Q2 2022 Kosmos Energy Ltd Earnings Call
Good day, everyone welcome to Kosmos Energy's second quarter 2022 conference call.
Just a reminder, today's call is being recorded.
At this time, let me turn the call over to Jamie Buckland, Vice President of Investor Relations at Kosmos energy.
Thank you operator, and thanks to everyone for joining us today.
We issued our second quarter earnings.
This release and the slide presentation to accompany today's call are available on the investors page of our website.
Joining me on the call today.
Cereal I'm be Ingo, chairman and C I.
Oh sure Yeah.
During today's presentation, we will make forward looking statements that refer to our estimates plans and expectations.
Actual results and outcomes could differ materially due to factors. We note in this presentation and then how U K and.
Pilot.
Please refer to our annual report stock exchange announcement, and SEC filings for more detail.
These documents are available on our website.
At this time I will turn the call over to them.
Thanks, Jeremy and good morning, and afternoon to everyone.
Thank you for joining us today for our second quarter results call.
So in today's presentation looking at the operational delivery in the quarter.
Let me hand over to Neil to talk through the financials before I wrap up today's presentation. We will then open up the call for Q&A turning to slide three.
<unk> was another quarter of strong execution for Cosmos as highlighted by the boxes on this slide.
Our production assets are performing well with production for the quarter at the upper end of guidance.
Redevelopment projects Torchy phase, one Jubilee southeast and Winterfell are continuing to make good progress and are expected to deliver production growth of around 50% by 2024, we continue to optimize our world class gas portfolio in Mauritania, and Senegal working closely with cotton.
And the governments to accelerate and deliver value for them off significant discovered resource.
Today Cosmos announced his plans to utilize the existing contractual rights and the sales agreement for GTA phase one volumes to divert cargoes to prospective buyers in order to benefit from the current market environment more on that in a moment and finally the balance sheet continues to improve as a portfolio.
Generate cash and drive down leverage all while supporting our differentiated growth.
Well dig into each of these things like that in today's presentation.
Turning to slide four which looks at our producing assets, which are performing well with two key production coming in at the upper end of guidance.
In Ghana, the Jubilee field continues to deliver gross production for the quarter, excluding the impact of the shutdown was around 92000 barrels of oil per day, including this impact gross production was around 74000 barrels of oil per day in.
In May the partnership completed a planned two week shutdown, achieving our key objectives, which included important maintenance and Italians for the rise for the Jubilee Southeast development.
Following the shutdown gross production has averaged over 90000 barrels of oil per day benefiting from the producer while in the injection well completed and tied in enjoying the quarter.
Alright have recently communicated the Ghana drilling performance has been excellent with wells coming in ahead of schedule and under budget.
The partnership will now focus on managing the performance and reliability of the field until the Jubilee Southeast Wells come online, which is scheduled for mid next year. These wells should drive the next step up in production towards the 100000 barrels a day feel target.
A 10 gross production of around 24000 barrels of oil per day was in line with expectations.
Won't produce awhile is currently being drilled it in yen euro with production for that well expected in the fourth quarter.
As the operator highlighted in his recent trading update the partnership has been performing a review of the 10 resource development opportunity. We believe there remains significant amount of undeveloped oil and gas and they are evaluating the optimal path to bring these resources online over the coming years.
As part of that optimization plan, we had two rounds of base wells planned to 10 this year to support the delineation of the interim resource.
In July the partnership drilled the first of the two rise our base wells the NT <unk> well was drilled to test two separate reservoir objectives, with the reservoir quality and thickness better than expectations, but the well encountered water.
The well was drilled in a structural loads attached the boundary conditions for the enzyme resource modeling.
The second one is the base well N. C. 11 is planned for late 2022, it's all getting a different fab in a structurally high assessing the results of the two wells should allow us to high grade and optimize the future drilling plans. So that's an enhancement projects.
<unk> gross production of around 31300 barrels of oil per day was in line with expectations, but sequentially lower quarter on quarter due to higher facility downtime and sudden wells being offline for Workover activity. We have two ESP installations planned this year with the first completed during the <unk>.
Quarter.
As we flagged in May the partnership extends the licenses about cyber and have to make to 2040, extending our C. P reserves base by around 6 million barrels, which creates an incremental NPV 10 at around $100 million at a $75 per barrel oil price.
With the extension of the partnership is committed to drill a package of four infill in ilex wells a rig has been selected and we expect to begin that work in the second half of 2023.
In the Gulf of Mexico, net production of 20600 barrels of oil equivalent per day was above expectations and around 10% higher than the previous quarter. Due to last time time of third party facilities in the second quarter, the HP, one vessel, which process production from that so NATO.
You had been scheduled for a routine drydock in late two Q. This has now been deferred to the third quarter. So we expect there will be downtime of around 45 days related to tornado and three Q full year production guidance remains unchanged.
Kodiak Sidetrack isn't that is now being drilled with completion activities ongoing drilling results of the well or in line with our expectations and initial production is expected later this quarter.
Also on Kodiak, we completed the preemption transaction in June to acquire an additional 6% interest taken out total interest around 35% the new sidetrack well combined with a larger working interest should increase on that production in the Gulf of Mexico by approximately 3000 barrels of oil equivalent per day.
After the Kodiak Sidetracked comes online.
Finally at the end of the second quarter, we sanctioned a new subsea pump project at the odd job field, which should both accelerate production and also increase recover reserves by extending the economic life of the field a great investment, which we expect to have a very short payback, particularly in a higher price oil environment.
Turning now to slide five.
We've talked in previous presentations of growing production by around 50% by 2024.
Slide hasn't status updates of the three key developments that we expect will drive that right.
First torchy phase one of our LNG projects in Mauritania and Senegal.
All work streams continue to make good progress with the projects at about 80% complete at the end of the second quarter.
On the hub terminal old 'twenty, one concrete patients have now been installed an important milestone for the project parting installation is on schedule and nearing completion with the construction of living quarters platform complete and in transit to the size on.
On the floating LNG vessel, which is being constructed in Singapore construction mechanical completion activities continue and commissioning works have commenced.
On the SBA, so which is being constructed at the Cosco yard and Qi Dong in China mechanical completion loop checking activities continue.
So about a 50% complete at the end of the second quarter.
He is working hard to mitigate the impact of the April lockdown of the Cosco yard and the ongoing COVID-19 disruptions in China, whilst ensuring the F. P. S. O leaves the yard with the targeted high level of completion.
However, the off rate has not been able to fully mitigate these impacts and we now expect the F. P. S O sail away just sled from in September into the fourth quarter.
This latest silo a date the partnership is working to maintain the overall project timelines first gas by optimizing the sequencing of the hookup activities.
On the subsea the installation of the subsea pipeline began in the second quarter with a second pipeline vessel expected to arrive later this year to begin the deepwater portion of the pie play.
There have been quality issues with the fabrication of some of the subsea equipment, which will require a path. We don't currently anticipate this to impact the overall project timeline and.
And finally on drilling we successfully drilled two of the four wells required for first gas and the third well is in progress.
So even with the supply chain challenges, we continue to make good progress quarterly and are still targeting first gas in the third quarter of 2023 with the first LNG cargo targeted for year end 2023.
On Jubilee southeast the projects approximately 40% complete with long lead items ordered and the drilling on track to commence in the fourth quarter.
As I mentioned earlier in the presentation work was done joined the Jubilee <unk> shut down so allow the tie in of these wells initial production is targeted for the middle of 2023 with the new wells are expected to increase total Jubilee field production to over 100000 barrels per day.
At Windsor file the field development plan has been submitted to the partnership and formal EF IV is expected by the end of the third quarter based on the additional technical what we completed on the initial wells. We now believe the total resource is significantly larger than previous estimates with up to 200 million barrels of gross recoveries.
Resource.
I'll talk more about the development plan on slide six.
We've described in the past we plan to develop winterfell SFA subsea tie back project.
The first phase, which can be seen on the right side of this fly is expected to include five wells three drilled before first oil it's all getting around 100 million barrels gross recoverable resource.
Based on the French who works on the discovery Wells, we now believe the total resource could be around double the original 100 million barrel estimate, which we expect to prove up as we drill and produce the phase one wells.
We understand it it's already well advanced with long lead items ordered and a rig selected to drill and complete the first wells next year.
The partners have received the field development plan from the operator, and we expect <unk> approval by the end of the third quarter.
This low cost lower carbon all development is expected to have strong economics.
Development costs are expected to be around $10 per barrel with operating costs around $12 50 per barrel delivering a breakeven is less than $25 per barrel.
First of all as expected at around 18 months from S. ICD approval.
Turning to slide seven.
Over the last two slides I'll discuss the development projects in the portfolio that we expect to drive production growth of around 50% over the next two years.
This slide looks at the deep hopper of opportunities in Mauritania, and Senegal that we expect can deliver significant additional value and contribute to a growing gas weighting across the portfolio.
First of all she phase one to optimize the commercial value of sales with the gas production from taught you Cosmos plans to utilize the existing contractual rights under all phase one LNG agreement to divert cargoes to prospective buyers in order to benefit from the current market environment.
In the gas sales agreement for phase, one we have a deliver or pay contractual right, which allows us to take advantage of elevated global LNG prices for a portion of our phase one volumes.
By exercising this rides and devoting cargos cosmos could retain significantly more upside to global gas prices, especially if current gas prices severely dislocated from oil prices.
Second Torchy phase two as we said last quarter given the structural changes to the global gas markets. We have seen in recent months, we are working with the operator on the governments to ensure we have the right development concept for phase two with regards to scope and scale.
We are therefore working closely with our partners to optimize the development scheme to best utilize the existing phase one infrastructure to maximize cash flow and returns the partnership.
We also want to manage cost exposure and lines of the supply chain constraints and inflationary pressures, we are seeing across the industry.
The development of station is now planned for the end of the third quarter.
Third home barilla with the exploration of the sea eight license into Q. The partnership has agreed the substantial terms and conditions of a new PSC and the license is awaiting government approval.
The new PSC, which retains the area surrounding our successful beryllium and orca discoveries with ground. The partnership two years to submit a development plan.
As we discussed in the past the area has future development potential of around 10 million tons of LNG Corona and we would also plan to develop these resources in phases.
As you would have a new PSC carved out from the existing line says we were required to write off our historically in a cost from an accounting perspective, although they are still tax deductible on costs recoverable against Oxford <unk> development.
Lastly, yakka Durango the partnership continues to progress the initial phase of the gas development with the government, which centers on a domestic gas solution to provide low cost gas to support the country's energy needs to drive its rapidly growing economy.
I recently visited Senegal, and Mauritania to meet with their respected energy ministers, and president salad, Senegal to discuss the future gas opportunities in the region with both countries. There's an aligned view around what the future could hold for that gas resource development.
There is a significant lower carbon advantaged gas resource available offshore that could help provide more energy security for the world in Europe in particular equally important given the caster as six of the gas and its low carbon intensity. This resource could play a significant part in bridging the energy.
Transition and then providing the affordable energy, the Mauritania and Senegal rightly demand for their own development, the very embodiment of a just transition.
Both governments recognize that we are living in a volatile world.
Pat pandemic and the events in the Ukraine have shown and I believe both countries have the vision to see through this volatility and become important players on the world's energy stage in the coming years.
As we refine the next phases of our LNG projects I believe the future is the Mauritania and Senegal O'brien.
With that I'll turn the call over to Neil to take you through the financials for the quarter.
Thanks, Andy turning to slide eight the second quarter saw continued progress as we further enhanced our financial position.
We are taking advantage of higher oil prices to rapidly strengthen our balance sheet with net debt approximately down $400 million in the first half of this year to $2 1 billion.
EBITDAX in <unk> was around $385 million, which resulted in free cash flow of around $70 million in the quarter and around $290 million for the first half of the year.
Excluding capital expenditures in Mauritania, Senegal base business free cash flow in the first half of the year was around $450 million demonstrating the strong cash generation ability of our business before our development projects come online.
Solid cash performance and continued net debt reduction.
It helped drive leverage down to one six times.
Liquidity, which has grown consistently over the last year with over $1 billion at the end of the second quarter, which is the highest it's been since 2018.
As we look forward with expectations that the business continues to generate strong levels of free cash we plan to continue to prioritize debt pay down and to get beyond our leverage target of less than one five times at year end net debt below $2 billion.
Turning to slide nine.
As Andy mentioned net production of over 62000 barrels of oil equivalent per day was at the upper end of guidance helped in particular by strong performance at Jubilee less downtime in the Gulf of Mexico.
We realized a price of $86 per Boe, including the impact of hedging.
Including hedging the realized price was around $109 per Boe.
Operating costs were lower than guidance during the quarter, reflecting production coming in at the upper end of guidance and some deferred maintenance activity and Equatorial Guinea.
Capex in the quarter was slightly higher than forecast, primarily a result of higher accrued capital related to activity in Mauritania and Senegal.
As many companies in our industry have reported we are seeing the impact of some inflationary pressures, particularly at the tortilla project in Mauritania and Senegal, as we get closer to the finish line.
As a result, we are increasing our full year capex guidance by approximately 5% to around $700 million.
Although we are seeing some higher costs, we have maintained our free cash flow guidance for 2022 of approximately $420 million, assuming current oil prices offsetting the inflationary cost impacts.
So to conclude the financial section of today's presentation. So theres. Another good performance in the quarter with continued progress across all key areas.
We delivered a strong cash flow performance with rising liquidity material debt paydown and the meaningful reduction to leverage.
I'll now hand back to Andy to close today's presentation.
Thanks, Neal turning to slide 10 to wrap up today's results presentation.
While the macro environment continues to be volatile Cosmos has had another solid quarter of operational and financial delivery.
Our production assets continue to perform well coming in at the upper end of guidance. Our three development projects continue to make good progress to drive that 50% growth in production, we expect from current levels by 2024.
We're working closely with our partners to optimize the value of our gas portfolio that we expect will deliver growth beyond 2024.
Our financial position continues to improve with continued strong free cash flow generation. This has enabled liquidities Orion some multiyear highs with leverage falling sharply well on track to exceed our year end targets.
And finally, we have the right portfolio at the right time.
Riding the energy the world needs today, and supporting a just transition that addresses the trilemma of energy security energy affordability and climate change.
Thank you I'd now like to turn the call I was the operator to open the session of questions.
Thank you.
And ladies and gentlemen at this time, we will conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pickup your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from Austin, All Cohen with Johnson Rice. Please state your question.
Good morning, Andrew nail and Jamie Thank you for taking the questions. This morning.
Yeah, Hey, good morning Austin.
On tour to Phase one could you help me understand the mechanics of the spot pricing opportunity also does this increase the potential value to cosmos over the first year or two of the contract.
Yes sure Austin.
We think there's a differential value in cosmos versus peers because of the material and growing exposure to international gas.
The structural changes in the global gas market on the back of the Ukraine wall.
The gas prices are likely to stay higher for longer and remained dislocated from oil.
Greg we've talked about in the past all phase one volumes are priced against our brand slope sorry, the price we receive is driven by oil prices.
However, there is a dilemma or pay course.
It would allow us to utilize and take advantage of current gas prices.
In instances, where pricing allows us to pay for it by a degree non delivery penalty to our current buyer.
This is a typical.
Revision in an LNG sales agreement.
And share with you the exact details of the contract but have contracts if they stay here.
The penalty is typically in the range of 20% to 30% of the contractual price the price that's linked to the Brian slow.
So if you take those inputs.
And you look at.
And average gas price, let's say about 24% and 25 of around $20 and at all price of let's say $100 per barrel.
Opportunity could be around $200 million of additional revenue net to kosmos.
Total over those two years and if you look out at the forward strip and you looked at where that sitting today.
Tcf as he's closer to an average of 25.
The 'twenty four 'twenty five time period.
And without always assumption is the revenue benefit to cosmos in aggregate over the two years would be around $350 million. So it's a significant opportunity for us and we believe it's important to start engagement with prospective buyers.
Now because the opportunities clearly that.
Well I appreciate the color on that and as a follow up.
You provided a positive update on your Winterfell project with <unk> approval expected later, this quarter and doubling back to gross recoverable resources.
Did the recent technical work from the initial two wells cause any modifications to your development plan slash timeline of this project.
No. It Hasnt all said I think we're where were targeting.
At the end of this of this quarter and that you know what can we say your first oil you know 18 months afterwards, clearly we've it's a tactical work on the first two wells, which we believe.
As indicated a significantly larger resource.
The first phase is a five well development as I said in my remarks, that's targeting development of initial 100 million.
<unk> barrel opportunity, but we think with production data from those initial wells, where you would see that being an indicator of a larger resource and the infrastructure that we're putting in would enable US then to build and expand to fully access that so I think that what we've been doing over the quarter to grant to F ideas around that.
Phase one three initial wells pre first oil followed by two following wells, but you know where we're anticipating a larger resource and therefore, the ability to expand from that.
I appreciate the color that's all that's all from me right great. Thanks Austin.
Our next question comes from Mail Mehta with Goldman Sachs. Please state your question.
Hey, Good morning. This is carly on for Neil Thanks for taking the time I wanted to just start on tour too as we think about the potential for phase two could you talk a little bit about what are the outstanding gating factors as we should.
Take in mind to get that project F. I D. And then are there any changes to the timeline to the expected first gas there.
Yeah, Hi, Kelly no I think that you know we.
We've taken the time to make sure that we've got the right project for phase III, but in terms of the sort of.
Scale and scope of the project Yeah, a lot happened in the six last six months with regard to.
A N G market in particular, the European market.
It's important that we've got the right project that enables us to fully access that opportunity. We also need to make sure that from a contracting perspective at a time of real inflationary pressures, we've got their wide approach to the market and the development.
Concept that we pursue is clearly an important part of that so that's been the work. The work we're doing at the moment. The objective is to come to a decision on that concept by the end of the third quarter that will then enable us to do the detail work the feed work to get the costs in Mauritania in San.
And I go on to get formal approval of <unk>, which as you know we have to go to the governments with the.
The full contractual position to forecast et cetera, and you know the anticipation would be that we would do that in 2023.
That leads you to right now.
First gas state and then you sort of added 26, 27 time frame. So no fundamental change to to that but I think it's ultimately about have we got the <unk>.
Concept, which allows us to best take advantage of the current market conditions and allows us to ensure that we've got the the optimum scope from managing the inflationary pressures, which are clearly they are in the market today.
Got it that's helpful. And then the follow up was just kind of on your last point on inflation.
As you're pursuing these different development projects across the portfolio can you just flush out a little bit kind of what you're seeing from an inflation perspective, and what steps that you're taking to mitigate those pressures.
Yeah, you know, it's clear that we're seeing in the deepwater now.
Supply chain challenges really across all dimensions, whether it's sort of drilling rigs being sort of at a high level of utilization.
Subsea equipment.
Installation vessels etcetera. So I think the the mitigation are around are doing.
Doing the work upfront to ensure that you've got a concept and an approach to the contracting strategy, which allows us to.
Get the.
The most cost effective approach and I think that's part of the work that we've been doing on Winterfell and again as an example in winterfell without getting ahead of our skis. We are we have been ordering the long lead items.
We've moved a I had to select a rig we've done that for the program and extra will gain.
Access to the right equipment is clearly.
Important so I think these.
Old tried and tested techniques.
The industry has used I think for us it's about being rigorous now about the management of this literally on a day by day basis.
No no increase in scope down allow the project to have any gold pricing and then it's about the rigor of execution right approaches to the market access to the best equipment SaaS right and I think that is the other challenge. The industry has today is not only an equipment issue, but it's also a human issue.
Getting access to the.
The the a teams so I think that you said there are all of the areas we're focused on but from.
From a cosmos perspective here that we have three projects, where credit where we stand on each of those projects and now as the rigor and discipline of monitoring them through to first production.
Great Thanks for that color.
Our next question comes from Matt Smith with Bank of America. Please go ahead.
Hey, Thanks, guys.
Couple of questions just around the LNG price and if I could could I just double check on the phase one volumes does that contractual right.
Apply to 100% of your that's probably somewhat of the phase one volumes.
Then the second question on the same topic was really around sort of phase two with a contracting opportunity that okay. I guess each time, we talk about this the gas curve keeps moving higher and higher and is it fair to.
Characterized that you're more likely to look for gas exposure.
Phase two volumes and if so is that likely to be true pure malt pricing or do you think that's a perhaps a happy.
Medium in between.
Yeah. Thanks a.
Yeah, I'm actually the LNG contract is public IC side, if you look through that contract what Youll find is that we can to we have to maintain every second year, 50% of the AC Q, sorry that means sort of.
One you can dive a 50% year two you can divert a 100% year three.
<unk> you can devote 50, yeah for you you can debate.
100, while still meeting all of your obligations under the contract with the penalty for the diverted cargos. So what it means is you know to do the math your youre paying a penalty on the deserted cargo and you can do that up to on average 75%.
Of the car guys, where they sort of in our modeling science, 50%, 100% and 50% 100%.
That's why I typically.
I cant share with you the actual penalty, but contracts of that era had a penalty of around somewhere between 20 and 30% of the of the <unk>.
<unk> to the to the buyer.
Yeah, sorry, yeah, yeah on phase two.
I think the step on phase one is an indication of why we intend to go on phase two.
We would want to sort of build a.
Our relationship with customers that could take those volumes and that's you know 20.
'twenty four 'twenty five 'twenty six 'twenty seven timeline, you know phase two volumes would be following absolutely you know after you know in that time period, and we would look to overlay it with contracts that gave us.
Really exposed to the the gas gas exposure as you said, but look I think genuinely it is gonna be a makes the big difference for phase two versus phase one was that we don't anticipate any financing requirements for phase two.
We put the infrastructure in place for phase one.
And therefore, the incremental build out in terms of additional capital at a very modest we've talked to a number of less than a $1 billion in the past. So as you start to think about the flexibility that gives us a significant.
And that's really.
The excitement that we have now around our you know the exposure to the international gas price as I said in my answer to the to Austin's question, I think where we're quiet.
Unique amongst our peers and having this exposure to not I mean, that's at a high margin low carbon oil, but actually high margin low carbon gas and as you start to look at now where the forward curve is going for gas.
So you know the unfortunate extension of the war in Ukraine, We we believe as a fundamental opportunity for us to access so again in terms of bringing that forward. We can do it with the phase one volumes as we've described with the divisions and then try to back that up then with the phase two volumes have become a very sort of credible.
Seller into the market.
Perfect. Thanks, Andy I really appreciate the detail I'll, probably have Mike if I can sneak one more in and it was just around the sort of NMC cough carry that you haven't talked too.
So it sounds as though you're sort of no longer prioritizing the refinancing.
Given that you don't have 70 balance sheet constraints anymore. So just wondering if you could remind us sort of from the default mechanism of.
How are you will recoup that cost them, perhaps even if youre able to give any color on how quickly you might recoup that that'd be much appreciated.
Can I I'll just pick that up yes.
Yes, so Matt the mechanism is meant for sort of the phase one revenues to the NSE is to replace or the NFC alone. Instead of there is some flexibility built in in terms of the duration of that repayment.
So, but clearly the more they generate from the phase one volumes.
Or we can potentially get our yeah.
Our get our proceeds from the loan back Alternatively, the yeah. As you noted to the citizens, while they sort of immediate pressures still off from getting.
Getting the NFC loan off of our books, it's still something we want to pursue I think just from a timing perspective that naturally will makes sense around the sort of the phase two project sanction to.
Bring back into the.
Default, so it's still something on the AR on the agenda.
Alright, okay. Thanks, Beth I'll pause here, but just right. Thanks, Matt.
Yeah.
Our next question comes from Alex Smith with Investec. Please go ahead.
Hi, guys.
Just two quick ones for me.
One you rapidly approaching your gearing target.
But houston healthy levels of cash flows.
That's right.
So it might be a decision on dividends or buybacks.
Or would that be a preference for either.
And then just on Ghana.
Just comment on the cost of the wells that you have been drilling you mentioned they come in slightly under expectation.
And the plan for the pacing up a second rig given the current oil price environment is there an opportunity to accelerate this decision given how well the drilling program is going to date. Thank.
Thank you.
Yeah. So let me just I'll talk about Ghana first and then you know Neill can pick up the the financial framework I think in terms of of the decision around the second rig.
It will come.
Commented in my remarks, we are.
Drilling well in Ghana are at the moment the wells are ahead of schedule.
On the cost and actually the opportunity there for us to deliver the volume increase that we are that we intended.
Across the assets, but actually do it through a high graded.
We have one rig program.
And that's the focus for today, so we don't anticipate bringing a second rig and currently we're going to continue to evaluate that opportunity, but I think it's all around this.
Mantra of capital discipline today, you know as you start to deal with the inflation refreshes.
You do have the opportunity ultimately is around operate more efficiently. That's how you mitigate the increase in the unit cost. So that's our focus today and I feel confident that we can actually do that so we don't we're not making a decision today to bring in a second rig we've got.
Create a program to enable us to stop the drilling of the <unk> South East Wells. This year that enables us to deliver on that project, where we anticipate startup once the subsidy equipment is in place and are in the middle of the year and that you know in terms of driving twenty-three volumes that is the.
A big driver and then we have a follow up of the 10 enhancement project that would fall out and you know 24 25. So I think we're we know we're well placed today and we don't have to.
There is no economic benefit.
From bringing a second rig today and then Neil in terms of the gearing targets yeah. So in terms of the gearing and as well as the allocation of capital or are these really haven't changed.
Changed overly too much Alex I think you know the goal is to fund the capital program, both the maintenance and the growth.
Projects that we have and then within that while leverage is.
Yes continue.
We continue to prioritize debt debt paydown until leverage is less than sort of one and a half times as I said, we're sort of get on track to get there before the end of this year.
But we want that to be sustainable before we sort of look at sort of shareholder returns, but it is sort of clearly next on the agenda.
That that we would look to in terms of buybacks versus dividends again, I think that will be more to come on that in terms of which specific method and will largely depend on where.
The share price.
It looks like at that time.
Period, but I'd say currently sort of more tilted towards the buybacks, but.
We'll look at that as we achieve our debt targets.
Great. Thank you very much.
Our next question comes from Bob Brackett with Bernstein Research. Please state your question.
Yes. Please I saw that you drilled two of the four producers at toward two phase. One can you comment on did they come in at least based on the logging analysis in line with pre drill predictions.
Yeah overall, you know where I'm, we're looking to build well capacity bulk where we've got to the coverage from really from sort of turning to slide three wells that will deliver the required.
So versus four so the first two wells of enabled stay on track to do that what kind of are currently drilling the third well and then the fourth well is actually a twin of one of the original exploration well so in terms of having the required.
Well productivity with the appropriate level of insurance of us gas, we feel good about what we've seen so far.
Great. Thanks for that in terms of E. G. You mentioned, the four wells as part of a drilling program.
Split between infill and I, Alex how are you strategically deciding whether to go for a more sure infill versus a greater upside dialects whats the logic there.
Yeah.
Great question actually if anywhere we see two really good opportunity sets. Yeah. Yeah. You can have a history of Bobby went into EG, we fell from two perspectives that it hasn't been fully developed from an infill perspective, and there was a sort of remaining exploration opportunity and the remaining <unk>.
Yeah, we were built we've built a pretty good help on our Oh.
Of infill opportunities and we're going to high grade the first three of those actually Bob in terms of the drilling program and then the fourth well will be the ilex, well, which is targeting a deeper.
Untested, albeit opportunity you know underneath the cyber and it came a infrastructure that looks really interesting. So that's the the balance and are.
Clearly the ilex our opportunity is significant and will be a significant check game changer in terms of our position there and inside but it came a wealthy infill wells are really high quality high rate of return and short payback and I've tied back to the existing infrastructure. So we.
Got some you know both of those opportunities on the on the roster and clearly gaining the license extension out to 2020 2040 as my both of those opportunities even better yeah. Because clearly you know with the extension we have if we were successful with the Albion we've got significant.
A time then to drill out.
Quite a large associated inventory so.
Probably almost all the back end of next year and I think it will be an interesting phase of the development of cyber and it came back.
Great Thanks for that.
Super quick one if I may in terms of just a follow on on exercising contractual rights on the tour to phase one I believe is BP, both the counterparty of those as well as the operating partner and as everything amicable between you all.
No I think you've gotta be it is quite important that a V. P is the upstream operator yeah.
BP gas marketing what is the the purchase.
So there's actually a Chinese wall between BP as the upstream operator, and BP gas marketing.
So the buyer of the gas.
And actually everything is Africa.
Perfect. Thank you.
Jack.
Our next question comes from James Hosie with Barclays. Please state your question.
Yeah, Hi, there a couple for me I guess going back to your right to divert some of the talk to states one cargos how much notice to give on that just wondering how far ahead, you can make a call with LNG spot prices.
Yeah.
Wanted to get into too much of the detail James because as you remember that it is.
But it but in terms of the the ability we have the right to get us to book a cargo by cargo.
And therefore, we have the ability to build a program. So you know we we can.
Dictate the duration of our all of the.
If a scale off of diversions.
Okay, Okay, and then just on another topic.
If you could give us some color on trying to trying to tee capsule budget shaping up just thinking about you talked about winterfell sounds like it's a $1 billion project growth and then also the inflationary pressure as well.
Be assuming higher capex compared to about $700 million.
Yeah. So look we don't normally give capex guidance for the following year until we can match it with and without final year results.
Our results, but I think conceptually the way to think about it is you know the base business as we've talked about it as sort of sustained production that we're spending around sort of $350 million on that.
In 'twenty, two and looking forward with the rigs locked it in etcetera.
We feel good about that number when you really got the capital that goes into the garage projects and you've got a couple of dynamics. Yeah, you probably got a similar level of spend on Jubilee South East you've got a reducing level of spend in Mauritania significantly reducing and then you've got an uptick in.
And and Winterfell as you described so you know I think that's the way to think about it and then the ophthalmology and you you've got discretionary capital around you know the the ilex programs. So I think that's the the the are the way to think about it and clearly the timing Oh.
The relative ramp up ramp down.
Of those projects.
As you know so you've clearly got a significant decrease in spend in Mauritania and Senegal, but you will have as you say an uptick in the in the window film spend.
Okay very good thank you.
Thank you and just a reminder to ask a question press star one on your telephone keypad.
Our next question comes from Mark Wilson with Jefferies. Please state your question.
Hi, Thanks for taking my questions a few points here. So it sounds like you're not bringing a second rig in order to do the Jubilee southeast development drilling.
First clarification.
We also just understand where we stand on those shell exploration payments, but that's the success that Libya.
And then lastly.
We've seen the B L. A.
Gorilla P S extension.
Some change tends to do we expect something else like that yeah coach Ranga. Thanks, a lot.
Yeah.
As I said answering a prior question on the second rig I think is actually a good news story.
At a time of real inflation, it's about driving efficiency.
For the business.
And I think on on on Jubilee.
We've seen the demonstration of that in terms of the drilling performance.
And so you know for us, it's about continuing down that path.
High grading the wild selections, you know being able to deliver the volume increase that we've outlined in Jubilee.
And and de lever the benefit from that project. So we don't we're not anticipating making a decision on a second rig currently and I clearly we will continue to evaluate that mark but the answer is no no second rig at the moment.
In terms of shell.
They have success with two wells in Namibia.
Going around and graph.
Our understanding is that they intend to submit a an appraisal plan.
The beginning of the fourth quarter with the submission of the appraisal plan they would be obligated to pay the.
The the bonus from the.
Contract that we have in place with.
With them. So that's what we anticipate.
On umbrella yeah, Yeah, Brian I'd say you know it's a it's an important step forward in the U K S C.
Clearly, we have to separate out and a development since the the discoveries that we had in <unk> and the surrounding our acreage I'm better to do it now ahead of a sort of development proposal then do it later so you know we spent the time now to do that.
You know in an accounting sense, there has been an impact but actually in an economic sense.
The costs that were associated with the essentially was the orca or exploration well, we got the benefit of that both in cost recovery on tax on torture. So there's no economic impact.
Impact from this but what we do have we have a new P. S C.
Substantially the same terms.
You have some small modifications around local contents et cetera, but ultimately we now have the basis on which to move forward now with gorilla.
Are you sort of.
Clean forward looking perspective.
And as I said I think that for US. It was important to do this now rather than sort of get to the development decision and then have to negotiate the new PSC as part of that a development decision. So I think you know where I'm. We're on track now to move forward and do the concept work that's required to bring that forward as a real opportunity.
And then as you know.
The Big resource base that Hey, you know again, it's characterized by low cost low carbon gas adjacent to the European market and our objective as I said in remarks will be to tap a laugh with a phased approach very much in the same way as we've done on towards you.
Yes.
Got it okay no. Thank you.
Great. Thanks, a lot I appreciate it.
Thank you since there are no further questions at this time I would like to bring the call to a close.
Thanks to everyone. Joining today you may disconnect your lines at this time. Thank you for your participation.