PetroNeft Resources plc (LON:PTR) Chief Executive Officer David Sturt caught up with DirectorsTalk for an exclusive interview to discuss final results, improvements in the business environment and what to look forward to for the rest of the year.
Q1: PetroNeft Resources announced 2020 results this week, obviously a challenging period. What the key highlights and how did the company manage to navigate through this period?
A1: It’s correct, 2020 was a terrible year for most people with the ravages of COVID and it’s the tragic loss of life we’ve been seeing around the world. I think if look at the oil industry in particular, it’s been hit by the massive demand destruction and price reductions. We first saw that this manifests itself in two basically themes that played out.
Firstly, January last year, we saw the split up of what’s called the OPEC plus agreements, which led to the initial reductions in the oil price and then, March, it started to fall very sharply as the demand was taken off the table, as people stopped traveling. So, that translates to a massive decline in oil price and actually, as we know, in April, there’s actually reports of negative pricing in the Texas plays.
Looking at our numbers, it has been a challenging year, but the highlight really is that we kept our productions relatively stable through the year, we had slight 3% decline. That was on the back of we’d actually decided in April, when the prices went so low, that it wasn’t economically viable to produce in that month so we shut in a lot of our wells and we also had some shut-ins in September through unplanned pipeline maintenance.
So, when you look at it, actually, we lost about 35,000 barrels of oil a day through the voluntary shut-ins and the pipeline so if we hadn’t had had that scenarios, we’d have actually been about 3% up year on year. Obviously, we’re not about just producing a little bit about producing oil economically so production was actually performed pretty well through this period.
The other part is production costs so obviously we’ve had a laser focus on this throughout the last couple of years, and we’ve managed to further reduce the cost of associated producing oil. It went down from $13.80 a barrel to $12.8, which is a further 10% reduction, which was a nice achievement.
The pricing environment, talking about it again, we look at what we got per barrel in 2019, we got just under $42 a barrel, and the average realised price for 2020 was just over $28 a barrel so there’s a massive 33% decline in our price we got per barrel as international market went through the ravages of the pandemic effects.
The great news is that despite all these challenges, because of our earlier focus on costs, and keeping production stable, we were actually able to reduce our losses by quite a bit, it reduced from just over $6 million to $4.5 million so we reduced our losses by 25% in a period when we had this drop in the oil price.
I think the other thing is that it was a challenging year from the COVID effects but we were able to operate throughout our year without a single lost time accident, which was again, great news and just demonstrates how we look after our staff.
So yes, a challenging year, but our cost reduction we had in place before 2020 and leading through 2020 had had an effect in reducing using our losses, despite the lower prices.
Q2: In the release, you mentioned the improvement in the business environment so far this year. How is this affecting the company?
A2: Quite dramatically actually, and perhaps not surprisingly, as we come out, we basically positioned the company through 2019/2020 to optimise the production. We improved the understanding of our fields, reduced operational costs, and then we’re entering this period where if we look at the macro environment, clearly the prices have been escalating and there’s an incredibly newfound confidence within the industry. Today, we’re looking at Brent of plus or minus $75 a barrel, it’s unprecedented.
How do that affect us as a company? Well, clearly it has dramatic effects on our cashflow at operational level, we’re generating good cash flow at the moment. If you look at even last month, we’re getting well over $60 about barrel last month, our operational costs of $12.3 a barrel with the mineral extraction tax in Russia being approximately 50%, you can see that the net amount we receive per barrel has gone positive in quite a dramatic way.
This is actually one of the good things about the Russian tax regime for the oil industry so it’s called the Mineral Extraction Tax, and it’s based on a percentage of the oil price so as it goes down and you pay less, as it goes up, you pay more, but you still get that percentage of the upside. In quite a lot of fiscal regimes around the world, as the price goes up, you tend to get taxed quite punitively, you don’t in Russia.
So, we’re benefiting from the increased oil price, and that’s generating more cash in our professional units, as reported recently, we constructed the road on License 67, the Cheremshanskoye field. We had a $1 million facility to do that, yet we’ve not used it yet, we managed to finance it so far out of cashflow so it gives an indication of how much cash is going through the system.
We’ve obviously been benefiting from the transaction, where we increased our equity in License 67, from 50% to 90% and the C-4 well on the Cheremshanskoye field in License 67 continues to perform extremely well with zero decline.
So our bottom line production numbers are going up just as oil price is going up, last year we were doing 1,562 barrels a day gross, this year we announced the other day that we’re up to just under 2,300 barrels a day. So production is strong, cashflows incredibly strong, we’re benefiting from the cost reduction programmes in the past and it puts us in an incredibly rosy position. At the same time, investors are increasingly looking on this as a good place to invest because the cash is generating.
It’s almost like a tale of two halves, 2020 was a terrible year, we managed to come through it, we reduced our losses, kept focus on costs to maintain production, places very well to the first six months of 2020, quite a lot of cash at the operational level.
I think the key thing is also, this is on the back of our operational programmes, which have been updating our investors on over the last few months, which has been pretty successful. The fracking program in License 61, the stability of the production at C-4, which has actually gone up, and Ledovoye, we had to work over, we didn’t actually put in production but we managed to get oil to surface.
So, we have a good pricing environment, good operational performance and our production has actually increased so a rosy picture now.
Q3: This year seems pretty busy, what can we look forward to for the rest of the year from PetroNeft Resources?
A3: Our field generally, on an operational level, you tend to do a lot of the work in the winter using ice roads but those ice roads are obviously no longer there as we’re now in the summer but that doesn’t mean to say that the company’s not doing anything.
We’ve had an incredibly successful operational season this last year, that is fundamentally important because it keeps improving our understanding of the assets and taking forward. The success of that programme in both licenses, it gives us great confidence that we have significant value to grow organically.
The major drivers we talked about in the past have been the Northern Hub in License 61, we have Sibkrayevskoye, Tungolsky and West Lineynoye and then the second part in License 61 is the enormous potential around the Cheremshanskoye field.
So we’re updating with our models that moment, it all looks very positive, now the key tasks for the company is to look at how we optimise it for taking those assets forward into a development phase. We have a significant reserve potential underground, we just need to find a way to extract that economically which in today’s high price environment is not the challenge it was last year.
So I think there will be quite a lot of news coming through in terms of updates on the assets and we hope to have some of that coming through fairly soon.
We can look forward with increasing confidence for a very active season next winter, just based on the cashflow we have already started to accumulate within the operational units so there’ll be quite a lot of news coming forward.