Interim 2012 Cairn Energy PLC Earnings Conference Call
Aug 28, 2012 AM EDT
CNE.L - Cairn Energy PLC
Interim 2012 Cairn Energy PLC Earnings Conference Call
Aug 28, 2012 / 08:00AM GMT
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Corporate Participants
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* Simon Thomson
Cairn Energy PLC - Chief Executive
* Jann Brown
Cairn Energy PLC - CFO & MD
* Mike Watts
Cairn Energy PLC - Deputy CEO
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Conference Call Participants
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* Alex Holbourn
Merrill Lynch - Analyst
* Laura Loppacher
Jefferies - Analyst
* Nathan Piper
RBC - Analyst
* Phil Corbett
Deutsche Bank - Analyst
* Michael Alsford
Citi - Analyst
* Jamie Maddock
Morgan Stanley - Analyst
* Mark Wilson
Macquarie - Analyst
* Anish Kapadia
TPH - Analyst
* Stephane Foucaud
FirstEnergy Capital - Analyst
* Christine Tiscareno
SP Capital - Analyst
* Caren Crowley
Davy - Analyst
* Sanjeev Bahl
Numis - Analyst
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Presentation
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Simon Thomson, Cairn Energy PLC - Chief Executive [1]
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And with me are Jann Brown, CFO and Managing Director, and Dr. Mike Watts, Deputy CEO.
We've got a number of slides to run through with you this morning, and the slides are on the webcast. And following completion of the presentation we will, as ever, be happy to take questions.
If you turn to slide three, this is just to summarize that I will cover four areas before handing over to Jann; the delivery, the summary of our delivery of consistent strategy, the capital growth opportunity that we believe the Company represents, the work that we have done in rebalancing the portfolio and what Cairn looks like in 2012.
Turning to slide four, this serves as a reminder that Cairn is a company focused on delivering value through exploration led growth, within the framework of a balanced portfolio of opportunities and, importantly, with balance sheet strength. Added to that, we do have an excellent record of delivery of safe and efficient operations, and that stands us in good stead with governments and partners alike.
If you turn now to slide five, and delivery of consistent strategy, we have had an extremely active first six months of this year, delivering on our strategic goals. As you know, in February we returned $3.5b to shareholders, and we recently followed this up in July with an on-market sale of a 3.5% shareholding in Cairn India, which provided net cash of just over $370m, thereby reinforcing our financial flexibility.
We've established a platform of lower risk exploration, appraisal and near-term sustainable cash flow, following the acquisitions of Agora and Nautical in the North Sea. And in terms of frontier exploration, we've also built a 10,000 square kilometer operated interest offshore Morocco, with a well targeted in 2013. And we've submitted bids in the Cyprus bid rounds with JV partners, including Marathon. And Mike will go on and discuss each of those initiatives.
We're well advanced in planning for future Greenland drilling, following the farm-down to Statoil on our key Pitu block. And again, Mike will go into some detail on the progress that we have achieved in Pitu.
Importantly, our key frontier exploration blocks now target in excess of 4b barrels -- that's gross unrisked -- of yet to find potential. And added to that, we have a very active lower risk exploration program over the next 16 months.
Turning to slide six, Cairn has consistently sought to provide shareholders with capital growth potential from focused exploration plays. As this slide indicates, we believe that our remaining holding in Cairn India and the cash on the balance sheet provide a very strong platform to exploit our existing portfolio and also new venture opportunities to position the Company for future capital growth. And that's really what Cairn is all about.
Slide seven indicates our belief that recent transactions have been successful in rebalancing the portfolio. So, with the Agora transaction, we initially added 20m barrels of 2C resource -- that was through entry to the Catcher project -- and also accessed what we believe was significant additional exploration potential. And importantly, also, a team had a track record of success.
Almost immediately, we increased value with the Skarfjell discovery, which as you will see from the slide has a range of resources attributable to it, but in our belief can more than double the contingent resource base that we initially acquired.
We subsequently acquired Nautical, which added a further 86m barrels of contingent resource, obviously gave us further exposure to Catcher, but also added the Kraken and Mariner development projects.
So what we believe we now have is an excellent platform for growth in the North Sea.
Flicking to the next slide, slide eight, in summary, we believe that Cairn in 2012 does have the building blocks in place to offer exploration led growth within a balanced portfolio. And that's comprising operated frontier exploration, which is very much our watch word, but also non-operated lower risk exploration and sustainable near-term production to fund future exploration. And Jann will talk about this in more detail, but we're targeting up to $1b per annum of annual cash flow from our development projects.
There is obviously a clear focus on exploration appraisal, currently in three regions, North West Europe, Greenland and the Mediterranean. And added to that, we remain very focused on capital discipline. With a strong balance sheet, we'll have in excess of $500m at the end of this year, plus obviously our stake in Cairn India and the right partnerships formed to ensure that our capital exposure to the frontier exploration plays is commensurate with the size of the Company that we are now.
And with that introduction, I'll now hand over to Jann. Jann.
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Jann Brown, Cairn Energy PLC - CFO & MD [2]
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Thanks very much, Simon. Good morning, everyone.
We'll go straight to the finance highlights slide, on slide 10. We had cash at the half-year of $933m on the balance sheet, and two significant cash movements happened after that date from transactions announced before the date. So, the first one, we announced the sale of 3.5% of Cairn India stock in June. The cash came in in July. That was $371m net proceeds. Also, we announced the acquisition of Nautical in the first half of the year. That completed in August, with a $560m net consideration paid.
Our retained stake in Cairn India is currently valued at approximately $2.2b. And we estimate our yearend cash position is going to be in excess of $0.5b. So the balance sheet remains strong. It's well positioned to unlock the value in North West Europe and to fund the core exploration.
Turning to slide 11, in the first half of the year we have converted our balance sheet strength into upstream E&P assets and we've regeared our capital base through the return of cash to shareholders, which Simon talked about. Now, that regearing of the capital base means that the farm-down of Pitu in Greenland, while it reduces our cost exposure, it also has a positive impact on the reward side of the equation.
We continue to target growth through our exploration drilling, and our forward program remains focused on converting the balance sheet strength and financial assets into E&P assets to build the balanced portfolio, a combination of sustainable cash flow with lower risk exploration on one side and transformational exploration on the other.
Moving on to slide 12, our financial assets currently available for investment stand at around $3b. The funding required to develop the already discovered North Sea resource base is estimated at around $1.5b to $2b over the next three to five years, and the prize we're targeting there is operating cash flows of around $1b per annum.
The debt markets remain very much open for our quality assets in the North Sea, and we will bring in debt funding at the right time to support the developments. On the exploration side of the business, we're looking to invest $250m per annum, which is around 10% of our current market capitalization.
So our financial allocation will be focused on creation of shareholder value through exploration, and our capital discipline will be focused on the creation of a sustainable cash flow platform to fund that exploration.
So finally, page 13, our finance strategy remains consistent. We have a clear track record of creating value, and that remains our focus. We recognize that to achieve this we need to make the capital structure work for us. We need to keep it efficient, to allow real impact for shareholders when we have drilling success. But we need to retain access to enough investment capital to fund the growth.
So what we are building right now is a platform for growth through exploration led success, but with the focus, as Simon said, very much on financial discipline.
And I will hand over to Mike, to talk about where we see the growth coming from.
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Mike Watts, Cairn Energy PLC - Deputy CEO [3]
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Thank you, Jann. Good morning, everyone.
Before I start, I would like to briefly say a word that sadly we lost one of our senior explorationists last week, who passed away, Steve Patmore. We attended his funeral yesterday, and at this point in time our thoughts are with his family and friends.
Now, if I can turn to page 15, this is the growth strategy of the Company. I should stress this has not changed for 22 years, but we are now making the strategy appropriate for the size of capital base of the Company, a $2.5b company.
I think there are four key things I'd like to point out. One is we are exploring for lower risk, and by that I mean one in five POS or better. And that is going to mean, certainly in transformational areas, drilling wells on 3D seismic data sets.
Also, that our equities will be looking generally for that 35% to 65% equity range, and that means that we will thirdly be bringing in partners, whether it's in bid rounds in the North Sea or whether it's in transformational areas. That's evidenced by both Statoil joining us in the Pitu block in Greenland, as Simon has pointed out, earlier this year, and also the way we approached the Cyprus bid round, bringing in, in particular, Marathon as a partner.
But fourthly, that means that we have tremendous gearing to the upside. And I think even though the capital base has shrunk, the gearing that we're going to offer shareholders is hugely enhanced.
So we are rebalancing the portfolio, and the emphasis will be on to operate the transformational areas and non-operate the North Sea, with some exceptions.
And just before I move on, I would like to mention one we made earlier, which is India, of course. Just to point out the current production is over 200,000 barrels a day. At Rajasthan it's 175,000, increasing to 240,000 next year and going to 300,000 barrels a day thereafter.
So, turning the page to 16, just looking at the North West Europe area. The recent corporate acquisitions, one private and one public, have effectively been brought in at an acquisition cost of around about $7 per boe. And as Simon and Jann have pointed out, that is the platform for future growth. We have a large number of licenses, and we have an active drilling program in the short term and a building one in the medium term.
The balance sheet strength and the expertise that we've brought to both the Agora and the Nautical acquisitions means we can build on their strategies, allow ourselves to go using their knowledge edge to get into higher equity positions in both licensing rounds and farm-ins.
If we look at page 17, you'll see the contingent resource or the predevelopment projects that we've acquired. Four main areas, the EnQuest operated Kraken field, the Premier operated Catcher area, the Statoil operated Mariner field and the Wintershall operated Skarfjell discovery.
I think the one thing I would just point out, Skarfjell, we do give a range. Internally our view is at the high end of that range. And that's mainly because of the quality of the reservoirs, the length of the oil columns and the fact that there was no sign of water whatsoever in the discovery well.
Page 18 picks up the program, drilling program as we see it. This obviously will firm up a little bit more. We've got the OCMs and TCMs this autumn. Things may change slightly. But in essence, we've got three wells this year and a number of wells programmed across the North Sea for next year.
19, I think this is an example. This is new opportunities where the Cairn muscle has brought more to bear. We've piggybacked, if you like, the expertise and the knowledge edge of the Agora and Nautical teams. But we've gone for a large number of applications, 14, with 18 blocks in the UK 27th round, at the 20% to 50% equity level. And indeed, some of the key areas around the Catcher field, for example, we've applied for blocks at a 46% non-operated level.
In Norway, there's bid rounds coming up and the next APA round is early in September. And we will be participating in a handful of blocks there, with the expectation of announcements in December.
So a growing resource base and a growing license base, we hope.
Page 20 starts the transformational potential, the raison d'etre, if you like, of the Company. And we are still focused on areas which are highly prospective, getting early or early on entry into fiscally attractive areas.
The positions we have already in Pitu, Northern Greenland, the Southern Greenland blocks, both of those areas are completely undrilled. We've announced this morning, and Simon's already mentioned Morocco, we've acquired two positions offshore Morocco. And Morocco is the conjugant margin of Newfoundland in a plate reconstruction. We have acreage in the Valencia Basin. All of those target at least 4b barrels, and that's a number which will be growing over time.
Applications that we've submitted, in Spain, we've mentioned before that the process is ongoing. There's a large block application in Spain, and blocks in Cyprus. And both of those areas, we have a very high number. Expectation is well over 2b barrels of expectations of oil equivalent. But particularly in Cyprus, it's a very competitive round.
Pending applications, in Lebanon, we wish to participate in the Lebanese bid round, where we have an edge. And also other basins, which there's no need to mention at the moment, but we will be participating in further bid rounds, again where we see multi-billion barrel potential with fiscally attractive terms. And we have some other initiatives ongoing, direct negotiations, etc.
So I think, as I said at the March results statement, our story is evolving. By the end of the year, our position will be transformed in acreage, and I think by the end of next year. And it's just a consistent delivery on what we've set out.
Going through the areas individually, we talk first of all about Greenland. And I'd just point out that the first phase of exploration we spoke about, we were very ambitious looking at about a third of the North Sea and we've built up a big database but have not made a commercial discovery. But we are now very much focused on where we see the most attractive parts where we can cut the risks down, bring them down to the one in five level, and focus on where we have a partner or where we have 3D.
So, I should point out that Southern Greenland we're excited by the potential; we're just going through the 3D there. But make it absolutely clear that the capital discipline that Jann in particular talks about means that we will not be taking a project forward unless we have a farm-in partner.
First of all, on page 22 we look at the Pitu Block. On that Block, at the moment we have an estimate of a yet to find of over 3b barrels. We have been focused on about 20% of that block. So the block is about 36 UK blocks on its own, so about twice what we've applied for in the UK 27th round in terms of area. But about 20% of it was covered by a 3D seismic survey we acquired last year, and all our initial efforts will be on that 3D seismic.
The data -- final data set came in in early August, and we've been doing some interpretation on slightly previous data sets. And it will be some time, a number of months, before we've gone through that. At the moment, we have one prospect on the 3D but more than half a dozen leads. I'm very confident that this -- our understanding will increase in the Pitu area.
The industry is very active, I think, in the area. You can see, if you look at the map, to the north of us we have Conoco, who have been shooting 2D seismic this year. Shell have a dual vessel, two seismic vessels doing a very large 3D seismic survey to the west of us. And Maersk are completing a 3D seismic survey to the south of us. So, indeed, we are one year ahead of the competition. There is a collaborative effort going on with the shallow borehole program that Shell is operating, and that will give us some regional information.
Specifically looking at page 23 and zoom in on Pitu, the prospect that we have at the moment on what we call the Melville High. It's a very proud structure in the center of the basin, perfectly located for charge. The mapping -- this is a stacked reservoir. There will be several horizons. But the first mapping, which has been confirmed by amplitude studies, shows about a 700m barrel prospect. There is no doubt in my mind, as the work continues, this will end up to be a 1b to 2b barrel prospect when the mapping has been completed.
Just to remind you, we did have very strong indications of oil seeps last year, when we did our statistically meaningful seabed sampling survey. All that means is currently our POS for this prospect is 22%, and I believe we will get that down in the next six to nine months to something like 30%, so roughly a one in three shot.
If we turn over to page 24, then move down to Southern Greenland, we also acquired a 3D survey. That's a 3D line shown there. The mapping has just started. The data also came in the last month. We're seeing the structures are being confirmed that we saw in 2D. We're mapping amplitude anomalies at the crest of structures. So that work will continue.
Interestingly, I would like to point out last year, on the way out from doing the geochemical survey, we managed to get just a handful of data points from the seabed sampling survey, so not statistically meaningful. Those were above the rotated Cretaceous fault blocks and on the flanks of those fault blocks. And we've had an extremely high oil signature of micro seeps, and this is calibrated with Barents Sea oil as well as dry hole areas. It's very encouraging.
Which has led us this year to take, if you look at the bottom right of that slide, what I would call an effective 3D sampling of the seabed, down to a 500 meter spacing in some locations but roughly at 1 kilometer spacing over what we deem to be the prospective area of the 3D. Which means, come Q3 next year, we will have finished the 3D interpretation, we will have the seabed survey, and it's that point that we could expect to then go and approach industry.
Moving to warmer climates, page 25 is Morocco. We announced this morning, as Simon has mentioned, there are two positions which are co-adjacent but, importantly, they are going for two different play types. The Foum Draa Offshore 1-3 blocks we farmed in, this is an old Shell block that we farmed into a Serica/San Leon consortium. We have taken 50% of that block and we'll operate. There are at least two key prospects which we've identified, and we're looking forward to targeting drilling Q4 2013 next year.
The Juby Maritime I-III blocks positioned where we have 37.5% operatorship. And Barrus Petroleum at the moment have done a transaction with Genel Energy, which is, I think, subject to government approval as we speak. This is for a different play type.
So we're very excited. This is an area where there is existing 3D that needs some reprocessing. We need to shoot some new 3D in Cap Juby. But also, there is existing 3D in the Foum Draa Offshore area. So the level of risking that we see here is in the one in four range.
Again, quickly turning the page to Spain, the Valencia Basin. There's five blocks that were awarded to us last year. Going forward, deepwater potential. We have a 3D survey planned. And subject to getting the necessary consents from the government, it's probably a 2014/2015 area to drill.
Very importantly, which we can't show at the moment, but we have a very large application for a number of blocks in Spain going through the system. And the government notified us a couple of weeks ago that they will be shortly gazetting these blocks. So I think that's manyana in Spanish, is when that will happen, but we're hopeful it will be this year.
And just finally, page 27, the Eastern Mediterranean, again, high potential areas. We think this has been de-risked by the Noble drilling and also de-risked by a number of 3D surveys. But we participated in the Cyprus bid round. We bid for two blocks. As I mentioned, we had Marathon as a partner. This has proven to be a very competitive bid round. There were 33 bids from 20 other companies for nine of the blocks, and the two blocks that we bid for were the most preferred blocks. So we've got to be realistic and see what we get there.
And finally, Lebanon, there is a bid round. It has been delayed, but we're ready, willing and able to participate in that round when it's announced.
Simon.
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Simon Thomson, Cairn Energy PLC - Chief Executive [4]
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Thanks, Mike. So, slide 29, in conclusion. We remain absolutely focused on delivery of our strategic objectives. In North West Europe, we've established a platform to build and grow sustainable near-term cash flow, which Jann talked about. And we've also, importantly, enhanced our operated portfolio, providing exposure to transformational exploration potential.
So with the building blocks in place, we do remain focused on an exploration led strategy, but with the capital discipline to grow shareholder value through a combination of our financial flexibility which we retained, and also a strong partnership strategy.
And with that, we would now be happy to take questions. Thank you.
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Questions and Answers
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Operator [1]
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You have a question from Alex Holbourn of Merrill Lynch. Please ask your question.
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Alex Holbourn, Merrill Lynch - Analyst [2]
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Morning, all. Three questions from me, please. The first is on the exploration front. Do you feel that your hands are now full or are you still looking to add further high-impact exploration opportunities, even beyond those that are currently pending?
And then secondly, just on the Morocco opportunity set and the players being targeted there in the two separate block areas that you've mentioned, I was wondering if you could touch in a bit more detail on those.
And then thirdly, just on the tax terms in the region and how you see those [favorably] versus international peers. Thanks very much.
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Simon Thomson, Cairn Energy PLC - Chief Executive [3]
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Sorry. It's Simon here. We didn't actually hear the third part of that question. Could you repeat it?
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Alex Holbourn, Merrill Lynch - Analyst [4]
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Yes, sure. The first part -- the first question was just on whether or not your hands are now full on the exploration front or whether you're still looking to add further high-impact exploration opportunities, even beyond those that are still pending.
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Simon Thomson, Cairn Energy PLC - Chief Executive [5]
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Yes, sorry. It was the third part of the question we didn't hear.
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Alex Holbourn, Merrill Lynch - Analyst [6]
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And on the third part, that was on the tax terms in Morocco versus peers and international comps.
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Simon Thomson, Cairn Energy PLC - Chief Executive [7]
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Okay.
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Mike Watts, Cairn Energy PLC - Deputy CEO [8]
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Well, I think just on the exploration, yes, we are ambitious. We concentrated in the first six months of this year on building the foundations and the platform in the North Sea. But in the background, the things that I've talked about we've been pursuing, that there are other opportunities which we are looking at as well.
So, it's difficult, because exploration is a long-term gain, to know when those will come into fruition. But I would anticipate, by the time we stand up in February or March next year, there will be further news flow. And as an exploration led company, we always need to be feeding the hopper.
I think Morocco, very briefly, the two plays, the Cap Juby area, it's a passive margin, Morocco, and Cap Juby is on the platform side at the very edge. So, on the platform, you're probably immature for source rock for any sort of hydrocarbon generation, and the generation takes place in the deep part of the basin. So, when you're on the shelf, what you're looking for is the shelf edge.
Cap Juby is an old discovery flow, 2,000-odd barrels a day of heavy oil in the upper Jurassic. That was a carbonate reservoir. That has potential interest. We will, of course, be looking at that. But we do, I think, see the potential for a deeper play. There's a light oil play in the mid-Jurassic, about 1,000 meters deeper. And that's one of the 3D surveys that we're planning in the end of this year. We'll be looking at that play. So, that's a passive margin shelf edge play.
The Foum Draa is really off into the basin, so we're looking there at really an untested play. There are only three deepwater wells in Morocco, 50 wells in the offshore but only three in the deepwater. The most relevant one is the Draak-1 well drilled by Shell a few years ago. But that didn't test the play that we are looking for, which is essentially lower Cretaceous turbinate slope channels and fans, which may have been ponded against salt diapirs.
So, it's in that area where we're seeing more upside prospects in the 100m barrel sort of range. But we need to sit down with the government of Morocco. We need to go through our strategy with them. And before we start going too far down that line, I think we just need to be conversant. We've just come into the area. So, I really want to give more detail when we can in February/March, when we know that we've got the government fully on board with what our intentions are.
And just I'll get Jann or Simon on the tax terms, but obviously a fiscally attractive country, Morocco.
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Jann Brown, Cairn Energy PLC - CFO & MD [9]
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Yes. As Mike said, the fiscal terms are attractive, as you would expect for frontier acreage. It's a tax royalty regime, but with a 10-year corporate tax holiday. The royalty's 10% for oil, 5% for gas. And in addition, there's a 25% state participation in the exploration phases, so attractive terms.
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Operator [10]
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Your next question comes from Laura Loppacher from Jefferies. Please ask your question.
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Laura Loppacher, Jefferies - Analyst [11]
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Hi. Thanks, guys. Just going back to the comments made earlier on the CapEx budget, you were saying about $250m a year on exploration. Can you give any sort of indication of what portion you think would be allocated towards what you're calling the transformational opportunities and what you would say would be your North Sea type opportunities?
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Jann Brown, Cairn Energy PLC - CFO & MD [12]
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Laura, it's going to be driven by the opportunity set in any given year. So, it depends very much on what Mike and his team come up with. We'll focus on targeting the areas where we see most potential to create value.
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Laura Loppacher, Jefferies - Analyst [13]
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And then just a clarification question, the $1.5b to $2b net development capital, does that include Skarjfell?
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Jann Brown, Cairn Energy PLC - CFO & MD [14]
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That includes our estimates on Skarjfell, yes.
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Laura Loppacher, Jefferies - Analyst [15]
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Okay. Thank you.
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Operator [16]
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Thank you. Your next question comes from Nathan Piper from RBC. Please ask your question.
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Nathan Piper, RBC - Analyst [17]
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Good morning. My question is coming back to the exploration portfolio. You said that you foundations are principally set. And are you signaling a slight change of emphasis here, and are you trying to focus on bringing in more transformational exploration opportunities?
And I guess leading on from that, do you have a sufficiently broad and diverse prospect inventory to exercise your fiscal discipline? I guess you seem to have lots and lots of leads all over the place, but when will you actually have a mature exploration portfolio to choose from?
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Mike Watts, Cairn Energy PLC - Deputy CEO [18]
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Well, Nathan, I think -- I'd please beg a little bit of patience. The first six months of this year, since our cash back, we deliberately focused on getting that -- bringing those predevelopment projects in. As I said, exploration takes time. We are filling the hopper and that's a continual process. I wouldn't be too concerned. Certainly, it's not a scattergun approach. We're being very focused on where we see high potential, where we have the operating capability to drill these wells quickly, efficiently and safely.
And I'm actually quite excited by the program. It's evolving. But it's not something you can put in place overnight. And particularly when you go through the licensing round process, you're at the whim of the government process.
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Simon Thomson, Cairn Energy PLC - Chief Executive [19]
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I think, Nathan, just to add to that, Mike indicated that of course we'll provide further updates next year, the results next year. And I think it is a continually building process. The principle he's set is that we've actually achieved a great deal in the first six months of this year, as Mike said, bringing the lower risk, but also adding to the transformational potential that we already have in the portfolio. So, we believe that the building blocks are there, but that doesn't stop us from adding more where we see there's the right kind of value opportunity.
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Nathan Piper, RBC - Analyst [20]
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I guess coming at it from a different point of view, you've got a couple of predevelopment assets but no cash flow. And particularly in the UK North Sea, that's not terribly tax efficient. I wondered if you're trying to signal that you've got enough or you plan to add more, let's say, tangible assets, or is it very much a focus on adding a broader exploration footprint?
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Simon Thomson, Cairn Energy PLC - Chief Executive [21]
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I think what we're trying to indicate is that we're very happy with the transactions that we've done in the North Sea. As Jann has outlined, we believe that they will give us in the near term sustainable cash flow. We can, through our current cash resources, bridge any gap between now and first cash flow.
So, from that point of view, we feel that we've achieved a task. That doesn't stop us from other opportunistic moves if we believe the value equation is right. But it's all about building that balance in the portfolio, and we do believe that we've made great strides in doing that in the first six months.
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Nathan Piper, RBC - Analyst [22]
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Understood. One final -- just a nitpick question, I guess. On your plans in Norway, do you think the rig availability may impact how quickly you can appraise Skarjfell?
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Mike Watts, Cairn Energy PLC - Deputy CEO [23]
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No, I think we're -- we're not the operator there. It's Wintershell, as you know. But we're looking for a two-well program next year. But you've got to remember the North Sea operates with an annual work program budget process, and we've not had that process set for next year. That will take place this autumn. So, I don't want to talk about details of things which have not yet been agreed by the joint venture.
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Nathan Piper, RBC - Analyst [24]
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Understood. Thank you very much.
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Operator [25]
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Your next question comes from Phil Corbett from Deutsche Bank. Please ask your question.
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Phil Corbett, Deutsche Bank - Analyst [26]
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Good morning, everyone. Just a few questions. Firstly, on Skarjfell, Mike, is your estimate of contingent resource just on your license alone or does it include possible extension to the south?
Just also on the CapEx estimate, Jann, I was wondering if you can give us an early view of 2013. I assume that you've got a buildup of that, which provides you with that $1.5b, $2b of CapEx. So, just adding that to exploration budget for 2013, can you give us any other guidance?
And lastly, should we assume the same kind of commercial threshold on Pitu for a discovery as we did on the southern blocks? Thank you.
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Mike Watts, Cairn Energy PLC - Deputy CEO [27]
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Yes. Well, the first question, very interesting. And there's no doubt, I think this Skarjfell is an interesting discovery. It's going to be a standalone discovery. I've got very little doubt of that, and it could be a hub. I think our estimates are on the block. That's not to say that in the upside cases, if we had a P10 number or a P5 number, it could not be significantly larger than that, and it could be off the block. That's pure -- that's absolutely --
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Jann Brown, Cairn Energy PLC - CFO & MD [28]
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Budget won't say anything publicly.
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Simon Thomson, Cairn Energy PLC - Chief Executive [29]
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And I think on the third part of your question in relation to Pitu terms versus the south, obviously, in Pitu there is a greater incursion of annual sea ice than in the south of Greenland, and that needs to be taken into account in development planning. We've already run development planning scenarios and done some generic cases through a number of third parties.
So, there will be a slightly increased cost. But I think it's safe to assume the original kind of threshold that we previously guided to, which I seem to remember was around about 250m barrels at around about $60 a barrel. So there's not a great difference in terms -- slightly more cost.
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Phil Corbett, Deutsche Bank - Analyst [30]
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Okay. And can I just ask a quick follow-up question? Just with your strategy regards the licensing just -- well, the licenses you drilled on before, do you think the government's going to be comfortable with you effectively just sitting on those blocks until you get an acceptable offer from the industry, or will at some point they want you to actually do a deal or take the licenses away?
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Simon Thomson, Cairn Energy PLC - Chief Executive [31]
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Well, I think, if you look at our track record in Greenland from a government perspective, we've delivered two years of drilling safely and efficiently within four years of data acquisition. A huge amount of seismic has been acquired. So, I think, from a government perspective, we have more than fulfilled all of our commitments on all of our licenses, way ahead of when -- any period that we were obliged to in terms of the license obligations.
So, we're not a company that just sits on things for the sake of it. I think the point is that we're trying to go through this in a methodical way, getting our understanding of data in the right place before we then transact and move forward. And I would say that -- just reaffirm our relationship with the Greenland government is extremely strong. And I think we have a -- we've got a strong track record of delivery which stands us in good stead with them.
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Operator [32]
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Your next question comes from Michael Alsford from Citi. Please ask your question.
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Michael Alsford, Citi - Analyst [33]
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Morning, all. Two questions, if I could. Firstly, on Greenland, could you maybe talk a little bit about forward planning on drilling, because I guess given the long lead times for the deepwater rig market we see at the moment, I guess you must have to think about how you go about thinking about getting a rig for drilling in Pitu?
And I guess, on that point, as you continue to shape the portfolio, would you say that your almost 60% stake in Pitu is what you'll run into drilling at, or would you think we might see further farm-downs there?
And then just secondly, just on the Mediterranean, again, a little bit more related to the rigs as well, I guess, again, finding a deepwater rig is a challenge in this market. Could we think maybe that we'd see Morocco and also potentially Spain drilling done at the same time, or would you say that you'll just try and get a rig slot for one well in Morocco? Thanks.
------------------------------
Mike Watts, Cairn Energy PLC - Deputy CEO [34]
------------------------------
Yes. Michael, all very good questions. I think in Pitu we're targeting 2014. That's because we need to pull the data together. We need to go through the joint venture process and get joint venture approval. And then we need to embark on a one-year approval process for environmental clearances and government support. So, there's a well-trodden path. And the critical -- the first year that we could complete that is 2014.
I think bringing in Statoil has been a big positive in terms of the rig market. Obviously, we're very alert to what is happening on the rigs. And having drilled eight wells in Greenland, we've got the respect, as Simon's mentioned, of the authorities.
There are several things happening. Obviously, with the others shooting seismic, it's unlikely they will be ready at the same time as us to drill. So, we're still looking for cooperation for a second rig. And I think the arguments that we will be presenting and have been presenting with the government is, look, we have demonstrated we can drill safely, and are there some rigs on the Canadian side maybe that Statoil are involved with or whatever that can be used in the relief backup case? And the industry's looking at cap and containment issues, as you know.
So, there's a lot going on in the background, as well as the subsurface evaluation. But I think 2014 is what we're targeting on.
In terms of farm-down, we don't need and don't want to farm-down anything from Pitu, barring strategic decisions. There could be advantages if we wanted to cross-fertilize with some other players or whatever. But I think that's the sort of -- the 35% to 60% range is where we want to be drilling our high-impact wells, particularly ones with the sort of potential that we see here.
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Simon Thomson, Cairn Energy PLC - Chief Executive [35]
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And in Spain, Mediterranean and Morocco, Spain, no, we'll be looking to drill first of all in Morocco, as Mike's indicated, towards the end of next year, and Spain will be some time after that.
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Michael Alsford, Citi - Analyst [36]
------------------------------
Great. Thanks to you both.
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Operator [37]
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Your next question comes from Jamie Maddock from Morgan Stanley. Please ask your question.
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Jamie Maddock, Morgan Stanley - Analyst [38]
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Good morning. Just on the point you made about the operating cash flow and about the $1b that provides you or that you would aim to have, is that -- do you think that's achievable from the current resource base, or is there perhaps something else you would have to add to the development, predevelopment part of the portfolio to allow you to obtain that? That's the first question.
And the second one is just to try and get a better understanding of what the other oil companies surrounding the Pitu block are undergoing this year with regard to the seismic acquisition, and whether you're aware of any activities they plan for [in addition there].
------------------------------
Mike Watts, Cairn Energy PLC - Deputy CEO [39]
------------------------------
Pitu area, we just know they're very active. Shell in particular is acquiring a very large survey, with two vessels. That's going to take a year to process. So, if these companies want to drill on their processed and interpreted results, I can't see anybody being ready for possibly 2014, but more likely 2015.
------------------------------
Jamie Maddock, Morgan Stanley - Analyst [40]
------------------------------
Thank you.
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Operator [41]
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Your next question comes from Mark Wilson from Macquarie. Please ask your question.
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Mark Wilson, Macquarie - Analyst [42]
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Hi. Good morning. It's just a question on the remaining Cairn India stake. You have previously pointed out how you are happy holders, but then we did see the sell-down of a small percentage. Do you expect further releases along the lines of that, or would it be more if the opportunities arise?
And to that end, there was a lot of discussion about near-term production, but strategically, would you like to have current production within the portfolio?
------------------------------
Simon Thomson, Cairn Energy PLC - Chief Executive [43]
------------------------------
Well, I guess on the first question, yes, the answer remains the same; we are happy holders. Obviously, we -- our watch word is financial flexibility, so we believe it was absolutely the right thing to do to transact that 3.5%. The market's been strong. But we remain happy holders in the stock. And the production's going up and the stock seems to be performing well, so that's very positive.
Sorry, the second part of the question was --?
------------------------------
Mark Wilson, Macquarie - Analyst [44]
------------------------------
Is whether you actually see the need for current production rather than --
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Simon Thomson, Cairn Energy PLC - Chief Executive [45]
------------------------------
No. I think you never rule anything out in terms of opportunistic transactions. But as we described earlier, we believe that the right way for us, from a value perspective, to access cash flows at the contingent resource base and to bridge the gap through our balance sheet strength.
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Mark Wilson, Macquarie - Analyst [46]
------------------------------
Can I just add one final thing on that? So, exiting the year at just over $500m of cash, is there a view going forward on what is the correct balance sheet makeup that we should envisage, say, end of 2013 and onwards into the new development?
------------------------------
Jann Brown, Cairn Energy PLC - CFO & MD [47]
------------------------------
Mark, again, it is too early to say. We're obviously very comfortable with the yearend position. We'll sit down with our joint venture partners and look at the profiles of the development spend. There's four predevelopment assets. So, until we've had those discussions, it's premature to start talking about our ideal balance sheet position.
------------------------------
Mark Wilson, Macquarie - Analyst [48]
------------------------------
Okay. That's fine. Thank you.
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Operator [49]
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Your next question comes from Anish Kapadia from TPH. Please ask your question.
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Anish Kapadia, TPH - Analyst [50]
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Good morning. I had a few questions. First of all, I was wondering, could you just explain in a bit more detail what exactly attracted you to Morocco? And are you looking to further build up your position in the region?
With the new blocks you acquired, I was wondering, is the Apricot prospect currently the most likely to be drilled?
And the final one, switching back to the UK, given the number of developments that you do have going forward now, does it make sense to acquire smaller UK companies with significant tax loss positions in the North Sea? Thanks.
------------------------------
Simon Thomson, Cairn Energy PLC - Chief Executive [51]
------------------------------
Okay. I think on the first one, I'll hand over to Mike on the prospects, but Morocco's a great example of somewhere that offers us a frontier exploration play and, as we've talked about, on terms that we believe are fiscally attractive. But, Mike, can we --?
------------------------------
Mike Watts, Cairn Energy PLC - Deputy CEO [52]
------------------------------
Yes. We do like building up a focused portfolio, so core area. But I would steer clear. We're not going to be hoovering up lots of little assets in there. We started looking at Newfoundland and, as I said, the conjugate margin of Newfoundland is Morocco. And it was a logical area to come into for us, and it's got high potential.
The prospects, yes, we don't give our prospects names, like other companies. We give our fields names, but not prospects. But there is a prospect which was called Apricot that is a candidate for one of the drilling. That's clearly the target is to test this lower Cretaceous -- untested lower Cretaceous play that the Shell Draak-1 well missed.
------------------------------
Jann Brown, Cairn Energy PLC - CFO & MD [53]
------------------------------
And on the tax losses, tax is just one element of the total value equation. So, yes, we would always take it into account when we were assessing any opportunity, but it's not going to drive us solely on its own. It's got to be about the overall value proposition.
------------------------------
Anish Kapadia, TPH - Analyst [54]
------------------------------
Okay. Thanks.
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Operator [55]
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Your next question comes from Stephane Foucaud from FirstEnergy Capital. Please ask your question.
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Stephane Foucaud, FirstEnergy Capital - Analyst [56]
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Good morning. The $500m -- of the $500m cash, what do you think would be your CapEx in H2? Thank you.
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Simon Thomson, Cairn Energy PLC - Chief Executive [57]
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Yes. Sorry, if I could start with the second one, we don't want really to say anything more about Morocco until we've sat down with the government. The prospects are about 100m barrels. The ultimate question is how many prospects are there going to be in that area. So, we don't want to say anything more than that at the moment.
On the EnQuest carry we've inherited from Nautical, that's related to the reserves of Kraken. So the minimum carry is $115m, but there's a $90m contingency which is allocated pro rata in the range of 100m barrels reserves to 160m. And we already see third-party analyses at the high end of that range. So, one of the comforting things I know helps Jann sleep at night is there is a development carry for the Kraken field.
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Jann Brown, Cairn Energy PLC - CFO & MD [58]
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And the guidance --
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Stephane Foucaud, FirstEnergy Capital - Analyst [59]
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Whether it's 240 or 150?
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Simon Thomson, Cairn Energy PLC - Chief Executive [60]
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It's reserve dependent. So, there's still some time, but I'm saying there's third-party views that were at the high end which would make it 240.
------------------------------
Stephane Foucaud, FirstEnergy Capital - Analyst [61]
------------------------------
Okay. Thank you.
------------------------------
Jann Brown, Cairn Energy PLC - CFO & MD [62]
------------------------------
And on the CapEx guidance, the full-year CapEx guidance remains pretty much in line. The second half of the year is probably about $120m to $150m.
------------------------------
Stephane Foucaud, FirstEnergy Capital - Analyst [63]
------------------------------
Thank you. And I think remaining -- the 15 was in the North Sea. What are we looking to -- what are you looking to target in term un-risked resources associated to that (inaudible) program?
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Simon Thomson, Cairn Energy PLC - Chief Executive [64]
------------------------------
Yes, it's difficult to be precise, probably more than 50m barrels on a risked basis, but how much more I don't know until we've gone through the full joint venture work program budget setting process this autumn. So, we'll have more flesh on the bone in February/March.
------------------------------
Stephane Foucaud, FirstEnergy Capital - Analyst [65]
------------------------------
Thank you.
------------------------------
Operator [66]
------------------------------
Your next question comes from Christine Tiscareno from SP Capital. Please ask your question.
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Christine Tiscareno, SP Capital - Analyst [67]
------------------------------
Thank you. All my questions have been answered.
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Operator [68]
------------------------------
Thank you. Your final question comes from Caren Crowley from Davy. Please ask your question.
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Caren Crowley, Davy - Analyst [69]
------------------------------
Good morning. Just a quick question regarding near-term growth initiatives and near-term corporate activity. Should we expect more farm-ins and participating in licensing rounds, as opposed to the deals similar to the Agora and Nautical acquisitions earlier on this year?
And again, I suppose it goes back to an earlier question, is the focus now more on, again, building up the exploration program and you're pretty happy with the balance of predevelopment assets that you have in there at the moment? Thanks.
------------------------------
Simon Thomson, Cairn Energy PLC - Chief Executive [70]
------------------------------
Yes, thanks for the question. I guess we'd never comment on whether or not we were considering any corporate activity. What I can reiterate, though, is that in the North Sea in particular we're very active in terms of whether it's new license applications, farm-in deals and so on, and that activity will just be ongoing within that portfolio.
And elsewhere, as Mike has indicated, there are a number of initiatives currently ongoing in relation to new acreage, bid round activity and so on that we hope by the end of the year, and therefore in February/March next year, we'll be able to provide you with more clarity on. We never rule out anything else opportunistically, but we wouldn't comment on it.
------------------------------
Caren Crowley, Davy - Analyst [71]
------------------------------
Thank you.
------------------------------
Simon Thomson, Cairn Energy PLC - Chief Executive [72]
------------------------------
Thank you.
------------------------------
Operator [73]
------------------------------
Your final question, from Sanjeev Bahl from Numis. Please ask your question.
------------------------------
Sanjeev Bahl, Numis - Analyst [74]
------------------------------
Hi. Just a quick follow-up question on Kraken. You've got a well scheduled for the first half of 2013. I was just wondering what the rationale of that well was. Is it appraisal or is it a development well?
And then, has [Keytoss] been pushed back to the second half, and why is that?
------------------------------
Mike Watts, Cairn Energy PLC - Deputy CEO [75]
------------------------------
Yes, good questions. It would be an appraisal well on Kraken.
Keytoss is an interesting -- at the moment, Cairn has 100% of Keytoss, and there is an agreement with EnQuest whereby they can farm-in and take equity. And that -- I think there was a deadline of September 24 for EnQuest to exercise that option, yes or no. So, it's not really certain until we know whether EnQuest are in or out, whether Cairn is going to remain the operator or EnQuest is going to take over the operatorship. So, there's some uncertainty on that particular prospect right now that'll be resolved this autumn.
------------------------------
Sanjeev Bahl, Numis - Analyst [76]
------------------------------
Apologies. Just to follow up on the Kraken appraisal question, why do you believe you need to drill another appraisal well on Kraken?
------------------------------
Mike Watts, Cairn Energy PLC - Deputy CEO [77]
------------------------------
I think the Kraken is a story where a number of wells have been drilled. They've all been vertical. And there was nothing very startling. Then last year, the 5Z well transformed the whole understanding. It was a 5,000-barrel-a-day test, could have been 8,000 barrels a day if unconstrained, with a horizontal well. So, I think there are parts of the field that need further appraisal. That's just the way it is. And I think what we view Kraken is a field with a tremendous amount of upside.
------------------------------
Operator [78]
------------------------------
There are no further questions. Please continue.
------------------------------
Simon Thomson, Cairn Energy PLC - Chief Executive [79]
------------------------------
Okay. Well, thank you all very much indeed for listening in. As ever, if there are any follow-up questions, please do get in touch. And David Nisbet's always the first point of call. Okay? Thanks very much indeed.
------------------------------
Jann Brown, Cairn Energy PLC - CFO & MD [80]
------------------------------
Thanks.
------------------------------
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