DETNF - Aker BP ASA (DETNF ) Q3 2022 Earnings Call Transcript

Aker BP ASA (DETNF)

Q3 2022 Earnings Conference Call

October 26, 2022 02:30 AM ET

Company Participants

Kjetil Bakken - Head of Investor Relations

Karl Hersvik - Chief Executive Officer

David Tønne - Chief Financial Officer

Conference Call Participants

Teodor Sveen-Nilsen - SpareBank 1 Markets

James Hosie - Barclays

Chris Wheaton - Stifel

Yoann Charenton - Societe Generale

Presentation

Kjetil Bakken

Good morning, and welcome to this Aker BP webcast with the presentation of the company's financial results for the Third Quarter 2022. My name is Kjetil Bakken, and I am heading Aker BP's Investor Relations team.

Today's presentation will be given by our CEO, Karl Hersvik; and our CFO, David Tønne. After the presentation, we will open to questions for those who are dialing-in. The dial-in details are included in the press release that we released this morning.

Now, without further ado and assuming you have all read the disclaimer text, I leave the floor to Karl.

Karl Hersvik

Thank you, Kjetil, and welcome to all of you who are listening into this Q3 presentation. It is now four months, since we completed the Lundin acquisition. And even though, we do live in rather challenging times, with war in our neighborhood high inflation and volatile energy prices it is good to see the resilience and the robustness of Aker BP. We are focusing on the things, we can impact and improve. And I do believe that, the quarter we have now put behind us serves as a good demonstration of exactly that.

With the Lundin transaction now under our belt, we have made a step change towards our ambition of delivering the lowest cost lowest carbon oil and gas production in the industry. We also have a very attractive portfolio of growth projects, which we are currently maturing towards PDO submission by the end of the year, and which will contribute to significant value creation in the years ahead.

More on that of course shortly. And not least, we continue to build financial strength and flexibility maintaining a strong balance sheet is a prerequisite for being able to invest in profitable growth opportunities and to maintain an attractive dividend. So in essence, I think we have made significant steps towards our vision of becoming the E&P company of the future.

Now, let's dive into some of the highlights for the third quarter. The operational performance in Q3 was excellent. Despite being a quarter with a lot of work related to the Lundin integration we managed to keep full focus on the operations. We delivered record high production efficiency high safety standards, low production costs just above $7 a barrel and industry-leading CO2 emissions well below four kilograms per barrel.

When it comes to our growth portfolio, the next milestone is the Johan Sverdrup Phase 2 which is now expected to start production in early December, and which will be the main growth driver into next year. Our portfolio of projects with PDO submission scheduled by year-end is maturing and as planned. We have now brought all these projects to a level of technical maturity, where they are investment ready and we are aiming to make the final investment decisions during the fourth quarter. We've also made two discoveries in the third quarter. One of these is located in Skarv and adds to the inventory of future tieback projects in this area.

On the financial side, we delivered a record high free cash flow of $1.9 billion, of course helped by higher realized prices in addition to the strong operational performance. And as a result our financial position continued to strengthen, with net debt down to $2.2 billion. We paid $332 million in dividends in Q3, and we will do the same in Q4. All-in-all, I am very pleased with our first quarter as one team and extremely excited about the prospect of what lies ahead for this company.

But before we look into that let me start with priority number one in Aker BASIS POINTS, which is of course safety. Safety is our license to operate and it's always and will always be our number one priority. I am pleased to see that, the number of injuries are trending down. And as you can see from this chart, we are now back to levels seen two years ago, but against the backdrop of a much higher activity level. And it's also pleasing to see that, we've been able to continue the positive trend also with the following – also following the completion of the Lundin transaction.

That said, we did record three incidents this quarter, which we're not pleased with. And I can assure you, that each injury, however insignificant will be scrutinized and evaluated to make sure that we do everything we can to make sure our employees are at least as well off when they are at the end of the working day as they are when they started it.

And even one incident is one too many. And we will never rest until we show zero incidents on a consistent basis. Now a strong safety culture is also an integrated part of our operating model. And we believe that there's a high correlation between safety and efficiency in general. And I believe we saw this correlation clearly in the third quarter.

With production of 412,000 barrels per day and a record high production efficiency of 96%, it's safe to say that the combined company is running very well. Our fields are now back to producing at full capacity, following the completion of the summer maintenance in Q2 and also actually in early Q3.

Most of the increase compared to the previous quarter comes from the back of high production efficiency on Sverdrup, Alvheim and Grieg & Aasen of course together with increased our ownership in the same fields.

I'm especially impressed I must say, by the operations on the combined Edvard Grieg, Ivar Aasen asset which we are already seeing the power of the two companies combined, resulting in 99% production efficiency in the first quarter [indiscernible] and producing almost 100,000 barrels per day. This is actually extremely impressive.

Now before moving into the environmental aspect, I would like to zoom in on one of the many initiatives we have taken to improve our production efficiency overtime. Maintenance activities impacted production efficiency in many ways.

The most direct effect of course is planned downtime as caused by the actual maintenance work. And we are working systematically to minimize this, through better planning and bundling of the activities.

But we also want to minimize the unplanned downtime. And one way of addressing this risk is by reducing the maintenance backlog and hence reduces the risk of equipment failures and other failures.

Now this chart shows how we've been working down the maintenance backlog by 30% -- 40% I'm sorry, over the last couple of years. This means that there are assets that are in better tactical shape, the risk of unplanned shutdown is reduced. And we should have a positive effect on overall production efficiency, going forward.

Now talking about the improvement, let's move on to CO2. With the Lundin assets on board, we have significantly increased our share of low carbon production, particularly from Johan Sverdrup.

In Q3 our CO2 emissions came in at an all-time low of 3.4 kilograms per barrel, well below our target of four kilograms per barrel and only around quarter of the global industry average. And we continue to drive our emissions down.

So far this year, we have delivered almost 50,000 tonnes of reduction through operational improvements across our fields, roughly and a little more maybe than three times what we targeted.

When Johan Sverdrup Phase two comes on stream we will also connect Edvard Grieg and of course then also Ivar Aasen to the grid and hence remove most of our Scope 2 emissions. With this more than 80% of the Aker BP production will come from fields that are electrified, further strengthening our position as an industry leader when it comes to low-CO2.

And speaking of Johan Sverdrup Phase 2, this project is now on its final stretch. And we expect production to start early in December. This will increase the field capacity to roughly 755,000 barrels per day and with our 31.6% ownership, this means that Johan Sverdrup will represent around half of our total production with ultra low production costs and CO2 emissions.

We are also making good progress on the rest of our project portfolio. The largest project in this portfolio is NOAKA where we have completed the feed and are aiming to submit the PDO by year-end. We will then also take over as operator for Krafla and hence be the operator for the entire area development.

With more than 600 million barrels of resources and with power from shore NOAKA will be a significant contributor to our low cost low carbon strategy into the next decade. The Valhall PWP and Fenris project is following the same timeline. This project involves a new platform at Valhall and an unmanned platform at Fenris. Fenris is this gas discovery previously known as King Lear and production is planned to start in 2027 as previously communicated.

For the tieback project at Alvheim Grieg and Ivar Aasen as well as for the Equinor-operated Wisting, the short version is that we are on track. Some of these projects are already in execution and for the rest of them we are aiming at PDO by year end.

All of these projects will be launched in the context of geopolitical instability, inflation, supply chain constraints, and market volatility. So, let me give a few comments on how we are approaching these topics.

In our work with the PDO projects, our focus has been to ensure technical and economic robustness. We have done more detailed engineering than what is normal in this phase and we have engaged alliance partners and other key suppliers at an early stage.

We have established detailed execution plans that ensure the projects can be delivered on time with the right quality and the right cost. Our industry is of course not immune to the inflationary pressures and the supply chain constraints seen across the global economy. And we've previously talked about how we are addressing these risks through close collaboration with our alliance partners through standardization and through strengthening our procurement strategy work.

In an environment with high predicted inflation, it's not always a good idea to lock in the inflated prices. And as an oil company we are better positioned to take on the inflation risk than most of our suppliers.

We are therefore applying a pass-through principle for certain cost elements. And over time it will lead to a better outcome than the alternative. In addition to the uncertainties related to inflation and the supply chain, the Norwegian government recently proposed to reduce the uplift on investments under the temporary tax rules and David will come back to this in his financial review.

As we are now moving into the decision phase for the PDO projects, we're taking all these factors into consideration. And we will of course keep the market updated along the way as we make the final investment decisions and submit the PDOs.

Now, before I leave the floor to David and the financial review a few words on exploration. Because even though exploration has not been attracting the big headlines lately, it remains an important way for Aker BP to replace reserves and generate future growth options.

And in the third quarter we made two noteworthy discoveries; Storjo and Newt, adding more than 50 million barrels of resources net to Aker BP. Both these discoveries are likely to retire back to Skarv in the future. We have five more exploration wells to go this year, which you can see on this slide and we are well underway to planning the 2022 program which will probably consist of around 15 wells as well as this year.

Now, this concludes my operational review. And now our CFO, David Toenne will take us through the financial review for the quarter. David, the floor is yours.

David Tønne

Thank you, Karl and good morning everyone. It is truly a great pleasure to present our third quarter results now with a full quarter behind us after closing the Lundin transaction and our income statements for the first time including the activities acquired.

The fantastic operational performance that Karl has walked you through and a continued elevated price environment, in particular on gas, led also to a very strong financial performance in the quarter.

Free cash flow was $1.9 billion. During the quarter, we paid a dividend of $0.525 per share. We then ended the quarter with a net debt of $2.2 billion and a leverage ratio of 0.2 times net debt to EBITDAX.

As normal, I will start my presentation by walking you through our revenues and the key drivers behind that. Total income was $4.9 billion in the quarter. We had a net production of 412,000 barrels of oil equivalents per day and an underlift of 5,000 which means that the sold volumes ended at 407,000.

The realized crude price was roughly $103 per barrel. The price was positively impacted by strong differentials across our crude qualities on average around $4.5 per barrel. Adjusting for NGL, our average liquids price was $101 per barrel.

If we then jump to the next slide, I will say a few more words on our gas sales and price realization. We saw record high production of gas in the quarter with almost 65,000 barrels of oil equivalents per day. The key driver of growth, of course, being the Lundin acquisition, but we also had increased gas production from for example the Skarv field in the quarter.

As can be seen from the pie chart, almost all our gas is sold on contracts linked to day ahead pricing with roughly two-thirds with exposure closely linked to TTF and one-third towards NBP. Gas prices continue to be volatile in the quarter and have also varied significantly between the different hubs in Europe.

The average realized price for our natural gas was $281 per barrel of oil equivalent up from 153 last quarter representing an increase of 84%. Combined this gave us a realized average hydrocarbon price of $130 per barrel of oil equivalents in the third quarter.

Now if we shift focus over to investments, total capital spend increased quarter-on-quarter as expected as the numbers now represent the combined entity. And if we look across the different spend categories, the increase in CapEx is mainly driven by the increased ownership in Johan Sverdrup and therefore also the Johan Sverdrup Phase II project, but also investments related to maturing Wisting and the Utsira High tiebacks towards a final investment decision.

In addition, we had an increase in spend on NOAKA and PVP Fenris as we are now rapidly approaching FID. Although, we see CapEx spend increase we are still underspending somewhat compared to the plan. This is both due to phasing, slightly revised cost estimates and the weakening of the Norwegian kroner against the US dollar.

Exploration spend in the third quarter was on the same level as in the second quarter and includes costs related to drilling of several wells including discovery on the prospect Studio, Newt and Ophelia.

If we then move on to production costs. The absolute production cost for the oil and gas sold in the quarter amounted to $236 million, while the costs related to the produced volumes were $275 million. The increase quarter-on-quarter is of course due to the increased production volumes following the inclusion of the acquired activities from Lundin Energy.

The average production cost per barrel produced was $7.3 per barrel of oil equivalent down from 12% or 40% down from the second quarter. The decrease reflects increased production and changes to the production mix following the completion of the Lundin transaction.

Production costs in the quarter was negatively impacted by continued high electricity prices and this was then partly offset by strong underlying performance and a weak Norwegian kroner.

Now with this as a backdrop, let's take a quick look at the P&L. When we subtract production cost of $236 million and other operating expenses of $9 million from total income we get an EBITDAX of $4.6 billion, a margin of roughly 95%.

Exploration expenses amounted to $85 million of which $52 million was dry well costs mainly related to the Barlindåsen, Lamba and Poseidon wells. Depreciation in the quarter was $522 million or $13.8 per barrel. This is slightly above the average rate for the last quarters. And we generally expect a small increase in the rate versus historical averages based on amortization of the fair values recognized in the Lundin transaction.

In the quarter, we also recognized a non-cash impairment charge of $55 million or approximately $12 million after-tax. This was related to the Ula area after further maturing the cost and production profiles following the acceleration of the expected shutdown from 2032 to 2028.

Net financial costs was $177 million compared to $62 million in the second quarter. Financial costs were impacted by loss on currency hedges mainly driven by the strengthening of the dollar against the Norwegian kroner. In addition, there is a negative currency element in the income statement resulting from consolidation of previous Lundin entities with another functional currency than dollar.

Profit before tax then ended at $3.782 billion and tax expenses amounted to $2.998 billion with an effective tax rate for the quarter of 79.3%. Consequently net profit ended at $783 million or $1.24 per share. The legal entities acquired in the Lundin transaction include companies with other functional currency than dollar, mainly Norwegian kroner. The purchase price allocation carried out as of the 30th of June was allocated to the respective currencies accordingly.

This gives rise to a currency translation element in the third quarter of $1.013 billion, which is included in the statement of other comprehensive income. This essentially represents the net adjustment to the balance sheet mainly as a result of the change in the dollar/NOK exchange rate between the 30th of June and the 30th of September 2022. And I'll rework back to this in a few minutes when taking you through the main changes in the balance sheet.

As most other items in the financial statements, cash flow this quarter was also a record high. Operating cash flow after working capital and taxes ended at almost $2.4 billion. Taxes paid in the quarter was $1.241 billion and working capital and other adjustments was roughly $950 million in the quarter.

And approximately 80% of this can be explained by three reasons. First and most important, increased receivables for in particular gas sales late in the quarter as prices increased so significantly, but also several liftings late in the quarter. Secondly, significant unrealized currency gains on NOK-denominated payables in particular driven by reevaluation of tax payables. And thirdly, reduced overlift balances.

Investment activities excluding payments on lease debt amounted to roughly $500 million in the quarter and then as mentioned free cash flow ended at $1.9 billion or $2.9 per share. On July 1st, we repaid a $600 million bank facility that was part of the Lundin Energy capital structure. And then dividends paid in the quarter was $332 million as Karl has already mentioned.

Interest paid, payments on lease debt, purchase of treasury shares and other finance items was $109 million. And we then ended the quarter with a cash balance of $3.042 billion, an increase of over $800 million from the second quarter.

If we then take a look at the balance sheet. The main changes from the second to the third quarter worth noting are related to the currency translation also impacting other comprehensive income as already discussed. Some consolidated entities in particular ABP Norway AS formerly named Lundin Energy Norway AS has NOK as functional currency, meaning that the statement of financial position is fixed in Norwegian kroner and that the equivalent dollar amount will vary depending on the currency rate.

The strengthening of the dollar against the Norwegian kroner in the third quarter generally, therefore, resulted in decreased balance sheet items. A good example is goodwill, which in all material respect is unchanged from the second quarter while the balance measured in dollars at the end of the third quarter decreased by $1.1 billion. This accounting technicality will remain until we have liquidated ABP Norway now expected to occur around year-end. Similarly around $600 million of the decrease in property plant and equipment is related to the reevaluation of balances recognized from the Lundin transaction.

Net additions in the quarter are negatively affected by a decrease in estimated abandonment liabilities, which entirely relates to a higher discount rate compared to the second quarter. The CapEx incurred in the third quarter amounted to around $400 million with the main contributors being Johan Sverdrup phase II, Valhall and NOAKA.

On the right-hand side of the balance sheet, we've also seen an impact from the currency effect from the consolidation, which is the reason for the decrease in equity despite of a net profit for the period of $783 million. In addition, financial debt has decreased due to the repayment of the term loan of $600 million in the beginning of the quarter.

Other long-term liabilities include provision for abandonment liabilities, which has decreased by $450 million compared to the second quarter, due to the mentioned increased discount rates at the end of the third quarter. Tax payables has increased during the quarter because of the strong results, and only one tax installment paid in the period.

With such strong cash flow generation and only one tax installment in the quarter, our available liquidity increased with over $800 million at the end of Q3, to a total of $6.4 billion. Net interest-bearing debt as mentioned, excluding leases ended at $2.2 billion and the leverage ratio was 0.2 times net debt to EBITDAX. Maintaining a strong balance sheet and financial flexibility remains a key priority for Aker BP. This means low leverage, strong liquidity and a conservative debt maturity profile.

If we then move on to tax. As mentioned at the second quarter presentation, in June we fixed the first three tax installments for the fiscal year 2022, to be paid in the third and the fourth quarter this year. The first installment of $1.241 billion was paid in the third quarter. This was below guidance of roughly $1.3 billion, due to the weakening of the Norwegian kroner.

In the fourth quarter, we will pay the next two installments related to income year 2022. In addition, on due date for the second installment in October, we took the opportunity to pay an extra installment in surplus to the fixed installment. This payment is made to better reflect higher profits for the full year, as a result of the higher-than-expected realized prices since fixing the tax installments in June.

This additional tax installment amounting to roughly $550 million was voluntarily done and done to manage liquidity and avoid interest expenses on the old taxes. The sensitivity for the three payments in the first half of 2023 here shown on the slide, are based on an average oil price for the fourth quarter 2022 and a fixed gas price of $30 per MMBtu for all the scenarios.

As Karl has already commented on, on the 6th of October the government presented the proposed national budget for 2023, including a proposed reduction in the temporary tax regime uplift from 17.69% to 12.4% applicable from 1st of January 2023 if enacted. As illustrated here on the slide, the proposed reduction in uplift rate will reduce the tax deductions for investments under the temporary regime from 90.7% to 86.9%, if it is carried through as proposed.

Now although, this proposal represents a lower tax deduction than the original temporary regime, it is still higher than the ordinary tax system that has a 78% tax deduction. Now, before leaving the word back to Karl to sum up, I will end my presentation with an update on the guidance for the second half of 2022 and our capital allocation priorities.

With the closing of the Lundin acquisition on June 30 ^th , we updated our guiding for the second half of 2022 for the combined entity at our second quarter presentation in July. On production, we guided at 410,000 to 435,000 barrels of oil equivalents per day, for the second half of the year.

With a very clear statement, that all things equal where in the range we would end up would be dependent on when in the fourth quarter, Johan Sverdrup phase II would start up. October start-up will take us to the high end of the range and late December will take us to the low end.

Now standing late October, we expect that production will start up in the first half of December and consequently we narrow the guiding range to 410,000 to 420,000 barrels of oil equivalents per day. On total capital spend, we expect to spend -- we expected to spend $1.7 billion in the second half of the year, as CapEx is ramping up on many of the PDO projects.

As also mentioned previously, we benefit from the weaker-than-expected Norwegian kroner and in combination with a slightly lower cost on some of the ongoing projects and a bit of phasing into next year. We reduced the guidance for the second half of 2022 with $100 million, down to $1.6 billion.

On production cost per barrel, we guided at roughly $7 per barrel for the second half of the year. Average cost was $7.3 per barrel of oil equivalents in the third quarter. We continue to see pressure on this KPI mainly due to the inflated power prices. However this is then mitigated by the weaker-than-expected Norwegian kroner.

Consequently we keep the guidance at roughly $7 per barrel assuming a relatively stable foreign exchange rate for the remaining part of the year. So to round off my presentation I would like to reiterate our capital allocation priorities considering the current very strong financial performance, the volatile macro environment, impacting both prices of our products sold, but also projected inflation.

And lastly, the changes to the uplift in the temporary tax regime proposed by the government in the national budget. Aker BP's capital allocation priorities stand firm. We will maintain a robust balance sheet with financial flexibility and protect our investment-grade credit rating. We will also continue to invest in profitable growth. The technical maturities of our project portfolio is as Karl has mentioned high. And together with the Board, we will now work to make well thought-out investment decisions in the months to come. The objective will not be to invest in growth for the sake of growing, but to invest in robust projects that maximize value creation.

And lastly, the value will be distributed back to our shareholders through a resilient dividend growing in line with value creation. The Board of Directors has resolved to pay a dividend in the fourth quarter of $0.525 per share which brings the total dividend in 2022 up to $2 per share an increase of 48% from 2021.

And with that, I will conclude my part of the presentation and give the word back to you Karl for some concluding remarks. Thank you.

Karl Hersvik

Thank you David. As usual a thorough walkthrough of the financials of the quarter. And now before we open up for questions, let me at least quickly repeat the main points from today's presentation.

First of all, the financial performance was strong in Q3, obviously driven by the higher oil and gas prices, but probably and at least to me more importantly by high production efficiency. And I can assure you that Aker BP will continue to focus on safe and efficient operations and to produce oil and gas with a low cost and low emission as we can possibly do.

Second we do expect Johan Sverdrup to start up in December, early December and this will contribute significant production and cash flow growth next year and further strengthen our cost and emission profile going forward.

And thirdly, Aker BP has a unique resource base. And by the end of this year, we are aiming to submit the PDOs for projects with total resources of roughly 900 million barrels of oil equivalent net to Aker BP. This project will represent substantial value creation both for Aker BP and its shareholders. But I think it's also important to state that this will be significant value for the society at large through both ripple effects and of course as time goes by taxes.

Now this concludes our prepared remarks and we are now ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll now move to the first question.

Teodor Sveen-Nilsen

Hello. This is Teodor Sveen-Nilsen at SpareBank 1 Markets. Good morning to Karl and David. I have three questions. First on the revised production guidance is that entirely explained by Sverdrup being pushed out a few weeks? And also just wonder what to expect as its production rate from Sverdrup Phase II for 2022?

Second question is on the proposed tax change. I just wonder could you briefly discuss the impact on the breakeven NPV for your project portfolio in light of the proposed tax change?

And third question is, Karl is around inflation and lock-in prices. Karl you mentioned that it's not necessarily a good strategy to lock-in oil prices when inflation is high. So, I just wonder if you just could briefly discuss your contract strategy for the last project portfolio in light of lock-in prices or not lock-in prices? Thanks.

Karl Hersvik

Thank you, Teodor and good to hear from you. So on production guidance, I think it's actually quite easy to calculate the total production volume of 755 minus product -- minus the Phase 1 volumes and then multiply that by 12 and our stake on 31.6%. And by doing so, you will quite quickly come to the realization that the downward adjustment of the midpoint in the guiding is entirely explained by the change in start-up date in Johan Sverdrup from early October to early December.

Now on the impact of breakeven. Of course, as David explained, the main change in this update to the tax system is a reduction in uplift. And that means that the effect on the breakeven will depend on capital intensity production profiles and timing of this CapEx. And that means that there will be a different breakeven effect on the different projects. So, we are in the middle of that assessment as we speak, and it will also obviously depend on a contract strategy as timing of CapEx will also be dependent on contract strategy. So, we'll come back to that when we have done the assessment.

On your last question on inflation what we have actually done is to break down inflation in about 16 categories. We have mapped those categories across all the investments in the portfolio. And we have tried to kind of find areas where it is sensible to today acquire services on a fixed price basis and where it's sensible to have a pass-through mechanisms.

And the reason is that, if you look at global inflation indexes such as Eurostat or IHS, you will of course quickly come to the realization that the price increase from 2021 to 2022 is quite high. But if you start looking into the different categories, you will see that this inflation is actually -- has a very large distribution, right? And also that prices on quite a lot of the macro trends steel and quite a lot of the other commodities are actually trending downwards as we speak.

So, the way we will execute this in principle is that parts of the procurement will go through the standard contracts as prices are already set in the frame agreements. And then for some of this, mostly where we have high impact from energy prices or other commodities, we will offer a fixed uplift to the impactable prices and therefore, take on board the price risk related to indexes and on other packages, which have more composite, yes, you can say deliveries we will close somewhere in between those two strategies.

So, it's actually quite complex. And I'd probably also add that at least for the first time in my career, we are now talking to and down to Tier 2, Tier 3 vendors when we are assessing the procurement strategy and not just focusing on the direct package vendors to the projects.

Teodor Sveen-Nilsen

Okay. Thank you. That’s fair.

Operator

We'll now take the next question. Please go ahead. Your line is now open.

James Hosie

Hi. Good morning. It's James Hosie from Barclays. A couple of questions from me. Just when you're mentioning the supply chain capacity challenges, are there particular projects where supply chain issues are seen as particularly acute. And then just apologies if I missed it, but I can't see any mention of your $30 per barrel breakeven target in today's release of presentation. Are you starting to relax that requirement in light of some of the supply chain and inflationary pressures you're now facing?

Karl Hersvik

Yes. So on supply chain challenges, so let me be very clear. So far we have not seen constraints of let's say unmitigatable issues related to supply chain. And as I also answered Teodor, we are actually now down to Tier 2, Tier 3 package providers and equipment providers. So I think we've got a yes, I think we actually got a pretty fair understanding of how the supply chain will deliver.

And so far even though the market is tight on certain components and it's particularly where we're overlapping with let's say yes the ESAT packages where we're overlapping directly with other industries probably the tightest markets. But so far we've been able to secure capacity for the Aker BP project.

Now when we're talking about a breakeven target, if you remember back to the summer of 2020 when we implemented the new temporary tax regime, we reduced the breakeven target from $35 to $30 to account for the tax effect from the temporary package. And the proposed tax changes if enacted will of course have some impact on the breakeven of other project. And we still target our project to be as profitable as possible and we'll evaluate all the aspects of these projects. And of course the – with the addition of supply chain and probably corporate priorities before potential sanctioning.

Now I must reiterate that our focus is firmly now on the things we can influence and the technical maturity which is now in place. And our focus is on maturing a decision towards the FID in the next two months.

James Hosie

It includes a lot of equipment material working capital outflows this morning. And to what extent should those unwind in the fourth quarter and 2023?

David Tønne

So the working capital changes as mentioned is in large driven by accrued income, driven by the high increase in gas prices but also liftings later in the quarter. So on an even basis of course, if the prices change then of course that will also impact working capital. In addition, there is also an impact of currency here, where tax payables has been reevaluated. So of course, when foreign exchange rates change and prices change and we have liftings – less liftings late in the quarter there could of course be an unwinding.

James Hosie

Okay. Thanks very much.

Operator

We'll now move on to the next question. Please go ahead. Your line is now open.

Chris Wheaton

Thanks. Good morning, guys. This is Chris Wheaton from Stifel here. Congratulations on a fantastic quarter. I can't think any investors should have a problem with $1.8 billion of equity free cash flow in the quarter. Two questions from me please. Firstly, could you talk a bit – picking up on James' point on supply chain. I would have thought the bigger issue for you would be not cost but schedule because as the tax line sets you've got such a huge contribution from CapEx into offsetting tax but the key thing is going to be delivering projects more on time than on budget, I would have thought in terms of the impact on NPD.

Can you talk about how you're trying to secure timing of projects, particularly when you've got so much to do along with everyone else in Norway? That's my first question. And then I had a question for David on tax please.

Karl Hersvik

So I can start on the timing. So as you are familiar with Chris, and thank you for your comments. We have established firm alliances and about 95% of the CapEx in this project are actually running through these alliances. That means that we have for some time now known who will be the main equipment providers, who will be the construction companies, the engineering companies, the line pipe suppliers et cetera, et cetera. And that means that we in the quarter have spent the most time actually securing that construction strategy and time line and working of course also the key activity plans.

So right now, the way we see this is that at least our projects are on a time line that we do believe is not only executable, but at least to a certain extent and if there's nothing can I say unpredicted happening actually quite robust.

But I would say that if I were to go to the market now and I issue an ITT, I would be actually concerned not only about timing but also about cost increases, right? But the fact is we have secured both construction slots procurement slots and yes pretty much all we need actually to execute and make the timeline robust. So, I'm actually feeling quite confident as to the timeline both on package deliveries assemblies, pre-assemblies and final assembly in the current projects. So, this is and you're spot on this is what we've spent the most time on in this quarter.

Chris Wheaton

Brilliant. That's really helpful. David a question on tax please. Comparing your Slide 22 on tax payments to your balance sheet you've got $5.4 billion of current liability for tax payable. If I add up the numbers on Slide 22 for the next three quarters alone you've got something guidance of around $7.5 billion to $8 billion of tax payable if I'm reading that correctly, that's a much bigger difference than normal between those two numbers. Could you help understand what's driving that difference please? And then perhaps if you can give any steer on the second half '23 that would be very helpful.

David Tønne

Yes. So we might have to follow up in detail on that question around the difference in what you see there on the net tax payable receivable of $5.4 billion versus the indications on the Slide 22. I think it's worth noting of course that we have paid already as mentioned $1.241 billion in the third quarter and now in the fourth quarter we have already in October paid a second installment and also the extra installment as mentioned.

And then of course the sensitivities depend on price realization also for the remaining of the year which of course then gives quite a lot of uncertainties in these numbers in addition to the assumed foreign exchange rates. So, we can definitely follow up on that in detail if you would like Chris. And then when it comes to sort of guidance for 2020 -- sorry second half 2023 that would of course depend on the price assumptions and production volumes and investments in 2023 which of course is not something that we're ready to guide on yet. And just to add one Chris, sorry for just to add on what -- so taxes for Q4 is not in the balance sheet yet of course.

Chris Wheaton

Okay, its helpful. Thank you very much.

Operator

We will now move on to the next question. Please go ahead. Your line is now open.

Yoann Charenton

Good morning Karl and David. This is Yoann Charenton from Societe Generale. Thank you again for the presentation. You already touched upon the impact of the tightening of the temporary tax rules on the breakeven target of below $30 per barrel. At the same time, you put some emphasis on the range of other factors to take into account when making FIDs in the current environment.

As such, can you please explain what such other factors mean for the company's breakeven target? And what are the implications of these factors and especially geopolitical instability as you posted for production cost? And still on this topic, I realize that you have removed quite a lot of content on CapEx projections from 2023 onwards and it makes sense given the list of factors you have listed in your earnings report.

That said, are you able to tell us as we are getting closer to the submission of PDOs for several projects. Are you able to provide more color on the provisional CapEx such as estimates for NOAKA and possibly for listing, if that is possible?

David Tønne

Yeah. I'm not sure, I completely understood your question, but let me have a go at it Yoann, and if I'm off, I'm sure you will correct me. So when we touched on the tax rules and the implication that has on breakeven as previously stated that will actually vary from project to project, because it will – the breakeven will depend on the CapEx intensity of these projects and it will also depend on the timing of production profile and CapEx profiles.

So that's why we – and as I previously stated, we are in the middle of that assessment as we speak. And therefore we have not gone out and updated the targets per se. And when we reflect on geopolitical stability, I previously in this Q&A session touched on the robustness of the execution strategy, and the procurement strategy that's now been lined up. And the final topics that relate to CapEx assessment of the, let's say non-frame agreement covered materials are ongoing as we speak.

So that means that, at the current stage we will need to come back with the actual assessment of the CapEx to break even on this project when we've done that assessment. And this is a little bit of a change to how we've evaluated the procurement previously. For example, the – a couple of quarters ago we actually estimated that we would continue procurement as we have done previously, which would be largely be a fixed price mechanisms. And that's of course introduced some more uncertainty into how we assess both direct procurement, but also contingency.

Karl Hersvik

Then, if I may add Yoann as well, we typically update our longer-term profiles as part of the capital markets update and when we have strategy updates. We typically don't update them on a quarterly basis of course. So I think that's worth noting. And then I think you also had a question around sort of geopolitical instability on production costs. And I think that's worth reflecting on right? Because – of course the two main risk factors at our on our production cost in this quarter is electricity prices which is high. That's of course closely linked to the instability in Europe at the moment, which also at the same time is weakening the Norwegian kroner.

So those are two effects sort of mitigating each others a bit. And then of course electricity prices, which is high is very correlated with high gas prices, which we are significantly benefiting on the revenue side. So underlying production cost is something that we can work on and to improve productivity as Karl talked through in the presentation around for example how we're working on the maintenance backlog. And then the external effect and factors is something that we of course just need to take into effect.

Yoann Charenton

Thank you both for the insights. Have a nice day.

Operator

[Operator Instructions] We will now take the next question. Please go ahead.

Unidentified Analyst

Hi. Good morning. Karl and David, thank you very much for the answers so far. I guess, first question really, clearly the tax changes have reduced the incentive to kind of accelerate these projects. So I get the picture that they're already at mature, but I suppose reading the statement it feels like not necessarily though they're ready to go not everything will necessarily be sanctioned. So I mean, is that a fair assumption that obviously you do have a lot of projects, maybe not everything goes ahead at this point in time or perhaps to look at it another way with the kind of cost inflation backdrop that we're sort of well aware of. Do you think that it's maybe more preferable to allocate more capital to shareholder returns in the near term and therefore focus maybe on fewer growth projects at an increased dividend.

David Tønne

Yeah. So thanks, James. I think it's too early to conclude that the projects will not go ahead. So if that was your read I'd like to correct you on that. What I stated is that we will spend some time now assessing these -- the financials both from the tax, but also the other implications and then make a decision. But I also stated that as the plan now sits we are ready to execute these projects. They're mature from a technical perspective, procurement perspective and execution perspective, they are actually significantly more mature than I'm used to at this stage. And it's now boiling down to basically a discussion around how do we allocate capital in the future. But we'll come back to that when the assessment is done. But I think it's -- I think it's a wrong assumption to at least assume as the base case that this would not be executed.

Unidentified Analyst

Okay. Okay. Fair enough. My second question would be is there anything more to the rebrand on Valhall could you -- or maybe just give us some more color there in terms of the change in description should we say, or is it a very similar project that's just been rebranded?

David Tønne

So you're thinking about the PVP well, yeah, there's basically a rebranding. So we previously called PVP or PWP, NCP which was New Central Platform and now PVP means, production wellhead platform. So that's basically just a rebranding. And Fenris was of course previously called King Lear. So it's just getting into the nomenclature that we're using both on Valhall and also for new fields on the Norwegian Continental Shelf. Nothing else.

Unidentified Analyst

Okay. Okay. Very clear. And then just finally for me, can you maybe just update us in terms of your strategy in terms of gas production? I mean, obviously realizations have been very high. Do you tend to continue to maximize gas production in the short term?

Karl Hersvik

I think we're currently running at roughly 12% gas production in -- on a total produced basis. And as you correctly state, we have maximized gas production. Currently, I don't think there's a lot of capabilities to impact or increase this short term. And the current level is yeah, you could -- which -- what -- you could look at the current level as our new development strategy and production strategy from an Aker BP perspective. The main change of course is what we did in Skarv, which was started in Q1 at least decided in Q1 where we stopped injection in two segments and exported those gas volumes that will continue.

Unidentified Analyst

Okay, brilliant. Thank you, very much, Karl.

Operator

We'll now move on to the next question. Please go ahead. Your line is open.

Unidentified Analyst

Hello. My name is Justin Hansen [ph]. I'm a journalist in EnergyWatch. We are a financial newspaper about the energy industry. You talk a lot about [indiscernible] at the presentation. You talked a lot about the volatility in the market and in the prices. How long do you expect this to last? And how do you work through this situation?

Karl Hersvik

I think, it's a good question, how long the volatility and the prices will last and I'm not going to attempt to predict that at this stage. I have a pretty bad track record of actually predicting volatility. But what I would say is that, it's always been Aker BP strategy to be able to manage such volatility, both on the let's say macro side in terms of oil and gas prices, but also on the input side in terms of long-term relationship to service providers and partners. So right now, I am not necessarily that concerned about the long activity of the volatility of the situation. I'm more concerned on how we actually do manage the situation. And that would require some new thinking compared to how oil and gas projects are usually executed in terms of procurement. So, I think I'll refrain from predicting long activity in these prices.

Unidentified Analyst

[indiscernible] you say you wanted to refrain?

Karl Hersvik

I don't think, I have a good record of predictive volatility and I don't think, I should speculate on how long these prices will last. What I will say is that from an Aker BP perspective, we're well set up to manage that volatility and probably better set up to manage this volatility than other companies of the comparable size.

Unidentified Analyst

Okay. Thank you, very much.

Operator

As there are no further questions at this time, I would like to hand the call back over to your host.

End of Q&A

Kjetil Bakken

Okay. Thank you then all for your good questions. And then we close this session. If there are any follow-up questions, the IR department in Aker BP is ready to answer. And if you're all happy we wish you a continued great day.

For further details see:

Aker BP ASA (DETNF ) Q3 2022 Earnings Call Transcript