Lundin Energy AB (publ) (LNDNF) CEO Nick Walker on Q1 2021 Results - Earnings Call Transcript

Lundin Energy AB (publ) (OTCPK:LNDNF) Q1 2021 Earnings Conference Call April 29, 2021 7:00 AM ET

Company Participants

Edward Westropp - VP, Investor Relations

Nick Walker - President and Chief Executive Officer

Teitur Poulsen - Chief Financial Officer

Conference Call Participants

Teodor Nilsen - SpareBank

Sasikanth Chilukuru - Morgan Stanley

James Carmichael - Berenberg

Yoann Charenton - Société Générale

Operator

Good afternoon or morning, wherever you are. Welcome to the Lundin Energy Q1 Results Call. I know it's a busy day. So thank you very much for joining. We'll follow the usual form. Nick Walker, the Chief Executive, will take you through the operations and Teitur Poulsen will take you through the financial section. There will be the normal Q&A function at the end. So first of all, we'll take questions from the conference call and then any questions from the web, I will moderate at the end. And if you do have a question on the web, please use the Ask a Question function in the top right-hand side of your screen. So thank you again for joining, and I will hand over to Nick.

Nick Walker

Well, good afternoon, or good morning if you're joining us from North America, and welcome to our first quarter 2021 results discussion. First, I want to run through the key highlights for the quarter, it's been about delivery on all fronts, which combined with the oil price recovery has yielded record financial results for the quarter. You can see our Q1 production 183,000 BOEs per day, that's above guidance. And as we've announced previously, Johan Sverdrup Phase 1 capacity is set to step up to 535,000 barrels of oil per day gross. And this will now happen ahead of schedule in early May. And all of our key projects are on track to provide growth to over 200,000 BOEs per day by 2023.

Our resilient low cost business delivered record financial results in the quarter. You can see operating costs for the quarter were $2.85 per BOE, which again also is better than guidance. We also delivered record quarterly free cash flow of $526 million in the quarter, resulting in deleveraging of the business with net debt reduced to below $3.5 billion at the end of the quarter. As a company, we're also providing a material dividends, with 2021 AGM approved dividends of $1.80 per share, corresponding to $512 million for the financial year 2020, which is more than covered by the free cash flow that we generated in the first quarter of the year.

We continue to make good progress on a decarbonization of our operations, with everything in place to achieve carbon neutrality from 2025. Today, we've announced the acquisition of the Karskruv wind farm projects in Sweden, which means our business, will be fully powered by our own generator renewables by the end of 2023. A few days ago, I was really pleased that we could announce the world's first certified carbon neutrally produced crude oil sale. This leverage is our industry leading low emissions position and I believe in time will become a key value differentiator for Lundin Energy.

So overall, a record starts to the year with delivery on all fronts. And I now want to step into the detail behind some of this. So first turning to production, our world class assets continue to outperform delivering production in Q1 of under 93,000 BOEs per day that's above the midpoint of the guidance range. And you can now see that 23 quarters running, we've met or exceeded production guidance. And looking forward, you can see that Q2 production is going to be slightly down. That's due to maintenance activities at the onshore gas terminal for Alvheim and some shutdowns at Johan Sverdrup to allow for the Phase 2 installations to start. But then we'll see a step up in the second half with additional capacity at Johan Sverdrup lift in the rates and further capacity upside, they've agreed due to further declines at Ivar Aasen.

For now, we're retaining the full year guidance range of 170,000 to 190,000 BOEs per day. But I think with the continued strong performance, I anticipate we'll be upgrading our guidance with our Q2 results. This delivery is backed by top tier operating performance. You can see excellent production efficiency metrics of 98% to 99% across all the assets. These are just stellar metrics. I talked about operating costs of $2.85 per barrel. That's better than guidance and of course continues in line with our industry leading metrics in this area. You also see really good performance on carbon emissions, 2.8 kilograms of co2 per BOE emitted in the quarter. And that continues to be about one six of the world average. And you can also see that we delivered safe operations in the quarter.

So turning now to our decarbonization strategy, we're making good progress on our plans with everything in place to achieve carbon neutrality from 2025, which will be our first for the upstream industry. To recap, the plan is supported by real action around three pillars. Firstly, reducing emissions with the electrification of our assets by providing power from shore. Second, replacing and offsetting our power usage with investments in renewable energy.

And thirdly, what we can't reduce commitment to nature based carbon capture through reforestation projects to offset the balance. What this means is that we will sell all of our barrels as carbon usually produced by 2025. And leveraging our industry leading low emissions position, it was really pleasing that we could a few days ago announced the world's first to certified carbon neutral produced crude oil sale. This combines the Intertek CarbonClear certification of Edvard Grieg as low carbon with natural carbon capture offsets to cover the residual emissions to deliver a barrel of oil that is carbon neutrally produced at the point of sale.

With entire trade being certified as carbon neutral by Intertek under its new carbon zero standards. I think this is going to be first of many sales is generated a huge amount of interest already. And we're already working on follow on opportunities. And I believe in time, this will become a key value differentiator for the company. A key aspect of our decarbonization plan is powering our business with renewables. We're on track with the power from shore projects at Johan Sverdrup and Edvard Grieg. And our target is to meet all of our own power usage with our own generated renewable energy. And today, we've announced the commitment to the Karskruv wind farm project in southern Sweden, which will be operational from the end of 2023.

Our Leikanger hydro project investments in Norway is now fully operational, which you can see will cover over 60% of our net power usage this year. And in Finland, our MLK wind farm project is progressing well and will be operational from the end of this year or early next year. And so when the Swedish, new Swedish project comes online, you can see that we will have a net generating capacity of 600 gigawatt hours per annum, which is more than our projected usage of around 500 gigawatt hours per annum. This means that by the end of 2023, over 95% of our production will be fully powered by our own generated renewable energy. So now moving on to our world class assets which underpin our business, the Johan Sverdrup performance continues to exceed expectations and just gets better and better. You can see this stellar operating metrics here, OpEx of under $2 per barrel, an exceptionally low carbon emissions of more than 100 times better than the world average.

We continue to see excellent reservoir performance ahead of expectations, which in time, I firmly believe will lead to reserves growth. But we need to be patient. It's such a big field; it's going to take some time to get the production history you need to provide support and upgrade. As I commented on a few moments ago, Phase 1 capacity is increasing to 535,000 barrels of oil per day gross. And that's happening ahead of schedule in the start of May, which takes the capacity additions to around 100,000 BOE barrels of oil per day above the original design level and this has come for almost zero cost. So Phase 1 is performing really well. And now if we look at Phase 2 of the project, it remains firmly on track for first oil in Q4 2022. And with costs unchanged from the PDO. Yes, there have been some challenges with COVID. But Equinor have done a tremendous job to mitigate these issues. And as I say the project remains firmly on track.

It's starting to get an exciting time for the project with the offshore installation set to commence in the current quarter. The jacket for the Phase 2 process platform is now loaded onto a barge and will be installed in the next month or so. And the parts of the Phase 2 process topsides are coming together. And the photo here shows the module support frame that was built in Thailand and is now on a vessel on its way to Norway. And starting shortly the subsea equipment installations will start to happen and will run through the summer. So started become an active project offshore. You can see the fulfilled capacity guidance still stands at 720,000 barrels of oil per day. De-bottlenecking studies ongoing to understand the impact of the Phase 1 capacity increases I talked about on the full field capacity. And when that works finished, I expect we're going to see the full field capacity level increased. So Johan Sverdrup continues to outperform and everything is on track regarding the Phase 2 of the project.

Turning out to the greater Edvard Grieg area. Our focus here is on delivering the multiple projects aimed at keeping the facilities full in the long term. We've got a huge amount of activity going on this year. At Edvard Grieg, we've commenced a three well infill well program, which I'll cover on the next slide. And we see also further capacity upsides as Ivar Aasen continues to decline. And I think we're online. We're seeing some of that come through this year. And we're also on track with the power from shore projects; we've just installed the power cable between Edvard Grieg and Johan Sverdrup top side work is progressing well. We have two tieback projects, Solveig Phase 1 and Rolvsnes underway. I'm going to talk about those in a moment. But the projects continued on track. And we're working hard to bring forward a number of new opportunities with the derisking of Solveig Phase 2 and Rolvsnes fulfilled developments which I hope we can move forward.

And we have exploration wells in the area of Lille Prinsen, actually combined exploration appraisal well at Lille Prinsen and the Merckx exploration well, and these are material opportunities that will be exciting to see the results from and we're continuing to work on a program of activity for next year. So lots going on in the Edvard Grieg area. I'm now focusing on the infield program at Edvard Grieg. This is all on track here. And we've completed the first well, which is targeting the lower quality conglomerate reservoirs in the south of the field. And we're developing and deploying here new Fishbone completion technology, which you can see in the chart here, which involves the drilling of 159, small bore holes out of the main bore. And the aim here is to increase productivity and reserves from these lower quality reservoirs in the Edvard Grieg area. It's going to be the whole operation is going really smoothly. And we'll be online in the next month. And it's going to be exciting to see the results. And I see lots of opportunity to deploy this in other areas. I think Solveig, I think Rolvsnes further areas of Edvard Grieg and maybe another thing that we do in Norway.

So this is exciting technology that we've been involved in the development or so it's going to be great to see how this performs. The two further wells to be drilled on Edvard Grieg this year. First of all, a well multi branch well to the east, which will develop the Jorvik area, which we discovered last year. And the second branch on that will explore the Jorvik high area that's not been developed or drilled previously. So it's going to be exciting to see the results from that. And then we'll be drilling long- reach well down to the southwest as a dual producer, water injector, but there's big upside that you can see shaded in yellow there. So it's going to also be exciting to see what that opportunity offers. So those two wells you'll see before the end of the year. You can see this project has stellar economics breakeven all price below $20 a barrel. And we're already beginning to think about a second phase of infill drilling here. So I think there's still going to be lots more to come after this year so and the field performance continues to meet expectations.

So now moving on to the Solveig Phase 1 and Rolvsnes extended well test projects. These are tieback projects to Edvard Grieg, and we're making great progress on these. Everything's on track for first oil in Q3 this year. And both projects are within budget. The subsea facilities and topsides modifications are nearing completion. And the West Bollsta rig that we have on hire to do this program has commenced completion operations at Rolvsnes. This is to complete the previously drilled horizontal wells that we suspended for this purpose, after which the rig will move on to drill the five Solveig wells later this year. Of course, the early production results from both of these are going to be key for derisking the second phase of Solveig development. And also the Rolvsnes fulfill development where there are material resources, you can see here, Rolvsnes potentially up to 100 million barrels and a significant increase potential at Solveig too. So if we have success on those, we aim to bring both those projects forward for PDO by the end of next year, and we're on track to do that, it's really down to seeing the reservoir performance, that's going to drive whether we move those forward.

And of course, these key projects are really important to sustain the long-term plateau through the Edvard Grieg facilities. When Solveig comes online, it'll plateau around 30,000 barrels a day. So this is an important element about keeping the facilities for long term. And to remind you, and pull that together and remind you the long-term production outlook for the greater Edvard Grieg area. We've shown this chart before, these projects and opportunities to stand the plateau to the end of 2023. And you can see that with Ivar Aasen declines, we have the potential to expand the production levels through the Edvard Grieg facility. The contractual level that we've been working out for a long time has been at 95,000 BOEs per day gross. And we estimate that with declines there is the potential to go up to 135,000 BOEs growth through the Edvard Grieg area. And this is a material and significant to Lundin.

I think this is a continually evolving picture, I see lots of further upside to keep the facilities full in the longer term. And I think we've got multiple activities happening this year that we hope can see further progression and pushing the profile out to the right here. So very exciting activities this year, and it's going to be really key to see the results. Moving on to Alvheim, this continues to deliver new opportunities. We're drilling three infill wells this year, the first online and it's performing in line with expectations and the other two wells will come in later in the year. With maturing three projects here, first of all, the Frosk project. And then the Kobra East and Gekko projects which are due for sanction in the middle of this year. And concept studies are ongoing at the Trell and Trine opportunity. And the aim with all three of these of course is to bring them forward for sanction in time to benefit from the temporary tax incentives that require us to sanction before the end of next year. You can see we're continuing to explore the area. And for me, it's really encouraging that we continue to find opportunities here to create value. And I'm sure there are still lots more to come. So this whilst a smaller asset for us, it continues to create value.

And then to sort of bring that all together, we're continuing to deliver on our growth strategy. Our key projects that I've talked about are all on track will deliver production growth to over 200,000 BOEs per day by 2023. And I'm confident we can sustain at those levels with a pipeline of opportunities. We've got nine potential projects being matured, targeting around 200 million barrels of oil net. And for those projects are now on track and heading towards PDO and the other five require a level of derisking, but all the activities are in place to achieve that. And if we get the right results, we will be able to move those forward to sanction to take advantage also of the tax incentives requiring sanction by the end of 2022. And a key part of our strategy is we aim to continue to create future value with a material exploration program. We have six remaining wells this year targeting around 300 million barrels of net and risk resources with three material wells in there, and a couple of important wells targeting more appraisal exploration opportunities. And we're already working on our program for future years. So I'm sure we're going to be bringing forward a big program for next year.

So, before I hand over to Teitur, I'm excited by the opportunities prospects ahead, I'm confident that we can continue to create growth and add value and sustain production long term.

With that, I'm going to hand over to Teitur who's going to run through the Q1 financials.

Teitur Poulsen

Okay, thank you very much, Nick and good afternoon. Good morning, everybody. So as you will have gathered from the operational slides, the asset base is still performing exceptionally well. And that's shining through on the financial numbers as well. And as Nick said, it's really a record breaking quarter more or less across the board on key financial metrics. So the key highlights here, as Nick mentioned, 180,000 barrels of oil equivalent per day in production, but we were over lifted. And we also had another 7,000 barrels of inventory released. So the total sales volume we had amounted to 205,000 barrels for the quarter. Very good oil price utilization essentially flat to the Dated Brent average for the quarter at $61 a barrel. And we've also seen a very good recovery in gas NGL prices.

So just below $46 a barrel BOE is what we achieved through the quarter.

As Nick mentioned, $2.85 in OpEx which is below our $3 guidance for the year on average. And spend was $220 million for oil and gas CapEx including exploration and appraisal and run about $7 million on renewable CapEx, which we'll wrap up as we go through the year. So the key financial metrics over a $1 billion in the EBITDAX, $1.018 billion which is record for the company. Similarly, for CFFO $750 million, another record, and free cash flow as Nick mentioned, $526 million, so more than covering the full year dividend, the 2020 dividend in this quarter internal cash generation. And our cash generation has obviously led to us deleveraging, the debt quite significantly, down to a net debt of $3.46 billion, leaving our net debt to EBITDA ratio of 1.3x at the end of Q1.

If we then look, zoom in a bit on the key financial metrics that we normally measure ourselves against the table on the top right, shows you comparative periods, and also sequential quarter-on- quarter and you can see comparative periods, both sales prices and sales volumes are up 33% on both metrics. And if you take sequential quarters, sales volume is up 38% and sales, sorry, sales price is up 38% and sales volume up 7%. So as I said that led to over $1 billion in EBITDA which is up 75% on the same period last year, and our EBITDA margin is continuing to be extremely strong at 92% in Q1 this year. CFFO was also very strong $750 million. And that's despite having a working capital bill of $135 million. So excluding working capital build, we would have been up at $885 million for the quarter, and we had a significant build of receivable towards the quarter end. So you will see in our balance sheet we have receivables exceeding $414 million at the end of Q1.

We also were wrapping up the cash taxes and we will do so continuously as we go through this year. But in Q1, we have paid cash tax of $121 million, which then also impacted the CFFO. And as I said the free cash flow $526 million after having incurred investments across CapEx and E&A and renewables of $224 million. The adjusted net profit was $150 million which excludes on FX mostly non cash FX loss incurred of $81 million, the net profit on the face of the P&L we reported was $69 million for the quarter.

If we then go to the next slide and look at our realized prices. As I said, very good quarter for price realization for us. You can see the timing effect of the different cargoes we lifted 21.4 cargoes during the quarter. And that lifting schedule was somewhat back end weighted when we look at the quarter on average. And given that we had the continuous more or less continuous oil price increase over the quarter; it means on a weighted average basis that we have a positive timing effect from those back end loads the lifting cargoes equating to $0.50 a barrel roughly. And then we had physical, the differentials to Dated Brent round about $0.50 as well. So getting us back to $61.1 for oil sold. And that's then reflected in the bar to the extreme right on this slide $61.10 for crude price, crude oil sales, and that is exactly in line with Dated Brent average for the quarter. And when we then blend in gas and NGLs on a BOE basis, we essentially realized $60 a barrel. A very good performance really by our marketing department too and a very busy quarter as well, almost a cargo done every fourth day during the quarter.

Then looking at the cost metrics, we talked about the CapEx per barrel for the quarter at $2.55, which is what you see on the right hand bar and this chart. What we're also seeing now is that the NOK is strengthening quite a lot. If we compare it to Q2 2020, we have seen a strengthening of 15% over this period. And if you compare to the comparative period last year is a 10% strengthening in NOK and given that all our office costs are not denominated that is increasing the dollar unit metrics. But with an increasing production volume going in tandem with this that means that we keep the unit cost very much under control here. And you'll see really the absolute OpEx $53 million for the quarter, pretty much in line with Q1 last year, despite having 20% higher production. These numbers exclude the over lift and inventory movements that we had in the quarter. So if you add that in, we will be sitting at around about $80 million for the quarter with $14 million coming from the over lift position and $12 million coming from the change in inventory.

But this actually a great job by the operational team in Norway to keep these costs very much in control in absolute terms. Then looking at tax installments on the next slide, we have a relatively high effective tax rate on the face of the P&L of 89%. That mainly relates to the fact that we had an FX loss of $81 million which occurs outside the Norway jurisdiction. And both of those FX forces are non taxable and therefore that pushes up the effective tax rate. But adjusting for that we were sitting on operational tax rate of 79% which is roughly in line with what you would expect in Norway given the 78% tax regime in Norway. And then on the bottom of this slide we are showing tax installments we are incurring quarter-on-quarter as we go through the year, as I mentioned $120 million was paid in Q1 which is a tax installment which really relates to the 2020 financial year. And similarly in Q2 we will have offered two of those tax installments, so double of Q1 $240 million, again relating to the 2020 tax liability.

And then what we are showing here as we project forward that run about the middle of the year, we will provide projections to the Norwegian Taxation Office to give a forecast of what we estimate to have to pay in tax for the 2021 financial year. And you can see here on price ranges from 50 to 70 from Q2 to Q4. We're estimating to pay somewhere between $220 million to $340 million in Q3, and double those amounts in Q4 given that you have two installments in Q4 and only on in Q3. So all in if you look at prices from 50 to 70, we expect the total cash bill for this year to be somewhere between $1.1 billion to $1.5 billion in the $50 to $70 Dated Brent price range.

Then quickly on the cash flow statement itself, as I said $750 million of CFFO for the quarter and is net of a working capital build of $135 million. The spent was $224 million, just shy of $160 million on oil and gas CapEx and $64 million on E&A. And then we spent round about $5 million to $7 million on renewables. We are guiding renewables of $100 million now for the full year. And in Q2, you should expect roughly half of that guidance to be cash spent in Q2, particularly in relation to this Karskruv renewable wind farm in Sweden completing. And we paid the first installment early in Q2 on that transaction. So that gives us our free cash flow pre dividends of $526 million. We paid the last 2019 dividends out in January this year, $71 million. So that's what you see here. And then that left us with debt repayments of $370 million, which led to the deleveraging of the debt by the end of the quarter. We all had bigger cash build than usual $78 million. And that mostly relates to the fact that we have another cash tax installment to pay in early April. So we had drawn that cash sitting on the balance sheet at the end of the quarter to have the liquidity to perform that tax installment.

Our debt position is looking very healthy; we are showing here the debt getting over the last nine quarters. And you can see at year end 2020 we were at 1.8x net debt to EBITDA. And we delevered down to 1.3x now and as we guided in capital markets day if we assume $60 average price for the full year, we do expect to be below one time net debt to EBITDA by the end of this year. And that's we also previously announced we successfully refinanced the balance sheet at the end of 2020. With another new $5 billion credit facility running for five years. So at the end of Q1, we were drawn just below $3.5 billion in net debt. And that therefore leaves just in excess of $1.5 billion of liquidity headroom as of end of Q1.

If we look at the average margin over Q1, it was 1.56% over LIBOR, which is lower than what we announced when we announced the facility itself where we announced 1.6% over LIBOR. And the Delta here is relating to the ESG KPIs we have in this credit facility. So if we outperform on certain ESG metrics that has a direct impact on the margin, and that is the benefit we've seen in Q1, and we should expect to continue to see those sorts of ESG impacts over the next three quarters.

Then a quick recap on our guidance. There are no changes here compared to what we guided at the CMD except for the renewable CapEx. As I mentioned earlier, we've now signed the transactional Karskruv wind farm in Sweden, increasing our CapEx by $30 million this year. The total all in CapEx coming with that wind farm is going to be EUR 130 million. So most of the Karskruv CapEx is actually sitting in '22 and '23. But all other guidance remains unchanged compared to CMD at the moment.

And then just a quick recap on the dividends as Nick mentioned upfront, the AGM approved $1.80 per share in dividend for 2020. And as usual, we will pay that out in quarterly installments. And the first quarterly payment of $128 million was paid out in early April. So that will have cash impact in our Q2 numbers and you see the rest of the dividend schedule on this table.

So with that, that conclusive financial overview, and I'll hand back to Nick for some concluding remarks.

Nick Walker

Thank you, Teitur. And I've just got one final slide to summarize before we open up for questions. I want to leave you with the message that the business is delivering on all fronts. We've got, we have world class assets that just continue to outperform yielding production and operating costs ahead of guidance, our resilient, low cost business delivered record financial results in the quarter and generated strong free cash flow which covered dividends, funds growth and significantly deleverage the business. You've seen that all of our key projects are on track, providing production growth to over 200,000 BOEs per day by 2023. And we'll be able to sustain at those levels with an upsides and a pipeline of new opportunities and projects that we're moving forward.

And then finally, we're delivering on our decarbonization plans, we'll be carbon neutral from 2025. And we've again made further progress on that in the quarter. I think this is a key aspect of our strategy, and I think it makes us relevant and investable, long term in response to the challenges around the energy transition. So those are our first quarter 2021 results. And thank you for your time and I think we'd now like to open up for questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Our first question comes from Teodor Nilsen from SpareBank.

TeodorNilsen

Good afternoon, Nick and Teitur. Thanks for taking the questions. And also congrats on the fantastic results, sounds impressive. Two questions from me from my end. Nick you mentioned again the 200,000 barrels per day from 2023. For how long do you expect that level to stay with the current portfolio? And of course, I expect that you also will be able to add on something on that if you're making discoveries. And so that's my first question. Second question is on the economics on the Karskruv project. Could you provide any details on project returns or earnings contribution or anything more than just the CapEx number that will be useful? Thank you.

NickWalker

Yes, Teodar, I mean that's a good question. And thanks for the comments. We guided our Capital Markets Day, the long term production outlook, in terms of our production, and you can see that, the business goes over 200,000 barrels a day in 2023, in fact, quite substantially over 200,000 barrels a day. We also provided some guidance at the time of the impact of upsides and the stream of new projects. What we haven't done is given you the long-term outlook for that, but I think we have a strong business that continues to create opportunity. And I think we can continue to do that in the long term. And that's definitely the aim of what we're doing as a business. I think your second question was around the metrics around the Karskruv project. It's a wind farm in southern Sweden; it's in a good price area for electricity pricing. We've taken it 100% in the partner and the development partner in that is OX2 who are doing the -- who we partnered with for the Finnish wind farm. It's going to generate around 290 gigawatt hours of electricity per annum when it's on online and the project will start construction next year. And should be online by the end of 2023. So we would expect that to be generating positive cash flow from the start of 2024, probably or late 2023. So with that project, it means that we have more than 100% of our own electricity generation to meet our usage. So, it's sort of closed that aspect of our decarbonization strategy and ensures that we can, it's another step in achieving the target by 2025.

Teitur Poulsen

And maybe I can add then you asked specifically on what rate of returns we are getting, I mean, that's not something we're disclosing as such but, suffice it to say that the risk profile that comes with the project like that this materially different than the risk profile on oil and gas projects, because in here the wind farm is all turnkey contractual arrangements. Which therefore takes out a lot of development risk, and also operationally it's a much simpler concept. So given that there's less risk, we are also willing to accept a somewhat lower rate of return than we typically would demand of an oil and gas project.

Teodor Nilsen

Okay, sure understand. And is it impossible to disclose on the kind what kinds of electricity price you achieve or do you have any fixed price agreement?

Nick Walker

We haven't guided on the basis on which we make those decisions like we don't on oil price. But I can't say we're going to sell a spots, which is what we've chosen to do with all of our renewable power. And the reality is that we're buying electricity on a spot basis in Norway to power our offshore facilities. So we're basically linked in price so.

Operator

Our next question comes from Sasikanth Chilukuru from Morgan Stanley.

Sasikanth Chilukuru

Hi, this is Sasikanth Chilukuru from Morgan Stanley. Thanks for taking these questions. I had two please. The first one, I just wanted to understand regarding the first certified carbon neutrally produced crude oil sale. Now I was just wondering if there was any premium on the price that you got for that cargo. Or is there -- is the pricing different from your regular cargos in that way? Anything on that would be quite helpful. The second one, I just wanted to touch on your policy regarding inorganic expansion in the M&A, just wondering whether the decarbonization strategy that you have would that some kind of limitations on the options that are available for M&A especially M&A assets producing in the longer-term horizon? Thank you.

Nick Walker

Yes, both good questions, and perhaps I'll take them and on the first one about did we get a premium, we sold the crude cargo to Saras market. This is a long term game. And I think what we're trying to do is to generate a market here. The reality is it costs us for, because our crude is already produced a very low carbon, the cost of doing this for us is extremely low. And but what we want to do is to try and catch the market here. And it was key for us to also have this certified by Intertek, I think it gives credibility to what we're doing. And the aim now is, once we've done, one is to see whether we can do more and see whether we can create some value out of it. But I think if you look at this, the buyers of our crude are also faced with trying to decarbonize and, if they're faced with buying a barrel of crude that's produced with high carbon emissions or with low carbon emissions, then they should see more value in the low carbon emissions barrel. And we estimate it could be a few dollars a barrel of opportunity here between us that we could share or even further beyond that, if carbon taxes go up. So we think it's time this is going to create a market and we're going to aim to try and do more of this.

I think the second question is around the M&A market and our decarbonization strategy. I think it's a good question. And I think everything we do as a business will be in terms of A&D activity. And in terms of development activity, we will look at it with that lens. And, I think we have to I mean, I think the whole industry has to and so it will play a part in how we think about acquisition opportunities. A good example is the Wisting opportunity that we purchased last year up in the Barents. That's expected to move forward with the electrification from power from shore. And that played a part in us and how we thought about that opportunity when we went into it. And I think if you look at Norway, there's really no way in Norway that you couldn't deploy power from shore if you wanted to, if the scale of resource was big enough. So to me, I don't think it has a material impact on the things that we can look at.

Operator

Our next question comes from James Carmichael from Berenberg.

James Carmichael

Hi, good afternoon, guys. And just a couple, firstly, I guess just on the Sverdrup Phase 2 you mentioned studies to try and debottleneck that and perhaps increase that guidance above the 720 levels. Maybe you could just provide a bit of color on what those bottlenecks are, and sort of timing on the studies. And then secondly, just on the sort of the wind farm investment, obviously looking at wave power as well. I mean the wind farm is certainly much higher equity position than you've got in the other wind and the hydro investments you've made previously. I guess, is there any sort of sense of this bit of creep in terms of renewables becoming a more substantial part of the strategy? Or are you pretty firm that it's just going to be offsetting emissions in the underlying oil and gas business? Thanks.

Nick Walker

Yes, I mean, I may be catch the second question first. I mean, no, we're not -- now the strategy of our businesses, oil and gas focused, and that's what it will remain. I firmly believe that the best companies are the ones that focus on what they do well, and that's our business. We see, we set out our decarbonization strategy, and the component of it was to provide all of our own renewable energy to support our business. It just so happens that when you look at opportunities, I mean, we took 100% of this one in Sweden, but it just fit quite well with our desire to achieve 100% coverage of our renewable power requirements by the end of 2023. And that's why we chose to do it on 100% basis. I don't think there's anything to read into that. I don't think you're going to see us, branch out and do a lot more renewable. I think you mentioned -- it was a press release out, I think yesterday around some R&D investment we have in some wave power, but that's a small spend and through our R&D funding in Norway. We do -- we fund quite a number of projects. And I just see this as something that's interesting and relevant to what we do. But again, don't read anything through to that we're heading into wave power, it is just the funding of an R&D project on a relatively low level.

And your second question about Johan Sverdrup capacity levels, I think if you go back to the guidance that was provided around the phase two increments, it was 220,000 barrels of oil per day increment for Phase 2. And that's the design level. And of course, now Phase 1 sitting at 535. And the sum of those is 755, which is above the guidance of 720 that's provided. And that's without taking any potential account of any potential debottleneckings upsides in the Phase 2 facilities, which are a similar design of the Phase 1. So, there's clearly a potential for upside, the challenge is that we start to hit other constraints in the facilities around the utilities and the pipe -- export pipeline. So what's going on at the moment to understand that, but I think it's a very high chance that we will see that 720 increased somewhere above where it is at and I think you have to be patient and wait, probably middle of the year, before we start to understand the detail around that. Does that answer your questions?

Operator

Our next question comes from Yoann Charenton with Société Générale.

Yoann Charenton

Good afternoon, everyone. Thank you for holding this quarter at midday which is appreciated. I will have two sets of questions. And you continue to refer to nine projects that could be sanctioned by year end 2022. That said, given the relatively small size of the discovery on segment D, it now sounds like if development belongs to the broader Sverdrup Phase 2 project but at the same time, correct me if I'm wrong again. And there's a round of infill drilling at Edward Grieg Eva may be making its way onto this FID or potential FID. So can you please clarify what are the nine projects you have in mind that could be sanctioned by year end 2022. And the second set of questions will be if you don't mind coming back on to this first certified carbon neutral oil sale. Are you able to disclose the actual size of these trades? And in view of high interests, you refer to during this call. And given the fact that Intertek issued this certification, this carbon clear certification back in July 2020. Why is the first sale only happening in April? In other words, what would it take for your marketing arm to do more of these deals in the coming quarters? Thank you.

Nick Walker

Yes, so the first -- the question around the project. So segment D was one of the original projects and I now see that is mixed in with Solveig so if we develop it, it is relatively small reserves, but it's potentially developable with wells from Solveig. And we also have a second phase of development for Solveig. So we look at that now as one project. And so you would argue the nine projects that we showed last time have gone down by one. But we've added since then through an acquisition, or swap opportunity, the Trell and Trine opportunity within the Alvheim area, relatively small interest, but that's also another project is moving forward. So segment D gets amalgamated within the Solveig area, and we are Trell and Trine. So that's how you get back to the nine potential projects. They're all listed in the Q1 text, all the other projects.

And I think I've been through most of them other than Wisting and Alta up in the -- and lving as we went through. The second question around is how -- why is taking us so long to go from carbon certification a year ago, I think we've been thinking about how to make this work and how to move this forward. And, it's this area of the business is developing quite quickly. And it's taken us a little while to get there. But we had to get one further step to do this, which was to certify. So the certification we did a year ago was what Intertek call that CarbonClear certification, which certifies that Edvard Grieg has low co2 emissions, which certified it as 3.8 kilograms of co2 per barrel. But of course, that still means that we're emitting co2 in the delivery of the barrel. So we had to go a second step here, which was to work with Intertek to develop a certification for what they're calling is their carbon zero standard, which included the requirement for us to offset -- to provide offsets certifiable offsets for the remaining emissions from the Edvard Grieg.

So, yes, I think there are two components building interest and just putting in place the practicalities around doing this. But I think what I've seen, and what we see from the market, from the connections and contacts that we have, that there's a lot of interest in this, and I think we're hopeful that we can build a momentum and do some further follow on opportunities.

Operator

Thank you. There appears to be no further questions registered. So now hand over back to the speakers.

Edward Westropp

Thanks very much, everybody. We have got a couple of questions from the line. Actually, there's a few that have already been answered through the cases. But these are anonymous, but I think, first one to cover off is given the announcement of the renewable and acquisition today, the cost group, et cetera. And I think we talked about earlier, but maybe just to reiterate, is that future -- continuing future direction business, or you're going to -- are we're going to continue focusing on oil and gas?

Nick Walker

Yes, well, I think covered most of this earlier. I mean the focus of our business and strategy is around oil and gas exploration, production and development. And that's going to be the key focus of our business. The renewable aspects of our business I see as part of our decarbonization strategy and part of facilitating making sure as a company, we deliver our barrels in the lowest carbon emissions possible and heading towards carbon neutrality by 2025 and sustaining that. So that's the focus of the business, you're not going to see us build, big renewable arm to the business. That's not the strategy at all.

Edward Westropp

Right, so something on the wider business and on guidance, the questions around what would it take to see guidance being upgraded this year? Whether it be on price differentials or on production? Is there anything if you could point people towards that might indicate guidance changing this year?

Nick Walker

Well, in terms of production, we've had a good first quarter ahead of guidance. We like to maintain a relatively prudent view on our production guidance. And you can see that from the track record that we've had of meeting or beating every quarter for 23 quarters. But I indicated as I presented that, I think if we have continued good production through the second quarter, I think we'll revisit production guidance, with the aim of narrowing it in the second quarter results that come, I guess, at the end of around July.

Edward Westropp

Very good. The next one is from Anish Kapadia from Palissy. And there's a couple of questions here, all sales are very strong in Q1 at 70 million barrels, what's the expectation for Q2 is it similar amount? What are the plans for the strong free cash flow generation? Excess free cash flow? Will it be used for M&A? Or are you going to be accelerating any development CapEx? Can you accelerate in development CapEx this year? Or if not, is there potential for dividend increases?

Teitur Poulsen

Yes, I mean, it is correct, we had an abnormally high sales volume in Q1. And that related, as we said earlier, 15,000 barrels of oil equivalent of what we're lifting, coming from both Edvard Grieg and Johan Sverdrup. And then in addition, we have a 7,000 barrel inventory release, were in at the end of Q4, we had a lifting of a cargo, which we haven't solved by the end of Q4, so therefore, that went into inventory, and then we sold it in January, at which point you release that inventory. But of course, as you look at this over a period of time, say over the full year, you would expect the over lift and all the dispositions to roughly balance out at the end of the year. So therefore, you should expect that to normalize, and therefore our sales volumes to roughly equal to produce volumes that we will have over the year. And then, of course, on cash flow and free cash flow generation, I mean, Q1 was exceptionally strong. And also remember, we had the working capital build of $135 million. But that needs to be counterbalanced by the fact that we had a low cash tax payment, which really still reflects the 2020 financial performance and as you'll see on the slide, where we showed the tax installments, as we move through the year, given the higher production volume and oil prices this year, we expect by Q3 onwards to pay significantly higher cash taxes, which is a good thing, because it means the business is performing well. And what we've also guided despite those higher cash taxes at $60, pre dividends, we still see us being on track to deliver a $1 billion dollars in free cash flow through to the year. So, we've obviously found the dividends from that more than price over a $60. And the delta is either allocated towards debt repayment, or obviously if we find the right M&A opportunity, then that's quite clearly something we have capacity to look at and move very quickly on, depending on whether the opportunity is right or not.

Edward Westropp

A couple more. This is specifically on the cost through project. The question is at six megawatts at EUR 1or EUR 1.5 per megawatt nameplate implied average and wind conditions. It sounds expensive. Why is that?

Nick Walker

Maybe I can touch, I mean, that's I think the way to look at this is not just on cost per megawatts, it's you have to look at the electricity generation yield that you get in the area. And there's also feed in tariffs, costs as well. So there's a whole host of elements that when we benchmark this project against other deals done, this is actually very, very favorable compared with other deals that have been done in the region and actually the better end of the price curve for doing it. So actually, we're very comfortable. We got a really good deal here. And so it's a great project actually.

Edward Westropp

Next question is regards the fishbone completions, given you already have good performance at Edvard Grieg why are you pursuing new completion strategies such as fishbone? Yes, maybe some color around why fishbones given Edvard Grieg is already performing so well if you needed that.

Nick Walker

Yes, no, I mean, yes, Edvard Grieg has performed really, really well. And I think everyone knows that we've increased reserves basically doubled and actually since sanction and there's still more to come, I think and but we have two reservoirs here, we're basically have very high quality sandstone reservoir. And then we have a quite a lot lower quality conglomerate reservoir. And these fishbone completions are aimed at improving the productivity and the recovery out of the conglomerates. And if we can do that, then there's an opportunity potentially to increase reserves in those areas of the field that beyond the booking levels that we have at the moment. So what this completion does is a horizontal well, and we drill out all these little fingers out of the completion.

So actually, in these well 159 additional holes to six meters long and think about an inch in diameter, which double essentially the productivity of the wellbore? And with the aim that we can improve recovery. And so it's actually very exciting. It's being done elsewhere with this one well being done in Ivar, and I think Equinor have done one well, as well. But this is with the most sorts of needle holes. And so it's exciting technology. And I think there are lots of other applications for us, I mean, we have a lot of conglomerate reservoir, lower quality conglomerate reservoir in the Edvard Grieg area. And if we can get more recovery out of that, that would be great. We have roles Rolvsnes which might benefit from this. And Solveig has two reservoirs, a high quality on the out -- on the down dip side, under the syn-rift reservoir, which is not such good quality. And again, this technology might work there. So I think there are other places it could work in our portfolio. So actually, I think it's a really good technology and aimed at improving recovery factor from these poor quality reservoirs.

Edward Westropp

I think the last question comes down to the sort of conservative guidance fact that we're beating guide -- production guidance quarter-on-quarter, does it suggest that we're being overly prudent or overly conservative?

Nick Walker

Well, you could look at it that way. And we have a debate in certainly around that. But, actually, we beat it by two, midpoint by 2% this quarter. And I think if you look back, unless we've had big projects coming online, where there's quite a lot of uncertainty around the startup date, I think we've not been that high above it. We put a lot of effort into making sure we get this right. And what I'd rather do is pitch the guidance of the level that we can meet or beat rather than a level where we fail to meet it and have to explain why we failed. And I think we've pitched it about right. And, again, yes, we're not significantly above it. But I mean we can't plan on having production uptime of 99%. We're just never going to do that. Even though we strive to get 100% we shouldn't plan our business on that. So I think we take a prudent approach.

Edward Westropp

There is one last question just come in. With one of the question regarding the price of the recent wind project, Mr. Walker mentioned feed-in tariffs as part of the assessment justifying price. Are they're actually feed-in tariffs on this project?

Nick Walker

Well, I think it's tariffs are going into the grid system. We have operating costs associated with that, and maybe I use the wrong term, but that's the way it is.

Edward Westropp

Pretty good. But that's it for questions. And that that concludes the conference call this morning this afternoon. Thanks very much, everyone for joining. If you have any further questions or want more detail, you know where to find us and me. Stay safe. And we'll see you again soon hopefully in person. Thanks. Bye-bye.