Gas-focused Neptune Energy boosted by hedging, but sees weak prices ahead

London — London-based Neptune Energy announced resilient second-quarter results cushioned by oil price hedging on Aug. 27, but warned of a slow recovery for gas and LNG prices.

Neptune, which has assets in the North Sea, Algeria and Indonesia and a bias toward gas in its portfolio, said it was succeeding in cutting its operating costs, with full-year costs estimated at less than $9.50/barrel of oil equivalent, down from $10.30/boe in 2019, and was on track with a planned reduction in full-year capital expenditure to $700 million-800 million, from $826 million in 2019.

The company's overall production was 3% up on the year in the second quarter at 150,000 boe/d, comprising a 12% drop in oil production to 37,000 b/d, a 1% drop in gas produced for sale as LNG, to 21,000 boe/d, and a 23% increase in gas produced for sale not as LNG, to 92,000 boe/d.

It achieved average realized oil prices of $41.50/b in the second quarter and average realized gas prices of $3.30/Mcf, thanks to its hedging.

Neptune had already announced a number of delays to North Sea projects it is involved in, including the redevelopment of Norway's Njord field, operated by state-controlled Equinor, and its Seagull UK oil project, but said it had continued with development drilling on other projects where it is operator, including Fenja and Duva offshore Norway.

On the price outlook, it said: "While oil markets have to some extent stabilised and prices are trading well above lows, LNG realizations are expected to decline in the third quarter due to lag effects in our contracts. A recovery in European gas prices is in the early stages, with prices expected to be higher in 2021."

The company said it was sticking with full-year production guidance of 145,000-160,000 boe/d, but output would moderate in the current quarter due to maintenance and restrictions on activity in Indonesia.

In Indonesia, work on the Merakes gas project, operated by Italy's Eni, is due to resume in October, with a shutdown of the Jangkrik host facility expected in January to enable final tie-in work, before the project comes on stream in April 2021.

The company also noted recent exploration successes in the North Sea, including the Dugong oil find, estimated at 40 million-120 million boe, and said it saw additional potential in the license area, although it gave no timeline for further work.

On the financial side, Neptune said its net debt had risen less than expected, from $1.5 billion at the end of the first quarter 2020 to $1.6 billion at the end of the second quarter, and it had been helped by a Norwegian tax break that temporarily speeds up reimbursement of capital spending and will apply to projects submitted to the authorities for approval before the end of 2022. It said the latter tax relief was prompting it to review potential investment options in Norway.

It had operating cash flow of $417 million in the first half, down from $613 million a year earlier.

It booked a financial impairment of $125 million in its results.

"The changes to the business we announced in the first half of the year will enhance our financial resilience, efficiency, effectiveness and adaptability, while retaining core capabilities and optionality for growth," CEO Jim House said. "This will result in a more focused activity set in the short term, but positions us better to still generate value, even in a lower commodity price environment."

Created in 2015, Neptune is owned by US private equity companies Carlyle Group and CVC Capital Partners together with sovereign wealth fund China Investment Corp, the latter with a 49% stake.

(Clarifies Neptune is operator of Seagull oil project in fifth paragraph)