of our production, but also in the longevity of our production. At a high level, we expect production to average around 450,000 barrels a day over the next three years.

15:51 While we expect the top line to remain broadly flattish, this masks the changing production composition, which should lead to margin expansion over time, all things being equal. With new high margin production in Norway and Argentina replacing declining high higher cost UK production. Then in the longer term, we see additional support coming from, for example, Mexico and or Indonesia from 2030. As a result, we believe we can keep production and more over cash flow at material levels well into the next decade, supported by our twenty year 2P reserve and 2C resource life. We also see potential for additional volumes not shown here from exploration success and or m and a.

16:43 Then in terms of capital allocation, which is set out on the on the next slide, so if if we could yeah. Perfect. So we set out our three year capital allocation plans to 2027 back in March at our capital markets update.

17:01 As I just mentioned, we expect production to average around 450,000 barrels a day over the next three years. We're also confident that we can maintain our unit operating costs at below $15 a bury. Then we expect total CapEx to reduce to less than $2,000,000,000 from 2026 as we continue to high grade our capital program. And all of this supports material free cash flow of $2,000,000,000 $4,000,000,000 over that three year period at a range of oil and gas prices. And as a result, we are confident that we can continue to deliver on all of our capital allocation priorities. That is maintaining an investment grade balance sheet, ensuring a robust and resilient portfolio, and delivering competitive shareholder returns, including the potential for additional returns via share buybacks.

17:52 So in in summary, turning, I think, to my last slide, why why HARBOUR ENERGY? We have a really strong track record of strategic, operational, and financial delivery. We benefit from a large scale and diverse cash generative production base, which thanks to a significant twenty year organic inventory we can maintain through to 2030 with upside from m and a and or exploration success.

18:20 We're very cash flow focused with a track record of returning cash to shareholders, and we're led by a world class team, which positions us well for the future. And with that, I think I will that's the end of the presentation and open it up to q and a. That's great. Well, Elizabeth, thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions. You can do so just by using the q and a tab that's situated in the top right corner of your screen. We have had a number of questions both pre submitted and throughout today's live presentation. And I'll start with the first one here, reads as follows. Given decline in The UK, what is replacing production and FCF in the near term? Yep. So what's replacing declining UK production? So I think, as I said, you know, The UK production today is still a material part of our portfolio, but it is struggling to compete for investment given other opportunities that we have in our portfolio elsewhere.

19:24 So if you look in 2020 last year, we invested around a billion dollars of CapEx in The UK. This year, we're investing around $700,000,000. And then from 2026, we're investing around $500,000,000, and that will result in a managed production decline rate of around 10 to 15% per year. So what is what is replacing that?

19:46 Well, what is replacing that in the near term is higher margin production in Argentina and Norway coming on stream. We have a pipeline of subsea projects, for example, in Norway that I just spoke about. And then we've also got the Vaca Muerta developments in Argentina. And then longer term, we have our growth projects in Mexico and Indonesia. So, again, as I said, while we've got sort of we expect production to be flattish to low single digit decline over time, what that's masking is the improving change into the underlying mix of our production. It's great. Thanks very much. Turning to the next question we have here. What's your expectations re EPL? When are we likely to the outcome of the recent consultation?

20:31 And would a positive change impact your plans there? Yeah. Thank you. Good good question. So for those of you that aren't aware, the EPL is a windfall tax, here in in The UK. That windfall tax is due to last until '20, '30. The UK government initiated a consultation with industry on what an appropriate fiscal regime would look like beyond 2030. There's a recognition by government that as currently designed, the windfall tax is not fit for purpose. And that's because the windfall tax is a 38% tax, which taxes all of our profit. So it's not a windfall tax. In the consultation, industry, and I think government are are aligned that we should be looking at introducing a profit based, mechanism or a revenue based mechanism for the windfall tax, which would only tax the the windfall profit that is made above certain oil and gas prices.

21:37 Industry, I think, put in, that price threshold at around a $100 a barrel. So we have a good level of confidence that whatever is introduced beyond 2030 will be an improvement on what we face today. However, our message to government is why wait until 2030 to introduce, you know, a a properly designed windfall tax?

22:03 Because by the time you get to 2030, you won't have an oil and gas industry to tax. While we, you know, the sort of the mood music, if you like, in the media and and then the public domain has been improving. The fact remains that the government still needs the revenue. And so we don't have what we don't have a high degree of confidence in is that anything will change in terms of the tax regime ahead of 2030. We expect in the budget and the autumn statement, which I think is due to be announced on the November 26 for for the government to say what you know, to set out what they're expecting the new regime to be from 2030. And we'll see whether or not there's any changes to be made ahead of them.

22:55 That's great. Thank you very much, Elizabeth. Another question here from an investor. How will you replace reserves, key projects? Yeah. So we have I mean, I guess, today, we have reserves of around 1,250,000,000 berries, which is a reserve life of around seven years, so quite short. The good news here, though, is that we have a significant and diverse two c resource base of 1,900,000,000 berries. So if you take into account our two p and two c reserves and resources, we have a reserve and resource life of around nineteen years. So we have a healthy inventory of organic options. And those two c resources, if you like, broadly fall into three buckets.

23:45 The first bucket is high return, short cycle, conventional opportunities close to existing infrastructure. So in places like Norway, The UK, Argentina. The second bucket is, we have some 600,000,000 barrels of two c resource, in offshore conventional growth projects in places like Mexico and Indonesia. So Zama alone would replace a year's worth of our production, for example. And Zama and Cannes, I just mentioned in the presentation, together could replace over two years worth of our production. We also have some significant discoveries in Indonesia, in the Andaman Sea, and we also have our tuna project. So we have a number of material growth projects that would help replace reserves.

24:40 And then, of course, the final bucket is the scalable unconventional opportunity that we have in the Vaca Muerta play onshore Argentina. And as I mentioned, we have interest here based in the oil and gas window.

24:54 And here with two sort of back and work position, we have years of worth of drilling inventory with hundreds of millions of barrels not yet booked on our on our resources. So, again, I think we have, if you like, almost we're we're certainly not opportunity constrained, and it's almost going to be a matter of deciding which projects we're going to proceed with and which ones we're not. And then on top of the organic opportunity set, we, of course, still have the m and a. It's it's still a core m and a is still a core capability within HARBOUR. Perfect. Thank you very much. Another question here from an investor. Recent elections in Argentina have not gone related way. How concerned are you?

25:42 Would an exit for the party mean economic progress made to date? And with what implications would this have for oil and gas in the country?

25:53 Yeah. I mean, I think we were also a little skeptical with regards to Argentina, to be to be honest. Unlike Norway or, say, you know, Gulf Of Mexico, it was never a target geography for HARBOUR prior to the acquisition. But it's probably the country that has surprised us most to the upside since completing the deal. And it does look like we happen to get into Argentina just at the right time and as a good valuation, especially when you look at some of the recent transactions that have been done. I think the other point that is important to make is that the quality of the resource there is real. There's been enough wells drilled in the to evidence this, and the quality of of of the resource and the reservoir is equivalent to your typical Permian acreage.

26:45 Yes. We we did see, of course, the recent Buenos Aires provincial election outcome. But I think what you have to remember is that in Argentina, there is strong, broad political support across all parties for oil and gas and and also society at large.

27:04 And and and that supports not least because of the difference that oil and gas can and is making to the country from, an export angle, from an economic growth point of view, from jobs, from infrastructure, etcetera. And it's and it's well understood, I think, by all what oil and gas can do for the country. And it's got to the point and there's such good momentum where it's almost become irreversible. So it's almost like what happened with the onshore shell in The US. At the beginning, people said that, you know, you have to stop the fracking. We need to shut it down. And then when Biden came in, he didn't touch it because it was increasing exports. It was supporting economic growth, it was making The US more competitive. So I think, you know, it's it's got to that point where in Argentina, there's a good momentum behind sort of developing the oil and gas. And, again, as I said, people can see what it's doing for the country.

28:03 Think the other point to note is we're not betting the farm on Argentina, so to speak. We're only spending at most, including our investment in Southern Energy, sort of 200,000,000 to $300,000,000 a year in Argentina, and it's scalable production that you can turn

28:21 off and and on. It's not like Zama or Cannes where once you've taken the final investment decision, you you're sort of committed to a big project. You're only sort of FID ing, if you like, the next batch of wells to be drilled. It's not like we're having to build sort of massive new facilities. So I think in summary, yes, you know, we are trying to sort of keep our not be naive and keep our eyes eyes open, but we are optimistic for for Argentina. Perfect. That's great. Another question we have here. What's your plans for further m and a slash portfolio rationalization? Yeah. I mean, as I said, so m and a is how how we've built HARBOUR to date. I mean, it's incredible to think that sort of only ten years ago, we were producing nothing, and today, we're producing almost half a million barrels of oil a day.

29:19 And and m and a remained, and that's been through m and a, and it remains a core part of our strategy. And even with the transaction, you know, we're not at the endpoint of where we want to get to. Our portfolio still remains work in progress. Now it may be that, you know, we do now have a significant organic inventory through that 1,900,000,000 berries of two c resource that I mentioned. So we don't have to rely on m and a to get to where we want to get to going forward, but rather we can use m and a to strengthen and enhance our portfolio. So it may be that we want to increase our operational control, for example, in a geography that we like, or we might want to make our production more evenly oil gas balanced.

30:05 So we'll continue to look at look at m and a opportunities. But, again, it has to compete for capital. And importantly, it has to be supportive of our margins, of our credit ratings, and of our shareholder returns strategy. In terms of sort of portfolio management, and and we say sort of active you know, we continue to actively manage our portfolio. We recently, completed the divestment of Vietnam, and we continue to look at our our portfolio and where we are in countries where we don't see a path to scale or where they're struggling to compete for capital, then, yes, they they do become a a potential divestment, candidate, as we continue to ensure that our resources, our capital, our people, are directed to the best opportunities within our portfolio that will drive margin expansion over time.

31:07 Thank you very much. What are BASF's plans? Are they participating in this buyback, and when do you expect them to exit? Yes. It'd be a BASF are a significant shareholder in HARBOUR today. They have around 46, 47% of our ordinary shares. They have long stated that they wish to exit oil and gas. And, actually, the sale of the Windshutt portfolio to HARBOUR sort of marked. They sort claim victory with to their shareholders of achieving that with the sale of the portfolio to us. They still they have an investment in us.

31:53 And how they describe that when speaking to their shareholders is that they see it as a financial investment, which, they're in no hurry to monetize. Rather, they'll look to do so in a way that maximizes value for their their shareholders. In terms of whether they're participating in the buyback, we should note that support for the buyback was unanimous at our board, and BASF have two appointed directors on our board. The 100,000,000 buyback is being deployed via an on market buyback, so we're not buying back directly off BASF. However, we understand from speaking to BSF and also from looking at our share register that they will look to maintain their percentage ownership in HARBOUR at current levels, which means that they are seeking you know, they are selling down a small amount of their shares as the program is executed to keep their presenters holding in HARBOUR whole.

32:47 And that that is indeed to what what we're seeing. Thanks very much. And the final question we have here, what's your expectations for SCF this year and going forward? Yep. So as I said in our half year results, we once again upgraded our free cash flow outlook for 2025 by a $100,000,000 to a billion dollars. So for 2025, we expect to generate around a billion dollars of free cash flow, assuming commodity prices of $68 Brent and $12.7 a scuff, for European gas. Going forward, what we said is we expect to be able to continue to keep production and cash flow at material levels.

33:37 And that's our capital markets update. For example, in March, we said that between 2025 and 2027, we expected to generate between two and four billion dollars of free cash flow at a range of of commodity prices. And we remain on track to do that, and we remain confident that we can continue to deliver against our capital allocation priorities. Okay. That's great. Well, thank you very much for answering those questions you can from investors. Of course, the company can review all the questions that have been submitted today, we will publish the response out on the investor meet company platform. But just before redirecting investors, provide you with their feedback, it's important to the company. Elizabeth, could I just ask you for a few closing comments?

34:23 Yeah. I think it's probably just worth reiterating what's what's on this slide actually, which is, you know, why HARBOUR ENERGY. I think it's, you know, as I said, we have a really strong track record of strategic operational and financial delivery. We benefit from a large scale and diverse cash generative production base. We have a significant inventory of organic opportunities, which enable enable us to keep production and cash flow at material levels through the end of this decade. And that supplemented with the so the our core m and a capability. And we remain very cash flow focused with a track record of returning cash to shareholders. And again, as I said, we're led by a a world class team, which positions us well for the future.

35:13 That's great. Well, Elizabeth, thank you once again for updating investors today. Can I please ask investors not to close the session? As you know, we automatically redirect it to provide your feedback, and all the management team can better understand your views and expectations on behalf of the management team of HARBOUR ENERGY PLC. We'd like to thank you for attending today's presentation, and good morning to you all.