BG Group Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 2.13 | About: BG Group (BRGYY)

BG Group (OTCQX:BRGYY) Q1 2013 Earnings Call May 2, 2013 7:00 AM ET

Executives

Chris Finlayson - Chief Executive Officer, Managing Director of Bg Advance, Executive Director, Chairman of Investment Committee, Chairman of Exploration and Appraisal Committee, Chairman of Governance Committee, Member of Finance Committee and Member of Chairmans Committee

Den Jones - Interim Chief Financial Officer, Financial Controller, Executive Director, Chairman of Risk Management Committee, Member of Chairmans Committee, Member of Finance Committee and Member of Investment Committee

Analysts

Brendan Warn - Jefferies & Company, Inc., Research Division

Oswald Clint - Sanford C. Bernstein & Co., LLC., Research Division

Theepan Jothilingam - Nomura Securities Co. Ltd., Research Division

Thomas Yoichi Adolff - Crédit Suisse AG, Research Division

Jon Rigby - UBS Investment Bank, Research Division

Neill Morton - Investec Securities (NASDAQ:UK), Research Division

Michele della Vigna - Goldman Sachs Group Inc., Research Division

Irene Himona - Societe Generale Cross Asset Research

Michael J. Alsford - Citigroup Inc, Research Division

Lucas Herrmann - Deutsche Bank AG, Research Division

Frederick Lucas - JP Morgan Chase & Co, Research Division

Rahim Karim - Barclays Capital, Research Division

Martijn Rats - Morgan Stanley, Research Division

Jason Gammel - Macquarie Research

Alejandro Demichelis - Exane BNP Paribas, Research Division

Andrew Whittock - Liberum Capital Limited, Research Division

Jason Kenney - Grupo Santander, Research Division

Unknown Executive

Good afternoon, and welcome to BG Group's First Quarter Results Conference Call. During the course of this call, our Chief Executive, Chris Finlayson; and our Interim Chief Financial Officer, Den Jones, will take you through the quarter's key business highlights, then Chris and Den will answer your questions.

During the call, we will be focusing on our business performance results, as highlighted in our results statement. We will also be making various forward-looking statements. Factors that could cause our actual results to differ materially from the results we currently expect are identified in detail in BG Group's annual report and accounts for 2012. In addition, please note that we have prepared a set of slides covering the topics that Chris and Den will be discussing. They can be accessed through the IR section of BG Group's website. We will not be referring to the slides specifically, but we would advise you to review them in addition to our results release.

Thank you. And now over to Chris.

Chris Finlayson

Good afternoon, ladies and gentlemen, and thank you for joining us on our call today. You'll have seen our results statement published earlier today, and before I hand over to Den to take you through our financial performance, I'd like to briefly update you on the progress we've made on our key milestones, our major growth projects and in our base assets. The focus for today is our operational and financial performance for the first quarter, and I would ask you that any questions relating to strategy should be deferred until our presentation on May 14 in London.

Now, in February, I outlined our commitment to excellence in execution across both our base assets and our growth projects, and that underpinned by relentless focus on safety. This morning, I want to update you on our progress.

I'm pleased to report that we have delivered on the 3 key milestones we set out for the first quarter and also seen a significant improvement in safety performance in the key focus area of Australia. In January, the second FPSO in Brazil started commercial production, on schedule and on budget. It's currently producing, it's around 25,000 barrels of oil per day from just a single producer well. In the North Sea, we brought our Everest East expansion project on stream, and production performance is in line with expectations at over 10,000 barrels a day. Production also resumed from the Elgin/Franklin complex.

Elsewhere, we've also made progress on derisking our remaining milestones for 2013. We committed to bringing a third FPSO onstream offshore Brazil in the second quarter and also to the safe completion of a plant shutdown at our Karachaganak field in Kazakhstan. Today, I can confirm that FPSO 3 is moored and positioned on the Lula field and is on schedule for first production during the second quarter. At Karachaganak, the 30-day maintenance shutdown started as planned on 18th of April and is progressing to schedule. Additionally, all modules for the Jasmine field in the North Sea have now been installed, ahead of schedule, thus substantially derisking the project prior to start-up in the fourth quarter.

On our major growth projects in Australia and Brazil, we continue to make good progress against our plans. In Australia, despite heavy rain throughout the first quarter, we made good progress on the QCLNG projects and we remain on target both for first LNG in 2014 and against the USD 20.4 billion Phase 1 cost estimates. Due to the adverse weather, we were slightly behind our first quarter well target, although we have already recovered the impact, with a record 73 development wells drilled in April. We also achieved a critical project milestone with the safe connection of Curtis Island to the mainland through Australia's longest large-diameter twin pipe-pull. This is a highly complex and technically challenging engineering feat comprising 1.2 million man-hours worked, delivered on time and with 0 injuries. On Curtis Island itself, all modules for Train 1 and the common facilities have been delivered, and the steel roof on the first LNG tank has now been raised.

In Brazil, I've already mentioned the start-up of FPSO 2 on time and on budget. Combined gross production from FPSOs 1 and 2 was around 140,000 barrels of oil equivalent per day during April. And with the production from the ongoing extended well test on Sapinhoa North, this increased to over 150,000 barrels per day. These volumes will be supplemented with initial production from the first well on FPSO 3, which is due on stream in the second quarter, as planned. Production from FPSOs 2 and 3 will ramp up in the fourth quarter as new wells are brought online via buoyancy supported riser systems, 2 of which are already in Brazil. FPSOs 4 and 5 are progressing on time and on budget. They are around 60% complete, and one hull is now en route to Brazil for topside integration.

The appraisal program on Iara in BM-S-11 continues, and initial results from the Iara-4 well have confirmed a better-than-expected reservoir quality. Elsewhere in Brazil, the Sagittario exploration well BM-S-50 has encountered good-quality oil and is drilling to deeper targets at the moment.

Other notable events in the quarter included the completion of our current appraisal program on the Jodari field in Block 1, offshore Tanzania, with the drill stem test there showing better-than-expected reservoir properties.

On the Mzia discovery in the same block, we've also seen better-than-expected results from a drill stem test on the deeper Cretaceous play. These good results should have a positive impact on development costs. The drillship Deepsea Metro-1 is now drilling the Ngisi 1 prospect in Block 4 and will also appraise the easterly extension of the Chewa discovery until the middle of the year when the current contract ends.

We are currently sourcing a new rig to continue our campaigns in Tanzania and then in Kenya. In Egypt, we sanctioned the next development phase for the West Delta Deep Marine concession, Phase 9a. Drilling for this phase has already started, and it will deliver new production in 2014. The receivables recovery mechanism operated as agreed during the quarter, with a USD 100 million reduction in the domestic gas receivables balance. However, clearly, the environment in Egypt remains challenging, and we will continue to monitor the situation very closely.

Our LNG business continue to develop long-term supply deals to high-growth markets, finalizing the sales agreement for up to 2.5 million tonnes per annum to India beginning in 2015. Whilst in Singapore, the LNG import terminal has been completed and the first BG cargo is due to arrive next week.

That concludes my brief summary, and now over to Den for a run-through of the financial and operational metrics.

Den Jones

Thank you, Chris, and good afternoon, ladies and gentlemen.

As you'll have seen, the group's total operating profit for the first quarter was down 5% to $2.1 billion. Upstream total operating profit for the quarter of $1.4 billion was 7% lower as the benefit of higher realized gas prices was more than offset by a 3% reduction in volumes, together with higher operating and depreciation costs.

The overall decrease in volumes was in line with our expectations. Production in the quarter was lower in Egypt due to reservoir decline, and also Elgin/Franklin, prior to the resumption of production in March. These reductions were partly offset by the new developments that came on-stream in the last 12 months, including the continued ramp-up of Brazil and East Everest in the U.K. North Sea.

E&P operating costs increased principally due to higher royalties from increased production in Brazil and Bolivia, while the depreciation charge increased due to new developments coming on-stream.

At reference conditions, our full year expectations for both these metrics remain within the per barrel guidance given in February of this year of $10.5 to $11 for DD&A and $11 to $11.5 for operating costs.

LNG Shipping & Marketing total operating profit of $742 million in the quarter was 3% higher. Whilst the results benefited from lower hedging losses, this was partly offset by reduced margins, predominantly driven by the pricing change on cargoes delivered to Chile. These results are consistent with the expected quarterly phasing underpinning our 2013 full year operating profit outlook of between $2.5 billion and $2.7 billion.

Earnings for the group were down 3% to $1.2 billion, reflecting the decrease in operating profit partly offset by a slightly lower effective tax rate of 44%. The group's capital investment on a cash basis of $2.6 billion in the quarter was up 5%. Cash generated from operations increased by 3% to $2.7 billion as a result of favorable working capital movements.

During the quarter, the group's portfolio rationalization program progressed, with the completion of the sale of noncore producing asset And acreage in the Cotton Valley formation in East Texas and North Louisiana. The net production we expected from these assets in 2013 was 3,000 barrels of oil equivalent per day.

As the end of the quarter, the group's net debt and gearing ratio were $10.6 billion and 23.5%, respectively.

Thank you very much for your attention. And now, back to Chris.

Chris Finlayson

Thank you, Den. And with -- now, we're happy to take your questions. As I mentioned at the start of the call, the focus for today is on our first quarter performance in the short term. Any questions relating to strategy, we'd appreciate if you will defer them until our presentation on May 14 in London and, certainly, won't be answered until our presentation in May 14 in London.

So I'd ask you to please state your name and your company when you're asking a question. Thank you very much.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Brendan Warn from Jefferies.

Brendan Warn - Jefferies & Company, Inc., Research Division

Gentlemen, it's Brendan Warn from Jefferies. Just 2 quick questions, and one you've probably answered in a roundabout way. Just in terms of regional production and variances, just compared to plan within your other assets you haven't mentioned. If you can just give us a first quarter update. I was hoping that you'd continue your breakout of production volumes by country that you showed on fourth quarter. And then just second question relating to, say, exploration activities in your first quarter, just an update. And if you can give, call it, like, a dry well costs for notice and timing. I believe it's now fourth quarter this year. And then also, you've seen constraints sourcing the rig for East Africa. And have there been ordering of long lead items and the likes for Tanzania and Kenya? And I guess, with Cheniere, is now -- is that now well into next year in terms of drilling?

Chris Finlayson

Okay. Quite a few questions there. We will be giving more disclosure at the strategy presentation going forward. I note, the comment with regards to country-by-country production, as you say, we haven't given at this time, and we'll take that on-board and think about it. With regard to East Africa, I don't think we -- certainly, we have no issue with regard to long lead items. We would be in a position to go -- to move forward with a continuous rig program if that would happen to be the rig availability. We have been looking at a number of rig options, and I think we are now close to resolving this question moving forward.

Unknown Executive

And notice...

Chris Finlayson

Oh, in terms of notice, well, I'm not giving you dry hole cost because we're halfway down the well. It is correct that we are now looking at a completion of the well in Q3, end of Q3, beginning of Q4. It's an extremely deep, extremely complex well, as we've said before. But at the moment, things are going smoothly, if a little slower than we'd like.

Operator

Our next question comes from the line of Oswald Clint from Sanford Bernstein.

Oswald Clint - Sanford C. Bernstein & Co., LLC., Research Division

If I could just ask, Chris, if you can share the 1Q over 1Q last year, the decline in the Egyptian volumes, if you could be specific on that, please? And then secondly, just on your comments on Sagittario and Iara, with the activity in the first quarter, can you maybe talk a bit more by that in terms of your expectations. Did these wells -- they did come in better, but are you going to talk about volumes on both of these prospects at some stage or even what's the timeline for future developments?

Chris Finlayson

Okay. In terms of Egypt volumes, what I would say is that we produced in Q1 10 LNG cargoes out of Egypt, which was in line with our plan. And perhaps to just maybe answer a few other more generic Egypt questions at the same time, I'll give you a bit of a background of our view on the situation in Egypt. As I said in the script, we share -- we worry, of course, ourselves about the macroeconomic and political situation and what the impacts of that will be. On balance, at the moment, the government is meeting its obligations, and we are moving forward with development. But of course, we keep an extremely careful eye on that as we go forward. Roughly half the gas production goes to the domestic market, roughly half goes to export, from WDDM. And whilst there is some seasonal variability allowed within that, within the agreement, as I say, so far, the government has stuck to its agreements and we have reduced the debt $100 million during the year. We do expect that the contracts will be honored, and given that, all forecast receivables should be current by 2017. And we have engaged at the highest level of government on that. So we're monitoring the situation closely. We engage with the stakeholders. And perhaps most importantly, I would say that the 2013 guidance for group production and for LNG operating profit remains unchanged. Turning to your Brazil question -- and sort of thank you for asking it because it's an opportunity to get a degree of my excitement over what's going on over at Iara out into a more public domain. We've always been very optimistic about Iara. It is a huge resource. It has a type close to that of Lula. But to my mind, it's always been very much neglected and undervalued in the market. We've now drilling 2 -- we're drilling 1 well at the moment, which is coming in with better-than-expected drilling results, so that's good news. And we have 2 more appraisal wells coming up next year: one in the not -- unappraised area of the field, and then the second well, Iara 6, which will be a high-angle extended well test where we'll do acid frac-ing to test whether we can, as we believe we can, get similar production rates from Iara, as we see in the other fields in the pre-salts in the Santos Basin. So I'm really excited about those prospects looking forward. We've got very good alignments with Petrobras on this now, and I would say that what we have at the moment is really a holder for the future developments of Iara because this is a massive and under-appraised field where we have a lot of work still to do. In terms of Sagittario, this is essentially the last exploration prospect remaining in our existing acreage. We found reservoir and oil, as expected. We found it shows that we have gone quite deep. We have set intermediate casing, which is why it's taking some time to drill the reservoir section. And we are now drilling ahead for the next few days to try and determine the length of the column. That, of course, would be the first well on the field. Development would be a number of years away, as we would then need to look and see what we needed to do in terms of a future appraisal program.

Operator

Our next question comes from the line of Theepan Jothilingam from Nomura International.

Theepan Jothilingam - Nomura Securities Co. Ltd., Research Division

Just going back to the volume guidance for 2013. Now that we've seen 3 months production, and also Elgin-Franklin up and running. I'm just wanting to know where you thought the biggest swing factors are in that range, the 630,000 to 660,000. And then the second question, I think Den mentioned that you saw the unwinding of losses on LNG hedging being offset by low profitability to Chile. I was just wondering want to know -- wanting to know whether you could quantify that or not? And my final question is just coming back to Brazil. Chris, you mentioned that the buoyancy -- 2 of the buoyancy vessels have arrived. Could you just talk about why it takes so long to get the risers hooked up for Q4? Is there -- coming back to my first question, is there a possibility to get an earlier hook up to the buoyancy vessels or not in Brazil?

Chris Finlayson

Okay, thanks, Theepan. So with the first question, about what is -- are the main factors in our range going forward, it -- clearly, it is the completion on-time of the remaining milestones that we have during the year. It is bringing back from the major shutdowns that we highlighted in Kazakhstan and also in the U.K. sector later in the year, that we delivered those on time and on budget. And it is also the rate at which the operator, Total, manages to increase the flow rates from Elgin/Franklin, the assumptions that they are making, which is something that is still they are working internally and still need to share with us as non-operative partners on that field. So that's what I'd probably highlight as the major uncertainties going forward. That said, we retain our guidance of 630,000 to 660,000 with the portfolio that we had at the start of the year. Now turning to -- I'm going to leave Den to answer the question on LNG guidance, but turning to your question on Brazil and the buoyancy supported risers. Maybe what we'll do, Theepan, is we'll add us a picture to the ones that we're putting on the web now to show you what these buoys look like. These are massive structures which are essentially suspended by positive buoyancy some 600 feet below the sea surface. Steel catenary risers are used to link those to the wellheads, and then flexible jumpers to take -- go across from there to the vessels. They are unique at this size and scale in the industry. So clearly, Petrobras as operator is being relatively cautious about the likely installation times, but we are in agreement with them on that and we think that these times are reasonable 50-50s given the fact that we are putting our first-time technology in place. And then I'll ask Den now to answer the LNG question.

Den Jones

Hi, Theepan. I mean, on LNG, I can't give you amounts, Theepan, but you'll see in the back, we delivered 10 cargoes in Chile, we -- as we did last quarter, and this is the first quarter where we've had the full impact of the Chile -- the richer [ph] consolidated price coming through. And on the hedging, whilst last year we were substantially hedged, this year, as we said before, we're substantially unhedged, although there is a proportion of that, that comes through the remainder of this year. And then, we become unhedged after Q1 next year. So there's a kind of counterbalancing there. But I'm not going to give you full amounts, but full year guidance remains at $2.5 billion to $2.7 billion. We've had a great start, and the phasing will come through rest of the year.

Operator

Our next question comes from the line of Thomas Adolff from Crédit Suisse.

Thomas Yoichi Adolff - Crédit Suisse AG, Research Division

My questions, around Tanzania, Egypt and Australia. Really quick one on Tanzania. And on the rig count, I mean, in essence, if you think about the size of the acreage and the prospectivity you have there, should we not be really thinking about potentially 2 rigs rather than 1 rig? And on Egypt, I think you sanctioned Phase 9a. And I was wondering, is part of that you're putting more money into work, whether do you -- whether you have some form of guarantee of LNG exports, i.e. no further diversion to the domestic market? I'm asking this because what we're seeing at the Damietta plant. And finally, just on Australia, you reiterated your CapEx to first LNG, but I was just wondering how we should actually think about potentially higher costs from the changing legislation on the back of community concerns. And I'm referring here to what we've seen with Origin recently, which increased CapEx for additional water costs, or around issues such as disposable of brine and fugitive emissions.

Chris Finlayson

Okay, thank you. All right, so 3 questions there. I think the first one is quite a simple one to answer. I mean, the Deepsea-Metro rig in Tanzania has given us actually exceptional well performance. We have continually increased the pace of exploration and appraisal and, now, well testing. Using that rig, it's been an outstanding performer. So we actually don't see the need for a second rig. We have several more prospects that we have drill-ready, but we would be able to absolutely keep up with the pace at which we can generate prospects with the rig resources that we have available. So no, we're not looking at a second rig. Turning to Egypt, I cannot discuss with you the details of any commercial arrangements that we have made with the Egyptian government, but I would point out to you that the situation of -- between Damietta and the ELNG plant are different in several ways. Firstly, the Damietta plant has always been fed from the grid rather than having dedicated fields flowing directly into the plant, which we have at ELNG. And secondly, the setup of -- the physical setup of the equipment in ELNG means that it is not physically possible to divert all volumes from ELNG direct to the domestic grid. So the situations are not directly comparable. In terms of Australia, we do have indeed. We reiterate and we keep reiterating that we believe we will deliver our Phase 1 costs, that's costs to the end of 2014, within the previously announced budget. I think people forgot -- forget as time moves on and other information comes out that we did declare the cost increase perhaps before others have done. But the fact that others have declared a further cost increase in the last few months does not mean that we have another cost increase to declare. We believe we will deliver within that. You talk about some of the factors perhaps pushing cost upwards. I would remind you that, as you'll be aware, increase in -- the mining boom has turned to a mining slump. And we see a lot of that, the resources that we need in the contracting sector, which are civil contracting resources, relatively low-tech pipelining resources, coming free from mining projects. And that actually is countering any upward pressure. So I think the Australian market is slightly bifurcating. And the cost pressures that you've seen in the last few weeks. We talked about offshore, Western Australia, does not reflect the coal seam gas markets in Queensland, but as you say, there are still challenges, but at the same time, there are other areas where we're seeing cost pressures definitely easing.

Thomas Yoichi Adolff - Crédit Suisse AG, Research Division

Okay, perfect. Just a quick follow-up on Australia again. Obviously, you have approval for 6,000 wells. Does it cover Tier 1 and Tier 2? But I was wondering whether it's kind of getting trickier to gain environmental approval for new projects and expansion? I'm thinking about Tier 3.

Chris Finlayson

Yes, when you look at -- all this has happened on the approval front in the last few months, has been this insertion of a layer of federal approval for water use as part of the overall environmental management plan. And you might have seen a speech that our Chairman in Australia, Cat Tanna, gave last week to the American chamber in Brisbane at which she emphasized that this was a poorly thought little piece of legislation since it only applied to the coal seam gas and mining industries, which is 4% of water, as opposed to the 50% of water that is used by agriculture. And there was actually a very positive reaction coming to that from the political establishment. It's not through the Australian Congress yet. We'll see whether it gets through before the elections are called. But at the same time, we see it as being an irritation, as opposed to something that will fundamentally change the costs or economics of the project going forward. What will determine when we're ready to take a decision on Train 3 is when we have completed our ongoing appraisal activities in the different plays that we're working in Australia, and are absolutely sure that we have the resource base that allows us to move forward with it.

Operator

Our next question comes from the line of Jon Rigby from UBS.

Jon Rigby - UBS Investment Bank, Research Division

3 quick questions, please? The first is on going back to Chile, I think there was some discussion last year that, with the shortfalls in Egypt, and then you may be able to sort of cross-attach the 2 and say -- and effectively not deliver your full contractual volumes to Chile because you had a shortfall in your supply side. And I just wonder where you are with that? Should we be assuming that you will fullfill your entire contract volumes into Chile when we do our modeling and whether there are any workarounds in that? Second is you referred to the disposal in the U.S. of noncore properties. So it kind of prompts the question, I guess, is where we are and where you stand on the U.S. at the moment and what you are seeing in terms of your expectations on gas production over the next of couple of years, please, and maybe where we are sequentially at the moment. And then just thirdly, and this is not expressing any dissatisfaction with Den's performance, but are you able to give us some kind of indication of when you would expect to be making a formal appointment of a long-term CFO?

Den Jones

Thanks, Jon.

Chris Finlayson

He's really looking relieved, Jon. Okay, so for the first question, no, I'm afraid we're not going to give you the details of the commercial discussions around our supply contracts into Chile. We just highlight the fact we've reiterated our LNG guidance for the year. Your second --, I've forgotten the second question. Sorry?

Jon Rigby - UBS Investment Bank, Research Division

On where you are in the U.S.

Chris Finlayson

On where we are in the U.S. Now of course, here's where you do start to stray, in the territory that we're going to talk about on the 14th. What I would say, the comment we made, actually, at the year end remains true, that we see the U.S. as a resource where we have a tremendous amount of flexibility in terms of our pace of development. We cut down from, whatever, 30 rigs down to 4, as when the price went down, as did the pitch to 280. As of last week, we were back up to 450 or so. One thing is clear, that we're not going to do anything which looks anything like a fast sale. The sale of noncore assets was a very large number of very old, low-producing wells which have made tremendous sense for us to get off our books and not -- and avoid the need to look at asset integrity issues which might arise across such a large well fleet. So it does not give you a direction of travel for the Lower 48 for us. It was a sensible small divestment to make, and we'll be talking more about our longer-term strategy, which obviously includes what we're going to do in the Lower 48, on the -- in May.

Jon Rigby - UBS Investment Bank, Research Division

Okay. I guess, just as a follow-up, I -- and to echo a number of other comments that have been made, I guess, when you've got the degree of flexibility you have in businesses like the U.S., is -- having some sort of regional or country production reporting on a quarterly basis would be quite useful.

Chris Finlayson

Noted.

Neill Morton - Investec Securities (UK), Research Division

All right. And the CFO, are we going to see one before the end of the year?

Chris Finlayson

Yes. We are moving forward through the process, and we are -- certainly, before the end of the year, you will see one.

Operator

Ladies and gentlemen, we have one question from the line of Michele della Vigna from Goldman Sachs.

Michele della Vigna - Goldman Sachs Group Inc., Research Division

It's Michele della Vigna here. 2, if I may. First of all, I was wondering if you could quantify the impact of the maintenance activity you expect in Q2 and in Q3? And secondly, I was wondering when you expect closing the deal with CNOOC and what are still the key regulatory hurdles waiting there?

Chris Finlayson

Okay, we don't break out individually the impacts of the -- of every shutdown. It would make the the data very complex. And we keep our IR people constantly engaged in asking questions around what does this figure mean and what does that figure mean. So I'm afraid not, no. In terms of the CNOOC deal, I think I can say that we are extremely close to signature of the fully termed agreements and that what will then be required is essentially clearance from the Australian government and from the Chinese government, both of which look to be very favorably disposed towards the deal.

Operator

Our next question comes from the line of Irene Himona from SG.

Irene Himona - Societe Generale Cross Asset Research

Most of my questions have been answered. I'll just have 2 quick ones, please. Firstly, is there any guidance you can provide on full year group tax rate? And secondly, are you prepared to tell us what your share of production was in Q1 in 2 areas, Karachaganak and in the U.S.?

Den Jones

Again, on the tax, our full year effective rates is 44%. That's what we said in Q4. So don't mind our [ph] -- no change.

Chris Finlayson

Your second question comes then back to the same one about aerial splits. And I undertook at the start that we go away and think about what we -- if we were prepared to say anything further on that.

Operator

Our next question comes from the line of Michael Alsford from Citi.

Michael J. Alsford - Citigroup Inc, Research Division

It's Michael Alsford from Citi. Just a quick question on the U.K. I know you touched a little bit on the opening front. Then but maybe if we took a second step back and look at the U.K. as a whole, one of the things you sort of set out in the fourth quarter results was improving production efficiency in that area. Could you maybe talk a little bit about maybe as of the target you have maybe year-on-year in terms of incremental volumes that you want to add within the U.K. from improvements you're wanting to do with those assets? Or maybe look at the percentage improvement that you're trying to deliver and how that's going. That'll be great.

Chris Finlayson

Yes, I think the important thing to know, and I think we did talk about this certainly in the Q&As around Q4 is that first important thing to say is that we are doing all our safety critical maintenance on our operated platforms that we need to do in the U.K. But because of, essentially, bed limitations, these are early '90s platforms with small living quarters on board. We have been constrained in doing the type of work we'd like to do to raise production efficiency. That will be resolved but not till next year because that's when we could source the floatels we needed for both Lomond and Everest, to get them alongside, and to carry out a lot of this work. So we are constrained in the amount of work we can liquidate to actually improve operating performance. That said, we have seen better operating performance this year than last year, in particular, as you will have been -- I'm sure will have been aware from other sources, on the Buzzard field, which is still our largest single contributor in the North Sea and where there has been a very significant improvement so far this year over performance last year.

Michael J. Alsford - Citigroup Inc, Research Division

And maybe just a quick follow-up, just on the CapEx, then. The run rate is a little bit lower than guidance. I'm assuming there will be a catch-up in the sort of second half of the year. Is that correct?

Den Jones

That's right, yes. We're expecting a catch-up in Q2 and Q3 and Q4. So yes, we're still happy with our $12 billion guidance for the full year of cash CapEx.

Operator

Our next question comes from the line of Lucas Herrmann from Deutsche Bank.

Lucas Herrmann - Deutsche Bank AG, Research Division

A couple of quick questions, if I might. Firstly, can you just lay down what the milestones that we should expect to see around Australia are on now for the rest of the year? And secondly, going back to performance you made about Egypt and that certain volumes, I guess, can't be diverted, can you give us an indication of the proportion of gas that can't be diverted? And also, with both trains running or, I mean, given the volumes coming out, it seems that the volume of LNG released is equivalent to 1 train. So is 1 now sitting idle? Or do you run the 2 of them at much lower utilization rates?

Chris Finlayson

Okay, a couple of questions there. The first one is very easy to answer. If you look at the presentation, which I have put up online, Slide #7 will give you the detailed guidelines for 2013 and 2014 for QCLNG. So I think you'll find all the information you need to answer your question in that slide. It's on a quarter-by-quarter basis. But with regard to Egypt, as I said, not all volumes can be diverted. There is a constraint on the -- on export, on what the export infrastructure can take. I'm not going to tell you exactly what those figures are, but I can tell you that, at the moment, roughly half the gas goes to LNG and roughly half goes to the domestic. Therefore, that's over the first quarter figures.

Lucas Herrmann - Deutsche Bank AG, Research Division

But Chris, you can indicate whether, the gas that goes in the plant, whether any of that is divertible or not?

Chris Finlayson

Clearly, there is variability. There always have been variability from season to season. So yes, some of it is divertible, but not all of it. To your last question, yes, one train has been shut down, so the plant is working on one train at the moment.

Operator

Our next question comes from the line of Fred Lucas from JPMorgan.

Frederick Lucas - JP Morgan Chase & Co, Research Division

A question on the LNG guidance. When you gave the $2.5 billion to $2.7 billion guidance, I think it was premised upon conditions prevailing when you gave the guidance since which time Henry Hub's up and the oil price is down. So I wondered where you got the slack to hold the guidance for the year. And the second question is around Australia. I hear what you say about catching up on the number of wells drilled, but what can you say about the course of the well results you're seeing? Are they deviating at all from your expectations? I understand there can be quite a wide spread of well results there. And can you say anything at all about discussions you're having with Shell? I see today that they've -- they look to abandon the standalone R-LNG project they're in discussions with you and 2 other CBM to LNG project sponsors. Anything you can say that would be interesting?

Den Jones

I can. Thank you for asking the LNG question. And when we gave the guidance of $2.5 billion to $2.7 billion, the conditions at the time, just to remind people, was an oil price of 108 and a Henry Hub of 3.4. Obviously, the kind of spread has shortened in the meantime. But as we look forward, we still believe that we will be in the range of $2.5 billion to $2.7 billion given the flexibility, cargoes from Egypt, et cetera, destination. The basis of our LNG business is from our 4 kind of legacy cut-supply contracts giving us the destination or flexibility that will deliver the range of values we think we'll get. So we're -- we feel confident about the $2.5 billion to $2.7 billion.

Chris Finlayson

And to the second question, with regards to Australia and well results. And I think it's interesting, just coming back for a minute to just general progress: We've -- I think we've all had a lot of focus on wells and would we get enough wells drilled in time for startup, and I would just recommend that we all start worrying about something else. We'll -- we are drilling the wells at a rate actually higher than we need to do to deliver them to startup. We may even look at reducing our level of rig resource because the drilling process is getting so effective. We clearly need to connect those wells up, and I'm pleased to say that, that is also now ramping up very fast. And I'm confident that we can -- that we will deliver on that as well. So I just feel that we can take the availability of wells off the critical path. The productivity of those wells, as you know, that we work with type curves, some wells are better than the type curve and some wells are worse than the type curve. As we build our well stock, we are seeing that distribution reinforced, so we are not seeing substantially worse results or substantially better results overall. So we're not changing our guidance there about the number of wells that we need.

Frederick Lucas - JP Morgan Chase & Co, Research Division

And any comments on discussions with Shell about processing their gas?

Chris Finlayson

No.

Operator

Our next question comes from the line of Rahim Karim from Barclays.

Rahim Karim - Barclays Capital, Research Division

Three questions, if I may. Just the first on the gas prices, in particular the international gas prices, a bit weaker than I had expected. If you could provide any color on that, that would be useful. The second question, just around, actually, production guidance. And of course, you talked about it reflecting the portfolio at the beginning of the year. If you could just help us understand what the impacts of divestments. You've obviously articulated the Cotton Valley on Australia. Do you see that being an off-slack in the 630 to 660 to absorb these divestments? Or should we expect that range to move down as those deals complete? And then the third was just to go back to DD&A. I think, Den, you reiterated the guidance for $10.50 to $11. First quarter was above the top end of that range. And with new startups during the course of the year, I had expected an output trajectory in that number. So any color on that would also be appreciated.

Den Jones

Okay. I mean, on the DD&A, we're still -- we'll reflect to this, our full year guidance as appropriate. I mean, we're just slightly above in the first quarter. But for the full year, we still believe we'll be in our guidance range. On the pricing you mentioned, I mean, no real further color to add. I mean, as your colleague point out, it's natural gas price actually above where we were last year but comes to just slightly below fourth quarter last year. No real color more to add to that really. What's your other question? Sorry.

Rahim Karim - Barclays Capital, Research Division

So just -- sorry. Just in terms of the production range that you've given in terms of 630, 660.

Chris Finlayson

Okay. I mean, we always -- I would like to make clear, you -- we caveat a range if it is with the current portfolio because I don't want getting people the false impression that you can go out and, if you were to do a significant deal, that somehow that doesn't impact on production. But to your specific point about Australia, any -- there would be no impact of completing the CNOOC deal on the production outlook for the year.

Operator

Our next question comes from Martijn Rats from Morgan Stanley.

Martijn Rats - Morgan Stanley, Research Division

All my questions have been answered. Thank you.

Operator

Our next question comes from the line of Jason Gammel from Macquarie.

Jason Gammel - Macquarie Research

I really just have a couple of follow-up questions to some things that were previously talked about. The first is on QCLNG. You mentioned, Chris, that drilling is off the critical path, most of the -- most difficult engineering feats have been completed. Can you talk about what is critical path at this point? Is it water handling, central compression, et cetera in the field? Is it knitting together the modules for the downstream? Or is it something else I'm missing? Second question is on Iara and what is apparently a lower-recovery factor that we have with Lula. Can you talk a little bit about why the reservoir would have the lower overall deliverability? Is this an issue of permeability, is it reservoir continuity? And I suppose, really, does that mean that high-angle drilling and completions could begin to solve some of those issues?

Chris Finlayson

Okay. On the question of Queensland and what defines a critical path, I mean, we are making really good progress with all elements of the project. So I certainly don't see progress on the island as being on the critical path. I think that will be delivered. The -- why we were so strongly highlighting the crossing with -- of the Narrows was that, that had, for some time, been seen as both the most engineering -- biggest engineering challenge and environmental challenge with the possibility of having to stop work with stability [ph] when we were pulling these dredging across the Narrows. And that proved to be much easier than we expected. We got that in place. And that took a real concern that I had off the critical path. If you look at the upstream part of the project, gathering is that, once to drilled away, you've got to gather it. The gathering is now really gathering pace, sorry for the pun. And we think that, that will be fine. The headers for collecting gas are also moving ahead very well. The new flow station, new generation of flow stations and gas compression, there's a lot ongoing. They're all rising out of the ground as we speak. They're relatively technically simple. We just need to get through the bulk work in time with our a plan. The water treatment plant, the first water treatment plant or the first major 1 of 2 small plants, are on stream and operating at capacity already. The major Kenya water treatment plant is in the final stages of commissioning. We're in the process of selecting an operator for that plant. And we anticipate that, that will be on-stream in, I think, Q3 which is in time with when we require it, which leads me to what will probably end up us defining the critical path, which is completion of the pipeline because we have many creek, road and rail crossings still to complete on there. It's -- if you like, the -- really, the one single point. If you haven't got -- if one joint is out the pipeline, you haven't got an export route. So I think that will probably, in the end, be the critical path. But that is on-schedule for completion before year's end at the moment. And we will then -- as we said at Q4, our target is gas on the island around the year end to start commissioning off the plant which, in itself, is a major project starting with the commissioning of the power generation.

Unknown Executive

The Iara...

Chris Finlayson

Okay, so let -- I just wanted to see if you had any follow-ups on that. If not, I'll move on to Iara. As I said in the first question, I think that Iara is actually a very good news story that's coming through there. Iara always assumed, both in Petrobras' figures and in our figures that we've put out to the market before, a significantly lower recovery factor because, for us, the -- where to extent permeability were lower in this field. Now the reasons why they are is essentially due to the depths of deposition of the carbonates which is remarkably sensitive to water depth at the time they were deposited. And a depth -- a change in depth of what was a huge lagoon at the time of 80 centimeters makes a significant difference to the vertical permeability within the reservoir. So I think there was, for quite some time, a degree of concern about how economic was Iara going to be, what would the ultimate recovery be coming from there. And the message I'm trying to get out now is that, the activities that we have ongoing this year and planned for next year, we think, will significantly de-risk this and allow us and the rest of the markets to see the value in what is a giant field.

Jason Gammel - Macquarie Research

Okay, that's very helpful. Any comments on why an acid frac is the first step? Do you think hydraulic frac-ing, at some point, would be feasible there?

Unknown Executive

I think it would be. But an acid frac, because it's carbonate, so it's the most effective.

Operator

Our next question comes from Alexander (sic) [Alejandro] Demichelis from Exane BNP Paribas.

Alejandro Demichelis - Exane BNP Paribas, Research Division

I'm Alejandro Demichelis from Exane BNP Paribas. A couple of questions here. In terms of cash flow, we have seen the working capital helping you here this quarter. Maybe you can give us some indication of how you see that evolving over the course of the -- and the second question is in -- the credit rating agencies have put you on a negative word for some time now. Are you expecting to engage with them kind of getting closer to the 14th of May? Or that kind of conversation has started already?

Den Jones

[indiscernible] cash flow obviously benefited from working capital improvements. And some of that is just on the receivable balance, and some of that is actually a reduction in receivables, domestic receivables, from Egypt. But you see, the cash flow coming through the rest of the year. Obviously, we're going through a high capital intensity this year of $12 billion in CapEx going out, but we've diversified our funding sources across over the last year or so with the use of hybrids, talking to the these ECA agents, et cetera. So we've got $4 billion in the bank on the balance sheet. We're very happy with where we are on fundings. But regarding the credit rating agencies, obviously, we spoke to them last year. As you correctly said, most of them put us-- or all of them put us on negative watch, or outlook in Q4 of last year after Q3. And obviously, we're talking to them as we go through the whole process of obviously the strategy presentation, indeed after strategy presentation as well. So we have a long-term and we maintain a long-term commitment to a mid single A rating. And if you look at what we've achieved over the year through the portfolio rationalization, et cetera, so we're pretty comfortable.

Alejandro Demichelis - Exane BNP Paribas, Research Division

So the commitment to the mid single A, that's still kind of where you want to be, yes?

Den Jones

Yes. We have a long-term commitment to a single A rating, yes.

Operator

Our next question comes from the line of Andrew Whittock from Liberum.

Andrew Whittock - Liberum Capital Limited, Research Division

A couple of questions left, I'm afraid. You've given us some detail on rest of the Phase 9a. I wonder if you could tell us what the capital cost of that is going to be over the next 2 years. And secondly, is it possible to provide us with the segmental analysis broken down by quarter for 2012, consistent with the Q1 results?

Den Jones

Sorry, can you say that last question again?

Andrew Whittock - Liberum Capital Limited, Research Division

Is it possible to give us the segmental analysis? In Note 3, by quarter for 2012 but consistent, definition-ally, with the numbers you've just reported for Q1 2013, consistent for those various changes in accounting disclosures.

Den Jones

I think that's on the website, actually, if you want to have a look.

Andrew Whittock - Liberum Capital Limited, Research Division

I have had a look, and I couldn't find it.

Den Jones

Okay. [indiscernible] afterwards, and we can...

Andrew Whittock - Liberum Capital Limited, Research Division

But principally, it is available and stays what you're saying.

Den Jones

Yes.

Andrew Whittock - Liberum Capital Limited, Research Division

Fine. And the question on Phase 9a?

Chris Finlayson

Oh, question on Phase 9a. I don't think we disclosed the cost of the individual project. It's -- clearly, we are funding 50% of it and Petronas are funding the other 50%, and the spend is phased over 2013 and 2014. So it's not of itself a significant proportion of the total capital spend on a -- in the group level.

Den Jones

On a net basis.

Chris Finlayson

On a net basis, indeed.

Operator

Our next question comes from the line of Jason Kenney from Santander.

Jason Kenney - Grupo Santander, Research Division

Chris, it's Jason Kenney, Santander. So usually, you get asked these questions after a 100 days, but I'm going to ask you after 122 days in the job: If there's anything that stands out and that's particularly positive versus your expectations prior to stepping into the Chief Executive shoes on January 1 this year. And then secondly, I'm also interested to hear your views on the share price performance year-to-date 2013. Obviously, you're moving from an over-sold level at the start of the year, but then the share prices dissipated of late today. I'm just trying to get a feel on how important you think the strategy day on the 14th of May will be to clarifying value delivery and also clarifying the value upside going forward?

Chris Finlayson

Interesting questions there. Look, I'll tell you my thoughts on what I think is great about this company, but after 122 days. But if I do my suns right, after about 136 days, i.e. on the 14th of May because that really is obviously very much a part of the strategy. And on the comment on -- my view of what has moved the share price in the course of the year, I'll just say that, of course, we hope that our strategy presentation will make it clear to the market what we believe should drive our share price.

Operator

As it is, we have no further questions. I will hand the conference to you.

Unknown Executive

All right. We appreciate your questions and your interest. And if you have further questions, just direct them to Investor Relations. Thank you.

Chris Finlayson

Okay. And on -- excuse me, on the -- so really, seconds left. We'd like to finalize by thanking everyone for their questions. I just want to finish by reiterating our main points today.

I think we have made a good start to the year. We've delivered the milestones that we promised in the first quarter, and our results were in line with expectations and guidance. Major growth projects in Australia and Brazil are on schedule and on budget, and we also made good progress in derisking the rest of the milestones for the rest of the year. But we're not complacent at all, there's still much more to accomplish. It's been an encouraging start to the year.

So I'd like to thank you all for your time today and also, of course, for the excellent questions. And I look forward to seeing you all in person on May 14 when I've -- I am then will be presenting our longer-term strategy in detail at the BAFTA [ph] Theater at 195 Piccadilly.

So thank you, and goodbye.

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