Relevant bits from the transcript below..
https://finance.yahoo.com/news/edited-transcript-cne-l-earnings-193204877.html=============
Obviously, the key focus for the second half year -- the second half of this year will be on Senegal. Significant progress has been made on project definition, and we're now working with the joint venture, with the government and with the lending group we've appointed to finalize financing and take FID later this half.
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So we will now move on to our SNE project in Senegal. And as a reminder, we are progressing towards final investment decision of Phase I, which involves development of 230 million barrels from a combination of lower S500 and upper S400 reservoirs. This is likely to be followed by further stages of both gas and oil development by extending the subsea infrastructure, installing gas export facilities and drilling further oil, gas and water injection subsea wells beyond the initial 23 wells envisaged for Phase I.
2019 has indeed been a busy year for the project. A high-resolution 3D seismic survey commenced in July to enhance definition across the field, particularly the S400 sands and potentially may become a baseline survey for a future 4D survey. The updated exploitation plan, including the findings of FEED, has been submitted to the government and is being reviewed. We anticipate costs will continue to reduce for the current scope, and at the point of FID, to be below $3 billion. And as a reminder, the Environmental and Social Impact Assessment associated with the project has already been approved by the government.
Excellent progress has been made on the drilling side too. Earlier in the year, we awarded the drilling rig contracts to Diamond Offshore for the provision of 2 deepwater drill ships: the Ocean BlackRhino, currently operating for Hess in the U.S. Gulf of Mexico; and the Ocean BlackHawk, currently operating for Anadarko in the same area. These modern units are 5 years old, have a very strong operational track record and have a unique feature, whereby the BOP manufacturer operates and maintains the pressure control equipment on a leased basis. And these contracts are well spaced and will commence in early 2020 and 2022, respectively. The drilling and completion services contracts have also been awarded and split between drilling, formation evaluation and sand-phase completion to Halliburton and upper completions to Baker Hughes.
Both front-end engineering and design studies have progressed well with the full support of the joint venture. The subsea FEED was awarded to SIA in late 2018, and this work is now essentially complete. With riser pipeline and subsea production systems' technical deliverables in the process of being closed out, and manufacturing slots allocated to protect delivery of long-lead items to support the start of drilling operations. All (inaudible) studies associated with the subsea production system are now complete.
The FPSO FEED was awarded to MODEC in early 2019, and this scope has progressed well. The tanker for conversion has been identified. It's a sister vessel to recent MODEC conversions, which inspected last year. And as a double-hold VLCC, it meets our basis of design for storage requirements. A VLCC also has a much larger surface footprint for future facilities expansion. Request for quotations or call for bids have been issued to all the main process and utility packages, along with the shipyard conversion work and subsequent integration and commissioning of this 100,000 barrel oil a day capacity FPSO. And as you can see, the project has progressed well with all of the key components now essentially in place, sitting with Tier 1 contractors familiar with executing projects of this nature in West Africa.
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Questions and Answers
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Matthew Cooper, Peel Hunt LLP, Research Division - Analyst [1]
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Matt Cooper, Peel Hunt. Two questions. So first one on the updated SNE development plan. Just wondered if you could give a bit more detail on that. Is there are any CapEx implications or production profile implications?
Paul Joseph Mayland, Cairn Energy PLC - COO [3]
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Yes. Sure. The SNE exploitation plan update is fairly simple, to be honest. There have been a few refinements, but I would say nothing material. And it's really just to incorporate the findings of FEED, which is a request from the government in terms of some of the design basis, some of the layouts and some of the additional details that came out of those front-end engineering design studies, including the layouts of products and so forth. But there's no sort of material changes to the reserves, the production forecast, and at this stage, the cost, which are still being refined on 1 or 2 elements, particularly the drilling and the owners' costs.
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David Matthew Round, BMO Capital Markets Equity Research - Oil and Gas Research Analyst [6]
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It's David Round from BMO. Two quick ones on SNE -- or one quick one, actually, to start with. Obviously, we've heard a bit from your partners around the time frame around FID in the second half of this year. So really just interested in any comments around your confidence of still hitting that target.
The second one, I think, Simon, you might have mentioned an attractive asset market and applying that to SNE. Obviously, you've talked in the past about a potential farm-down there. I suppose I'm just wondering, we've got all the inputs. We know what the project is potentially worth. Is that the type of project you are looking for full value given the -- what sounds like an attractive backdrop? Or how much would you be willing to leave on the table to entice a buyer? Because obviously, that has advantages for your balance sheet, et cetera.
And sorry, just thinking about -- if you were to leave something on the table, would that be likely to be oil price or resource upside?
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Simon John Thomson, Cairn Energy PLC - CEO & Executive Director [7]
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Yes. Well, dealing with the second part of your question first. I mean, I think every negotiation is different. Obviously, another thing that we do, we're looking to try and extract full value from many discussion. I suppose when you think about timing, Nova is an example of something where we're taking money off the table ahead of first production. Looking back through time, India is an example of where we waited until first production to take value off the table. So I think -- and each one of those discussions has a number of different aspects in terms of, as you say, what's the underlying price assumptions, what's the timing to market, are they fully valued, et cetera, how much other interest is there and so on and so forth.
I mean what I would say in relation to Senegal specifically is that we continue to have incoming interest, but our line remains the same. We will look at or around FID if there is an appropriate transaction that we may take some value off the table but we don't have to. And that remains the position on it.
In relation to timing and 2019 FID, I mean, we remain in close discussion with all of the JV, speaking with Woodside last week, have regular meetings with government and so on. I mean there is an alignment -- no matter what you might hear about other things, there is an alignment to move this project forward to FID. That's what everybody wants. And specifically, that is what the government wants and what they are targeting. So we're all working very hard towards that, yes. So that remains the case, FID in 2019.
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Michael J Alsford, Citigroup Inc, Research Division - Director [8]
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It's Mike Alsford from Citi. So a couple of questions. Just on SNE as we're talking about SNE. Could you maybe just speak more specifically on the financing, where we are and what needs to be done? Clearly, there's a number of parties with different requirements from a funding perspective. So could you maybe talk a bit holistically about the project from a financing perspective?
And then just on the sort of U.K. North Sea area and Norway. I was wondering if you could provide us with an overview of your assessment of how the strategy has gone since you entered the basin in 2012 with Agora. And what's worked? What hasn't worked? And should we see any changes to that U.K. Norway strategy going forward?
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Simon John Thomson, Cairn Energy PLC - CEO & Executive Director [9]
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Yes. I'll let James answer on SNE financing, I mean, on the strategy and the general entry into the U.K. and Norway. Yes, I mean, not everything is going to work. And as you pointed out, we've had a number of wells that haven't been successful. As Eric has been highlighting, what we tend to do is try and move towards more materiality in terms of prospects, in terms of newer types of plays or extending those plays. And that's higher risk. So we obviously have had success in terms of -- Nova's an example of that, and what you can realize in terms of value.
In terms of future strategy, I think we'll continue to do what we have been doing, which is constantly honing our efforts around those areas that we see as attractive, technically, first of all, most importantly, and where we think we can build a large position around success. I mean, sometimes, it takes time necessarily, I mean, don't forget, Rajasthan was the 16th well before we found Mangala. So I think everything -- it'd be nice if you had success all of the time, but I think strategically, you've got to take a longer-term view in terms of the -- of any particular basin that you're exploring. And furthermore, I mean, obviously, there's a cost advantage in Norway, but that is not the driving factor. The driving factor is we're looking for things that we think have sufficient materiality.
Eric, I don't know if there's anything else you want to comment on in there?
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Eric Hathon, Cairn Energy PLC - Director of Exploration [10]
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No. I think that's exactly right. It's a long-term view. It's a balanced program. And we do tend to target things that when they come in, will make a material difference for shareholders.
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James Donald Smith, Cairn Energy PLC - CFO & Executive Director [11]
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Yes. On SNE financing, the -- I mean, we've appointed a group of commercial banks in the various key roles to move forward with the senior debt financing and in terms of discussions on -- or agreements around terms with them, and also with the government to the extent that those interlink. That's well progressed and well defined now. So we've been working towards being ready to press go on the -- effectively, on the credit prices for that senior debt.
In terms of project definition, obviously, all key contracts have been awarded now. So from a cost point of view, that's well defined. As Paul has mentioned, there's probably a couple of areas where there's one more turn with the intention of hopefully moving those cost estimates down. But they're in a good place already, and the resource base is obviously well defined. So yes, we're close to being able to push the button on that.
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Michael J Alsford, Citigroup Inc, Research Division - Director [12]
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And just to confirm, on the financing, is it -- do you need to see the end of the arbitration process before the banks will lend?
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James Donald Smith, Cairn Energy PLC - CFO & Executive Director [13]
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Well, look, we are -- if you're talking about the FAR Woodside arbitration, we're (inaudible) to that site, I -- you wouldn't expect us to be able to comment on what the potential outcomes or the timing of that is. What we do know is that everybody in the joint venture and particularly the government is aligned on seeing this project funded in FID in the time frame that we've talked about.
No. Okay. On the financing, SNE, are you assuming you have to pay for the government's stake?
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James Donald Smith, Cairn Energy PLC - CFO & Executive Director [17]
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No.
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Al Stanton, RBC Capital Markets, LLC, Research Division - Analyst [18]
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It's -- all right. No. You're not assuming that you're paying for the stake?
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James Donald Smith, Cairn Energy PLC - CFO & Executive Director [19]
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No. The PSC is very clear that the Petrosen is fully carried through the exploration and appraisal phase and post-FID, post exploitation license towards a production license award that they pay their share of development costs. They have the option to increase their share from 10% up to 18%, and that is very much the basis on which we've been working with the government. And Petrosen has been making its preparations, yes.
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Thomas Henry Martin, Numis Securities Limited, Research Division - Analyst [24]
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Thomas from Numis. Firstly, on SNE, the rig contract has been signed, and just to be clear, are the costs associated with that now set in stone? And I think you said before that 60% or thereabouts of the development costs are rigs -- or excuse me, are wells. So does that mean that you've locked in getting on the 2/3 of the development cost?
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Paul Joseph Mayland, Cairn Energy PLC - COO [25]
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Yes. Partially, I guess, is the answer to that. So that's the variable element of the cost. But obviously, the other element is the durations. So we're still looking at the optimized schedule in terms of the batch approach which we successfully did, for example, on Kraken. Can we phase the wells? And also looking at the durations in terms of sand phase completions and upper completions. So an element of it is indeed fixed, as you said, but there's another element, which we're still trying to optimize further.
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Thomas Henry Martin, Numis Securities Limited, Research Division - Analyst [26]
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Okay. So the sort of time on the rig (sic) [well] is priced, but -- because then you said it was a rig -- I'm sorry, a well-based contract. But it's not a fixed price per well then that you've agreed.
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Paul Joseph Mayland, Cairn Energy PLC - COO [27]
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No, it's a normal day rate-based contract. But the commitment we'll make under that contract will be well-based rather than duration-based.
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Thomas Henry Martin, Numis Securities Limited, Research Division - Analyst [28]
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On the SNE FPSO footprint point that you made for future expansions, does that imply that you will have the ship coming to shore in future phases to put this in?
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Paul Joseph Mayland, Cairn Energy PLC - COO [29]
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Could you repeat the question?
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Simon John Thomson, Cairn Energy PLC - CEO & Executive Director [30]
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(inaudible)
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Thomas Henry Martin, Numis Securities Limited, Research Division - Analyst [31]
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Because you spoke about having a big footprint there to put it on...
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Paul Joseph Mayland, Cairn Energy PLC - COO [32]
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No. It's basically -- it's just the additional modules that would be added. I mean it's predominantly around the consideration of gas export, so we'll have -- we've got a basis of design of 130 million standard cubic feet a day of gas. So that's more than what we need in terms of gas lift and fuel on the FPSO. So there's a future phase of potentially gas export, which would follow, first, oil by several years. We would need to consider export risers and obviously pipeline, et cetera, to shore. So there's flexibility to do that, and there's flexibility if necessary to expand the FPSO.
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Thomas Henry Martin, Numis Securities Limited, Research Division - Analyst [33]
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Okay. So you could be loading modules onto the FPSO offshore for future expansions?
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Paul Joseph Mayland, Cairn Energy PLC - COO [34]
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Correct, yes.
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Thomas Henry Martin, Numis Securities Limited, Research Division - Analyst [37]
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Okay. And sorry, I'm almost there. Just on the bigger picture on exploration spend and strategy. I mean you touched on it a bit before. But on the one hand, you've got SNE, which it looks to me like you're well funded for a good period of time on your current interest. But obviously, if you're spending $170 million a year on exploration for multiple years, that becomes quite a large amount of money. Looking at the drilling program, should we be thinking that the exploration budget for next year is, give or take, similar to this year's budget?
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Simon John Thomson, Cairn Energy PLC - CEO & Executive Director [38]
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Yes. I mean, I think, year-on-year -- I mean, sometimes, it will be higher. Sometimes, it will be lower. But the guidance remains around about $150 million is what we would like to allocate towards exploration. I mean coming back to your point on SNE exploration, other calls on capital, we're always looking at that balance. We're always looking at the weighting and the balance between development activity and exploration. But at the end of the day, we have viewed ourselves an exploration-led company. We believe it's very important, core to the strategy to continue to provide exploration catalysts, and that's what we'll want to do. So we'll look at that in terms of our thinking around the balance of expenditure in the portfolio without being specific about what we might sell or when.
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James Thompson, JP Morgan Chase & Co, Research Division - Analyst [39]
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It's James Thompson from JP Morgan. A couple of questions from me. Just in terms of Senegal, the SNE seismic program, what are you hoping to learn from the more detailed view of the S400 sands?
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Paul Joseph Mayland, Cairn Energy PLC - COO [40]
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Yes. I mean so basically it's primarily looking to add -- to trying to improve the overall imaging and connectivity within the S400 reservoirs. And potentially, it may well help in terms of well placement and orientation.
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James William Hosie, Barclays Bank PLC, Research Division - Research Analyst [48]
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It's James Hosie from Barclays. Another question on SNE. You're very clear that you can get FID by the end of this year, but have you prepared for the worst and talked to the government about an extension to the PSC just in case?
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Simon John Thomson, Cairn Energy PLC - CEO & Executive Director [49]
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Well, that would be the job of the operator. But the answer is no. We are moving forward on the basis of FID this year.
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James William Hosie, Barclays Bank PLC, Research Division - Research Analyst [50]
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So the operator had any -- or between the JV partners discussed plans for extension?
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Simon John Thomson, Cairn Energy PLC - CEO & Executive Director [51]
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No. There's no plan for it because the plan is to get FID this year.
Any other questions? No? Well, listen, thanks for coming, and we look forward to coming back to you with news flow. Thank you.
(20min delay)