Ithaca Energy PLC (IACAF) Q4 2022 Earnings Call Transcript
Ithaca Energy PLC (OTCPK:IACAF) Q4 2022 Earnings Conference Call March 30, 2022 4:00 AM ET
Company Participants
Gilad Myerson – Executive Chairman
Alan Bruce – CEO & Director
Iain Lewis – CFO & Director
Conference Call Participants
Sasikanth Chilukuru – Morgan Stanley
Mark Wilson – Jefferies
Matthew Smith – Bank of America Merrill Lynch
Gilad Myerson
So just as a reminder, my name is Gilad Myerson. I’m the exec chair, we have Alan Bruce, CEO; and Iain CFO, Catherine leading our IR. Thanks a lot for coming. It’s very exciting for us. It’s our first time we’re publishing our end of year results for 2022. It’s been a fantastic year. The way I would like to turn the session is half an hour will run through a presentation and leave the other half hour for Q&A.
I’ll dive directly into the slide that summarizes where we are. So 2022 has been a transformational year for Ithaca. We completed 3 very significant acquisitions, the major one being Siccar Point, and we listed on the London Stock Exchange. If you look at the operational highlights, we produced 71,000 barrels per day and Q4 was 80,000 was operated guidance.
Captain EOR is progressing on plan. We’re the only company that produces polymer in the North Sea. Abigail came online in October 2022. It was a fantastic development, 10 months from sanction to having first oil, successful drilling campaign at Jade, infill drilling at Mariner, work at Erskine and Alba. So a lot of operational work as well that has come through.
And we are very clear on our net zero target. We’re doing a lot of work to decarbonize our platforms, improving compressors. We also looking for electrifying Captain asset. We are trying to do as much as we can to make sure that we are one of the pioneers and leaders on that dimension as well.
Financial highlights, adjusted EBITDA of $1.9 billion, which is an 84% increase from 2021, and we have significantly deleveraged our balance sheet, currently have a net debt-to-EBITDA position of 0.5x reported net debt of $971 million. All this is very much in line with what we discussed during the IPO, and we’re very happy to be able to stand here today and talk you through these results.
Just a reminder, who is it again? What do we do? So we are one of the leaders in the U.K. energy landscape. The second by resources, third by production. We have a track record of value creation through developing fields, through the acquisitions that we’ve done. We’ve got the most attractive pipeline of organic opportunities, the [indiscernible] independent with the diversity of development opportunities. These are all resources that can and will be developed likes of Cambo, Rosebank, Marigold, Fotla and others. We have deep operational expertise. There are very few independents in the North Sea that operate majority of their production.
We’re proud to be the operator. We’re proud to safely control our destiny. Our capital allocation framework is very balanced. It was one of the most important points that we heard from investors in the run up to the IPO, they were looking for growth as well as dividends and we continue to provide that growth outlook, as well as a very concrete dividend.
We are on route to providing that $400 million as committed to in 2023 already and now $133 million, and we will be announcing $267 million as we go through the year. And we have, once again, a clear focus on decarbonization. That’s part of our license operator in the North Sea and pioneering some fantastic studies, which hopefully will be sanctioning in the near future around electrification around other type of flaring improvements on the platform themselves.
A reminder of our strategy. Our strategy is very simple and clear, and we’re following it. Buying assets is the first element of our strategy. We’ve demonstrated our ability to do accretive M&A, Siccar Point recently, but also Summit and Marubeni we completed last year. Before that, with Chevron was the first large acquisition that we did and Mitsui as well. Building assets, the second of our strategy, we have Cambo, Rosebank, Marigold, Fotla and other assets that are also are in our pipeline to build and finally boost the asset performance.
And we’ll talk you through some of the operational improvements that we’ve been we’ve been running on our platforms that have enabled us to essentially reach the top end of our guidance in Q4 last year. Just a reminder of the track record. This is one of my favorite slides, which just demonstrates year-on-year through the COVID cycle, how we managed to set to increase the equity value of the company.
This once again is equity value as per Duff & Phelps and Kroll reports that we report year-end. And now the ’22 number is complete, and we can see this is continuous growth, and we’re now are looking to continue the growth by sanctioning projects, potentially by additional acquisitions to continue this trend. I’m going to address EPL because it’s such a huge topic, and it has impact on the business, and I’m sure there’ll be quite a few questions about it.
Obviously, the whole industry is talking about EPL and its impact. And I’ll start by saying that Ithaca Energy is very, very focused on accelerating our development. So when we listed the business, we spoke about the desire to accelerate Cambo, initially, we planned for an end of 2023 — sorry, Siccar Point planned for end of 2023, we wanted to accelerate that as well as Rosebank and Marigold and Fotla looking to other assets as well.
The purpose is to deliver energy security as well as economics value, as well as employment in Scotland, these assets are clear win for the economy, for the country, for Ithaca, for our shareholders. And therefore, we look to FID 2023 and 2024 most of our developments. EPL has been unfortunate in that regard. There are 2 major unintended hurdles, consequences of the EPL.
Number one is JV partner confidence. So while we are very keen to continue to develop, you need partners in this industry, you need to make sure that the partners are as willing to invest equity as well as debt that they see their future in the North Sea. And it’s fair to say that quite a few partners have turned down and said no. They do not want to invest in the U.K. North Sea, given the fiscal instability. The second element is the debt capacity. And this is something that we spoke very constructively with the treasury about and explained to them that when there is no price flow, the simple implication is that the RBL banks in any case lend to the industry on a reduced dollar per BOE, roughly when you put 75% tax on a reduced oil and gas price, ultimately, the credit availability just dries up.
And therefore, the banks are unwilling to invest or to provide capital to the industry to then go and develop assets. And therefore, this has led us — put us in a position where we now need to prioritize, and we can’t accelerate the development at the pace that we’d like to want to, once again due to the partners, as well as due to the debt availability. We have aimed to be as constructive as we can with the government.
We understand the need for the government to increase taxes to raise more funds for the economy. It’s worth mentioning that the concept was a windfall tax, on windfall profits where commodity prices are at the moment, there are no more windfall profits coming through at $70, $75 per BOE. Gas as well as 100 pence per therm, which once again translates roughly $70 per BOE. So these aren’t those windfall taxes going forward, it means the current profit and therefore, it’s hard to justify the windfall our taxes. It’s fair to say that the discussions that we’ve had with the government have been constructive and they are aware of the situation and you see rumors about the government reconsidering some of the EPL elements, and we are hoping that there will be changes in the short term that will allow us to continue to move ahead and develop these assets for energy security and the employment in Scotland and U.K. more broadly.
Happy to answer additional questions on EPL, which I’m sure you’ll have later in the presentation. But with that, I’ll pass on to Alan to walk through the operations.
Alan Bruce
Great. Super. Well, thank you, everyone. So I’m going to start on Page 9 here. I’m going to touch a little bit on safety, then a bit on production and then finally, the developments in the portfolio. So moving on to Page 9. And really first priority for us as a company. This industry is making sure that we’re running our operations safely in an environmentally responsible manner. We’ve had a lot of activity in 2022, particularly around the major projects that we’ve been doing. And the picture that you can see on the slide here is actually from our Captain assets.
So it’s the installation of one of the clamps for the riser caisson on that we’ve spoken to you about during the IPO, and you can see the rope access technicians getting that installed there. So a lot of significant sort of engineering and then construction complexity in the work that we’ve done. I’m really pleased to say that we’ve done all of that safely and with no issues. Although we are continuing and you can never take anything for granted, so we’re continuing to try to improve.
And last year, we’ve been focused on leveraging the international association of oil and gas producers and standardizing our lifesaving rules and applying process safety fundamentals, which is a focus area for us for 2023. On the slide — on the right-hand side, we’re just showing our outturn performance on emissions for the year. Our emissions intensity for 2022 sitting at 23.8 kilograms per BOE on a gross operated emissions basis, the 483,000 represents about a 15% reduction from where we were in 2019, that’s our baseline.
So I’ll talk a bit more in the presentation, but we’re continuing to advance projects. We’ve had good success at FPF-1 with a couple of projects coming online last year. We’ll see the benefit of that this year and beyond. And we’re doing engineering on some of the more complicated projects like Gilad alluded to, for example, flare gas recovery and electrification at Captain.
Moving on to Page 10. This slide is just a summary of where we are from a production performance perspective. So we’ve increased production 26% in 2022 relative to where we were in 2021, driven both by the acquisitions, but also by our organic investments like the drilling campaign at Captain that’s helped production. As you can see, during the year, we had higher volumes in the first quarter and then the sort of typical turnaround season, second and third quarter and then again, really strong performance in the fourth quarter, expect to see something similar in 2023 in terms of the phasing of production with the turnaround season in the middle of the year.
The benefit of our portfolio really is the high-quality assets that we brought in. And with having stakes in 6 of the 10 largest fields, we’ve got a long life, strong production base. Just walking through sort of how the numbers stack up here, the 56,000 barrels a day, we acquired the Marubeni assets, which started contributing from February. So it was about 7,000 barrels a day added there, a further 11,000 barrels a day between the Siccar Point and Summit acquisitions in the middle of the year. So that gets you up to about 74,000 barrels a day.
And then as we’re thinking forward, the portfolio declines at about 8% per year. So that’s about 6,000 barrels a day and that helps give a bit of calibration for our 2023 outlook. We’ve obviously got some investments that bring us up to the sort of guidance range that we’ve gotten for 2023, and we’ll cover that a bit more in the later part of the presentation. Long term, our focus is still on what we articulated at the IPO, it’s the 70,000 to 90,000 barrel a day range.
And really, that’s going to provide strong cash flows that will help support our capital allocation policy and help support our distributions. So moving on, just to give a bit more specifics on the portfolio and the optionality we have in there. So on Page 11 now, given a summary of the resource base that we have. So we’ve got over 500 million barrels of 2P, 2C resource in the portfolio, and that represents a reserve life of over 19 years. So really strong optionality for us. And you can see that the optionality is all the way from big greenfield to West of Shetland projects through close to infrastructure infill developments to infill wells from existing platforms. And that optionality is really something that’s valuable for us as a company.
We’ve got a good mix between liquids and gas. The chart on the left-hand side is really just a summary of oil demand scenarios. And of course, not here to talk about various oil demand forecast today. You’ll have your own forecast in terms of different oil demand projections. But the key point for us is that the future is very uncertain. And what we believe is that given the amount of uncertainty that exists, have an optionality is something that’s going to be valuable.
So that’s what we’ve built into the portfolio with the acquisitions that we’ve done. And as we look to sort of allocate our extra capital and extra cash flow, we’ll do that on whatever adds the best value for the company. And having that optionality will be really valuable for us as we progress through the middle of the decade and beyond. Moving on to Page 12 and just giving some specifics of the operated activity last year and where we are, a bit of detail here. I’ll just pick out a few highlights.
So on the left-hand side there a picture of the platform working with Harbour Energy, we’ve doubled the production in Jade in 2022 through drilling of 2 additional wells, which came on time and on budget and continuing to see good performance there. We’ve had other good performance from the infill drilling opportunities like the opportunities at Mariner, we’re continuing to drill up the field and some of the well work that we’ve done in the operator portfolio like Alba and Erskine.
FPF-1, we touched on Abigail coming on stream, and we’ve seen been able to get that online in less than 10 months and seeing that continue to contribute. Lots of options in terms of West of Shetland, not just the Cambo and Rosebank that we talk about quite a lot, but also the Tornado gas discovery and there’s an exploration prospect called Tuck that sits in a similar license that offers some potential there as well. And then just touching on Captain, clearly, the flagship asset in our portfolio, over 1 billion barrels of oil initially in place and working to strengthen our recovery through the enhanced oil recovery of polymer injection scheme.
As a reminder, we’ve already recovered about 10 million barrels of oil from that first phase of the project. And the second phase is extending it to the subsidiary of the field. The major construction work was done last year. So that was all done safely and on budget. Riser caisson was installed towards the end of the year and then the additional decks on the bridge linked platform are all installed. So the key scope now is completing drilling of the additional wells.
The rig came back on location, and we started drilling the injector. So we’ll get those completed over the next 2 years with a view to having first injection in 2024 and then peak production in 2025, as we start to see the impact of the polymer flood. So key message there is that the project is still on schedule and on budget. And we’re working really hard to continue to drive down the emissions intensity of the asset.
So the project is going to help that, but we’ve also got a few additional opportunities like we touched on the flare gas recovery project and the electrification projects which we’re actively pursuing. And if we can get those through final investment decisions and get them online in the near term, they have the potential to drive the emissions intensity down into the single digits on Captain as well. So really consistent with our strategy of developing long-life assets that have low emissions intensity.
Just a bit of color on the some of the future opportunities in the portfolio, and you’re aware of the main opportunities that we have, of course, from the big greenfield developments through near field high-value tiebacks like Fotla and Marigold, exploration opportunity like K2 and the Montrose Infill project. I’ll just pick out a couple of those. I’m on Page 14 now, and touching on the Rosebank project. You have seen the progress that’s been made on that with some announcements in the news around the selection of the Petrojarl Knarr vessel, which is going to be refurbished and will be redeployed onto the Rosebank field.
So engineering is complete on that. We’re at the point where the development program and budget is in a very mature stage. And so it’s really nearing being in a position to make final investment decision on it and just working to make sure that all stakeholders are aligned on that one. And going back to some of the comments made earlier, just around having support for the project. It’s a really good project, low emissions intensity development. expected first production at the end of 2026, and that will add 15,000 barrels a day of net production to Ithaca with our 20% share.
Other one I want to highlight, we didn’t talk about this a lot in the IPO, but we’ve signed up the rig contract to drill the K2 exploration well, which is an opportunity that came into the portfolio through the Summit acquisition. So it’s a Forties target, which sits near the Montrose/Arbroath and Everest/Lomond area. So an area that we know well. And of course, we’ve got assets in that area in terms of our interest in Erskine and Montrose/Arbroath.
So the intent there, if it’s a discovery would be that it could be a rapid tieback to existing infrastructure, and really capture the value from a couple of perspectives for us in terms of the development itself, but then also the value through the infrastructure with our assets that we’re already in. So hopeful for that and look out for the drilling results as we work through the summer on that one. So a final slide for me really is Page 15 and then just recapping our strategy from an emissions perspective, unchanged from the IPO. And as a reminder, we have short, medium and long-term goals.
In the short term, our focus is driving down our gross operated emissions. And that will come from projects like the captain projects I’ve touched on and the projects that we’ve done at FPF-1, reducing our flaring continuing to optimize power generation and efficiency there. And for example, the hydrocarbon purge replacement project on FPF-1. So continuing to do what we can on the existing portfolio in the short term, medium term, looking on a net emissions intensity basis, and really focused on portfolio transition as we bring in the lower emissions intensity assets.
And the assets that we’re looking to develop have emissions intensity 65% to 80% lower than the current U.K. average. So we really think that they are the right thing to be doing from a security of supply perspective, but also from the perspective of net-net, having a lower emissions impact as a country than would otherwise be the case with imports. And that’s all in service of our goal of net 0 by 2040.
So just quickly recapping then before I hand over to Iain to touch on the financials. We’ve got a portfolio that’s delivering really strong cash flows. We’ve got lots of great reinvestment opportunities, and we’ll capitalize on those opportunities to deliver value which will be able to support our cash flow allocation strategy and our dividend policy that we stated in the IPO and we remain committed to. Iain, over to you.
Iain Lewis
Thanks, Alan. Right, we’ll go on to Slide 17. And really is a slide summarizing the key numbers for the year. So these are record numbers on every front for the business. We’re very proud of them. From the production numbers of $71.4 million through the EBITDA that was generated from that $1.9 billion, net income for the year of over $1 billion and group free cash flow of $1.1 billion, a real evolution of the business, a really strong number.
You can see in the bottom there that we’ve used quite a lot of that for M&A investments. So we’ve nearly $1 billion of M&A cash flow evolving the business. You can see the reserves number on the right-hand side there in resources. That’s come partly to the acquisition, given us optionality that Alan’s mentioned. And so we’ve used the strong performance here from a cash perspective to generate long-term value. We’ve been able to do that, however, by maintaining low debt, less than $1 billion of debt in the business, just over 0.5x net debt to EBITDA. And at the end of the year, we had kind of available liquidity of $5 million, $7 million, $9 million.
So we closed the year out in a very strong position from both an earnings perspective, an evolution on growth of the business perspective, but also from a capital perspective. You can see that on the right-hand side, we also continue to invest in our core base assets to over $400 million of CapEx in the base business, a lot in Captain, obviously, a flagship project and a significant investment there.
But nonetheless, able to commit to the dividend that we paid the first tranche of it in Q1, we said we would, and we have committed to continue that through the rest of the year with $400 million being the target that we look well in line to deliver as expected. So in terms of — the next slide, this is try to give you a little bit of the evolution story on year-on-year position in terms of production, prices, OpEx and EBITDAX per barrel.
And really, it’s showing the strength of the business, the evolution of the business, 26% increase in production, strong realized commodity price positions, obviously, in the year that we’ve had with $100 of oil and $150 per barrel essentially on gas. But really pleasing to see the unit OpEx number staying low. Inflationary headwinds continue to be an issue, and we continue to fish them, but we’re able to manage that in 2022, continuing to deal with that prudently and responsibly in 2023 and only a modest increase of 5% on the dollar per barrel cost base.
And in fact, in Q4, it was $18 a barrel of cost. And that’s driven the EBITDAX number up 46%, $73 per barrel of EBITDA generating substantial cash. A little bit of more detail on that in Slide 19. Lots of people like this summary that we provide, so we keep providing of the EBITDA. So we’ve got full year ’21, full year ’22 and then Q4 ’22 called out on the right-hand side. And again, just let me just pull out a few numbers in the middle column in full year ’22 here on Slide 19, you can see the production of 71,000 and the oil gas split there.
You can see that’s driven revenues actually before hedging losses of over $3 billion and that hedge position, of course, protect us in the down cycles, but still realizing from production post hedging, $94 a barrel across the portfolio. And with that relatively flat cost per barrel position of $19 a barrel generating $73 per barrel of EBITDA. So that’s the kind of full year ’22 number that really rounds off the year for us.
We think very positive and highly cash generative position. To call out Q4 a little bit, you’ll see the production capability of the business to averaging 81,000 barrels a day in Q4. So that’s the potential of our asset base on stream. So strong production quarter. Obviously, prices were a bit softer, particularly gas pricing in October and November was challenging, which impact a little bit of these numbers.
You can see $129 average of gas compared to $149 for the full year. But nonetheless, $86 a barrel of value per production and $64 post cost to get the EBIT tax and again, calling out that $18 a barrel figure in Q4. Now all that translates into profits. So pretax profit of $2.2 billion, tax charge of $1.2 billion. That includes $76 million of deferred one-off EPL charges that we have to take. But with the result of $1 billion of net income, delivered $1.026 per share. It’s hard to get away from a very strong result and a very strong year from an earnings perspective. And that flows into the dividend. And as Gilad said, we committed to this at the IPO. We delivered the first tranche and clear line of sight to deliver the remainder of the $400 million of dividend.
Next slide, Slide 20, just chose this cash generation and utilization really pictorially for you to give a bit of sense of scale, $1.7 billion of net cash from operating activities, that high $300 million — $380 million of CapEx cash in the base business.
And the acquisition CapEx there that shows that reinvestment substantial amounts of the net cash from operations. Obviously, using net cash through ’23, et cetera, as part of the dividend payments. But you can see increase in cash and investment through the year. Call it the next slide, Slide 21, just giving some overview of really the robust financial framework behind the business.
So we’re very proud of being able to develop the business, to grow the business and to maintain financial discipline. We have a robust capital framework. At the end of the year, $65 million of bonds on the left-hand side there with RBL less cash of 346. We had 1.2 billion drawn facilities. That’s in the middle of the slide there at the year-end. We’ve since paid down some of the RBL as we continue to be cash generative, as well as paying the dividend tranche in Q1.
And the key thing is we’ve grown the business substantially, as you can see the EBITDAX line substantially grown. But the debt relative to that coming down. So very clear in terms of our position and our capability with Liquidity at the end of the year of $579 million.
Next slide is Slide 22, which summarizes a little bit of the protection of the business. And again, the policy, the hedging policy, which we apply in a thoughtful way around the market, we’ve been able to lock in some strong pricing for the next 12 months through 2023. You can see that we’re between oil and gas, we’re up in the 40, 45-plus percentage of production guidance that’s covered by oil and gas hedges. So 2023 well protected.
And you can see that the average floor of our pricing there is around $70 a barrel and 220 pence a therm with ceilings that go up to $90 a barrel and 450, 500 pence per therm. So you can see that the solid hedging position for 2023, which again gets confidence in the numbers and the projections.
The next slide, Slide 23, is really a revisit of our cap allocation framework. We believe this is a unique element of our proposal for investors in the market. it stands out as clear and balanced and prudent. We start off with using cash from operations to invest in our core assets. And as Alan said, about 70,000 to 90,000 barrel a day range is where that investment keeps us and we have the organic ongoing drilling capability in the business to sustain that kind of production range at that kind of investment level in the $400 million to $550 million bottle range that, that investment takes us.
Then commitment to protect the business, less than 1.5x net debt to EBITDA range. Again, we’re nowhere near that at the moment at 0.5x. We have significant headroom there, but [indiscernible] the cycle to keep ourselves below that position and to return. And again, as Gilad mentioned, we heard investors at the IPO. We were clear as to what was expected. And so we [indiscernible] clearly at a long-term commitment to 15% to 30% post-tax cash from operations with a clear commitment in the $400 million for this year. And we believe there’s upside in the commodity cycle for investors with that clear commitment and the ability to see where the dividend policy takes you in terms of your view on pricing.
Got to see that the way things are in the business that we have cash flow well beyond that for the Evolve bucket. So this is our use of remaining cash flow post returns to either grow, extend or yield. And the optionality we have, and Alan has mentioned this already and really in the organic portfolio, we have substantial optionality, but also externally, we have optionality as well, and we’re well placed in terms of our capacity to do is best value for the business in terms of organic and inorganic activity.
So moving on then to close out with the outlook. So Q4 guidance we gave at IPO and glad to say that we have come in on the guidance actually above on the production guidance over barrel a day, so outside the top end of the range. And on both the OpEx and the CapEx numbers coming in towards the bottom end of the range lower than the midpoint in both of those cost metrics. So Q4, again, solid performance on delivery. The guidance for 2023 has been updated.
So you’ll see that the production guidance range has gone from $72 million to $80 million down to $68 million to $74 million, but also a substantial reduction in our OpEx and CapEx positions. You can see coming through there in terms of our — refining of our view of OpEx and CapEx. And the overall change in the range through 2023 is partly reflected you can see in the guidance for Q1.
So about half of the 2023 guidance change is around Q1 short-term production issues that are now resolved. So that’s kind of reflecting in the production numbers there. But again, lower guidance ranges for OpEx and CapEx as well in Q1. We’ve tried to summarize in the next slide, the kind of cash impact of the changes. So using the midpoint at $75 a barrel, which is where we were when the slide we put together, on Slide 26, we’re on looking at the offset of the midpoint changes for OpEx and CapEx and cash terms brings us down to a limited cash impact with [indiscernible] impact as well in terms of the profit figure, we don’t expect a significantly material change in the profit view as well. So updated guidance and clarity on where that’s coming from, as we close out the presentation for the year. Gilad.
Gilad Myerson
Thanks, Iain. So just a concluding remark on the final slide. So we’re very happy to say that we’ve committed to our investors and we delivered on those commitments. One of the most important elements that we announced recently was the dividend. So we committed to a $400 million dividend, and we’ve already paid $133 million of that.
If you look at the current share price that provides a dividend yield, which is very, very attractive compared to all industries and specifically also in the oil and gas industry. And with the type of reserve life that we have, we believe the share price doesn’t reflect the longevity of the business. We’re talking about a business compared to other independents that has an RP ratio of 19 years if we can maintain that 70,000 to 90,000 barrels for the longevity of the business that will enable us to keep that growth — the organic growth as well as maintain a 15% to 30% CFFO post-tax dividend target.
What are you going to see going forward? You’re going to see more of the same. We’re going to be buying assets, very disciplined M&A. You’re going to see us building assets, targeted capital allocation. It looks like Rosebank will be the first out of the gate. It may or may not happen very much dependent on external partners, EPL and another element. And then you’ll see us boosting assets, working tirelessly to maximize the field recovery in the field that we currently operate.
We recently entered the FTSE 250 as well, which was another milestone, and we look forward to growing within the FTSE 250 and be more prominent in the London Stock Exchange. So with that, I’ll open up for Q&A.
Question-and-Answer Session
A – Alan Bruce
So we’re going to take questions from the room first, and then we’ll see if we have time to give folks on the line of chance to jump in. So yes, Sasi.
Sasikanth Chilukuru
Yes. I had 3 questions. The first one was on the Rosebank, now that Equinor has kind of taken in a higher stake as well. Is there any scenario where you’re looking to take an additional stake in the project for Rosebank specifically to let get it going off the ground as well. The second was related to the [indiscernible]. Just wondering what were the key hurdles for an FID there?
Is it financing, the reluctance from your JV partners to put in CapEx or profitability of this project. I was just wondering if the — should we expect to come by FID before the first half of this year? Or are you comfortable for it to pass into 2024? And last one is, given the uncertainty of the U.K. fiscal terms and that we have right now, are you considering any scenario of expanding beyond the U.K.
Alan Bruce
Great. Okay, sure. Well, I’ll pick up 1 and 2 and then I’ll give Gilad a chance to jump in on number three. So first one was on Rosebank. I think look, what needs to happen there is the transaction that Equinor announced needs to complete first. And so we’ll need to let that process run its course, I think, both on Rosebank and Cambo, good projects, the 2 largest undeveloped discoveries in the U.K. So there’s compelling economics associated with both projects.
And really what we just need to see is across the whole portfolio is that broad support from all of our stakeholders to be able to progress through final investment decisions. And so, yes, that really just as Gilad mentioned, that’s the key point. On the overseas one?
Gilad Myerson
Yes. On overseas, our focus is value creation. That’s really our true north, we listen to create value. We weren’t looking overseas when we’re in the run-up to IPO, many processes and opportunities came our way, and we discounted them so we focus on the U.K. I must admit that with EPL, the fiscal instability in the U.K., there are some opportunities now which are significantly more attractive road than here in the U.K. and we’re asking ourselves in terms of a capital return standpoint, should we be looking at these. And we have started looking.
We have internal capabilities. We have people who worked in other jurisdictions. Alan has worked extensively in U.S. Iain has been in Canada. We have teams that have been in Asia and other parts of the North Sea. So we do have that knowledge base and expertise and we fundamentally are very good at operating offshore platforms.
So we will look at opportunities elsewhere to diversify the risk. But I would say that really, our home turf is the U.K. We know all the assets, we know the regulator, we know the partners. And therefore, we have a lot of supply chain synergies. So all our equal, we’ll be investing in the U.K., but if fiscal visibility continues, we will look to diversify outlet.
Unidentified Analyst
I just wanted to ask about the dividend and sort of how you think about that. Obviously, you said 15% to 30% of operating cash flow with the possibility for a little bit more on top, depending on how much cash you have? How much would you sort of focus on at least maintaining that $400 million level? Or is it sort of an absolute? Or do you think about it more as a percentage? So could we see it fluctuate depending on what operating cash flow or as I say, you sort of back off it from the $400 million and say, we kind of like to keep it there. It’s going to get quite a bit worse before we drop that?
Iain Lewis
Yes. too. I mean, I think our IPO statements were pretty clear on the fact that $400 million, the ambition is that we grow those. So that’s the ambition. But what we wanted to make sure we lock our policy around something that investors could get their arms around clearly. So that’s why the 15% to 30% post tax cash from operations as they are. So yes, I think the $4 million is committed to — we’d like to see that grow. Obviously, oil and gas prices have a huge impact on that. And our capital program, depending on the cycle as well. So that’s why we’ve given ourselves the room in that. But I think $400 million with an ambition to grow remains our position.
Alan Bruce
Ashley?
Unidentified Analyst
Yes. I was just wondering how big K2 was in terms of prospective resource.
Iain Lewis
Yes. I don’t know we have shared that yet. So I think — do we see on the slide? I think maybe — Yes, yes. So I think — look, there’s a bit of uncertainty, of course, like all of these potential opportunities. I think there’s some offset wells that have some hydrocarbon shows which give us some confidence in this particular one, and I think watch this space and we’ll come back to you once we drill the well.
Unidentified Analyst
It’s reasonable. So it’s a nice potential development.
Iain Lewis
Yes, yes. I mean I think has the potential to be anywhere from it’s a small tieback to stand-alone facility, but it’s an exploration prospect. So we’ll see where we get to. Further questions in the room? Let’s go first, Mark.
Mark Wilson
Can you tell us about the operational issues at Captain that required step down from 80,000 to 70,000 and you [indiscernible] like a late start to peers, but the late start of really [indiscernible] Clearly, it sounds like Captain is the major.
Alan Bruce
Yes. No, well, we — certainly, I’ll take that one. So a few things in the first quarter there. So we had assumed production from peers for the whole of the quarter, and that hasn’t been the case. I think we’re hoping it will get started up in the next days here. So our expectation is that, that will be resolved going forward. On the Captain one specifically, I think of a one-off issue where we had a problem with the pump, it turned out been maintained back onshore during COVID.
And when we got that pump offshore, there was issues the way the bearings have been greased. And again, I think a bit of a QA/QC issue that just was a bit of a nuance because of the fact that it was done during COVID and we didn’t have — either us or the vendor didn’t have the same access to the workshop at that time.
So a one-off issue that we were able to resolve and it’s now back up and running there. And then I think the other one we flagged in the first quarter really was around Abigail. But being a gas condensate, you kind of have a fairly high decline on that. And what we’ve seen is as we sort of flagged IPO, the initial rate coming not quite as high as expected.
We were always expecting it was going to fall off fairly quickly just given the reservoir, and we’re seeing a much sort of lower for longer profile. We’ve had some buildup tests on it, and it looks like it’s still seeing the in-place volume that we’d expected at the time of sanction. So still expecting that we’ll recover the anticipated volumes from that. It’s just a bit lower for longer. So it’s just a bit of a phasing issue there.
Mark Wilson
Okay. Could you give us like a current group rate? And then the second question is, if Rosebank is going to FID in 1H, could you give us an idea of the CapEx on that project?
Iain Lewis
Yes, sure. So on the current rates, I mean, we’ll be on an instantaneous basis, I guess, we’ll be back up around 80,000 barrels a day. Of course, we’ve got shutdowns coming on to work through the rest of the year. We’ve got a fairly sizable turnaround on Captain, some of the times we need to do this year. So it will be a bit lower and then higher again as we work through the year. And then on — the second question was CapEx for Rosebank — it’s — our shares are in $700 million.
Alan Bruce
And that would be the [indiscernible]
Gilad Myerson
That’s over a 5-, 6-year period. Yes, it’s well within the kind of purview of our normal cash flows.
Iain Lewis
Yes. Go, Chris.
Unidentified Analyst
2 or 3 questions for me, please. Firstly, just a clarification on the dividend because that $400 million you paid includes $133 million effectively for 2022, you want to grow, but you’re reiterating the $400 million is the dividend that you want to pay on an annual basis going forward. Is that correct to understand.
Iain Lewis
Yes, it’s a 2023 dividend. We want to give a first interim early, which is what we did. And I guess this is part of the timing of IPO actually, I guess, drove part of that. So the commitment to the $400 million for 2023 to reference that and to show the comment to it, we want to pay the first tranche early, which we did and we committed to.
And then we’ll be in a normal cycle. So after the 2H or the 1H results, we expect to pay a second interim, so kind of normal September, October time frame. And then the final dividend tranche at the end of the year post the final year results for ’23. But the ambition is to grow that annual $400 million dividend in line with our 15% to 20% post-tax cash policy.
Unidentified Analyst
Do you have any feeling for how you’d weigh that interim versus final dividend?
Iain Lewis
So the normal 1/3, 2/3 will be going forward. This is — again, the timing of IPO, it was a slightly unusual year.
Unidentified Analyst
Second question was on CapEx. Could you help perhaps unpack a bit more that $70 million delta, how much is deferral versus cancellation? Because if I say half of that cancellation, you’re probably looking at taking $3,000 to $5,000 a day of your sort of steady state production rate all else equal, because [indiscernible] there’s less spending because of the consequences of the windfall tax.
Alan Bruce
Yes, I’ll have a run at that, and I’ll let Iain jump in, make sure I don’t get anything wrong, but I mean I think the there’s some optionality in other circumstances, we’ve got some options in the portfolio where we might have accelerated some capital given the change in production. It’s just been a bit of a challenge given partner’s position on some of the other assets.
And so some of that capital still is available to invest if we end up with conditions that are supportive for the industry. So I don’t know I would necessarily take it as a given going forward, that we won’t be in a position where the capital could come back. Iain, do you want to add?
Iain Lewis
No. I think it’s — so there are a number of deferrals or [indiscernible] has actually been canceled…
Unidentified Company Representative
Just a permanent deferral.
Iain Lewis
Well, it’s permanent. I would suggest some of is no. It’s signaling potentially from some of our partners. But I guess the key point is there’s a clear question around every capital program in a fiscal [indiscernible] evaluated. That’s normal. Our partners are doing that. We’re doing that. It’s the right thing to do. So that will mean that things like acceleration may change. I wouldn’t see really anything of what we’ve — what’s reduced in 2023 as really significantly affecting our production profile. The 70,000 to 90,000 barrel day range continues. We expect to be in there and it’s relatively modest input.
Unidentified Analyst
Okay. One last question, if I may, on balance sheet, which is how much cash do you — or how much capacity do you genuinely have for M&A given gas price, gas and oil prices are going to be more volatile in the next 5 years than the past? I think that’s a reasonable assumption to make. You have a substantial CapEx with Cambo and Rosebank coming.
And as you said, I think the [indiscernible] capital has been withdrawn from the industry, not just for ESG factors, but because the government is just — There’s so much I’d like to say, but I can’t. I’ll get sued.
The government has deliberately undermined the industry with attacks that isn’t a windfall tax. It’s just a tax. So there’s a lot less capital. There’s been less access to debt, which means you’re reliant on equity cash flows — you’ve got a lot of CapEx coming that you’ve already effectively committed to pre windfall tax, as long as the projects get sanctioned, that suggests to me there’s not that much balance sheet capacity available for M&A and you haven’t got a share price that gives you an equity currency. How do you solve that envelope of constraints on the business?
Unidentified Company Representative
Yes. I’m happy to pick that from a strategic standpoint. If we’re having this discussion 6 months ago before the IPO, before the additional change to the EPL was from ’25 to ’35 and 2025 to 2028 change investment allowance and removed the price flow. Really, the plan was to just go ahead and accelerate Cambo, Rosebank, Marigold, Fotla, [indiscernible] Tornado and others, really the mindset was we’re moving from a very, very acquisitive organization to a development organization.
And the capital returns were extremely attractive, and therefore, we’re going to dedicate most of our CapEx to those developments. Where we are now with EPL 2, the ultimate returns from these developments are less attractive than they were before. On the other hand, the price expectations of — for some of the acquisitions have come down quite considerably because if we spoke to anyone with the gas portfolio in March 2022 before EPL that were selling the gas at 400 to 500 pence per therm.
And hence, their price expectations with sky high, they were paying very low taxes. They didn’t have the energy profit levy. And all of a sudden that has now reversed. We have gas portfolios at 100 pence with therm with 75% tax and therefore better [indiscernible] out and therefore the price has come down. And then when you weigh a development, including EPL versus an acquisition with lower price expectations, you then ask yourself in terms of ultimate return to shareholders, what is more attractive.
And I could say that some of these acquisitions will provide attractive growth, they will provide additional cash flow that will allow distribution of attractive dividends and therefore one must ask themselves, is this something which is more attractive than developing a project especially when there are rumors or there’s prospects of changes to the government end of 2024, beginning of 2025.
And the fiscal instability is likely to continue. And therefore, we are looking at different opportunities. And therefore, to your question specifically, use of balance sheet, we are looking at buying and building and asking ourselves where do we get the best returns.
Alan Bruce
Yes. Maybe I’ll take one more from the room here and then we can just give the folks online a chance.
Unidentified Analyst
Yes. Just a quick one on net zero 2040. It’s a long way off in the future. You’ve got an RP life of 19 years, 2040 is 17 years away. Is it just an arbitrary date and it’s so far off in the future that it’s a future problem? Or how do you actually get to zero. I mean the partial electrification of Cambo and Rosebank gets you part of the way and your average comes down. Is it through offsets? Is that the delta? You’ll get to zero through offsets — the project…
Alan Bruce
No, no, thank you for the question. So what I would say is it really factors directly into our strategy. So we’re looking at sort of the buying and building piece is something that we will evaluate in all the opportunities that we assess. The challenge just now is the business models for some of these other opportunities just aren’t quite mature enough yet, really.
So we understand the opportunity around CCUS. And for example — and we have capability that would be compatible with that. But of course, there’s still a lot of work to do for that business model to be sufficiently matured, but we would be in a position to evaluate it and understand what the shareholder return and would look like and how that was compared to other things we’ve got.
So we — so I think the key thing is that it’s not an arbitrary date. It is — we have modeled it out. We understand the various options that we have, and it factors into our sort of strategic cash flow allocation. Okay, so maybe we could ask the operator, we’ll just take a couple of questions on the line if there are any before we reach our time commitment here.
Operator
[Operator Instructions]. We have a question from Matt Smith of Bank of America Merrill Lynch.
Matthew Smith
Sorry, I couldn’t be in the room today. I mean, you slightly already answered my sort of burning question on the M&A, perhaps revise it slightly and put it into 2 parts. And I guess the first part would be we discussed M&A potential outside the U.K., I just wanted to put to you whether you thought the post EPL world had made U.K. M&A any more attractive, the negatives are obvious, but perhaps the arbitrage between those tax losses and without has become even bigger and the price expectations of sellers might have come down.
So I just wanted to test whether U.K. M&A could be more on the cards? And then my second question was really what you alluded to earlier in terms of the highest return capital allocation decisions could M&A feature ahead of the likes of the developments that options that you already have in your portfolio. And I think you’re pretty clear and that it could be the potential for that.
So perhaps I just revised the question. Do you think that’s more of a M&A versus Cambo decision? Or could this be Cambo as well as Rosebank? I’m just trying to get a sense of what do you think is highly likely to go ahead within your portfolio today? Or what is sort of in the air, and I appreciate that’s completely dependent on what’s competing within the M&A market to lead at that.
Alan Bruce
Yes. I think you did a really good job of answering your own question there. And yes, so I mean I would say I’ll give you a chance to jump in here as well. But I think yes, I mean, look, just really focused on delivering the highest value and the value in all opportunities on a consistent basis to be able to do that. And like you alluded to, there could be some opportunities which enable you to do more.
And of course, if you’re bringing in extra production that could help from Chris’ question on the balance sheet perspective, it could help there and also help just support our cash flow allocation strategy. So I think it’s really dependent on the opportunity. But just kind of continue to focus on value delivery. Anything else you would add?
Iain Lewis
Absolutely. So specifically in the U.K., our assets have become cheaper for 2 reasons. One is there’s less cash flow in these assets and one in — number two, strategically, companies are looking to accelerate the exit from the U.K. given the fiscal instability, and therefore it creates a slight dislocation whereby assets will be a lot cheaper, and therefore potentially could be attractive. And therefore, we definitely are looking at assets in the U.K. as we speak in terms of M&A versus developments, really, as Alan mentioned, it’s all about value, it’s all about returns, and we’ll look for the most attractive value-accretive opportunities. We actually are blessed in that regard.
We have very attractive opportunities, and we have very attractive M&A. And ultimately, we’ll go to the Board to prioritize capital allocation very similar to the way we’ve been discussing with yourselves today.
A – Alan Bruce
Great. Thanks for the question. Do we have any other questions online? Okay. Well, look, we’re pretty much at our time commitment there in terms of almost 10:00 here in the room. Just would like to say thank you very much, everyone, for your interest in the company. Thank you for taking the time to join us today.
Reiterate that we’ve got a great portfolio of assets, a company that’s delivering strong cash flows, which will support our distributions, our strategy that we outlined at the IPO and our distribution philosophy, no change there. So thank you very much, everyone, and have a good day.