Neptune Energy Q1 2020 Results Wednesday, 27 th May 2020 Neptune - - PDF document

Neptune Energy Q1 2020 Results

Wednesday, 27th May 2020

Neptune Energy Q1 2020 Results Wednesday, 27th May 2020 2

Opening Remarks

Sam Laidlaw Executive Chairman, Neptune Energy

Welcome Good morning everybody. This is Sam Laidlaw and welcome to our earnings call for the first quarter of 2020 for the period ended 31st March. In these unusual times we hope that you and your families are healthy wherever you are. Clearly, the combination of Covid-19 and the sharp fall in commodity prices represent a unique challenge for our industry. Safety Paramount Resilient performance with growth in the portfolio If you turn to slide four you will see that we have responded decisively to protect our people,

• ur operations and our projects. We have changed both what we are doing and the way we

do things. I am very grateful for the huge efforts and sacrifices made by our teams in the field, in the office and for those working at home. The result has been the production year- to-date has been consistently strong and indeed well-above last year’s levels. Our focus on safety remains resolute and we have moved quickly to curtail non-critical offshore and field activities. More recently we have introduced programmes to support employees, contractors, suppliers and local communities and are now looking at the opportunity to re-engineer the business for a very different price environment. So far the greater impact from Covid-19 has been on our construction activity, which has clearly been disrupted by travel restrictions and dislocations in the global supply chain, while the reduction in manning levels at host platform facilities has slowed topside construction schedules. Already, however, we are seeing some of these disruptions beginning to ease and Jim will talk about the new project schedules in detail. At our full-year results we outlined cost reduction measures amounting to operating cost savings of $50 million and capex deferrals of some $250-£350 million. I am pleased by the response throughout our organisation and I am confident that we can exceed the operating cost target. We have already grounded more than $300 million of the 2020 capex reduction

• target. However, it is important to highlight that as we prioritise value over volume there will

be some impact on production volumes. This will be very limited this year but will lower our production profile for the next two years. Focusing on value, we announced on 19th May our agreement with Energean to terminate the proposed acquisition of Edison’s Norwegian and UK subsidiaries. Whilst this reduces our 2020 capex by some $460 million and significantly enhances our liquidity, it will also reduce our planned production output in 2021 and 2022. Despite these significant reductions in investment, we still expect production growth from existing projects out to 2023. Importantly, we have enhanced our liquidity profile and now expect to be free cash flow positive after capex in 2020. Neptune remains a cash flow and growth story with significant opportunities throughout our

• business. However, as demonstrated by the upsizing of our RBL, our business is financially

robust and continues to generate significant operating cash flow even in a low price

Neptune Energy Q1 2020 Results Wednesday, 27th May 2020 3

• environment. With that, I will hand over to Jim to take you through the operational highlights

before Armand will talk to the financial highlights. Then we will open it up to questions.

Operational Update

Jim House Chief Executive Officer, Neptune Energy

Good morning to you all. I would like to reiterate the hopes that you and your families wherever you are remain safe and healthy through this timeframe. Although we could not anticipate the magnitude of the current circumstances, we reacted swiftly to the early signs that were emerging and initiated the first steps of our resilience plan during February. These early decisions helped us prepare and respond well and to-date have seen minimal impact from Covid-19 on our operations. As Sam has said, our cost reduction plan has progressed quickly and it is likely that we will exceed our initial guidance. The agreement to terminate the Energean transaction demonstrates our disciplined approach to capital allocation and focus on value over volume. Our liquidity position is substantially enhanced. While our production outlook is lower, we retain significant opportunities throughout our business. Financial and Operating Results Strong operating and robust financial performance In the first quarter of 2020 our lost time injury frequency rate remained low at 0.7 per million working hours. However, our total recordable injury rate increased slightly to 2.3 per million working hours compared to 2.1 in the fourth quarter of 2019. The measure is higher than what we would like and we have taken steps to re-emphasise the importance of health and safety throughout our organisation. While we are still a young company, our aim is for our safety performance to demonstrate top quartile performance relative to our peers. Our process safety event rate metric which we introduced in 2019 has continued to improve and is below target at 2.1. Turning to our operating KPIs, production in the first quarter of 2020 averaged 162,100 barrels of oil equivalent per day, which was 10% higher than in the fourth quarter of 2019. During the period we have benefitted from higher production efficiency in our key operated assets in Norway and the UK, and the front-loading of production and the completion of the Saka development carry in Indonesia as well. Meanwhile, production at Touat also continued to ramp up. Reported volumes in the quarter were further enhanced by the change to the gas conversion factor we highlighted in our full-year results, which added about 6,000 barrel

• f equivalents to the figure. Production efficiency and the operated assets improved 86% in

the first quarter from 85%. Excluding third party curtailments, production efficiency at out

• perated assets was actually 88%.

In a challenging environment our financial performance in Q1 2020 was robust. Operating cost declined to $8.90 per barrel, down from $9.20 per barrel in the final quarter of 2019 and $10.10 per barrel in Q1 of 2019. Due to our cost production measures opex is currently trending well-below guidance and we now expect operating costs to average less than $10 per barrel in 2020. Operating cash flows in the first quarter declined marginally to $355 million that were robust considering lower commodity prices. Our cash flows in the first quarter benefitted from hedging gains, cost reductions, lower taxes and a working capital

Neptune Energy Q1 2020 Results Wednesday, 27th May 2020 4

• gain. During the period we invested $233 million on developing capex which was slightly

higher than in the fourth quarter of 2019. The run rate for the remainder of 2020 is expected to decline substantially as our resilience measures and new project schedules are realised. Finally, our net debt to EBITDAX leverage ratio increased to 0.99x reflecting a small reduction in our 12-month rolling EBITDAX. We expect leverage to increase further in 2020 but our current forecast shows a material improvement compared with where they were in March. Diverse Geographical Portfolio Strong operational performance in Q1 2020 Moving to slide seven and a review of our operational performance in the first quarter. In Norway production averaged 68,100 barrels of oil equivalent per day. Production was higher following the start up of the Troll C gas module which increased volumes from the Fram field while the recommencement of the Mossmoran ethylene plant in Scotland increased liquid recoveries from Gjøa. Due to higher export availability and production efficiency levels at Cygnus, production was also strong in the UK averaging 19,300 barrels of oil equivalent per

• day. In light of this performance, we have deferred the gas compression projects until 2021

for completion of the project, minimising capex and reducing our expected carbon emissions in 2020. In the Netherlands production averaged 19,200 barrels of oil equivalent per day in the first

• quarter. It was lower than planned in February and March due to a shutdown of the L10

platform and delay of a compressor project on the G17 platform. Our new development wells brought on-stream in late 2019 and early 2020 are performing well and production in April was actually 25% higher than in March. The PosHYdon hydrogen project continues to track significant interest and we have recently announced both Gasunie and Eneco as partners. Moving to Germany, our reported volumes increased significantly in the first quarter reflecting the change to our Group gas conversion factor. This added approximately 6,000 barrels of oil equivalent per day with production averaging 17,300. However, this has no impact on our financial results. At the end of the quarter we announced two discoveries at Adorf-Z15 and Ringe-6. Ringe-6 oil discovery has already been tied into existing infrastructure and is producing around 500 barrels of oil per day. The Adorf-Z15 gas discovery is expected to be

• n-stream before the end of the year.

In Indonesia production for the first quarter averaged 25,500 barrels of oil equivalent per

• day. Production reflected an addition of volumes famously attributed to the repayment of the

Saka development carry and our front-loading of production in the year due to a plant shutdown in Jangkrik in May. With that shutdown now postponed until 2021 we have rebalanced the production plan for the remainder of the year and expect reported volumes to average slightly lower. In North Africa production from the Touat project continues to increase in the first quarter averaging 7,500 barrels of oil equivalent net per day to Neptune. The plant is now operating at 12.8 million cubic metres per day at plateau capacity and plans are being finalised for the final handover from the EPC contractor. In Egypt production was strong averaging 5,200 barrels of oil equivalent per day in the first quarter. In the period we completed five development wells and commenced a campaign of workovers to bring on-stream at various shut-in wells. As part of the resilience plan, however, four development wells and two

Neptune Energy Q1 2020 Results Wednesday, 27th May 2020 5 exploration wells have been deferred into 2021. In April we have participated in a ground- breaking OBN or ocean bottom node seismic survey in the Gulf of Suez. This was the first of its kind in the region and will help improve imaging of complex subsoil geological structures. Our share of the cost was funded from a receivable balance with the EGPC. Near-Term Production Outlook Optimising our shutdown schedules While we have significantly revised our shutdown plans for 2020 to reflect Covid-19 restrictions and new project schedules, we still anticipate a small reduction in production from May to September. The main impact of production is from shutdowns in Gjøa, Cygnus and the Snøhvit fields and smaller reductions expected from shutdown plans in Netherlands and

• Germany. Due to our gas-weighted portfolio Norway’s mandated oil production cuts are

expected to have minimal impact on our output with gas fields including Gjøa unaffected. The agreement to terminate the Energean transaction removes a small contribution of production previously expected from the Edison E&P UK and Norwegian assets in the second half of

• 2020. Despite this, our full year production guidance remains unchanged at 145,000-160,000

barrels of oil equivalent per day. High Quality Growth Pipeline Revised project schedules – Norway Turning to slides nine and ten which outline our revised project schedules, the new timelines address challenges from Covid-19, the resulting disruptions to supply chains and the need to protect the operational integrity of our host platforms. Programmes also deliver significant spend reductions in 2020 to protect asset values. There are some additional costs associated with the deferred activity but these have been offset by other savings. This reflects that most

• f our deferrals are in our offshore campaigns where the timings have shifted rather than an

increase in the work programmes. The deferrals combined with other cost reduction measures taken are expected to reduce Group forecast production by about 10% in 2021 and 2022, essentially pushing the production curve out to the right. At our Gjøa tiebacks the development drilling and subsea campaigns are broadly unchanged. However, following the successful heavy lift of the Nova module onto the Gjøa platform in May, further topside activity will be reduced in 2020. As a consequence, while P1 is set to come on-stream around year-end as planned, first production from Duva is likely to be deferred by 4-6 months. A slowdown in activity at our non-operated Njord project has delayed first production until later in 2021. As a result, we have taken the decision to slow down activity in our operated Fenja project to coincide with the Njord timetable with first production now planned for early

• 2022. At Fenja we completed the world’s first dual drilling operation from a subsea template.

Revised project schedules – Rest of the World Turning to our UK and Indonesian projects on slide ten, in the UK the schedule for Seagull has been deferred with first oil expected in late 2022. We now plan for all four development wells to be drilled ahead of first oil compared with our previous plan for only two on-stream

• initially. We continue discussions with the operator of the host platform at ETAP regarding

the timing of the topside schedule with potential for the programme to be accelerated in the near future. As previously reported, our Merakes project in Indonesia has been delayed due to Covid-19 restrictions. There is no change to guidance of our first production in mid-2021.

Neptune Energy Q1 2020 Results Wednesday, 27th May 2020 6 Medium-Term Growth Outlook Significant new production to be brought onstream by 2022 On slide 11 we show how changes impact our medium-term production outlook. As a result

• f smoothing our investment profile we now expect our production growth to be more gradual

with steps up in 2022 and 2023. While this outlook may evolve further it is important to recognise that this growth is coming from our existing project pipeline and does not include acquisitions of any unsanctioned activity. Importantly, while our production profile is anticipated to be slightly lower in 2021 and 2022 than previously expected our forecast, by shifting volumes into later periods we are expecting to increase our exposure to higher prices, protecting overall asset values. In the medium-term we continue to maintain a target production of 200,000 barrels per day. With this I will pass you on to Armand who will us through our financial results.

Financial Results

Armand Lumens Chief Financial Officer, Neptune Energy

Financial Highlights Robust financial performance in Q1 2020 Good morning everyone. Turning to our financial highlights on slide 13 now, despite softer commodity prices in the first quarter, Neptune reported strong post-tax earnings and cash flows for the first three months ended 31st March 2020, down only marginally from the comparative period in 2019. EBITDAX for the first quarter of 2020 was $323 million, down 28% from the prior year but nonetheless a good performance as hedging gains and lower costs partially mitigated lower commodity prices. Net profit after tax was $47 million in the first quarter and that was $6 million lower than reported in the first quarter of 2019. This reflects sharply lower taxes which is a natural hedge within our portfolio as earnings in higher tax countries declined with lower commodity prices. This is also reflected in post-tax operating cash flows which were $355 million in the first quarter, down $7 million from the same quarter in 2019. Operating cash flows in Q1 benefitted from favourable working capital movements related to a lag effected from sales invoices in a higher pricing period being paid and early cash calls being paid by our partners in our operated projects. In the first quarter we invested $233 million in development capex, up from $153 million in the same period of 2019. As Jim just said, we expect capex to moderate in the subsequent quarters of 2020 as a result of our deferred project schedules. Net debt was $1.5 billion at the end of the quarter and this was $350 million higher than at the end of Q1 2019 but down marginally from our position at the 2019 year-end. Reflecting a lower 12-month rolling EBITDAX, our leverage ratio increased slightly to 0.99x but remains at relatively low levels and well within our RBL limits. Key Financials Hedging activity protects cash flows Moving now to our average realisation and hedging positions on slide 14. Both average oil and gas price realisations were weaker in the first quarter of 2020 than in the corresponding

Neptune Energy Q1 2020 Results Wednesday, 27th May 2020 7 period in 2019. Average gas prices were down 55% on a pre-hedge basis and down 37% on a post-hedge basis. Average oil prices were 19% lower before hedging and 15% lower after

• hedging. Our average LNG realisations declined by 18% but remain robust at more than $7

per MMBtu. LNG realisations are expected to decline in 2020 reflecting price lag effects in our Indonesian contracts. Clearly, both oil and gas prices have weakened since the end of the quarter but more recently

• il markets have shown signs of stabilising and are now well above lows that we experienced

earlier in the second quarter. That said, the outlook in the near-term remains highly uncertain. We have taken steps to protect more of our oil revenues and in late March hedged an additional three million barrels of oil for 2020. For the remainder of 2020 we have hedged around 47% of our post-tax oil production at a weighted floor price of $43.9 a barrel. This is above our business plan oil price of $30 per barrel in 2020 with volumes hedge weighted towards the second and third quarters of the year. We remain unhedged for oil in 2021 and 2022. Our gas hedge position remains unchanged from what we reported on our results call in March earlier with a 90% hedge ratio in 2020 to 65% ratio in 2021 and a 49% ratio for 2022. Our average gas hedge floor price is substantially above current spot prices. On an aggregate basis our post-tax hedge ratio is 68% for the remainder of 2020 providing us with confidence in the robustness of our earnings and cash flows. The mark-to-market value of our hedge book at the end of first quarter was $420 million, of which $278 million relate to contracts expiring in this current year. Delivering a significant reduction in costs Moving on now to our income statement on slide 15, as mentioned, net profit was broadly stable at $47 million in the first quarter with lower revenues offset by cost reductions and lower taxes. G&A costs were substantially lower reflecting our cost efficiency programme and

• ne-off R&D credits. Exploration expenses increased to $22 million following the write-off of

the unsuccessful Grind exploration well in Norway. Strong operational cash flows Turning now to slide 16 and our cash flow statement. As already mentioned, we generated strong post-tax operating cash flows in the first quarter of 2020 and we were able to invest $233 million in development capex, $39 million in exploration and $13 million in our equity accounted entities. For the full-year we expect our exploration spend to be around $125 million. This is a net reduction of $20 million compared to our original plan, despite additional drilling costs for our successful wells and seismic acquisition costs in Egypt. The seismic cost in Egypt, as Jim mentioned, refunded out of Egyptian receivables balance, reducing cash costs further. Due to the progress made with our resilience plan and project deferrals, our development capex guidance is now $700-$800 million for 2020 compared to the $1.1 billion guidance provided earlier. As you may have seen, the Norwegian government has announced proposals to provide tax relief for the oil and gas industry in 2020 and 2021. This will allow full write-off of

Neptune Energy Q1 2020 Results Wednesday, 27th May 2020 8 investments in both periods and a tax refund for tax losses, but will be offset by higher taxes payable in subsequent periods. We will provide guidance on the likely impact of these proposals after they are finalised in June. In their current form they are likely to materially enhance our liquidity position in 2021 reflecting our significant investment programme in

• Norway. The agreement to terminate the Energean transaction is expected to further reduce
• ur investment requirements by around $460 million in 2020 and savings are expected to be

partially offset by higher cash taxes in 2020. Strengthening our liquidity position Turning now to slide 17 and our net debt and leverage position, as mentioned at our full-year results in March, we have successfully redetermined our RBL. The facility has been upsized to $2.6 billion with a borrowing base of $2.3 billion. This is marginally lower than the previous guidance provided in March following the agreed termination of the Energean transaction. The upsized RBL facility provides a $360 million increase in the liquidity and that is now standing at $1.7 billion. In total we now also have $3.5 billion of committed facilities. As a reminder, the amortisation of the RBL has been deferred by 12 months to April 2022 with biannual reductions of $250 million each. The facility also now includes Merakes and Touat but excludes our assets in Egypt. RBL covenant restrictions remain unchanged with a net debt to EBITDAX limit of 3.5x. At the end of Q1 2020 our leverage was at 0.99x and we expect it to rise to around 1.6x at year-end of 2020, primarily as a result of lower EBITDAX caused by lower commodity prices. This ratio is 0.4x lower than guided at our full-year results, caused mainly by the termination

• f the Energean transaction. Based on our revised project schedules cost reduction measures

and commodity price assumptions, we expect leverage to rise slightly in 2021. Our aim is to de-lever as our project pipeline comes on stream and cash flows will be used to return our leverage ratio to below 1.5x. This is expected to occur in 2022. Importantly, these forecasts exclude the potential liquidity benefits from the proposed material tax changes in Norway. As I mentioned, a further update on this will follow most likely in June or July. In summary, we delivered a strong post-tax financial performance in the first quarter of 2020 and have further strengthened our balance sheet. While we expect the second quarter to be tougher, our production so far has been encouraging and our hedging position provides some

• protection. The decisive steps outlined by Sam and Jim earlier as part of our resilience plan,

ensure that our financial position is expected to remain robust as we continue to progress through our investment programme. With that I will hand you back to Jim for the closing remarks.

Overview

Jim House Chief Executive Officer, Neptune Energy

Robust Operational and Financial Performance On slide 19, our business and people have responded well to the challenges of Covid-19 and lower commodity prices. While we are seeing limited impact on our operations, Covid-19 has changed working practices and disrupted global supply chains. This has necessitated a slowing of development programmes together with a need to protect operational integrity and

Neptune Energy Q1 2020 Results Wednesday, 27th May 2020 9 the curtailment of non-critical activities. Project schedules have been deferred but may be subject to further change as we adapt to market and operational positions. This will lower expected production growth in 2021 and 2022 as we previously anticipated. However, asset values were protected through our resiliency efforts. As I mentioned earlier, we are making good progress on our cost reduction measures and to put it into context, at the start of the year we had a development capex programme or budget of $1.1 billion. We now expect investment of around $700-$800 million in 2020. Despite an increase in some activity we have also been able to reduce our planned exploration spend in 2020 by $20 million to $125 million, while our opex guidance for the year has been lowered to less than $10 per barrel equivalent. As Armand has outlined, we are in a strong financial position. With the increased liquidity through our new RBL we have responded quickly to the market conditions increasing all hedges in 2020 where we were previously less protected and we remain well-hedged for gas. Our performance in the second quarter has been encouraging so far and our production is expected to be lower in May and June as work is undertaken on our projects and our maintenance programmes commence. While the impact of weaker commodity prices is partially mitigated through hedging, we expect that our earnings and cash flows will be lower in the second quarter. Investment is expected fall as reductions from our resilience plans are

• realised. With that I will hand you back to the operator to open the lines for questions.

Thank you.

Q&A

Werner Riding (Peel Hunt): Morning. I was wondering if you could elaborate a little on the reasons for terminating the agreement with Energean. Is it that other attractive opportunities have overtaken it or is it something market-related and the deal no longer works for you at these prices? Sam Laidlaw: Obviously, this was an agreement that we entered into last October in the expectation that it would close before the end of last year. Market conditions have obviously changed very significantly. Most importantly, I think that some of the UK assets would be

• perating at a loss and where decommissioning would be happening sooner so it is really

around the fact that we do not see the value in the transaction that we saw a year ago. Werner Riding: More broadly on M&A, are you acquisitive in this market which must be

• pportunity-rich. I would have thought with your robust balance sheet you must be licking

your lips, so to speak, or are you looking more to defensively to focus on organic growth? Sam Laidlaw: I think we are fortunate in that we do have a good pipeline of organic growth

• pportunities. What we have been doing, as Jim’s presentations have outlined, is actually

moving some of those back a little bit, shifting them in some cases six months and in other cases up to nine months back. However, we still have a lot of growth and capital requirements to deliver that growth in the existing pipeline. That is our primary focus but we will always be mindful of opportunities out there if we think there is really good value. I think it is still very early in the whole process of understanding the impacts of the pandemic and what it is going to do to demand and to commodity prices. We will keep a cautious stance but nevertheless remain alive to opportunities as they arise.

Neptune Energy Q1 2020 Results Wednesday, 27th May 2020 10 Werner Riding: Okay, thank you. Sebastian Kaufmann (Tresidor): Good morning guys. A question on the production levels in 2022 and 2023. Can you give us some idea where you think those could be? How close are you going to be to the 200,000 number? Then also maybe on the Norwegian tax changes, can you give us some kind of feel or idea of what in monetary terms it could do to your liquidity? Also, from a hedging perspective obviously looking at the gas forward curve, very favourable versus spot. You guys continue to hedge for 2021 and 2022. Thanks very much. Jim House: Good question, Sebastian, and obviously we came in the year with a plan and a development programme of $1.1 billion in capital with a projected peak from the pipeline of projects as sanctioned. Bear in mind we still have unsanctioned opportunities in our portfolio too, as well as some other contingent resources that will be continued to be matured. As we talked to in this and as you can see in our capital profile, we are smoothing the curve, so to speak, or smoothing the growth curve so that the peak now as we currently understand it, absent any other changes and these all evolve over time, instead of peaking with the current portfolio sanctioned projects in 2022, it is now going out to 2023. However, we are not giving firm numbers. We are giving indicative looks but it is up and to the right of 2021, 2022 and

• 2023. The question is, can we hit 200,000 with existing portfolio and sanctioned projects? It

is yet to actually be detailed but that is a target and our current pipeline gets us very, very close. Armand Lumens: Sebastian, it is Armand on taxes and hedging. You have probably seen in the media that this has gone to the Norwegian parliament, this set of measures, already twice and there are some discussions still with the opposition party in Norway on what the final set

• f measures will be for the entire industry. We have done some initial calculations of what

the potential impact could be. I think what is likely to happen is that capex can be basically treated as opex from an accounting point of view. Therefore instead of having depreciation

• ver multiple years you can bring forward that investment into the first year. Given that we

are a big investor in Norway and have all these capital projects, or most of them, in Norway, it brings forward quite a bit of tax credits into 2021. I would like to be very cautious with a number because this is still very fluid and subject to obviously votes in the parliament. However, it is material, and material is for me more than $100 million, if it would come to

• fruition. Let me be very cautious and come back to this audience in July.

Then on the hedging, you have heard the hedging percentages that we have already on gas. We are very well hedged on gas for quite some time. We took opportunities over the last one and a half years basically to build that hedging book for 2020 and 2021. We are almost maxed out on hedging in gas and therefore we would probably be cautious taking on more hedges beyond what we have already. We feel we are pretty well hedged on gas so far. Sebastian Kaufmann: Even for 2021 and 2022 you feel you are well hedged or max hedged despite being only 49% for 2022? Armand Lumens: On gas definitely, on oil we believe that there is actually quite some upside in the markets and we see it going up almost daily at the moment. We believe that leaving our position open for now on oil is best. Jim House: It is safe to say we are watching it closely and when the right opportunity comes we will layer in some further hedges on oil.

Neptune Energy Q1 2020 Results Wednesday, 27th May 2020 11 Armand Lumens: We remain very cautious and we obviously stick with our RBL requirements to be 50% hedged here for the first 12 months and slightly less in the next years after. We look at this on a daily and weekly basis. Sebastian Lumens: The fact that you say 49% is enough for 2022 is also based on your expectation that the gas market should improve materially from where it is at the moment. Armand Lumens: We are hedged much higher than the 49% for gas in the near-term so that is why we feel comfortable with those hedging percentages. In terms of the gas markets in themselves, it is very, very difficult to predict them. I think we might still see gas prices going down over the summer but maybe kicking in and going to higher levels over the winter and after the winter. That is what we expect. Sebastian Lumens: Understood, okay. A last question if I may. Given the performance so far in Q1 which was good, the termination of the M&A and the first output productions in Norway, you are keeping the full year production guidance at 145-160. Any direction whether you are going to be more at the lower end now given that or any more details you think of it? Sam Laidlaw: I think Sebastian, it is a good question. We are keeping it at this level because obviously we have had some moving parts going on, firstly the withdrawal from the Energean transaction. That clearly impacts production a little bit. We have also of course had some impact of project slippage a little bit. On the other side of the equation we have also had shutdowns, some of which have been increased and some of which have been reduced in terms of timing. I think it is too early for us to give more definitive guidelines as to where we are going to be within the range. Clearly at the moment we are at the top of the range but, as Jim mentioned, in his piece we have got four significant shutdowns to occur during the year. I would also say that we are managing for value not for volume and therefore if we see very weak gas prices, producing flat out is not necessarily the best thing to do. That will impact where we end up for the full year as well. Sebastian Lumens: Thanks very much. James Carmichael (Berenberg): Morning guys. Quickly going back to the Energean transaction, I think you note in the results this morning that your liquidity is enhanced by $460 million. Obviously, the consideration was around $250 million so could you elaborate on the difference between those two numbers? Presumably, that is not all working capital. My second question is on operating cost, obviously now down below $9 and under $10 is the guidance for the year. I am keen to understand what the main drivers of that are and how much of that is sustainable in the event that the commodity prices and activity recover? Sam Laidlaw: In terms of the acquisition cost you are absolutely right, that was $250 million but then on top of that the effective date of the transaction was due to be 1st January 2019 so there was significant additional pre-completion adverse cash flows because the Dvalin field and the Nova field were under construction and capex for this year. That added effectively

• ver $200 million to the transaction. Then of course there was a $5 million break fee as well.

It is really the additional capex incurred on Nova and Dvalin field that is obviously avoided capex now. Jim House: On the operating cost question, which is a good one, as you would expect there are many moving parts within what makes up your operating cost structure. Upfront on the

Neptune Energy Q1 2020 Results Wednesday, 27th May 2020 12 resiliency efforts our teams have been able to defer or cut in this what they consider to be banked for about $90 million out of our headline number for the year. Now, we have also got some FX effects and other things and there are more savings to come. How much of it is actually sustainable we are working through that. That number is walking up. What you also find is when you tend to slow down a bit historically there is also extra costs that do come

• ut. We are being arguably a little bit probably conservative in guiding at under $10 but you

have got to keep in mind there will probably be projects that will pick up next year that were pushed out to next year. We are still within a very healthy position and compare favourably to our competitors. Costs have come out and we will take some sustainable cost with it. James Carmichael: Okay, thanks very much. Mark Wilson (Jefferies): Good morning. I would like to ask two maybe medium-term

• points. In terms of the six areas in the world you show production, arguably split into three

regions, Europe, Asia Pac and North Africa, given the Energean deal situation, do you consider

• ne of those three regions to be even more strategically attractive for future growth
• pportunities as and when they come? Secondly, could you remind us of your carbon

emissions strategy and where you stand on that? Is there a timeline on such things or a strategy regarding that? Thank you. Sam Laidlaw: You are absolutely right, we are represented in three regions. Clearly North West Europe is the largest region and then we have a presence in Algeria where we operate and we are seeing good strong production now coming through from the Touat field. The Egyptian business is smaller where we are a non-operator and then clearly we have the Indonesian business where we are not an operator but we see a lot of growth potential in the Jangkrik and the whole of the Kutei Basin following on from Jangkrik. Then a presence in Australia with Petrel. They all bring different things to the portfolio. North Africa is obviously low operating cost,

• nshore and therefore potentially shorter cycle times and lower technical risk. Indonesia

actually brings the opportunity of some very high impact exploration prospects and I think very substantial reserve replacement that is deep water and not operated. If you like, the North Sea business is generating a lot of the current cash but as we look forward we can see no further growth coming from some of the other areas. We look at all three and it would be simple to just focus on some of the areas where we see the greatest synergies but also we have to marry that with some of the areas where we see growth going forwards. Essentially we are value-driven, we are opportunity-driven. We are not going to go beyond those areas and those countries. We have got enough geographic focus and, as I say, they do bring three very different areas. We would be entirely driven by the economics and the returns to shareholders and bondholders as to where we invest the marginal dollar and that is taking not just a short-term cash flow view but also a long-term growth opportunity view as to what the future running room is. In terms of the carbon intensity, if you have had a chance to catch up with our annual report you will see that actually we do think that carbon intensity is hugely important and setting carbon emissions targets is actually important for us as a business. We start in a relatively very good place in the industry in that if you compare our carbon intensity in kilograms of CO2 per barrel of oil equivalent the industry average would be around 18kg and our level in

Neptune Energy Q1 2020 Results Wednesday, 27th May 2020 13 2019 was 5.8kg of CO2 per barrel of oil equivalent. We would expect that to go up as we add compression to various fields and in fact if we just deplete out our existing portfolio it would probably rise to something like 14kg. In a world where climate change is important for all of us we set a target of a 60% reduction down to 6kg. Actually we are running well within that this year so a CO2 intensity target of 6kg of CO2 per BOE by 2030, this is a 2030 target, as a company that has only been going two years we are not setting 2050 targets at this stage. However, we have also set a methane target. If you think about the greenhouse gas impact

• f methane it is potentially much more serious and we have got a very strong story to tell in

terms of our methane target because our current methane intensity is 0.02% and we are targeting actually net zero by 2030. In both areas, whether it is CO2 or methane, we are setting targets over the next ten years that I think are industry-leading, certainly on

• methane. We have the advantage that our Gjøa field in Norway is actually powered by
• nshore hydroelectric electricity. We are looking at other projects in Norway where we can

actually build on that further. It is something that is important to us. It is important to the whole team and to our shareholders and we understand the importance to our bondholders as well because we are determined to position Neptune as being at the forefront of the energy transition. Mark Wilson: Thanks, those answers sound very comprehensive, thank you. Teo Lasarte (Marathon): Good morning. My first question is regarding the force majeure in the Indonesian operation. To understand that a little bit more clearly, what sort of financial impact would this have on you? Jim House: This dates back from last year. Sam Laidlaw: It is important to highlight that this is not a new Covid-19 phenomenon. This is a market-related phenomenon that dated back to last year. We did mention it in earlier quarters. Armand Lumens: We have had some force majeure situations and we are basically sorting

• ut those situations with replacement volumes and replacement cargoes. We expect to

basically get the revenues of those past cargoes into this year and discussions with ENI and

• ther partners there to basically sell that volume this year. Although we are not completely

shielded from potential further force majeure situations in this year but so far we have not had any particular impacts this year. We are basically clearing the situations with our partners and hopefully getting the funds related to those cargoes in this year. Teo Lasarte: When you mentioned the risk of forces majeures is that focusing on your Indonesian operation or do you think that could be a factor throughout your footprint? Jim House: Teo, we look at our operations globally and contracts of all sorts with contractors as well as with people who we supply. Proving end gas too and maintaining an active risk

• register. We do not see any real active concerns in terms of force majeure outside of perhaps

a few deferred cargoes out of Indonesia maybe later in the year but the ones that took place in 2019 are being addressed. There are discussions underway with the ENI, Pertamina and SKK Migas in Indonesia. Arguably they have been slowed down a little bit because of Covid-19 but it has been addressed and we plan to have these things reconciled this year. Armand Lumens: Now we have no force majeure situations elsewhere.

Neptune Energy Q1 2020 Results Wednesday, 27th May 2020 14 Teo Lasarte: Okay but are you aware that in the industry customers are declaring force majeure because of Covid-19 and so forth? Has that been a phenomenon? Sam Laidlaw: It has not been an impact on us and we have read some press reports but we have not had any impact ourselves. Jim House: The only major one that took place was the one that ENI declared with the contractors in Indonesia for the Merakes project which slowed things down and that has been resolved. Sam Laidlaw: However, that was not LNG off-take. That was due to inability to continue construction work. Teo Lasarte: Okay, understood. Then a separate question. You mentioned the receivables in Egypt and using some of those receivables to fund exploration expenses. On that point, how much are you owed right now by the Egyptian government? Armand Lumens: About two years ago we were around $50-$60 million. We have manged to bring this back to about $17 million at the moment. Teo Lasarte: Okay and the last one from me on Algeria. In terms of the revenue-sharing agreement there with your partners in Algeria and with the government, is that fully finalised

• r is that currently negotiating?

Armand Lumens: The gas sales agreement has been fully finalised and fully signed by the various parties including Sonatrach and the government and we are up and running. We are actually in a situation where the first gas flows are coming through from the project as well because there is some delay as a result of that gas sales agreement contract that took a bit more time. We are fully up and running from a planned physical perspective and also from a contractual and financial cash flow perspective. Teo Lasarte: Very clear, thank you. Julian Regan-Mears: There is one question come through on the webcast from Al Stanton at RBC Capital Markets. Do you envisage any capex increases in response to the Norwegian tax changes or is this an opportunity to pay down debt? Jim House: I would say there is a range of potential answers to this. We do not have it fully mapped out but what I will say is, as Sam mentioned, we saw a project yesterday from our Norwegian team that involves powering another project which would fit well with us, would bring power from shore. We are looking at it. There is obviously a range of outcomes that could come from this package which bring tax improvement. Armand Lumens: A more general answer regarding the debt repayment, as we said on the slides and in the presentation, we are keen to maintain a healthy balance sheet and a very prudent debt view on that. If we have the opportunity to pay down debt we will do so but we will obviously continue to look at growth opportunities as well. It will be a balance between those two areas. Magnus Hybinette (Barclays): Good morning, thanks for taking my questions. Could you maybe clarify a little bit on the hedging? I can see on page 14 that you mentioned the post- tax hedge ratio of 90%, 65% in 2021 and 49% in 2022. Do I understand correctly that the hedged volumes given is about 10 million barrels in 2021? If I translate that into actual daily

Neptune Energy Q1 2020 Results Wednesday, 27th May 2020 15 production that is about 30,000 barrels of so. Is it correct to think that on a normal production basis you are about 30% hedged in 2021 and about 25% in 2022 assuming current run rate of gas production? Sam Laidlaw: The reason we hedge the after-tax volumes rather than the pre-tax volumes is that we would pay tax on any hedging gain so we hedge it on the after-tax. Magnus Hybinette: Yes, but if you take an average tax percentage of 50% or 60% then you need to correct that if you want to come to an effective hedge volume. Armand Lumens: That is the way our industry hedges volumes, after tax, for the reasons that Sam just outlined. Sam Laidlaw: The big area here is Norway where we obviously have a 78% marginal tax rate and Norway is 45% of our production. If we hedged the pre-tax amount we would end up being very over-hedged on a post-tax basis. Magnus Hybinette: Okay, thank you. Sam Laidlaw: If there are no further questions, let me thank you all very much indeed for sparing the time to dial in. We look forward to speaking to you again in August. I think you will have seen that we have had a strong first quarter. Clearly we will see lower prices and some shutdowns in the second quarter but nevertheless I think the business is proving to be very resilient despite all the challenges of both the pandemic and lower commodity prices. We still have very good growth in our portfolio for the future. In the meantime can I wish you all the best of health and thank you again for dialling in and for your very good questions. [END OF TRANSCRIPT]