Pharos Energy Plc (LON:PHAR) Chief Executive Officer Katherine Roe caught up with DirectorsTalk to discuss operational resilience, investment plans, and growth strategy in Vietnam and Egypt during a recent trading and operations update.
Q1: How does Pharos Energy’s low breakeven oil price help it withstand market volatility?
A1: I think clearly a lot of us have seen in the sector over the last few weeks and months volatility across all markets, but particularly in respect of commodity prices and oil prices. So, it’s really important for us to have another hard look at our business model to ensure that our operational framework is robust enough to survive that volatility.
We are fortunate to have those low break even’s and that really allows us to ensure that we’ve got sustainable production, and I think really importantly as well enable us to continue with our growth plans. By that I mean our investment programme largely in Vietnam this year with the drilling campaign. We’re really seeking to appraise a new area of our blocks to unlock additional incremental production volumes. We’re able to do that because we have a low breakeven cost environment.
So, even with these lower oil prices and volatility, we’ve got a sustainable model that ensures we can continue doing what we need to do to deliver value for shareholders.
Q2: With no debts, £22 million cash, sustainable dividend, and self-funded capex programme, how do you balance returns to shareholders with reinvestment?
A2: It is a balance, it’s exactly that. We can’t control the capital return through the share price, but we can control a tangible return through the dividend, so the dividend as a way of returning value to shareholders remains an important priority. Clearly that can only survive for as long as the assets are able to support that dividend so reinvestment back into the assets is also important and it’s balancing the two.
We feel at the moment this year, we have that self-funded investment programme to drive future growth, not just sustained volumes, but see that incremental growth that I mentioned, whilst also being able to support a long-term dividend policy that we’ve been doing for several years now.
It is striking the right balance. Clearly, we don’t have any debt to refinance or service so that definitely alleviates pressure on our cash allocation and capital allocation, which is obviously the first year for many years that the business has been in that position. We’re very fortunate with that.
As I say, trying to get that balance right between delivering return, sensible reinvestment back into the asset, but also a tangible return through the dividend.
Q3: What can investors expect from the upcoming Vietnam appraisal wells and Egypt consolidation?
A3: Really important catalysts for us to drive further value. I think the priority, particularly since I joined the business, has been to extract and grow the existing assets before we look elsewhere.
What does that mean? That means obtaining the licence extensions in Vietnam to unlock this drilling programme that we’re now preparing for in the second half of this year. Really, that includes some in-fill drilling, but also, importantly, an appraisal programme. It’s that unlocking part of the block through the appraisal, which we believe will allow us future development and that’s really where we can drive further growth out of our existing producing assets. So, that’s really important and a real catalyst and news flow driver for us this year and we hope shareholders can keep an eye on that being a successful campaign.
In Egypt, we have, again, existing producing assets. We are trying to improve the economics for further investment and the way we do that is by this consolidation discussion that we’re having with the government. It’s a fairly well-trodden path; we’ve seen other peers in-country successfully manage this and we have done ourselves in the past. That is to improve fiscal terms and, as they say, provide a healthier economic framework to allow us to reinvest, to drive volumes, but only in a position where the return is justified.
So, we would like to see production grow in Egypt as well, but it has to be in a self-funded way. As I say, we’re close to agreeing improved fiscal terms, which will only add value to those existing assets and allow us to move forward with further activity.
Q4: As production grows, both organically and through acquisitions, how will you maintain Pharos Energy’s operational and financial resilience?
A4: It’s a balance, again. We need to ensure that we can have a business that’s robust and stable and can withstand some of these global shocks that we’re seeing, the volatility we’re seeing, some of the unknowns going forward, particularly in this oil price environment.
So, we have to balance investment carefully. We have to make sure that we build the business in a careful way. We do have a healthy balance sheet which we can leverage, but we would only do that if we felt very comfortable that the ability to support that leverage and provide a return was there.
So, it’s a balance of risk that we believe can deliver reward but again, with a backdrop of concern about the global environment. There are plenty of businesses in our sector that will find it very challenging in this environment.
Having stable production that generates stable cash flows, no debt to service, a healthy dividend that’s sustainable to shareholders, and growth that could be self-funded through that internally generated cash flow is a really positive place to be.
We will continue doing good business with a healthy risk-reward lens as we move forward in the current market.
