Equinor ASA (EQNR) 2004 Q3 法說會逐字稿

It is a pleasure to welcome all participants to this presentation to our third quarter results hear in Oslo. A warm welcome also to all of you participating to this conference through the internet. I am Mari Thjomoe head of industrial relations in Statoil and I would like to introduce the presentation.

The result was published this morning at 8:30 central European time together with all the background material on our industrial relation web pages. The presentation material that will used in this meeting is also to be found there at Statoil.com.

Before starting please note that we have included a disclaimer in front of the material as we are going to make forward looking statements during the presentation. May I also remind all web participants that they are welcome to send us questions on the internet during the presentation and if you could be so kind as to turn off the mobile phones that would be good help for us. Helge Lund, Statoil’s our new president and CEO will take us through the financial result for the third quarter and he will comment on the strategic developments and progress for the group. After the presentation Helge Lund will together with chief financial officer Eldar Saetre will be available for questions. So with this introduction Helge the word is yours.

Thank you Mari and good afternoon to all of you. Appreciate the interest for our presentation. We are today delivering record operational earnings in third quarter 2004. The main reasons are a continued high oil points and also high national production. We have as you know had substantial turn arounds, plant arounds and shutdowns, during the quarter and these activities have impacted our production.

In addition there are some effects that we going to talk to later on in the presentation on the now concluded rig conflict at the NCS. On this basis we’d lower production unit costs are also higher this quarter the capital efficiency is still high in Statoil and for the last 12 months we are today reporting 19.5% return on capital employed.

Over and above these numbers there have been I think significant progress in terms of industrial development in the sense that 4 new fields are put on stream to create down project Sleipner , Olfaloud (ph), In Salah (ph) and also the Kizomba A project.

In addition to that 3 additional fields are sanctioned Rosa and the huge HCG phase tree field is sanctioned and also the Statoil board has during the quarter sanctioned the new investment in Acbami (ph).

Also on Friday last Friday we got new from Irelend in the Corib field finally. And ah we’re happy that this project now seems to be on a more easy track going forward.

All in all I think this quarter’s performance sort of confirms my initial impression on Statoil that there financial and strategic position is strong. At the same time I believe that there are both opportunities to develop the company further strategically as well as executing operational performances across the organization. The picture you see here is on Kvitbjorn (ph) and I think is an excellent example how Statoil can create value for its share holders across the whole value chain, involving not only the upstream activities but also the natural gas business as well as our downstream business. I’ll talk to that a little bit later in the presentation.

Earnings for operations are NOK 16.1billion and that is all time high for Statoil. The main drier is the 37% higher oil price compared to last our, our third quarter last year, that should in a reaching NOK and also a 5% increase in the natural gas prices. Net income over 5.8billion is the second strongest quarter ever only superseded by the second quarter 2002, where we had net financial gains of more than NOK 5billion. Capital efficiency is high as I said at 19.5% and we still believe that is one of the best in the industry. On normalized condition the rocher (inaudible) has fallen to 11.1 at the end of the third quarter 2004 that is mainly due to over contribution from the downstream business more specifically from one of related FAS 133 effects on inventory in addition to that we gained low lifting on the NCS as we discussed already and increased capital employed.

Year round I still believe we can reach around 12 percent on normalized return on capital employed which is the goal of the target for the company in at the end of 2004. That is both driven by higher expected lifting, but also improved results from the down stream business.

The third quarter production is heavily influenced by the plant turn arounds and upgrading activities this had reduced our production of oil of roughly 44,000 barrels per day and they now concluded the rig conflict had an impact negatively on roughly 6,000 barrels per day during third quarter in 2004.

Taking these 3 events into consideration the quarter production is at satisfactory level and I think that it is worth noting that at least where I am most happy is the increase in international production that is 32% higher than at the same level last year.

Also on the gas side I think the organization it did an excellent job when it comes to maximizing the production permits for the gas year of 2003. The company has previously indicated that it might not fully meet our production target of 1,120,000barells per day. This view has been strengthened during this quarter due the two, particularly due to the rig conflict and also some limited effects on the high oil price and then impact on the international PSA agreements.

Looking at the unit costs, the unit costs increased during the quarter to $3.4 per barrel. Normalized for the exchange rate we showed a minor increase to $2.9 per barrel and the explanations are primarily reduced lifting on the Norwegian Continental shelf due to the already mentioned effects and events. The year-end targets of $2.7 per barrels is still achievable buy increasingly challenging to reach at the year end.

Net interest-bearing debt at the end of the quarter was NOK 17.7b versus NOK 9.3b at the end of third quarter 2003. The main reason is mainly due to NOK 3.7b reduction liquid assets and short-term investments and an increase in short-term debt, overall NOK 5.3b. Normalized for the cash build-up due to significant tax payments done on October 1st. Net debt was at NOK 27.7b. Net-debt-to-capital-employed was 18% at the end of the quarter and normalized for the cash build-up, it was around 26%. Year end we expect net-debt-to-capital-employed to be slightly below 25%.

Moving to net financial items was at $1.7b in third quarter versus $0.8m last year. The main reason for the difference was currency gains and the short-term currency positions. While the currency gains on the long-term debt was comparable to the same quarter last year.

On the investment and CapEx side, gross investment in third quarter was a little above NOK 11b, NOK 11.2b. And year-to-date gross investment is NOK 33.4b, where NOK 6.8b of this was paid last year in collection and acquisition that were made in Algeria.

The main projects driving CapEx year-to-date are the two projects in Algeria, In Salah and In Amenas (ph), in addition to Snohvit Christian (ph) and finally the Kizomba A and B. And I still think our return on equity compares very well with our main competitors.

Moving to the business areas…first, E&P Norway delivered NOK 12.6b in third quarter and that is the best result ever for this part of the business. Mainly, again, explain by the high oil prices. And, also, higher internal earnings from increased gas transfer prices to the natural gas business of 17% compared to last year. These upsides were partly offset by an 11% reduction in oil lifting and NOK 0.5 million stocks from a very high market price to actual production costs. We can cover that later.

Crete Barron (ph) came on stream at end of September it is a natural gas and condensate fields south of Goodfox, located at 4,000 meters below the sea belt. Very challenging reservoir, 780 bar and the temperature is 150 degrees Celsius. It is being developed with a fixed reduction platform carrying draining package processing facility and a quarters volume. Statoil has developed this project on time and according to budget.

Recoverable reserves are estimated to be 54b cubic meter natural gas and 132 billions of condensate and our share is 50% and share of total production is estimated at roughly 105,000 barrels.

Another project concluded in this quarter, Sleipner Alfa North is another gas and condensate field. And it’s developed with a substantive high end to Sleipner by an 18-kilometer pipeline. CapEx project came in at NOK 2.2b and that below budget, 26% below budget and on time.

Recoverable reserves are estimated to 13 billion cubic meters and 13 million barrels or condensates. Our share here is a little below 50%, 49.5%. And that will give an equity production of about 23,000 barrels per day at plateau.

Moving abroad, the international results are tripled this quarter. And, I think we see some effects of a long effort to develop the international business. I think it’s fair to conclude for any company that it is hard, regardless of industry, to develop a substantial international portfolio. And certainly Statoil has had its ups and downs and we will most likely have that also in the fortune. But I think you can see here that the direction is right and is paying off the efforts that the company has made over a long period of time.

Our regular production is now well above 120,000 barrels per day. And the main reason for the improved earnings compared to last year is increased lifting of oil and gas by 54% in addition to stronger prices. Primarily four fields are explaining the difference, the Shah Deniz (ph), Jasmine, Sikombo, Kizomba A and In Salah in Algeria.

Just to put a little bit into historic context -- and you see here the last four years the production have -- production has increased steadily. In 2001, we produced an average 67,000 barrels per day and in third quarter then around 120,000 boes doubling in this four-year period. And I feel confident that our targets of producing roughly 300,000 barrels per days in 2007 is deliverable.

A picture from Kizomba A that came on stream the 7th of August, again on time and on budget. It’s a development that embraces attention that give Frontal E&P tied back to one of the world’s FPSO’s that can store roughly 2.2 million barrels. The total reserves at this field is expected at 1 billion barrels and the target is to produce at peak roughly $250,000 barrels per day. And Statoil’s equity share is a little above 13%. Kizomba A is the second development in block 15. Kizomber came on stream last November and Kizomba B is due on stream early 2006 and they are discussing a Kizomba C that is under evaluation.

Over to the gas business, the natural gas business area, the results are characterized by 6% high sales volumes in Europe, a 5% higher external realized price. On the other hand, the internal transfer prices from the E&P in Norway to natural gas was 17% higher than last year. The reason for that is that the internal transfer prices is following the oil crude price while the external sales price is more tied to different oil products. This asymmetry resulted in the reduced internal margin for the natural gas this quarter. In addition, comes a little bit more than 100 million in additional transportation cost compared to last year due to some extra bookings towards the U.K market.

Looking at the sales side in natural gas, in total we sold some 4.3 bcm of natural gas in third quarter. That is actually the highest third quarter sales ever. The volume includes .5 bcm energy sales to the U.S. and .8 bcm third party natural gas both and then subsequently sold in Europe. I believe we are very well on the way to reach the target of 2004 equity sales of 20.5 bcm for the year as a whole.

A picture of the Kollsness NGL facility came off stream also at the end of September confirming a quite active project period in Statoil and we have increased extraction capacity for the highly valuable NGL’s by 26 million cubic meters per day in order to be able to treat increased natural gas amounts from (inaudible).

Again this project was delivered on time and well below budget in the area of 20% below budget. Down stream business, they’re delivering a robust total result of roughly NOK 1b compared to NOK .8b in the same quarter last year. Oil sales and trading is delivering a good result particularly when we take into the FAS effects we mentioned earlier, that is roughly at .7 billion.

On the other hand, we had a similar positive effect from an earn out agreement for the sale of the malacure refinery back in 2001 improving the results with NOK .5 billion and this is also treated as a derivative according to the FAS 133.

Manufacturing is delivering good results mainly due to much higher refinery margins actually 63% higher than the same period last year and also the petro-chemical business in Borealis had good result due to a 33% higher petro-chemical margins. Marketing is some what weaker due to margin pressures particularly in Denmark oil and too a more limited extent in Norway.

The best process at Mongstad expansion again concluded 1st October and this is a sort of picture showing that the (inaudible) and up at Mongstad. The stabilized concert is transported directly from Kvitbjorn crude point terminal to the Kvitbjorn oil pipe line and the NGL’s that was extracted at Kollsnes is transported onwards to Mongstad via the best process.

At Mongstad, the NGL extraction and to (inaudible) retained and after and then subsequently sold to the external clients. I think primarily this upgrade was driven by the need for accommodating additional volume from Kvitbjorn as we discussed earlier.

HSC is important for the industry and will continue to be even more important and is high on my agenda in Statoil. I have confirmed the goal of zero harm. This is an extremely difficult target to reach but I don’t think we can have a lesser goal for our operations and I’m encouraged by the development and progress the company’s making but unfortunately this was over shadowed in the last quarter by two fatal accidents in Iran with one of our sub-contractors.

We are currently working on several initiatives to further improve the competencies and performance in this area and I more and more believe that this is important also for qualifying for new business opportunities.

Moving to the key performance targets, these targets as you know were set more than three years ago and for Statoil I don’t think they were easy targets to reach. All of them I think meant sizable improvements for the 100% government owned organization. As far as I can judge today Statoil will reach or be very close to reaching all of the targets apart from the F&D cost in line with I think most other oil and gas companies these days.

Coming from the outside and having worked in several other industries, I know how difficult it is to put forward targets on a three year horizon. And based on that, I think it’s quite encouraging and I’m quite impressed by the organizations ability to deliver on the targets and it’s certainly an ability and a competence that we will try to push even further moving ahead.

All in all I think that the third quarter was a good quarter for us for Statoil. It has record operational earnings and continued high capital efficiency. I had the pleasure of observing the company from March to August without having any responsibility and I was quite pleased with the activity level at that time. I have never the less felt it was my task to create even more speed, more activity, and more pace in Statoil and therefore it was important for me to address the management issue quickly. So we put the first layer of management in place by 1st of September, 2 weeks after I started and we did the second layer of management 4 weeks later. That has actually meant that 60% of the positions are changed since the 16th of August and I believe we have an even stronger team to attack the challenges and the opportunities for Statoil moving forward.

Having said that I think the big issue and the big challenge for all oil and gas companies today is to ensure that we’re investing not only the next two to three years but also the period after. The four new themes on stream, the three themes that are sanctioned, the letter of intent with our Russian partners on Stockman, should all be seen in that longer term perspective and also this is the reason why we have been delivered a quite offensive application in the (inaudible) process in Norway right now.

My initial conclusion that I communicated to you earlier in August and September that the core part of Statoil strategy is robust, remains. We should not expect big surprises in the direction of the company at Capital Market Day. You should neither expect big changes in terms of how we are operating and what kind of targets that we’re driving at, but I think already the new team has identified further opportunities in terms of operational and strategic opportunities and I look forward to discuss this with you at the Capital Markets Day in Stavanger. I think it is on the 16th and 17th of December. Thank you for your attention.

Thank you Helge. I now want to invite you to participate in the Q&A session. We have to use the microphone to the benefit of the people participating on the web. For your information, it’s not working here but you need to speak loud and clear into it. And please if would also state your name and company when you put the question, that’s very much appreciated. Do you want me to start with the question from here? Please.

I’m (indiscernible)of ABN Amro. Production target 1million one hundred and twenty thousand, can you confirm that this is excluding In Salah(pd) and can you also give some comments on In Salah production going forward or in fourth quarter and my second question is related to CapEx because you previously said CapEx amount of NOK 40 this year and NOK 30 next year including the acquisition for this year. And I wondered when it comes to Statoil (indiscernible) and the acquisition of an additional stake in Snohvit(pd) how that is in relation to this NOK 40.

I can confirm that the target for production excludes the acquisition in Algeria and I think perhaps Helge you want to comment on the dated questions.

The In Salah production -- In Salah started production on the 18th of July and on average for this quarter we had approximately 13,000 barrels a day in oil equivalence entitlement volumes from the In Salah. That field is now producing at a plateau level and they have indicated that 33,000 barrels a day oil equivalence level, which also is the indication for fourth quarter. 33,000 barrels a day on entitlements, Statoil entitlement.

Then you have the question how we did with the NCS acquisition

In terms of CapEx, the CapEx level and what we are reporting now on the figures that we show, that includes the NCS transaction. So we have guided on $30b excluding both the In Salah transaction and Inamena transaction and the STS transaction but including the Snohvit transaction increasing our share of Snohvit. So that is included in that number. So when you guided on the more than $40b that includes the whole lot so the Algerian transaction, Snohvit and the NCS transaction. Going forward we have no changes to our guidance on next year so that is still at a level of $30b.

So far we have said roughly $30b in 2005 and 2006

May I do one correction? It’s 43,000 barrels, which is sort of the plateau level on the In Salah. I cannot guarantee that will sort of be what we expect to see in the fourth quarter but that is the plateau production and definitely 33,00 barrels from that field, fourth quarter.

I will take one follow-up question from Sositier Generale(pd) on the production target for 2004 Amiret Vilallier(pd), he asked us to be more specific about how much you actually believe you will be able to deliver this year.

I think we have said that the target remains at 1,120. We have communicated earlier that, that is challenging and that we should expect that there are more chances that they’ll be marginally below than they will be higher and I think this quarter confirms the increased challenge. I am not able to or will not due to the uncertainty of these numbers be more specific than that at this point in time.

Good. We have one question from here.

On the production costs, the normalized twelve months rolling cost is little up-tick and would you explain it due to the reduced volumes due to extensive maintenance but that means over the last 12 months have been much more reduced volumes than the previous 12 months. Can you elaborate on the numbers, what we now saw in this quarter was 44,000. Do you have the numbers because I see the production is still up for those, the respective 12 month period?

Do you want to comment on that specifically Helge?

Well the main explanation is related to the volumes. The underlying production cost that we on NCS is not increasing, it’s going slightly down. There is one element, which is included in the third quarter numbers last year. Then we got paid back from the insurance settlement on OsGood close to $200m so that reduced our cost so that is now taken out of this equation. In addition I can mention one amount, which is adding, increasing the international production cost this quarter. We have made cost provisions for the maintenance on the Sinco field and it turns out that we have to increase that cost provision of approximately NOK 100m so that increases the cost number this quarter compared to the level we have seen during the last four quarter, three quarters.

There is also in the front there

Could you describe the drivers behind the gas price that you get from In Salah, I was a bit anxious to know whether that was at a considerable discount with the owner to the oil price but it turns out that it was quite high. Can you elaborate a little bit on that?

Actually I’m not in a position to do that. That contract is …. we’re not open to sort to sort of discuss the specific conditions in that contract but overall it’s a contract which is not very different from the typical contracts that we see from NCS into the European gas market.

There is a question from Hugh Williams at Cassanov. He asks us to update you on Snow White and Kristin developments. If there is any updates on time schedules on these projects?

On the Snohvit project we have nothing new to report other than we will deliver final forecast before the year end. More specifically on the beginning of December and there is nothing new to report on the development of the project on the cost side and I think you should expect that the cost overrun will be within the range that we had communicated to the market earlier. The work at Hammarfest moves well. The compressors as you have seen, the issues we had there are solved and the field work is progressing well and the issue that we are working with and responding to is the productivity level in Spain and that is also moving in the right direction. So all in all I think we are confident that we will end up in the range that we have communicated to the market earlier but bearing in mind, and I have some experience with big projects that we can never take any, or declare any victory before the project is finally delivered. On Kristin, it’s moving well. Nothing new to report and the progress at Arkestord is going well and we are also pleased with the other part of the development of the project including the very challenging sub-sea tasks that are in that project but nothing new to report an the project is progressing as we have discussed earlier.

I’ve got 2 questions basically first it’s your current exploration program, 2 of the main exploration programs this winter is in Venezuela and Nigeria and I wonder have those 2 exploration programs been influenced by one in Venezuela, the uncertainty regarding of royalty level? And in Nigeria the somewhat troubled situation there at the moment? And secondly just a follow up on In Salah, you said that the average production in Q3 was 33,000 barrels?

13.

13 yes alright, 13 that’s only one question.

I’ll check the numbers. In terms of exploration and there are now due to change there are no situation in the environment so far there are no impact on our plans for the exploration neither in Nigeria nor in Venezuela. So they are progressing those activities. In terms of our program for next year we have not concluded yet, but we are so far planning between 18 to be involved in between 18 and 20 wells at the NCS and between 15 and 20 wells internationally, i.e. a significant step up in or activities in the exploration field.

Could I do a correction on the (indiscernible) number there was a comment and it was rightly so at 16,000 barrels per day third quarter.

I have financial question again from the Internet and that is Tony Eckels (ph) in City Group. He asks about the facts of strengthening Norwegians Krone (ph) to the dollar leading to a NOK $1.5b in currency effects. And how this compares with the sensitivity showing that 0.5 change in the NOK $1.5b in currency gain.

I’ll leave that to Mr. Saetre.

Thank you, I think if we apply sort of the guidance that we have given we should arrive at approximately a currency gain of $1b due to the 22 Euro per US dollar change. So that is something in addition. And what happens it that we you know we have to do a lot of currency exchanges from taking US dollar into Norwegian Krone to prepare ourselves for the huge tax payment which is going to take place on a (indiscernible) $20b on the first of October. So we do that all this exchanges on a regular basis through out the quarters. And in this case as we have seen on appreciation of the Norwegian Krone through the quarter that have actually given us a gain. So the remaining part the 500 is actually explained by sort of that kind of exchange operations in this quarter.

(indiscernible)

A question regarding your production cost per barrel, just a comment there. Isn’t it fair to say that this number has been inflated by this negative inventory effect of half a billion NOK this quarter?

No that is treated accounting wise as a reduction of our revenues, so that does not go into the production cost as such.

Okay I can take two questions here related to production. First this is Jeremy Elden (ph) who asks how much maintenance we have last year in the same quarter? And the second is from Joe Morris in Morgan Stanley, saying that production was down significantly in third quarter this year compared to last quarter that it looks like as though depreciation in the EMP remains flat versus last year. And he wants to hear the reasons behind this.

I think the answer to the first one is that the impact was roughly a little bit above 30,000 barrels in third quarter 2003 and perhaps --.

36 approximately that.

Perhaps you’ll take the second question.

Yes so it’s what you see is that compared to the same quarter we stay at approximately the same level of DD&A. There is one special item that I have to mention in this quarter’s DD&A and that is one off related to the removal cost of the freight field which the estimates of that has increased and there is no where else left to place that into so we simple have to take that as a write down on the freight field. And that accounts for approximately NOK 150m. So that is basically the main explanations when you look at depreciation beyond that it’s pretty much the combination sort of which fields are actually producing in which quarters? And what we typically see is that sort of gas fields have a lower, like the Toll field and (indiscernible) field have a lower unit cost of depreciation than we see on some of the oil fields. So that is the rest of the explanation. You have to look at sort of the combination and the mix of fields producing.

Is there any more questions from here? I see 2 questions.

I’m a bit surprise that you still normalized returns of 12% you have year to date of 11.1 and if you’re assuming that your cap employed is not falling due to high level of Cap-Ex then you need a huge improvement of normalized earnings in Q4. Could you elaborate a little bit on that?

I think I can elaborate in detail, I think basically driven by expected higher lifting and secondly you are avoiding some of this run of effects in the downstream and downstream business for the fourth quarter 2004. Perhaps you want to elaborate on --.

Well there not much to elaborate I mean if we perform well and do regular performance on the downstream on the refineries and also avoid the FAS 153 effects negatively. And if we do regular gas operations last this quarter we also had a shut down at the Costa (ph) facilities, which we have not planned to repeat next year, next quarter. So combining this look at other element it’s actually what we expect could happen that we will reach the 12%. And remind you that sort of moving from the last quarter to this quarter we actually move from 11.8 to 11.1 so things happens from one quarter to another quarter. And that’s – we’re looking at sort of which the fourth quarter next year last year which is then going out of the formula on this quarter and what kind of performance we expect this quarter on a comparable basis. And that gives us a reasonable assumption that we might reach the 12%.

You had also one un-planned event in third quarter that was the fire at the (indiscernible) also has impacting somewhat the numbers.

I have noted 2 more questions. One here in the front if you could please signal other questions now or we would then finalize this session after this.

Yes it’s regarding the reserves that you will publish for 2004 in a quarter’s time. You have a number of PSA agreements and I was just want to question how the current oil price if that goes on until the end of the year what kind of impact that will have on the PSA reserves?

I can give you some general guidelines it’s, generally speaking, the PSA agreements is of course structured in a way that oil price over a period of time really impact negatively. The reserves you can book for start our list number I would guess much smaller relatively speaking and for many others as we have relatively few PSA, but the trend is negative if the oil price is high.

Excellent I will read the last question then from Nicholas Aldridge (ph) in Deutche Bank. He is going back to Cap-Ex for this year. Do you still expect Cap-Ex excluding acquisition to be NOK 30b for this year? That implies quite a slow down in spending rate in the fourth quarter he says. Is there a chance you exceed that $30b number and if so by how much? And in general what kind of upward pressures are you seeing in your Cap-Ex numbers due to the external commodity prices?

I think perhaps (indiscernible) will comment on the leverage. I think as other Company representative I think in some areas we see also some pressure on what people call the technical IE pressures from some of the sub contractors and contractors that are delivering services to the oil and gas industry. And I think without being specific that is also an element that we take account of as we move forward.

I guess you have lots of use to that sort of where we intend to come out with Cap-Ex levels slightly beyond what we have guided you on and I don’t think you can expect that this year really. So we still keep a guidance of $30b but there are I don’t know sort of – it’s more likely sort of that we -- sort of this time might even exceed that number. But we see no reason really at this stage really to change the guidance and it wouldn’t be any major number above the $30b level in case we end up with that.

The guidance was for organics in addition we have the $10b on acquisitions. There are no more questions. I want to thank you all for your attention and for contributing so good in the Q&A session. We wish you all the good afternoon and thank you very much for attending, good-bye.