Cairn Energy's (CRNCY) Simon Thomson on Q2 2014 Results - Earnings Call Transcript

Aug.19.14 | About: Cairn Energy (CRNCY)

Cairn Energy Plc ADR (OTCPK:CRNCY) Q2 2014 Earnings Conference Call August 19, 2014 4:00 AM ET

Executives

Simon Thomson - CEO

James Smith - CFO

Richard Heaton - Exploration Director

Analysts

Nathan Piper - RBC

James Thompson - JP Morgan

Michael Alsford - Citigroup

Dan Ekstein - UBS

Rafal Gutaj - Bank of America Merrill Lynch

Stephane Foucaud - FirstEnergy

Peter Hitchens - HSBC

Jamie Maddock - Morgan Stanley

Tom Robinson - Deutsche Bank

Mark Wilson - Jefferies

Alex Topouzoglou - Exane BNP Paribas

Thomas Martin - Canaccord

Simon Thomson

Okay, good morning everybody. Welcome to Cairn's Half Year Results Presentation. I am Simon Thomson, CEO; with me are James Smith, CFO; and Richard Heaton, Exploration Director. This is the first time that James and Richard have been on the dais with me. I am sure both of them are well known to most of you, but by way of background, Richard has been even longer than I have, over 20 years, brings with him a wealth of experience. Formerly, Bangladesh country manager, India, Deputy Country Manager; Head of Exploration; and in recent times, exploration director.

And James, who joined us earlier this year, has been a longstanding and trusted advisor, since before the time of the Indian IPO, has been involved in every transaction that Cairn has participated in, and so amongst other things, brings a wealth of transactional experience to the role. So very pleased to have them working alongside me. And the three of us, in addition to Paul Mayland, who is our Chief Operating Officer, form the core of Cairn's executive team going forward.

As is usual, we have got a few slides to run through with you today, it's being web cast. So please if you have questions at the end, there will be microphones and for the sake of those listening in, if you could state your name for us and question.

So if we go on to my first slide and an overview, Cairn remains fully funded to deliver our balance exploration development program, and that's through to free cash flow in 2017, and James will come on and talk about the mechanics of how we achieved that funding situation.

As I mentioned six months ago, to ensure that funding position and given the size and scale of the company that we are today, we have taken a very disciplined approach towards the allocation of capital and risk.

So we do have an active drilling program coming over the next 12 months, with a combination of operated and non-operated wells, we will come and talk about that. Whilst we will continue to be very active in our Frontier acreage position, future exploration expenditure will be focused on our emerging and mature basin portfolio.

At the same time, we have taken the opportunity to take a significant organization restructure, that restructure is aimed at retaining our core technical operational and commercial skill-set, but looking at reduction of fixed costs, and taking out of the organization, those functions that do not need to be there permanently. Its an ongoing process, the consultation has started, it will result in a reduction in overall headcount, including fixed term contractors of around about 40%.

If we turn to the next slide, in India; as a reminder, we have not received an assessment or demand from the Indian tax authorities. However, since the end of January this year, we have been unable to access the value of our 10% shareholding in Cairn India, worth approximately $1 billion. Now we remain resolute, that throughout our history of operating in India, we have been compliant with all applicable legislation, and we have paid all applicable taxes; and as you can imagine, we are absolutely focused on getting this result, and we are making every effort to seek an early resolution.

You will have seen that in June of this year, a new government, the BJP was installed and in July of this year, a budget was published, which has recently been enacted, and that budget contained some proposals in relation to dealing with the retrospective tax issue. One of those proposals included the forming of a committee to deal with cases. Now we await the outcome of those proposals, we await detail in relation to the formation of that committee, its scope and its remit; and in the meantime, we continue with a very active engagement program, which is ongoing.

Now I know you would like to get more detail from me today, but I hope you understand and appreciate that there are elements of commercial sensitivity, there are things that I can't talk about publicly. But rest assured, every effort is being made to resolve this as early as we can, and we will come back to you, as and when we have progress to report.

Turning to next slide, in terms of our strategic delivery, are on track with our core developments of Catcher and Kraken, which will result in peak production at Cairn of approximately 25,000 barrels of oil equivalent per day, and we see free cash flow in 2017, there is no change in that guidance from what we said last time, and again, James will come on and talk about that in a little bit more detail.

As I said currently, seven wells anticipated over the next 12 months, that number may change, may increase, as well as move from contingent to firm. Richard will provide detail, in relation to the upcoming exploration program, but as I said, expenditure, future exploration expenditure will be largely focused on the emerging and mature basins. We have built an extensive portfolio in Northwest Europe, where we have 30 licenses in the North Sea alone, and you will have seen today, that we have announced an entry into the Barents Sea, through a farm-in through the Statoil operated Ensis prospect. That we hope is the first of a larger entry into that basin, which we rank highly in our worldwide basin ranking exercises. It also indicates a focus on emerging basins and our desire to explore in those areas.

We have, as you know, established a significant Frontier acreage position. We will remain active in that acreage, but what we are designing is a limited capital expenditure going forward. Obviously, we intend to leverage and follow-on from many successful encounters, especially in the current program, but also we have the ability to farm-down and partner as appropriate.

In relation to the current program, we are currently operating the FAN well in Senegal. We have a further well after that, and then of course, there is a non-operated well in Morocco being operated by Kosmos later on this year.

So notwithstanding the tax issue in India, we remain on track to deliver a balanced self-funding portfolio. That portfolio is designed to sustain cash flows through reinvestment, and to deliver exploration potential through our rolling program [indiscernible]. We continue to focus on appropriate equity interest, and that's right through from exploration, through to development, and ultimately production. We will look to monetize assets, as and when we think it’s the right time to do so. We signaled previously that Skarfjell is a candidate for monetization.

And lastly, before handing over to James, in the event that we believe we have surplus cash above and beyond the requirements of the business, then we will look at methods of returning value to shareholders, as we have a track record of doing that.

With that, I will hand over to James.

James Smith

Thank you, Simon and good morning everyone. So to start with an update on the funding position, in terms of the sources, the cash on the balance sheet at midyear was just short of $1.1 billion, and in addition to that, we have now fully executed the previously announced $575 million RBL facility, which we put in place to fund the Kraken and Catcher development projects, and that for the time being, remains undrawn.

In terms of future capital commitments, CapEx for the second half of this year of $300 million across both the exploration and development activities that we are undertaking. A preliminary estimate of next year's exploration program in the region of $110 million, and I will give some more detail on that in the next slide, and then as previously guided, $1 billion of CapEx for Catcher and Kraken from 2015, through to the point of being free cash flow generative in 2017.

So as you can see, the funding position out over the next three years is robust, and will sustain the portfolio through the point of being free cash flow generative, and therefore, self-funding on an ongoing basis.

Next slide sets out some detail behind that capital program. We split it between the West African Frontier Program, Northwest European Exploration activity and the development project.

In the West African program, a total spend at about $305 million, which is in line with previous guidance, and with the Cap Boujdour, we are all expected to spend in the year-end period, around $20 million of that total will be incurred in 2015.

As Simon indicated, there are no further capital commitments to this part of the portfolio beyond the current program. But clearly, we remain well placed to capitalize in success from any current drilling, and indeed, to access future upside, which will be generally through a strategy of farm-downs and other partnering strategies.

Moving to the Northwest European program, total spend this year of around $105 million, that's a slight increase on previous guidance, but that takes into account the Ensis farming that we have announced today, and some early stage work on the Spanish Point well, the bulk of which is being deferred to next year; and looking forward to next year, an indicative -- and I would say its an indicative exploration program CapEx estimate of $90 million, which includes Spanish Point well, and a number of other wells, predominantly in the U.K. North Sea, which Richard will come on to talk about in more detail.

Development on Catcher this year, $80 million and the bulk of that will be in the second half. Remain for the time being, fully carried on Kraken, and then, as I said, the total spend on those two projects at 2015 through first half to the end of 2017, of just under $1 billion.

So just to reiterate, that's $470 million total spend this year, of which $170 million was incurred in the first half, and therefore $300 million remains for the second half, and the preliminary estimate for next year's exploration budget of $110 million and $1 billion for the development project through to 2017.

I wanted to say a few words about the corporate reorganization that Simon alluded to. Clearly, we continually focus on having the right skillsets to identify and realize value as an E&P company. But its also critical, that we maintain the appropriate cost base for our work program going forward. And as we look at that work program going forward, clearly, we are moving from a year, which is being pretty much a continuous operated, deepwater program towards a scheduled activity that's more of a balance between operated and non-operated activity, and which for the most part, we will see our spend in more established hydrocarbon regions.

As a result, we have identified opportunities to outsource a reasonably high portion of our activities in areas such as well engineering, logistics, supply chain management, and the various associated support functions, whilst at the same time, retaining a critical mass of G&G and other technical skillsets that are effectively the core of the value offering that we have.

We are therefore in consultation with our staff at the moment regarding a proposal to deliver that model, and that proposal, as Simon said, would result in a roughly 40% headcount cut across contractors and employees, it's roughly equally split between the two, and that clearly will deliver over-time, significant cost reductions to our central cost base.

We anticipate the new organization structure will be in place by year end, and you will note that in the administrative expense for the first half this year in the P&L, there is a provision of $7 million relating to those restructuring costs, around $3 million of that is cash and $4 million related to accelerated share-based payments.

So to summarize and set out the financial strategy as we see going forward, importantly, we are fully funded to deliver our business model, right through the E&P asset life cycle. Clearly, there is a near term focus on the two development projects, which ultimately will deliver that cash flow sustainability. These projects remain on-track and on budget, and contracts have been awarded for the great bulk of the capital program on both of those projects.

We are continuing to deliver material exploration program, which Richard will come on to highlight in more detail, but always ensuring that we have a clear handle on the risk profile of that exploration program, within the scale and strategy of the business going forward.

Ultimately, the critical element for me is having a disciplined focus on capital allocation, so we can access the most attractive economic returns, wherever they occur in the portfolio, and wherever they are in the asset lifecycle. And so Cairn going forward, that will mean, capital allocation between three things, and a balance of those three things; generating sustainable cash flows, delivering material exploration upside with the right risk-reward profile, and ultimately, where appropriate and as we have done before, returning cash to shareholders.

On that note, I will hand over to Richard to talk to through the well program in more detail.

Richard Heaton

Thank you, James, and good morning everyone. Before I start to run through activity set and program, I just want to reemphasize really what Cairn is about. I have been with the company, as Simon mention, over 20 years, and essentially our strategic and core, if you like, remains the same, that we are looking to generate value through -- if you like, the generation of our own prospects, and leaves through the operations to actually deliver value from those. So there is a very strong focus on technical expertise and commercial acumen, of course, backed by some financial prudence.

We are exploration led, and we have a very wide portfolio, which occupies quite a wide range of areas, three main areas around the world. We have a very strong G&G team, some of it -- mostly in Edinburgh, but also in Stavanger, and strong technical and commercial teams to back those up. Everywhere we go I think, we are an experienced and respected operator, but where necessary, we are quite happy to work with partners, who have shared our ideals, as a non-operator. We do have the full cycle capability, and we have a portfolio really that does stretch all the way through from Frontier, to emerging to mature basins, and from exploration through development, and shortly into production.

A lot of our assets are in areas that are very attractive and are very tradable, and we are very actively trading that portfolio, to make sure that we focus on the opportunities that are going to deliver for us, the best value. So we are actually in a very strong position. We are fully funded with a pretty active exploration program at the moment, which contains some number of wells in our program of operated, deepwater exploration, but also, and going into the future, a greater emphasis on the emerging basins and the mature basins in the North Sea and Northwest Europe. So whilst the Frontier areas will remain very important, we will be needing to be farming down, and bringing in new partners to engage in major capital expenditure in those areas.

So I will move now to the Northwest Europe area. We have been building, over the past few years, an increasing acreage position in Northwest Europe. We see it as very technically attractive and commercially attractive too, in Norwegian fiscal terms in particular, obviously attractive to the industry for exploration. We have an experienced team of explorers with a good history of success in the North Sea, both in the U.K. and the Norwegian sectors. The assets are very tradable, and we have been able to demonstrate that through consolidating our position around the fields that we have got discoveries in, making sure that we then follow-up on our technical expertise in those areas.

And in all these cases, in all the wells that we are drilling, one of the key factors here is that they are very early to commercialize, monetization, development, tie-ins to existing infrastructure is very easy.

So we have an active drilling program here going forward. We have of course been expanding, as Simon mentioned, into Barents Sea, and I will come into some more detail on that in the future. We are also applying for operatorship in Norway that will give us greater flexibility both in license round and farm-ins there. And I think it’s a very exciting program we have got coming up over the next few years.

I will start with the fields briefly though, of these -- these are the means to us, having a sustainable business, making sure that we can continue with our exploration programs, and the remaining part of the business. We will be delivering a net 25,000 barrel oil per day to us on plateau, when these fields get onstream, and we have now 56 million barrels of reserves from the two fields in the North Sea, and also in Skarfjell, we have some contingent resources that we may be looking to trade.

We have a sustainable business, in other words, supported by these fields. The Kraken field, in addition to the actual main field, where the development program is on track and on budget, we do have a well later this year into an appraisal and exploration target, on the west, the field into the Tyrone and other geo-bodies there, multi-sidetrack well, and this will add considerable reserves potentially, that can easily be brought on-stream and into the development program.

The Catcher field too, most recently, field development plan approved by them [ph]. Three fields here that are within that development program at the moment. But in addition to that, there are a number of satellite discoveries already being made around the area, and within the block, and a number of exploration opportunities too, also within the area. And we have through recent license round, built up a good consolidated position in many of the licenses around here. SO this does give us a good deal of exposure to the area. Again, both Catcher and Kraken likely to come onstream, and Kraken perhaps as early as 2016, but certainly both by 2017.

Moving now on to the exploration in the North Sea; MPX are currently drilling, a partner here at the Aragon well, and for the North Sea, this is a very attractive and large prospect. It is essentially already been discovered in some ways by a couple of wells. It’s a gas and condensate prospect. Both those wells had a gas and condensate downtubes in them. It is a stratigraphic trap, and so what we are looking to do, is to penetrate the thicker part of essentially a stratigraphic unit in here, where the wells have already in the uptick portion proven gas and condensate, and this is where we expect to get thicker reservoir. So this is 100 million barrel oil equivalent gross prospect. Pretty large in the North Sea, and the key to this, is that its very close to infrastructure, and can be developed relatively straightforwardly and quickly.

The Ensis prospect is our entry into the North Sea, entry into the Barents Sea. This emerging basin ranked pretty much at the top of a worldwide basin ranking process that we carry out. Both for its combination of good technical interest, but also the good fiscal terms of course in offer in Norway.

Its relatively shallow water, its relatively close to shore. It is currently operating. The rig that Statoil are using here is actually undertaking a number of prospects here, so they are doing some batch top hole drilling. But this should be -- results from this will be know obviously before the end of the year. It’s a prospect that's relatively low risk for the Barents Sea. We have the Nucula discovery right next door, that's in the Upper Jurassic, and if you extend the hydrocarbon contact from that prospect, which is from that field or discovery which is in here, across into the acreage where Ensis is, this lower cretaceous unit sits within the same oilwater contact. So though this is largely stratigraphically trapped in here, there is an element of proven hydrocarbons nearby, which reduces the risk considerably, and the size of the two combined, certainly very attractive even in this location. We are not very far away here from the Goliat development.

In addition of course, as Simon mentioned, there will be a license round-up coming in the Barents Sea, next year, and we look to be taking part in that, obviously very interested to see if we can increase, we can find the right opportunities.

Moving now across to Ireland, we have hoped to drill the Spanish Point well this year, but we are not able to get access to the rig in the right time, so that's now pushed back to 2015. This is a discovery that was made in the 1980s. There is a very long hydrocarbon column here of gas and condensate. Good flow rates in the upper part of the reservoir. What we will be looking to do with our well here, is to try and get the project, if you like, over the hurdle towards the 400 BCF that we see as the main resource needed here to create a good strong commercial project. There are lots of different fault blocks here, which contain hydrocarbons.

There are additional and shallower reservoirs that we will be targeting in the new well, and we do have, as well as the Spanish Point gas condensate discovery. We have the Burren oil discovery in the acreage, and we are currently undertaking an exploration 3-D seismic program over much of the acreage here. So there is a good follow-on potential within the area.

Moving now to Frontier, operated deepwater program in Senegal. We have a large acreage position offshore Senegal, straddling the shelf and into the deepwater. Oil is present in the shallow water here, as it is in many of the shallow water areas to -- where adjacent to our license acreage around the Northwest African margin. What we are doing is, stepping off into the deeper water, where we know that extensive source rocks and cretaceous fan systems extend into the deepwater here. So these are very important wells, trying to open up a new basin, and the key of these Frontier wells is that, should they come in, then there is a huge amount of follow-up potential.

The well has been delayed. We have had to undertake quite a lot of maintenance on the rig, but we are still operating. We expect the well to be fully complete at some time around the end of this month, and until then, can't really say too much more.

What I will remind you of is, that this is a very large set of prospects, stacked drilling systems in the low cretaceous with very large volumes of potential resources, and this is the fan, north fan here. In the even that this one comes in, there are a string of other similar look-alike prospects in the area. Any one of these levels that comes in, and there are others in addition to this, even within this well, any one of these is on its own commercially very attractive under Senegalese terms.

Once this well is finished some time in early September, we will move the rig across and finish off the Shelf Edge well. We have done the top hole section on this, bit in the way like Statoil are doing in the Barents program as well. We have done the top hole. Again this is a multi-target multi-stacked resource in here, and again, if this comes in, then we do have a string of other follow-on possibilities. The results of the two wells, there is some dependency clearly, a good result here will be helpful for the Shelf Edge prospect, but also the Shelf Edge prospect is dealing with different reservoirs, and it also has the potential for feed from a slightly different number of source rocks as well. So there is some independence to it. But these are very exciting prospects.

Later this year as well, perhaps the largest prospect that we will be involved in drilling, is the Gargaa prospect. This is in the Cap Boujdour acreage, its Kosmos operated, we are the partner here. As you will see, this is 22,000 square kilometers of acreage, an enormous license area, and again this is a basin opening well. We have very large four-way dip close features to Gargaa feature being the largest that we have on 3-D at the moment. But, although we have quite a large 3-D here, we are also currently acquiring an even larger 3-D in another part of the block at the moment, hoping to follow-up from that. Clearly, this is almost 1 billion barrel type prospects, gross -- our share of it is still very-very substantial; and there is not only this play in the lower cretaceous that we are looking at in channel sands here, but a string of other players as well.

So just to wrap up on that; we have a seven firm well program, very exciting program, mixture of different sorts of wells in different areas covering pretty much all the portfolio, stretching into 2015-2016. There are a number of wells, mostly within the Northwest Europe area, that's yet to be decided, it’s a little bit early in the year for those to be firmed up at the moment and for rigs to become clear. So the program will develop a little bit. I'd like to think that we will continue a pretty active program all the way through the first oil from our fields. Thank you.

I will pass over to Simon again there.

Simon Thomson

Thanks Richard. So in summary, we are funded to deliver our program. We are making every effort to resolve the tax issue in India, and we will come back to you as soon as there is progress to report. In the meantime, we are implying a highly disciplined approach to capital allocation. As we have indicated, future exploration CapEx will be largely focused on emerging and mature basins, and whilst our intention is to remain very active in our significant Frontier position, that will be through farm-downs, partnerships as appropriate, and also obviously on following on and leveraging any success that we have.

We are also following through on what we said six months ago about creating a fit-for-purpose organization. As James indicated, the consultation process with staff is ongoing, and we intend to have a resized organization by the end of this year.

And we continue with an approach towards active portfolio management, focused on value, as we seek to use our capital and skills to get the best returns on investments that we make.

And with that, I will hand over for questions.

Question-and-Answer Session

Nathan Piper - RBC

Good morning. Nathan Piper from RBC. Two questions if I may, [indiscernible] is sort of retooling of our business model investment case to an extent, why are you remaining offshore? I mean, if you're trying to control costs, there are a number of emerging basins around the world that are unsure where the costs involved are materially different. So I guess, just trying to understand, [indiscernible] the Barents Sea is due to exploring because of the tax rebate, but its still an expensive place to develop anything. So can you just describe how the move to Barents Sea fits with our focus on cost, and why you aren't going to places where, just fundamentally, its cheaper to drill?

Simon Thomson

Yeah I mean its -- let Richard come in after me, but I think just leading into that is a couple of things. Obviously, you go where you believe technically its attractive, and where you believe you have an edge, in terms of your knowledge and technical capability. And certainly, I think with the team that we have in U.K., Norway, and indeed to an extent in the Barents, we believe that we have a degree of technical edge, that allows us to be a player there, and obviously, we have also got, as Richard mentioned, a good reputation from the point of view of our operating capability, that actually does lend well to partners, who are seeking somebody -- to bring in somebody who has got a like-minded approach towards operations.

And I think secondly, also its down to opportunity sets. I am sure, any oil company sitting in front of you would love to be in a very cheap onshore position with immediate access to infrastructure in great fiscal terms. But the trouble is, as you know, it’s a highly competitive world out there, and the opportunity set is naturally restricted. So we have to go to areas that we believe in technically, that we think are fiscally attractive and you have talked about the Norwegian rebate, but also that are available to us. Richard, any additional comment on that?

Richard Heaton

No I think it answers most of it very well. I think that -- I mean, we do have, based on the ranking process, where we do know which onshore basins around the world we'd be interested to get into, and we certainly look at those, and it’s a question of spotting the right opportunity at the right time, and obviously being able to take a big enough position, particularly if it is more of the emerging or Frontier end of things, there is no point getting a postage stamp to start with it. We don't think you can continue. We don't think we have the edge to build a position in those places.

Nathan Piper - RBC

Understood. Quickly, the second question, and you move away from Frontier exploration to an extent -- capital allocation towards Frontier exploration. Does that reflect within your board? I mean, your board now has -- I mean, historically, Cairn has had engineers and geologists and so on, on the board. From my understanding, the board hasn't got anyone really with a technical background on the board -- very strong board, but not with perhaps those fundamental beliefs or whatever. So is the move away from Frontier a reflection of the board structure that you have got in place now, or the exploration is still getting a fair shout?

Simon Thomson

Yeah I think you know, first of all the board speaks in one voice. Secondly, we do retain technical and engineering skills with Todd Hunt and Alexander Berger, both of whom have strong technical backgrounds on the board. Obviously we have a very commercial approach towards things. I mean, I'd think I'd emphasize, its all about capital allocation. We have a large portfolio of assets, and its what's appropriate for us in terms of the allocation of the capital that's available to us, to generate returns that are attractive to shareholders. And I would emphasize, we are not moving away from Frontier; what we are doing is, sticking to use our money and other vehicle's money more cleverly, in relation to our approach to Frontier exploration.

Nathan Piper - RBC

Thank you.

James Thompson - JP Morgan

Hi, its James Thompson from JP Morgan. Just three questions please; in terms of Senegal, by my accounts, you only need to drill sort of two, three meters an hour to reach the top reservoir, since you've resumed drilling on 28th of July. Has there been another delay since then, or have you reached top reservoir, maybe you're not going to tell us. But seems strange that you haven't hit reservoir just yet on such an important well?

The second one is, in terms of downsizing the organization, in terms of headcount, does that mean you can still support the 64 licenses you've got, or are we going to see that number coming down in the future? And the last question, in terms of India, you say you're making every effort. I mean, I appreciate you are not going to talk about the details, but can you may be elaborate on what every effort is from a current perspective?

Simon Thomson

Sure. I mean, I think just let me deal with the last one first. I mean, we have had over 100 meetings with key stakeholders in the last few months. We are -- again as I say, [indiscernible] limited in what I can say publicly, but we are well prepared to move forward and of course, we are in close contact with our advisors from the point of view from protecting our legal position. I know, it would be good for you to get some more granularity that. I hope you appreciate that in the meantime, whilst we await more clarity from the government on the constitution of a committee to deal with cases, we have to be relatively guarded in what we can say from the point of view of the future approach.

Sorry, and the other two questions were in relation to Senegal?

James Thompson - JP Morgan

The number of licenses you've got.

Simon Thomson

Number of licenses, yeah. I think as James said, what we are looking to do through the consultation process is effectively contract out those functions that we don't need to have internal control of, but keep the core discipline, from the point of view the G&G, the commercial and the core legal functions and so on. So yes, its absolutely designed to handle the portfolio of licenses that we have to-date. That being said, there will continue to be active trading, whether that's increasing license positions in some areas or decreasing in others.

And on Senegal, yes, its tight hole. So we can't say anything.

James Thompson - JP Morgan

Okay. Thanks.

Michael Alsford - Citigroup

Good morning. Its Michael from Citi. Three questions for me actually please. Just firstly, on the Frontier exploration, the portfolio monetization plans. Clearly, a lot of assets up for sale in the market, we all know that, the majors are not really looking to acquire, and I guess, one of the company is looking to try and calm down. Could you may be talk about how actively or where you are in that process, with sort of Point agreement for example, that's a big position you've got; and maybe if there's any commitments you have on that Frontier acreage, that might lead you to see -- spend money on that position before farming down, that's my first question.

And then just secondly, Skarfjell, a writedown on the recent drilling spend. Could you talk about what the carrying value actually is [indiscernible] for Skarfjell, currently? And then thirdly, just on the go-drilling, could you just remind us what the risk, pre-drill risk is for the drilling of those two prospects, doesn't look like its in the presentation?

Simon Thomson

Sure. On the first point, and I will hand over to James and Richard; on the first point on commitments, everything is discretionary, number one, from the point of view of going forward, post the cessation of the current drilling program. And yeah, I agree with you, there are -- it all depends on how attractive people see particular assets are. I mean, as you know, in the agreement we have some time and I think it will -- we need some time to be able to be able to work out the forward plans and the forward activity. But we have satisfied all of our commitments, so we are in a happy position of not having any capital to have to commit going forward. Its all about discretionary spend, and that's how we have tried to design all of the Frontier position. So that, anything that we choose to do going forward, and hence the desire to bring in partners in to farm-down, is at our discretion, rather than -- we got our backs against the wall in having to do something.

On the Skarfjell point, James?

James Smith

Yeah on the Skarfjell, so we appraised a Skarfjell discovery as you know in the first half of the year. That essentially confirmed the carrying value that we have with Skarfjell on the balance sheet, and -- but didn't upgrade it. And therefore the cost associated with appraisal activity were written off as unsuccessful exploration costs, which is the appropriate accounting treatment of that. So the carrying value remains in line with where it was historically. We don't spend that asset-by-asset.

Richard Heaton

And on the final point, I think on the risks on the Senegal wells, it varies a little bit by layer, by and large on average about one in six.

Dan Ekstein - UBS

Thank you. Its Dan Ekstein from UBS. When you think about the sort of downsizing of the organization that's ongoing. I think its impossible and inappropriate for an E&P company to be all things to all mine [ph] across the value chain. But its important to be top quartile somewhere, and when you think about the organization that you are trying to shape, whereabouts in the value chain will you offer investors access to industry leading skills and expertise in your view? Thanks.

Simon Thomson

In the same area that I believe we have done before. So not only have we been at the forefront of discovering and realizing value from exploration success, but we also have strong developemental skill sets. And I think we have proven in past, that we have a fairly disciplined approach towards monetization of assets. That monetization may mean that we are the -- monetized early in the asset's lifecycle, or we believe that we hold on until first half for example, and monetize at that point. So I think that is very much our point of focus, and that's backed up by a strong technical and commercial skill-set.

And I think, in relation to the downsizing, its about not losing those core skills obviously, but about having an appropriate size of organization around that core skill set that can support you.

Rafal Gutaj - Bank of America Merrill Lynch

Good morning. Its Rafal from Bank of America Merrill Lynch. So just two questions, coming back to exploration in 2015, could you give us a sense, and I appreciate its all pretty fluid, but give us a sense of what your risk net prospective resources targeted for 2015, and how that compares to 2014, and then also your average chance of success on those prospect versus 2014? And then just coming back to Greenland, could you give us a sense of your timing on potential farm down there is that -- firm 2015 event, or how should we be thinking about that?

Simon Thomson

I will let Richard answer the first point, quite complicated. But on the second one, yeah, I think probably look to us, trying to target something in 2015, and we have got time to be able to do that.

Richard Heaton

Obviously, our program for 2015 is not yet fully formulated, and clearly, we have a program that's partly formulated and partly not, and it will be slightly less obviously overall, in terms of its -- what its targeting. The risks, again, till we actually have that program, if you like, fully formulated. It’s a bit difficult to say what the average net risk will be, and what the total that we are targeting will be. But it will be slightly less than we currently have for 2014 at the moment, is how its perceived.

Rafal Gutaj - Bank of America Merrill Lynch

Is there a way for the budget cycle, and the availability of rig slots pushed -- tends to happen more towards the end of the year? So would you say it would be around half of this year, or less than that? Half the rigs prospectively or still too early?

Simon Thomson

Too soon.

Rafal Gutaj - Bank of America Merrill Lynch

Thanks.

Stephane Foucaud - FirstEnergy

Good morning. Stephane Foucaud from FirstEnergy Capital. Two questions as well. First, the Ensis prospect, what's the history of choosing this particular prospect? Obviously, the partner being Statoil, I guess they were not particularly cash strapped. So why this one particularly? What has been the thinking process behind it?

Second, on the RBL, are there any limitation on covenants, on timing when you can start drawing on the RBL, on allocation cracking versus capture or anything you can basically talk about?

Richard Heaton

I mean obviously, we have identified the Barent's areas as being an area we would like to move into. Our team does include some very experienced geophysicists, and I think we have been able to see within that particular prospect, some geophysical attribute and analysis that indicates that it does potentially have a relatively low risk in terms of -- well in such an area. You wouldn't be developing some of the geophysical attributes -- although put it this way. Our assessment is that, you wouldn't normally see those, unless you actually have some reservoir in that area, and we do think we see those. Now sometimes, you get false positives, and that's really why its still a one in three risk. If you were in an area where you had a better knowledge of the overall geology, then perhaps the risk would be much lower than that. It is still in a relatively undrilled area, but it stands out to us, as one of the things that we have looked at around the area, as being relatively low risk, right adjacent to -- like discovered hydrocarbons and on the migration path. So we are particularly attracted to that. And also, if it is [ph] available for drilling right now.

Stephane Foucaud - FirstEnergy

Was it competitive, to get access to those 25%?

Simon Thomson

Was it competitive? Yes.

Richard Heaton

Yes, it was a competitive process. And on the RBL, effectively there is two key things driving the availability of that. The first is, its essentially a project-based development financing, pretty difficult for base lending bank facility. So the availability of it is driven by a banking model, which basically derives the MPV of the projects that are in the borrowing base, i.e., Kraken and Catcher. And so that model, over time, sizes the availability of the debt; and the debt is drawable, basically to fund CapEx as it has incurred in the two projects. So you'd expect the drawdown to be in line over time with the capital program on the two projects.

Peter Hitchens - HSBC

Peter Hitchens, HSBC. Couple of questions for you. Can you just give us your assessment of the political risk with Gargaa? The other question is, given the stage we are, in the cycle valuations etcetera. Shouldn't you be buying assets, rather than returning money to shareholders?

Simon Thomson

Yeah, I think on the first point, we have been extremely impressed by the operator Kosmos, and the approach that we have taken to operating that region. They have had and have an ongoing engagement process with the government, with the United Nations, with concerned bodies. So obviously there is risk, and obviously our intention and that of the operators, is to ensure that as we move forward, we move forward in concert with all people who are affected by any discomfort that may be made, and that is certainly what the UN are also indicating they would like to see.

So from our perspective, I think, everything is being done that should be done in relation to the approach to the political risk in that region, number one.

I think in relation to your second question, yeah. As we indicated, and we obviously have a track record of returning cash, where we think it’s the right thing to do, where we think its not required or surplus to the delivery of the business strategy. Obviously, we have indicated, and we have indicated previously, that where there are opportunities to bring forward cash flow for example into this business, that's something that we will look at very closely. And so I think, any time, as James mentioned, we have got to look to where we are in that position. We got to look to what our balance sheet position, what its looking like. Is it strong enough? What opportunity set is there available to us, that is the right thing for us to possibly bring forward cash flow. Thirdly, if we think this surplus over and above that, and this is in the best interest of shareholders, then we will seek to return. So I think its always the balance of the time, to look at one of the best uses of capital.

Jamie Maddock - Morgan Stanley

Thank you. Jamie with Morgan Stanley. Just looking at Ensis, it looked -- I guess in your [indiscernible] is a structure of a trap that you're targeting, which doesn't seem to be present on Nucula. I am just wondering why you think it exists, and I guess from that, you would then expect that to contain oil? I am assuming that sort of -- that's the first question, I will come with a second one after that.

Simon Thomson

Essentially, there is a -- the theory is that there is a common oil/water contact, potentially goes across the area. But we do see evidence within the Ensis prospect of geophysical attributes, which tend to support that. So that's one of the things --

Jamie Maddock - Morgan Stanley

I guess all I am saying is that the well drilled in Nucula, did not penetrate the sound, which you expect to see at Ensis, which is the sort of the drive here. The second question is then, with regards to Senegal, what gives you the confidence on the source, and that is a relatively low risk attribute?

Simon Thomson

Essentially there is a deep sea drilling project well, admittedly, a couple of hundred kilometers away, further offshore. But there are geophysical timelines into that well; and that well confirms, even though it’s a long-long way offshore, the [indiscernible] source rocks are seen pretty much all around the Atlantic margin are indeed present that far out, and the geophysical tie demonstrates those tying into our area, and thickening up as it gets closer to the shore. So the well that we are currently drilling, FAN-1, within that well profile, we will drill through those source rocks. It is one of the reasons why we are drilling the FAN well first, and confirmation of those source rocks and the majority in richness obviously is an important piece of the well.

Clearly, the most important thing is to find some commercial hydrocarbons, but this being frontier drilling, any information you can get on source rocks, and reservoirs has a huge impact on the surrounding prospectivity. And so, we are pretty confident that its there, what you can't tell without drilling though, is how good and how much, and just exactly where it is within the well. This will tell us, once we have finished.

Tom Robinson - Deutsche Bank

Thank you. Its Tom Robinson with Deutsche Bank. Two questions please, and they are both strategy related really. The first one is on shale distributions. I mean today, as far as I am concerned, you have laid out a strategy to fund the business on cash and debt alone really. So does that suggest that Cairn India is indeed surplus to requirements, and if a resolution is achieved, then most, if not all of that, will potentially come back to shareholders? And the second question is, again strategically related, but the exploration, particularly in 2015, when you've substantially reduced the budget, and I think its now around 5% of your market cap. So just two parts to that, is that -- do you think that's an appropriate level of reinvestment, and for an exploration-led company? And then secondly, how do you think about preserving the opportunity set, when you think about the Frontier acreage this year that may not be in the portfolio next year?

Simon Thomson

Yeah, maybe I will let James answer the first question. In relation to the second one, I think the key point for us, as I said, is all about how we are allocating capital across the portfolio. We spent the last couple of years building a large portfolio, this combines Frontier, mature and now emerging basin positions. I think for us, we obviously have a more limited source of funds today than we had, when we built that portfolio. So we have to apply those funds according to what's available to us today. I think the program that we have outlined seven plus wells going forward over the next 12 months, on a rolling program of additions beyond there, is appropriate for the size of the company that we are. I think you look at the range of prospect sizes on those wells. A number of those wells are extremely large from the size of the company that we are today. So I think we will continue to focus on materiality, notwithstanding a reduced amount of capital available to allocate into -- whether its exploration, development or whatever else. So I think its all about getting that balance right and preserving the opportunity set such there are material events that are capable of uplifting the value of the company, and that will continue to be the case, whether we have more money or less money any particular time.

James Smith

And on Cairn India, I mean clearly, we don't have clarity on the timing of resolution of that, that is usually -- the prudent thing to do was to design the business model and get the funding in place to sustain it in the absence of the value in Cairn India. To the extent, we recover all of that value, and when we do, the capital allocation will be a balance of what we described, just making sure the balance sheet is strong enough to sustain the development projects on a continuing basis, looking at opportunities to accelerate they strategy, and we see plenty of those in particular, I think we'd be keen to accelerate cash flow in the portfolio, if there are value accretive opportunities to do that, and to extend this cash beyond that, then obviously we will consider returns to shareholders. Yeah.

Mark Wilson - Jefferies

Hello. Mark Wilson, Jefferies. If investor sentiment has been hit by a lack of commercial exploration success across the sector, and also by development lead times slipping; let's talk about the one that you have got more control over, which would be, development leadtimes. Is there anything specific that partnerships such as yours at Catcher and Kraken is doing now, to look ahead to 2017 and think what can we put in place to avoid slippage of those vessels, [indiscernible] the contract to contractors, but we have seen frankly in every recent development, delays to construction timelines. Is this something you're conscious of, as a partnership group, and anything you're doing actively to address that ahead of whatever will come to path?

Simon Thomson

I think yes, you're absolutely right. Everybody is conscious of that potential slippage in the value and that can have on any development. I think we have got a fairly integrated approach with both Premier and EnQuest in terms of the teams and we talked previously about having a position of an influence as a non-operated partner, I think that's what we have got in, in terms of our contribution to the joint venture and the timelines and the approach to any particular piece of kit that we are ordering and what long leadtimes are and what the potential for delay is, and so on and so forth.

I think beyond that generality, as Richard I think mentioned, bulk of the core pieces of equipment are obviously setup and ordered and underway. You're right. I mean, I think, you have to watch the vessel as one of the largest components in all of that, but so as the development is drilling, you need to make sure that rigs are attended and all the rest of it. So every part can have a knock-on impact and everything else; our job as a non-operator, but as one with influence is just to stay on top of that as much as we possibly can, because this is driving the bulk of the value of the business right now. Certainly the bulk of our investment.

Mark Wilson - Jefferies

Are there any potential changes of scope with any of those developments? Does the Kraken appraisal well potentially impact scope of design?

Simon Thomson

I think the Kraken FPSO is a big piece of kit, and I think so -- our assumption is that we will be able to time back that without a fundamental change of any design color. Obviously if you have follow-on success elsewhere in the block, and you may need to think again in terms of additional kit, or well you know, what else you'd do. I think [indiscernible].

Mark Wilson - Jefferies

First question was on the -- going back to the Barents Sea again. Just thinking more from a development perspective going forward in a success case, because we have seen delays and issues with Goliat, we have seen the Johan Castberg development has kind of been put back to drawing board, because it looks non-commercial at the moment, and it seems to me where you're drilling, you've got Nucula, which is say a 50 million barrel or so discovery combined with the potential of this discovery. Still seems like it would be kind of on the threshold or below commerciality. So I was just wondering, if you could discuss how you think about potential commerciality for -- and the success case?

Richard Heaton

Our own work on Ensis and Nucula, we believe if we meet the sort of mean gross resource estimate that we have on our estimations, the project will work as an FPSO project under the current condition. So we have done a full, relatively light obviously, forward modeling of all of that, and it does work. Its relatively compact, its relatively straightforward, its relatively shallow-water, its relatively simple in terms of engineering required to do it, and we don't see that as a -- it is one of the attractive things about it, relative to some of the other things that we have seen in the Barents Sea, which are much further offshore, much more environmentally challenging.

Mark Wilson - Jefferies

Just staying on Norway, second question was on Skarfjell, I was just wondering if you could give an update on where we are on Skarfjell, what's the forward plan over the next year or so, and current size estimate?

Simon Thomson

On Skarfjell, as I said, it’s a potential candidate for realization and again, its one of these things where we are looking from the point of view, is there a potential to bring forward something that would otherwise have production in 2021, and swap it one way or the other into near term cash flow. So while we continue with the aggression of the Skarfjell development, I think it is probably something we will focus on some kind of disposal or partial disposal.

Mark Wilson - Jefferies

Just a final one, looking forward to 2015, in terms of G&A spend in 2015, what would you expect sort of the updated number to be, after the reorganization?

James Smith

I think its too early to say. As Simon said, we have started the consultation process with staff, and that will determine how redundancies work and so on, and the focus has been on reducing the sort of cash, central costs that we have, how that gets allocated to G&A depends on the work program next year, as it gets firmed up and so on. But clearly, we are looking at significant reduction in headcount. Headcount is a significant bulk of our cost base, and you'd expect that to flow through. But I think its too early to give guidance.

Alex Topouzoglou - Exane BNP Paribas

Hi. Its Alex Topouzoglou from Exane BNP Paribas. Just on the U.K., given your growing presence in that area, and your focus on capital allocation, what major recommendations have you made in the U.K. fiscal review this year, and have you received any initial feedback? And secondly, on Ensis, what were the terms of your -- the farm-in, and do you have any contingent liabilities in the case of success? Thanks.

Simon Thomson

On the first point, I think like a number of other participants in the North Sea, what we are proposing is a simplification, where possible of tax structurings, simplification of management of uplifts and rebase through alliances, and I think from our perspective, and the perspective of many others, the simpler things can get, the easier it can get to encourage further investments, that's the kind of theme of our feet into that. And sorry on the second question, it was Ensis?

Alex Topouzoglou - Exane BNP Paribas

Farm-in terms.

Simon Thomson

Oh yes, farm-in terms. So its not -- its confidential. One last question I think probably then, our time may be up.

Thomas Martin - Canaccord

Thanks. Thomas Martin at Canaccord. Can you remind me, what is the actual draw-downs under your debt facility, post the syndication of the debt? And on Skarfjell, are we -- if we think about the discovery well, I understand the seismic and G&G costs, is that broadly what was in the historic pool for Skarfjell?

Simon Thomson

James?

James Smith

First of all the question, I couldn't quite -- did you talk about draw-down?

Thomas Martin - Canaccord

What's the actually sealing on the facility that you can draw-down to, often the headline is in what the company can actually draw-down the debt facility to. Can you draw the full 575?

James Smith

So as I said, the debt capacity over time is determined by a rolling MPV calculation on the projects that are in it, and in addition to that, we will draw, in order to fund the CapEx, this has incurred part equity, part debt funding. So that will determine the profile of the draw down.

Thomas Martin - Canaccord

Okay. So in broader terms, if we take $1 billion and a bit cash plus some portion of 575, gives you up to 1.6 of headroom? You have got 300 of CapEx, second half this year, $1 billion and $110 million of exploration, giving you about $1.4 billion, there is $200 million gap in there between, what you may or may not be able to draw down to? That's the bit that you have got to fund, cost changes on projects, and exploration post 2015? Is that correct?

James Smith

Well I think on a standstill analysis today, that's exactly right. But clearly, we retain flexibility in a portfolio to move around equity interests, to apply our capital, where we see the strongest capital returns, economic returns.

Thomas Martin - Canaccord

And so conceptually on Skarfjell, a bit of G&G and the discovery well, is that what was in the cost pool now? Is there anything else, a bit that I am missing?

James Smith

No. That's right, after we have expensed the appraisal wells out of this year. Yeah.

Thomas Martin - Canaccord

Thanks.

Simon Thomson

Okay. Well thanks very much indeed for the questions, and happy to take any other questions after this. Thank you.

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