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

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 |  About: Cairn Energy Plc (CRNZF)
by: SA Transcripts

Cairn Energy PLC (OTC:CRNZF) Q2 2014 Earnings Conference Call August 19, 2014 4:00 AM ET

Simon Thomson

Okay, morning everybody. Welcome to Cairn's half-year results presentation. I am Simon Thomson, CEO. With me are James Smith, CFO, and Richard Heaton, Explorations 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 at Cairn 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 I'm very pleased to have them working alongside me. And the three of us, in addition to Paul Mayland, who's our Chief Operating Officer, form the core of Cairns’ executive team going forward.

As of usual we’ve got a few slides to run through with you today. It’s being webcast, so please, if you have questions at the end, there will be microphones and sake of those listening if you could take them for asking questions.

So if we go on to my first slide and an overview, Cairn remains fully funded to deliver our balanced exploration and 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 achieve 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 through 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, and we’ll come and talk about that. Wells we will continue to be very active in our frontier acreage positions, future exploration expenditure will be focus on emerging and mature basin portfolios.

At the same time, we’ve taken the opportunity to undertake 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.

It’s an ongoing process, the consultation has started. It will result in reduction in overall headcount including fixed and contractors of around about 40%.

If we turn to the next slide, on India, as a reminder, we have not received an assessment or demand from the Indian Tax Authority. However, since the end of January this year, we have been unable to access the value of our 10% share holding in Cairn India worth approximately $1 billion.

Now we remain resolute that throughout our history of operating in India we’ve 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 resolved while making every effort to seek an early resolution.

You all have seen that June of this year, a new government, the BJP was installed and in July of this year, a budget was published which is recently being enacted and that budget can change some proposals in relation to dealing with the retrospective tax issue. One of those proposals included the forming of a committed to deal with cases.

Now we await the outcome of those proposals, we await detail in relation to the formation of that committed and its remise and in the mean time 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 as and when we have progress to report.

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

As I said currently, seven well anticipated over the next 12 months, that number may change. They increased as well as moved from contingent to firm. Richard will provide details in relation to the upcoming exploration program, but as I said, expenditures, future exploration expenditure will be largely focused on the emerging and mature basins.

We fill some extensive portfolio in Northwest Europe, where we have 30 licenses in the North Sea alone. And you would have seen today that we’ve announced entry into the Barents Sea through a farm-in to the Statoil operated Ensis prospect.

That we hope is the first of a larger entry into that basin which we rank highly in 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 for many success in Cairns 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 do not expect – later on this year.

So, notwithstanding that tax issue in India, we remain on track to deliver a balanced self-funding portfolio. That portfolio is designed to sustain cash flows to reinvestment and to deliver exploration potential through a rolling program of wells.

We continue to focus on appropriate equity interest and that’s right through from exploration through the developments 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 Statoil is a candidate to monetization.

And lastly before handing over to James, in the event that we have sufficient 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.

With that, I’ll 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 resources, the cash on the balance sheet at mid-year 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 is going to be in place to fund the Catcher and Kraken development projects and that the time being remains undrawn.

In terms of capital equipment, CapEx for the second half of this year of $300 million of cost base of 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’ll get to more detail with that on the next slide and then, as previously guided, $1 billion of CapEx for Catcher and Kraken in 2015 through to the point of being free cash flow generative in 2017.

So as you can see, the funding position over the next three years is robust and it’s safe to say in the portfolios due to the point of being free cash flow generative and therefore self-funding on an ongoing basis.

Next slide sets out some detail behind net capital program. We split it between the West African Frontier program, Northwest European exploration activities and the development projects. In the West African program, a total of about $305 million which is in line with previous guidance and with the Cap Boujdour well expected to span the year end period around 20 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 on the success of many current drilling and indeed to access future upside which we generally be through a strategy of farm-downs and other partner structures.

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 Simon has announced today and some early-stage work on the Spanish Point well.

So both of which is being spud to next year and looking forward to next yea, an indicative, and I would say as an indicative exploration program, CapEx is estimated $90 million which includes Spanish Point well and a number of other wells predominantly in UK North Sea which Richard will come on to talk about in more detail.

Developments on Catcher this year, $80 million, the bulk of that will be in the second half remains for the time-being fully carried on Kraken and then as I said, the type of spend on those key projects at 2015 through the end of 2017 at about just under $1 billion.

So just to reiterate that $470 million total spend this year, of which $170 million was incurred in the first half and therefore $200 million remains for the second half and the preliminary estimate for next year is, 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’ll continually focus on having the right skill sets to identify and realize value as E&P company, but it’s also critical that we maintain the total 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 has been 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 are spending more established hydrocarbon regions.

As a result, we’ve identified opportunities to add source, recently a high portion of our activity is in areas such as well engineering, logistics, supply chain management and various associated support functions, while to the same time, retaining a critical mass of G&G and technical skills that affected with 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’ll note that in the administrative expense for the first half of 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 are being awarded for the great bulk of the capital program on both of those projects.

We are continuing to deliver a 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 generating sustainable cash flows, delivering material exploration upside with the right risk/reward profile and ultimately where appropriate returning cash to shareholders.

And on that note, I’ll hand over to Richard to talk about reward program in more detail.

Richard Heaton

Thank you, James and good morning everyone. And before I start to run through our activity set and program, I just want to reemphasize really what Cairn is about. I’ve been with the company, as Simon mentioned over 20 years. But essentially, our strategic and core if you like, remains the same.

But we are looking to generate value through, we like generating of our own prospects and leads and through the operations to actually deliver value from those. So it’s 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’s in – but mostly in Edinburgh but also in Stavanger and strong technical and commercial teams to back those up.

Where we go, I think, we are an experienced and respected operator, but where necessary we are quite happy to work with partners who have share our ideas as a non-operator. We do have the full size of capability and we have a portfolio really that does stretch all the way through from frontier, to emerging, to mature basins and from explorations through developments and shortly into production.

A lot of our assets are in areas which are very attractive and that 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 with that value. So we are actually in a very strong position.

We are fully funded, we have a pretty active exploration program at the moment which sometimes – some number of wells in our program have operated at deepwater exploration, but also in going into the future, it’s right to emphasis on the emerging basins and mature basins in the North Sea and Northwest Europe.

So, whilst the frontier areas will remain very important, we will needing to be farming down and bringing in new partners to engage in major capital expenditure in those areas.

So moving now through 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.

The Norwegian fiscal terms and in particular it was the 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 UK and the Norwegian sectors.

The assets are very tradable and we’ve 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 factor here is that they are very early commercialized, 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 is Barents sea and I’ll comment just some more detail on that in the future. We are also trying for operatorship in Norway that will give us greater flexibility both in license rationalization and farm-ins there. And I think it’s a very exciting program we’ve got coming up over the next few years.

I’ll start with the fields briefly though. Obviously, 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 barrels oil per day to us on plateau when these fields get on stream and we have now 56 million barrels of reserves from the two fields in the North Sea and also start to have some contingent resources that we made in this 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 of the field into the Tyrone and another geobodies there notice side track wells and this will add considerable reserves potentially that can easily be brought on stream and into the development program.

To Catcher field two, most recently, the field development plan approved by that. 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 been made around the area and within the blocks and a number of exploration opportunities too also within the area and we have through this license round built up a good consolidated position in many of the licenses around here.

So this does gives us a good deal of exposure to the area. Again, both Catcher and Kraken likely to come on stream. Kraken pass as early as 2016 but certainly both by 2017.

Moving now on to the exploration in the North Sea and MPX is currently drilling, the partner here, the Aragon well and for the North Sea, this is a very attractive and large prospect. It’s essentially already been discovered in some ways by a couple of wells. It’s a gas and condensate prospect. Both those wells had gas and condensate down through in them. It is a stratigraphic trap.

And so what we are looking to do is to penetrate the sicker part of essentially a stratigraphic unit in here where the wells have already in the portion proving gas and condensate. And this is where we expect to get thicker reservoir. So this is a 100 million barrel oil equivalent gross prospect which is pretty large in the North Sea and the key to this is that it’s 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 through its combination of good technical interest but also the good fiscal terms of cost and offer in Norway.

It’s relatively shallow water here. It’s relatively close to shore. It is currently operating the rate that Statoil is 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 known obviously before the end of the year and 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 the field or discovery which is in here across into the acreage where Ensis is, this lower cretaceous unit sits within the same oil water 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 is certainly very attractive even in this location. We are not very far away here from the Goliath development. In addition to 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. And that’s 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 were 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 with 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 the over the hurdle towards the 400 Bcf that we see as a mean resource needed here to create a good strong commercial project.

There are lots of different fault locks here which can contain hydrocarbons there 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 3D seismic program over much of the acreage here. So there is a good follow-on potential within the area.

Moving now to our frontier operated deepwater program. In Senegal, we have a large acreage position offshore Senegal startling 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 a license acreage around the Northwest African margin.

What we are doing is, stepping up into the deeper water where we know that extensive source rocks and cretaceous farm sound 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 had to undertake quite a lot of maintenance on the rig. But we are still operating. We expect the well to be fully completed sometime as around the end of this month and until then can’t really say too much more. What I will remind you of is, this is a very large set of prospect.

Statoil really systems in the low cretaceous with very large volumes of potential resources and this is the FAN, North FAN here. In the event 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 in the Senegalese terms.

Once this well is finished, sometime in early September, we will move the rig across and finish off the Shell Edge well. We have done the tophole section on this that in the way like Statoil are doing in the Barents program as well.

We have done the tophole 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 number of source rocks as well. So there is some independence to it. But these are very exciting prospects.

Like this year as well, perhaps the largest prospect that will be involved in drilling is the Gargaa prospect. This is in the Cap Boujdour acreage. It’s Cosmos operated we are the partner here. As you’ll 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, the Gargaa features being the largest that we have on 3D at the moment, but, although we have quite a large 3D here, we are also currently acquiring an even larger 3D in another part of the block at the moment hoping to follow-up from that.

Clearly, this is almost 1 billion barrel type prospect gross. Our share of it’s still very, very substantial and not only this play and the Lower Cretaceous that we are looking at channel sums here, but the string of other plays 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 and 2016.

There are number of wells mostly within the Northwest Europe area that is yet to be decided sort of a 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 would like to think that we will continue a pretty active program all the way through to the first oil from our fields.

Thank you. I’ll pass over to Simon again.

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 mean time, we are employing a highly disciplined approach to capital allocation as we’ve 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. And as James indicated, the consultation process has started 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 secure our capital and skills to get the best returns on investments that we make.

And with that, I’ll hand over to questions.

Question-and-Answer Session

Nathan Piper – RBC Capital Markets

Good morning. Nathan Piper from RBC. Two questions if I may. Yesterday sort of re-tooling of your business model investment case to an extent, why you are remaining offshore?

If you are trying to control costs, there are number of emerging basins around the world are onshore where the costs involved there are materially different. So, I guess, just trying to understand, steering off the Barents Sea is cheap to exploring because of the tax rebate, but it’s still an expensive place to develop anything.

So, can you just describe how the move into the Barents Sea fits with our focus on cost and why you aren’t going to places where just fundamentally it’s cheaper to drill?

James Smith

Yes, this is, maybe I’ll let Richard comment after me, but I think – just leading into that, there is a couple of things. Obviously, you go where you believe technically it’s 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 UK, 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’ve also got, as Richard mentioned, a good reputation from the point of view of our operating capability that actually does lend well to partners seeking to somebody – to bring in somebody that’s got a life line to the approach towards operations.

And I think secondly, also in terms 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 the media access to infrastructure and great fiscal terms. But the trouble is as you know, it’s a highly competitive world out there and the opportunity set isn’t actually restricted.

So we have to go to areas that we believe in technically that we think are fiscally attractive and we talked about the Norwegian rebate but also that are available to us. Richard, do you want any make any additional comment on that?

Richard Heaton

No this answers most of it very well. I think that, I mean, we do have basing 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 that is 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 you have the edge to build a position in those places.

Nathan Piper – RBC Capital Markets

Understood, a quick second question. And you moved from frontier exploration to an extent of capital allocation towards frontier exploration. Is that reflected in your board? Your board now has, historically Cairn has had engineers and geologists and so on, on the board.

From my understanding the Board hasn’t got anyone who is really with a technical background on the board, very strong board but not – which has those fundamental beliefs or whatever. So it the move away from frontier a reflection of the board structure that you have got in place now or are the explorations are still getting a fair show?

Simon Thomson

Yes, I mean, I think, first of all the Board speaks with one voice, secondly, we do retain technical and engineering skills, Todd Hunt and Alexander Berger both possessing those strong technical backgrounds the Board. And then obviously we have a very commercial approach towards things. I think, I’d emphasize with all about capital allocation.

We have a large portfolio of assets and it’s 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 seeking to use our money and other people’s money more cleverly in relation to operate in the frontier exploration.

James Thompson - JPMorgan

Hi, it’s James Thompson from JPMorgan. Just three questions please. In terms of Senegal, I mean, by my count, you only needed to drill sort of two or three meters an hour to reach the top reservoir, since you’ve reengineering on 28th July. Has there been another delays since then, or have you reached top reservoir maybe not going to tell us.

But it seems strange you haven’t hit reservoir on such 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 a last question in terms of India, you say you are making every efforts, I appreciate you are not going to talk about the details, but can you maybe elaborate on what every effort is from a Cairn perspective?

Simon Thomson

Sure, I mean, I think let me deal with the last one first. We’ve had over a 100 meetings with key stakeholders in the last few months. We are – again as I say, limiting 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 of protecting our legal position. I know it would be good for you to get some more granularity on that.

I hope you appreciate that, in the mean time, whilst we await more clarity from the government on the constitution of the committee to deal with cases, we have to be relatively guided in what we can say from the point of view to the future approach. Sorry, on the other two questions, in relation to the central…

James Thompson - JPMorgan

The number of licenses you got…

Simon Thomson

Yes, number of licenses, yes, I mean, 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 the keep the core disciplined from the point the G&G the commercial and the core legal functions and so on and so, yes, it’s absolutely designed to handle the portfolio of licenses that we have today.

That being said, there will be continued to be active trading whether that’s increasing license positions in some areas or decreasing in others. And on Senegal, yes, it’s quite hard, so.

Michael Alsford - Citigroup

Good morning it’s Michael from Citi. Three questions from me actually please. Just firstly on the frontier explorations portfolio monetization plans. It’s clearly a lot of assets up for sale in the market. We all know that where the majors are not really looking to acquire and I guess smaller cap companies looking to turn and farm-down.

Could you maybe talk about how actively or where you are in that process I would sort of the point of agreement for example at the big position you’ve got and maybe if there is any commitments you have on that frontier acreage that might lead you to see you spend money on that position before farming down? That’s my first question.

And then just secondly, Skarfjell, a write-down on the recent drilling spend. Could you talk about what the carrying value actually is in the balance sheet for Skarfjell currently? And then thirdly, just on the Senegal drilling could you just remind us what the pre-drill risk is for the drilling in those two prospects that is the presentation? Thanks.

Simon Thomson

Sure, on the first points, and then I’ll hand it over to James and Richard. On the first point on commitments, everything is discretionary, number one from the point of view of going forward plus the situation of the current drilling program, and yes, I agree with you. There are – it all depends on how attractive people see particular assets are. As you know, in Greenland we had some time and I think we need some time to be able to workout the forward plans and the forward activity.

But we’ve satisfied all our commitments. So we are in a happy position of not having any capital to have to commit to going forward. It’s all about discretionary spend and that’s how we’ve tried to design all of the frontier position.

So that’s anything that we choose to do going forward and hence the desire to bring in partners into farm-down is at our discretion rather than we got our backs against having to do something. On the Skarfjell plan, James?

James Smith

Yes, on Skarfjell, so, we appraise the Skarfjell discovery as you know in the first half of the year. That essentially confirmed the carrying value that we had to Skarfjell on the balance sheet and that – but it didn’t upgraded and therefore the cost (inaudible) and the price of activity were written off as unsuccessful exploration cost this is the appropriate accounting treatment to that. So the carrying value remains in line with where it was historically. We don’t split them at asset-by-asset. Richard?

Richard Heaton

Yes, and on the final point I think on the risks on the Senegal wells, it will vary little bit by layer, but by and large on average are about 1 and 6.

Michael Alsford - Citigroup

Thank you.

Dan Ekstein – UBS

Dan Ekstein from UBS. When we think about the sort of downsizing of the organization that’s ongoing, I think it’s impossible and inappropriate for an E&P company to deal all things to across the value chain. But it’s 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 way that we believe we’ve done before. So, not only we’ve been at the forefront of discovering and realizing value from exploration success, but we also have a strong development skill set and I think we’ve proven in the past that we have a fairly disciplined approach towards monetization of assets.

That monetization may mean that we either monetized early in the assets’ life cycle 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, it’s about not losing those core skills obviously, but about having an appropriate size of organization around that core skill set that can support us.

Rafal Gutaj - BofA Merrill Lynch

Good morning it’s Rafal from Bank of America Merrill Lynch. So just two questions. Going back to exploration in 2015, could you give us a sense and I appreciate it’s still pretty fluid, but give us a sense of what your risk in that prospective resources targeted for 2015 and how that compares to 2014?

And then also your average chance of success on those prospects versus 2014? And then just coming back to Greenland, could you give us a sense of your timing on potential farm-down from 2015 events or how should we be thinking about that?

Simon Thomson

Yes, I’ll let Richard answer the first point, quite complicated, but on the second one, yes, I think, probably look to us, trying to target something in 2015 and we’ve got time to be able to do that.

Richard Heaton

Obviously, and our program to 2015 is not yet fully formulated and clearly we have a program that’s partly formulated and partly not, it will be slightly less, obviously overall in terms of its what it’s targeting. The risks – again, until we actually have that program it you like, fully formulized, 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 the 2014 at the moment.

James Smith

It’s not a way for the budget cycle and the availability of rigs slots which tends happen more towards the end of the year.

Rafal Gutaj - BofA Merrill Lynch

So let’s just say it will be around half of this year or less than that, half of the risk prospective resources?

Simon Thomson

Two=thirds.

Rafal Gutaj - BofA Merrill Lynch

Thanks.

Stephane Foucaud - FirstEnergy Capital

Good morning. It’s 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, we are not particularly cash trapped. 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 drilling on the RBL, on allocation, Kraken versus Catcher or anything you can basically talk about?

Simon Thomson

Richard, do you want to?

Richard Heaton

Yes, obviously, we’ve identified that the Barents area has been 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 with an 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 of 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 that sometimes, you get hole posted in and that’s really why it’s 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 that’s being relatively low risk and right adjacent to the discovered hydrocarbon and on the migration path.

So, we are particularly attracted to that and also the available for drilling right now.

Simon Thomson

James.

James Smith

And on the RBL, basically there is two key things driving the availability of that. The first is, it’s essentially a project based development financing pretty difficult reserve based lending bank facility. So the availability of it is driven by a banking model which basically drives the MPV of the project that are in the boring base Kraken and Catcher.

And so that model over time sizes the availability of the debt and the debt is durable basically to fund the CapEx as it’s incurred in the two projects. So you would expect to got down to be in line over time with the capital program on the two projects.

Peter Hitchens HSBC

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

Simon Thomson

Yes, I think on the first point, we have been extremely impressed by the operator Cosmos and the approach that they’ve taken to operating that region. They’ve had and have an ongoing engagement process with the government with the United Nations, with concerned bodies.

So, I think, oversee the risks and oversee our intention and that of the operators is to ensure that as we move forward, we move forward in concert with all the people who are affected by any discovery that maybe made and that is certainly what the UN is 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, yes, 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 it’s not required or surplus to the delivery of the business track sheet.

Obviously, we’ve indicated and we’ve 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’ve got to look to where we are in that position we’ve got to look to what’s out balance sheet position was looking like is it strong enough.

What opportunity set is there available to us that is the right thing for us to do to possibly bring forward cash flow. Secondly, - thirdly, sorry, if we think the surplus over and above that, and it’s in the best interest of shareholders then we will seek to returns and I think there is always a balance of the time to look at what are the best uses of capital.

Jamie Maddock - Morgan Stanley

Thank you, it’s Jamie, Morgan Stanley. Just looking at Ensis, I guess the newer contain is a structure of a trap that you are targeting which doesn’t seem to be present on Nucula. I am just wondering why you think it exists? And I guess, from now you would then expect that to contain oil? I am assuming that’s the first question. I’ll go on to take one after that.

Simon Thomson

Essentially, there is a common ore border 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 things.

Jamie Maddock - Morgan Stanley

I guess, all I am saying is that, the well that drilled Nucula that did not penetrate the sand which you expect to see which is this substrate trap. Okay, and the second question is then, with regard to Senegal, what gives you the confidence on the source and it’s a relatively low risk attribute?

Simon Thomson

Essentially, there is a deep sea drilling project well admittedly, couple of hundred kilometers away further offshore. But there are geophysical tie-lines into that well. And that well confirms, even though it’s a long, long way offshore, that the Turonian and – source rocks that 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 which is one of the reasons why we are drilling the FAN well first and the confirmation of those sourced rocks and the maturity and richness obviously is an important piece of the well.

Clearly, the most important thing is to find some commercial hydrocarbon, but this being frontier drilling, any information isn’t yet on sourced rocks and reservoirs has a huge impact upon the surrounding prospectively. And so, we are pretty confident that it’s there what you can’t tell without drilling it though is how good how much and just exactly where it is within the well. But this will tell us what we have finished.

Tom Robinson - Deutsche Bank

Thank you. It’s Tom Robinson from Deutsche Bank. I’ve got two questions please and the both are strategy related really. The first one is on shale distribution. Today, I was concerned, you’ve laid out a strategy to fund the business on cash and debt alone. So does that suggests that Cairn India is indeed surplus to requirements and if a resolution is achieved, and then most if not all of that will potentially come back to shareholders?

And the second question is again strategy related but thinking about exploration in 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 with that, is that – do you think that’s an appropriate level of reinvestment to an exploration light company and then secondly how do you think about preserving the opportunity set when you think about frontier acreage this year that may not be in the portfolio next year?

Simon Thomson

Yes, maybe I’ll let James answer you the first question. In relation to the second one, I think the key point is for us, as I said it’s all about how we are allocating capital across the portfolio.

We spent the last couple of years building a large portfolio as combined to 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 and the rolling program of additions on that, is appropriate for a size of a company that we are.

And I think when you look at the range of prospect sizes on those wells, a number of those wells are extremely large for the size of company that we are today. So I think we will continue to focus on materiality notwithstanding a reduced amount of capital available to allocate to whether it’s exploration development or whatever else.

So I think, it’s all about get that balance right and as opportunity sets such there are material events that are capable of us lifting the value of the company, and that will continue to be the case whether we have more money or less money any particular time that changes it.

James Smith

And on Cairn India, clearly, we don’t have clarity on the timing resolution at that. That is usually to the prudent thing to do was to design the business model and get the finding in place to sustain it in the absence of 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 is making sure the balance sheet is strong enough to sustain the development projects on a continuing basis and looking at opportunities to accelerate the strategy and we see plenty of those in particular I think we’d be keen to accelerate cash flow in the portfolio if they are value accretive obviously we will to do that.

And to the extent cash beyond that, then obviously we’ll consider returns to shareholders there.

Mark Wilson - Jefferies

Hello, it’s Mark Wilson, Jefferies. If investor sentiments will 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’ve got no control over which would be development lead times.

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 during the contract to contractors, but we’ve seen frankly in every recent development delays to construction timeline. Is this something your conscious of as a partnership group? And anything you are doing actively to address that ahead of what will come to pass?

Simon Thomson

Nothing, ye, you are absolutely right. I was a bit conscious to that potential slippage in the value impact that can have in any developments. I think, we’ve got a fairly integrated approach to both Premier and Enquest in terms of the teams.

We talked previously about having a position of influence as the non-operated partner. I think that’s what we got 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 the long lead times are and what the potential for delays and so on and so forth.

And I think beyond that, generality, as Richard I think mentioned, the bulk of the core pieces of equipment are obviously set up and ordered and underway. You are right, I think you have to watch the vessel is one of the largest components to all of that but so to seen a development in drilling you need to make sure that the rigs are tendered in all the rest of it.

So, every part can have a knock-on impact and everything else. Our job as 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 or design?

Simon Thomson

No, I think, the Kraken FPSO is a big piece of kit and I think, so, our assumption is that we’ll be able to tie back that without a fundamental change of any of the cycle. Obviously, if you have follow-ons that serves elsewhere in the block then you may need to think again in terms of additional kit or what else you do. I think, our view is I can tell that.

Mark Wilson - Jefferies

Hi, this question on the – going back to the Barents Sea again, just thinking from a development perspective, going forward and in a success case, we’ve seen delays and issues with Goliath, we have seen the Johan Castberg development that’s going to been put back to the drawing board because it looks non-commercial at the moment.

And it seems to me where you are 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 you would be kind of on the threshold of the low commerciality. So I was just wondering if you could discuss how you think about potential commerciality in a success case?

Simon Thomson

Sure. Rich?

Richard Heaton

I mean, our own work on Ensis and Nucula, we believe that 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 conditions. So we’ve done a full relatively light obviously full modeling of all of that and it does work.

It’s relatively compact, it’s relatively straightforward, it’s relatively shallow water, it’s relatively simple in terms of the 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’ve seen in the Barents Sea which much further offshore and much more environmentally challenging.

Mark Wilson - Jefferies

Just saying 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 kind of current size estimate?

Simon Thomson

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

Mark Wilson - Jefferies

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

James Smith

Look, I think it’s too early to say, as Simon said, we’ve started the consultation approach that with staff and that will determine how redundancies work and so on and the focus is been reducing the cash central cost that we have how that gets allocated to the G&A depends on the work program next year as it gets firmed up and so on. But, clearly, we are looking at a 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.

Mark Wilson - Jefferies

Okay, thank you.

Alex Topouzoglou - Exane BNP Paribas

Hi, it’s Alex Topouzoglou from Exane BNP Paribas. Just on the UK, given that your growing presence in that area and your focus on the capital allocation, what major recommendations have you made in the UK 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 structuring, simplification of management of uplifts and rebates through our alliances. And I think, from our perspective and in the perspective of many others, is simply things can get, the easier can get to encourage whether investments – feed into that. And sorry, on the second question it was… Ensis?

Alex Topouzoglou - Exane BNP Paribas

Yes. With the farming-down.

Simon Thomson

Oh, yes, farming-down, so it’s not – it’s confidential. One last question I think, probably and then time maybe up.

Thomas Martin - Canaccord Genuity

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

Simon Thomson

James?

James Smith

The first part of the question I couldn’t quite – do you say, talking about draw-down?

Thomas Martin - Canaccord Genuity

What’s the actual ceiling on the facility that you can draw down to sort of – often the headline is 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 NPV calculation on the projects that are in it. And in addition to that, we will draw in order to fund the CapEX that was incurred part – the equity part debt funding. So, that will determine the profile of the draw down.

Thomas Martin - Canaccord Genuity

Okay, so, in broader terms and if we take a $1 billion cash plus some portion of 575, gives you up to 1.6 of headroom, you’ve got 300 CapEx second half this year, $1,110 million of exploration giving you about $1.4 billion.

James Smith

Yes.

Thomas Martin - Canaccord Genuity

There is a $200 million gap in there between what you may or may not be able to draw down to that’s the bit that you’ve 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 the portfolio to be brand equity interest to apply our capital where we see the strongest capital return – economic returns, yes.

Thomas Martin - Canaccord Genuity

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

James Smith

No, that’s right. After we’ve expensed the appraisal wells early this year, yes.

Thomas Martin - Canaccord Genuity

Thanks.

Simon Thomson

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

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