Earnings Call Transcript - KOS Q4 2023

Operator, Operator

Good day, everyone. Welcome to Kosmos Energy's Fourth Quarter and Full Year 2023 Conference Call. As a reminder, today's call is being recorded. At this time, let me turn the call over to Jamie Buckland, Vice President of Investor Relations at Kosmos Energy.

Jamie Buckland, Vice President of Investor Relations

Thank you, operator, and thanks to everyone for joining us today. This morning we issued our fourth quarter and full year 2023 earnings release. This release and the slide presentation to accompany today's call are available on the investors page of our website. Joining me on the call today to go through the material are Andy Inglis, Chairman and CEO; and Neal Shah, CFO. During today's presentation, we will make forward-looking statements that refer to our estimates, plans and expectations. Actual results and outcomes could differ materially, due to factors that we note in this presentation and in our UK and SEC filings. Please refer to our annual report, stock exchange announcement and SEC filings for more details. These documents are available on our website. At this time, I will turn the call over to Andy.

Andrew Inglis, Chairman and CEO

Thanks, Jamie, and good morning and afternoon to everyone. Thank you for joining us today for our fourth quarter and full year results call. I'd like to begin today's call talking about our purpose as a company, which defines our strategy and the characteristics that make Kosmos unique. We'll then provide an update on our operational and financial progress in 2023, before looking forward to a catalyst-rich year ahead. Starting on Slide 3. At Kosmos, our purpose is clear. We are a leading deepwater independent E&P company, focused on meeting the world's growing demand for cleaner energy. With oil production from our low-cost lower carbon oil assets in Ghana, the U.S. Gulf of Mexico and Equatorial Guinea, we are providing the world with the energy it needs today. At the same time, we're developing cleaner sources of energy for the future through world-scale gas projects offshore Mauritania and Senegal. And finally, as we deliver the energy the world needs, we strive to be a force for good in the countries we operate in, accelerating economic and social progress across our host nations. We do this through growing production, which leads to increased revenues and royalties for the countries. We are also providing natural gas for domestic use in power generation, enhancing access to more affordable and more reliable electricity, while also investing in important social programs in our countries of operation. Turning to Slide 4. Kosmos has a unique investment case with a world-class portfolio, differentiated growth in the right assets and strong free cash flow outlook. Taking those three in turn; first, we have a diversified portfolio of world-class assets. This portfolio is comprised of advantaged oil assets today, characterized by production with low-cost and top-quartile carbon intensity. Alongside our oil assets, we're building out our advantaged gas position, which will lower the overall intensity of the products we sell. Importantly, the portfolio has longevity with a 2P reserves to production ratio of over 20 years with a deep hopper of discovered resources that can further extend the reserve line. Second, we have meaningful growth. We are targeting production rising to around 90,000 barrels of oil equivalent per day by the end of the year, in line with our 50% growth target from the second half of 2022. As part of that targeted growth, gas is anticipated to increase from around 10% of our overall production to around 25% over that period. Beyond that, we have a hopper of value-accretive growth opportunities such as Tiberius, Yakaar Teranga and Akeng Deep to support future growth, albeit at a more measured rate as we look to prioritize free cash flow and debt reduction. And finally, we expect to see significant improvement in free cash flow, as we move out of the current development phase with CapEx expected to fall with the start-up of both Winterfell and Tortue this year. With those projects online, we forecast quarterly free cash flow of around $100 million to $115 million at mid-cycle oil prices. We plan to prioritize the use of our future free cash flow towards debt pay down, until we achieve our leverage target, after which we'll consider shareholder returns. Turning to Slide 5, which looks at the first of the three characteristics that make Kosmos unique, the quality of our portfolio. We have a diverse portfolio of exploration, development and production assets across five countries in the Atlantic Basin, balanced between short cycle oil and longer-dated gas opportunities. The chart on the top right of the slide breaks out our reserve space. Our 1P reserves of around 280 million barrels of oil equivalent provides a 1P reserves to production ratio of around 12 years, weighted more towards oil. The quality of the portfolio is highlighted by the 1P reserve replacement ratio in 2023 of over 100%, which reflects the strong reserve additions at Jubilee, as we brought Jubilee Southeast on stream. On a 2P basis, we have reserves to production ratio of over 20 years, which is slightly more to gas than oil, demonstrating the direction of travel over the coming years with gas set to play a growing role in the outlook for the company. The chart at the bottom right of the slide shows the importance of the diversity in the asset base with all business units playing an important role in the delivery of the company's future. The 2C resource base, which includes some contribution from Yakaar Teranga as well as upside in Jubilee and Winterfell, gives the company a 2C reserves to production ratio of over 30 years with additional discovered resources beyond that such as Tiberius expected to extend the production life. Turning to Slide 6, which looks at our growth this year and beyond in more detail. The chart at the top shows the progress we're making towards our 50% production growth target. The Jubilee ramp up is already contributing a meaningful step-up following the Jubilee Southeast start-up last summer. This ramp up is planned to continue with five additional wells expected online at Jubilee in the first half of this year. First oil of Winterfell is expected early next quarter, an important milestone for our Gulf of Mexico business. After that, we are looking forward to the start-up of Tortue, which is expected to take the company’s production to above 90,000 barrels of oil equivalent per day. On the bottom half of the slide is our opportunity set beyond 2024. We have a balance of high-quality short cycle oil opportunities, such as Tiberius and longer-dated gas and LNG opportunities like Yakaar Teranga and Tortue Phase 2. Turning to Slide 7. As we deliver our current phase of development projects and then pursue selected investment opportunities, we expect more measured growth and our free cash flow profile to improve significantly. With a targeted 50% increase in production by year-end 2024, as measured against the first half of 2022, we expect our free cash flow to grow materially at mid-cycle oil prices. As these projects deliver, CapEx is expected to fall sharply. With Tortue and Winterfell online, we expect annual CapEx to return to a more steady state number in 2025 and beyond of around $550 million including maintenance and some further growth. With growing production and falling CapEx, we're reaching an important inflection point with quarterly free cash flow expected to be in the $100 million to $150 million range, once the current phase of developments is delivered. Turning to Slide 8. Supporting our strategic and operational progress is a continued focus on our ESG activities. Supplying the energy the world needs today and meeting growing future demand must be done in a responsible way that not only provides affordable and reliable energy, but also provides sustainable growth and benefits to our host countries. I'm proud of our progress in 2023. Starting with the environment, we continue to maintain carbon neutrality for our operated Scope 1 and 2 emissions. In 2023, we announced a near-term target to reduce by 25% our equity Scope 1 emissions in 2026 from a 2022 baseline and are making good progress towards that goal. Turning our attention to social, we aim to be a trusted partner and good corporate citizen in our host countries and here in the U.S. We continue to invest in our people and the communities we work in supporting a just energy transition that provides greater access to power in Africa. We continue to have 100% local employment in all of our overseas offices and we're again named the top workplace in both Houston and Dallas in 2023. We care deeply about the people who work for and with Kosmos and this is an important part of our success as a company. Lastly, governance. Kosmos has a very experienced and diverse Board with a wide range of backgrounds. This was further enhanced in 2023 with the addition of three new Board members that bring unique perspectives and new ideas that help continue to support Kosmos' growth. In summary, ESG credentials are a core part of our strategy. This commitment was once again recognized by MSCI, one of the leading ESG rating agencies, which ranked Kosmos AAA, the highest possible rating, which puts us in the top 20% of companies in our sector for the second year. Similarly, Newsweek and Statista named Kosmos one of America's most responsible companies for the fourth consecutive year. Our ability to effectively execute our strategy relies on our commitment and focus on operating responsibly. That commitment starts at the top with our Board of Directors down through leadership and to all of our employees and supports our ability to deliver long-term value to all of our stakeholders. Turning to Slide 10, a recap of our achievements in 2023. 2023 was another year of continued delivery. We continue to operate safely with lost time injury rates and total recordable injury rates significantly below industry averages, a trend we have maintained for several years. As discussed earlier in the materials, production is growing with fourth quarter production of 66,000 barrels of oil equivalent per day, up 12% year-on-year. Our development projects are progressing with Jubilee Southeast online and ramping up, Winterfell due online shortly and Tortue Phase 1 making good progress with start-up expected later this year. We continue to build out our future growth opportunities with the discovery of the operated Tiberius ILX prospect and by increasing our working interest in Yakaar Teranga and assuming operatorship. As discussed on the previous slide, our continued ESG focus was recognized by MSCI, as we maintained our AAA rating. I'll now let Neal run through the financial results for the quarter and the year.

Neal Shah, CFO

Thanks, Andy. Turning to Slide 11. Production for the year was in line with the updated guidance we provided last quarter with 4Q production at the lower end of the range due to the water injection issues that Jubilee flagged earlier. These issues have now been resolved and Andy will give an update on current operations in Ghana shortly. OpEx for the quarter was higher than anticipated due to higher workover costs for the initial rig activity in Equatorial Guinea before the operator terminated the rig contract for safety issues, which we'll also talk about in more detail shortly. Other costs including DD&A, G&A and tax all came in below guidance, helping to drive today's EPS beat versus consensus. We did record an impairment to 10, reducing the carrying value down to zero, reflecting an anticipated reduced activity set together with well performance. Positive 1P reserve additions at Jubilee more than offset the downward revision to 10 1P reserves during the period. While we still see future potential value at 10, both in oil and gas, the realization of that value is contingent on the approval of the plan of development and the activity set has to compete for capital with other opportunities we have in the Kosmos portfolio. CapEx for the quarter was higher-than-expected, largely due to the timing of inventory related to the EG drilling program. Inventory arrived earlier-than-expected and therefore was recognized as CapEx in the fourth quarter. I'll now hand it back to Andy to go through the outlook for the year ahead.

Andrew Inglis, Chairman and CEO

Thanks, Neal. Let's turn to Slide 13. 2023 was a pivotal year in Ghana with the start of a Jubilee Southeast with more to come in 2024. Full year guidance from the operator for Jubilee and TEN is around 116,500 barrels of oil per day gross, which equates to around 40,000 barrels of oil per day net to Kosmos with a further 6,000 barrels of oil equivalent per day net of gas. At Jubilee, operator guidance is for 100,000 barrels of oil per day gross for the year, with production expected to grow through the year as new wells come online. So far, one water injector and one producer have been brought online in 2024. A second producer well is expected online imminently and that should take Jubilee production back above 100,000 barrels of oil per day gross with two additional wells due online thereafter. In addition to the infill drilling program, our focus with the operator this year is on management of the production base, targeting 100% voidage replacement. We've had a good start to the year injecting record levels of water into the field and plan to continue optimizing injection support this year. As production rises, the reduction in OpEx per barrel we saw last year should be maintained, as the partnership continues to drive through efficiencies and fixed costs are spread over more barrels. On gas, the interim gas sales agreement for Jubilee has been extended through the end of May at around $3 per MMBtu. On TEN, operator guidance is around 16,500 barrels of oil per day gross through 2024. On the TEN plan of development, we are awaiting government approval and therefore have not planned any major activity on the field this year. Turning to Slide 14. In the Gulf of Mexico, 2024 is expected to be another busy year. Full year guidance is 15,500 to 17,000 barrels of oil equivalent per day net and includes our estimated hurricane downtime in the second half of this year. Starting with our production optimization activities, the Odd Job subsea pump project is on track to start-up mid-year with the Kodiak workover planned around the same time. Both of these are high-return projects, which should accelerate future production. On which both first oil from the first phase of development is expected in early Q2 with two wells expected online in the second quarter and a third expected later in the year. The project has gone well so far with the first two well tests in line with expectations. And we remain excited about the future potential of the Greater Winterfell area. On the Tiberius discovery where Kosmos is the operator, we have received the lab analysis of the rock and fluid samples, which supports the production potential of the development wells and is in line with analog wells in the Wilcox. We're now progressing a phased development solution with a subsea tieback plan to the Lucius platform 6 miles away. Lucius is operated by Oxy, a partner in Tiberius. FID of Tiberius is expected later this year with a development timeline of 18 months to 24 months, similar to Winterfell. On the map on the bottom right of the slide, in lease sale 261, Kosmos and Oxy added the block to the west of Tiberius and two blocks to the southeast, which contain the Logan discovery. These adjacent and nearby blocks provide additional near-field upside beyond the Tiberius discovery and can support the phased development of the Greater Tiberius area. It's an exciting time for our Gulf of Mexico business with expected near-term production increases from Winterfell and our production optimization activity to be followed by an operated Tiberius development providing the next leg of growth. Please turn to Slide 15. The next will be Guinea. Based production continues to be steady, with full year production guidance of approximately 8,000 barrels of oil per day net. This guidance does not contain any contribution from the planned infill drilling campaign, which has been deferred after the operator terminated the rig contract due to safety concerns. Kosmos fully supports the operational decision and will not compromise the safety of operations. The partnership is now evaluating alternative rig options that would allow for the infill drilling campaign to recommence later in the year followed by the Akeng Deep infrastructure exploration well. We'll update the market with news on a replacement rig when appropriate and have included potential CapEx assuming the resumption of the EG drilling program in the high end of our CapEx range. Turning to Slide 16. On Tortue Phase 1, the key work streams continue to progress. The hub terminal is complete and has been handed over to operations. The floating LNG vessel has arrived on location. The mooring is now complete, and connection to the hub terminal is now ongoing. Golar continues to work with the operator to advance commissioning. Subsea work scope is progressing in line with expectations with completion expected by the end of the second quarter. And finally, the FPSO is currently in Tenerife for the planned inspection and repair of the fair leads. Following completion of this work, the vessel will then move to its location at the field early in the second quarter and begin final hookup and commissioning activities. The FPSO remains on the critical path for first gas, which is expected in the third quarter of 2024. Elsewhere on Tortue, we expect to have a ruling on the arbitration regarding future cargo optimization around the middle of the year. In addition, BP on behalf of the partner group has served the previous subsea contractor with a claim notice and initiated the process under its agreement to recover the losses incurred. We estimate our net share of the potential recoverable damages to be up to $160 million. As Tortue progresses towards first gas, we look to bring in a partner on Yakaar Teranga; industry interest in the assets has risen. This may provide an opportunity in the future to crystallize some value from our gas portfolio and accelerate our financial resilience. With that, I'll hand back to Neal to take you through the financial outlook.

Neal Shah, CFO

Thanks, Andy. Turning to Slide 17. As Andy mentioned, we remain focused on enhancing the financial resilience of the company as production rises over the coming months and CapEx falls. In 2023, we repaid the Gulf of Mexico term loan, which means we have no debt maturities this year. On the RBL, represented by the dark blue blocks on the chart, the refinancing process with our bank group is going well with completion expected in the first half of the year. The aim is to push out maturities by approximately three years, which would push the final maturity to almost 2030. On leverage, we exited 2023 at 1.9x and have a long-term target of 1.5x or below at mid cycle for oil prices. With CapEx anticipated to be higher in the first half of this year, the cash generation we expect once production is ramped up should come through in the second half of 2024 and would be used for debt pay down. Leverage should then start to fall quickly towards our target. Turning to Slide 18, our capital allocation priorities for the year. CapEx for full year 2024 is expected to be $700 million to $750 million, just over a third of which is maintenance CapEx. Growth CapEx is anticipated to be around 60% to 65% of 2024 total primarily related to completing Winterfell and Phase 1 of GTA, which does include some duplicative subsea costs incurred as a result of the switch in subsea contractors made last year. We hope to recoup this through the recovery of damages from the process mentioned earlier. Looking beyond 2024, we expect normalized annual CapEx to be around $550 million with around $300 million to $350 million in maintenance CapEx and $200 million to $250 million of growth CapEx. As CapEx falls and free cash flow increases, we have three clear priorities; first, enhance our financial resilience. As noted on the previous slide, we want to get absolute debt and leverage down sharply, and this will be the first call on free cash flow generation. Second, we want to invest selectively in compelling opportunities. We support the continuing growth of the company, albeit at a lower rate than what we expect in 2023 and 2024. And third, when leverage is in the right place, we will look at shareholder returns. I'll now hand back to Andy to conclude today's presentation.

Andrew Inglis, Chairman and CEO

Thanks, Neal. Turning now to Slide 19. 2023 was a year of continued delivery for Kosmos. We achieved a lot with production growing through the second half of the year as the first of our major development projects came online at Jubilee Southeast and we remain on track to achieve our production growth target by the end of this year. We made a Tiberius discovery and we took over operatorship of Yakaar Teranga. 2024 is a catalyst-rich year with Jubilee ramp up and Winterfell first oil both expected in the coming months. Later in the year, first gas from Tortue will be a major milestone for both the company and the countries of Mauritania and Senegal. Rising production and falling CapEx drive strong cash generation through year-end into 2025, with rapid deleveraging towards our target debt levels. The Kosmos team is excited about the year ahead and energized to deliver on our strategic objectives. Thank you. I'd now like to turn the call over to the operator to open the session for questions.

Operator, Operator

Our first questions come from David Round with Stifel. Please go ahead with your questions.

David Round, Analyst

I have a couple of questions, please. First, Andy, you mentioned potentially crystallizing value from the gas portfolio. Could you elaborate on what you meant by that? Are you actively looking into it or is it mainly related to potential income in Yakaar? My second question is about the recent pause in U.S. LNG export approvals. Has that affected any conversations you’re having or impacted any of your future assumptions, or is it too early to tell?

Andrew Inglis, Chairman and CEO

It seems to be time for Kosmos in Mauritania and Senegal as we advance our broader agenda. As I mentioned earlier, the first gas from Tortue is now within reach. We're making significant progress with PETROSEN on the Yakaar Teranga concept. I'm also pleased to report that we're advancing discussions with the national oil companies and BP on a concept to expedite Phase 2 ahead of BP's previous timeline. When you consider all of this, we are building a substantial LNG business that is emerging at an opportune moment when the long-term value of gas is gaining recognition and its role in the energy transition is being highlighted. The external context is evolving, and there is currently a pause in U.S. LNG, which I believe is a factor in the increased valuation of new gas sources. Today, you've seen us take a step forward with our announcement regarding the expansion of our business. There are likely both positives and negatives on the supply front, but one thing is clear: future supply is becoming very concentrated, making new sources of supply that offer diversification more valuable for customers. We have generated interest in Yakaar Teranga, and as stated in our third quarter results, we are actively seeking a partner with the right skills and resources to assist us in making progress, and that remains our top priority. While discussions around Yakaar Teranga are ongoing, there are interested parties who may want a larger stake that includes our other assets in Mauritania and Senegal. We will consider this as part of the process for bringing in a partner for Yakaar Teranga. The reason for this is that it would allow us to advance our strategic agenda more rapidly. We are looking forward to growth and have a wealth of opportunities, but we need to determine the right working interest for that. We're also exploring alternative means to enhance the resilience of our balance sheet, which would enable shareholder returns. Therefore, we see this as another avenue to achieve our goals. It's still early days, with discussions primarily focused on Yakaar Teranga, where we will complete the pre-FEED and then initiate that process. However, if a larger deal involving Tortue becomes an option, we would consider it for the reasons mentioned.

Operator, Operator

Our next question has come from the line of Neil Mehta with Goldman Sachs.

Neil Mehta, Analyst

The first question is just about the free cash flow inflection. You talked about $100 million to $150 million a quarter once we get to run rate. Can you talk about what pricing set that's under? And just as you think about going into 2025, as you get to this major free cash flow inflection, what the priorities for cash are in terms of where we go from here?

Andrew Inglis, Chairman and CEO

Yes, let Neal address the question regarding the metrics that drive this. It's crucial to recognize that 2024 is a significant year as we complete the two major projects, Winterfell and Tortue, which will lead us to a free cash flow inflection point. Successfully delivering these projects is a key milestone for the company. It will enable us to strengthen our balance sheet, reduce debt, and subsequently focus on shareholder returns. Additionally, this progress allows us to maintain growth, although it will be at a more measured pace compared to the past two years. As we move through 2024, 2025 will focus on balancing the prioritization of free cash flow for debt repayment while also facilitating growth, albeit at a slower rate. Neal, could you provide the fundamental metrics that support the free cash flow?

Neal Shah, CFO

Yes. Based on our current estimates, it's around $70 for WTI and approximately $75 for Brent.

Neil Mehta, Analyst

And then as we think about 2025, couple of cost structure questions. One is, is it fair as a placeholder to be using something in the $550 type of CapEx range recognizing you'll put some more meat on the bones here in the next couple of months? And then, I saw in the footnote that you talk about operating costs $115 million to $130 million for Greater Tortue. Is that the right run rate CapEx once the project comes online?

Neal Shah, CFO

Sorry, I'll cover your second question first, Neil. Just on the operating costs. Yes, I mean, I think it will be slightly higher because that's sort of phased over time as the development ramps up and we'll get this year, there's a couple of moving parts in terms of the ramp-up, commissioning costs, et cetera. So it'll be a little higher than that on a regular basis, but the per metric, barrel metrics, per BCF metrics will look more attractive on that basis, on a 25 in regular run rate going forward. And then just sorry, what was your first question again, Neil?

Neil Mehta, Analyst

It's just Neal. What do you think of CapEx for '25 rough roll with them recognizing you're going to have?

Neal Shah, CFO

Yes. And again, I think as we said on the call, so the $550 million is what we're targeting for the next several years, including 25 beyond. So I think it's a good sort of number to have penciled into your models.

Andrew Inglis, Chairman and CEO

And that number basically underpins sort of maintenance CapEx of about $300 million to $350 million on a long-term basis and then growth of sort of $200 million to $250 million. So much more measured growth and ultimately at $550 million long-term CapEx, you can sustain that free cash flow of $100 to $150 per quarter.

Operator, Operator

Our next question has come from the line of Matt Smith with Bank of America.

Matt Smith, Analyst

First question on the capital allocation front. Thanks for laying out the detail in the presentation. I think the inflection point is clearly an important one for Kosmos. I guess I just wanted to come back. Is that $550 million CapEx an indication of sort of a steady state or is it firm commitment from Kosmos? Because I think it's clear that you're very opportunity-rich. I mean, it's great to see that sort of Phase 2 of Tortue you might be coming back onto the table sooner than previously anticipated. And you talked about Yakaar Teranga as well. I guess, I just want to understand whether, say, the $550 million is an indication or really whether that's a commitment to shareholders that sort of whatever the plan, whatever the working interest that's the sort of level of CapEx that you're going to be comfortable spending over the next few years? I just want to sort of understand where the priority is really on that, if that's okay? And then the second question would be on the FPSO in terms of Tortue. I think really confirming the news that we've heard elsewhere in terms of the delay in first gas to the third quarter now? I just wondered whether you'd be able to talk about confidence intervals that you have in terms of reaching that milestone this time around, please.

Andrew Inglis, Chairman and CEO

If I address the capital allocation for 2024, it's a significant year for us as we continue to see growth from projects like Jubilee Southeast, Winterfell, and Tortue. Looking ahead, we indeed have a strong portfolio, and it's crucial for shareholders to know that we're selective with the projects we choose to pursue. We have options regarding timing, phasing, and levels of participation in these projects. Having this portfolio is beneficial, particularly since we have increased control through our operatorship, and we aim to work within a structure that fosters long-term growth. As I mentioned earlier, the pace of growth will be more cautious compared to the previous two years. However, the Kosmos portfolio remains robust, carrying a long-term value, which we must balance with delivering the free cash flow that our shareholders expect. Our first priority will be to reduce debt, and once we achieve our leverage targets, we will focus on returning value to shareholders. We are maintaining a framework of $550 million, confident in our ability to sustain base production, which is crucial in regions like Ghana, the Gulf of Mexico, and Guinea, allowing us to invest $200 million to $250 million in selected growth initiatives. This outlines our financial goals moving forward. Regarding Tortue, concerning the FPSO, we have made significant progress recently. Earlier this quarter, we completed our drilling and finished the hub terminal. Now, the vessel from Guinea has arrived at the hub terminal, where it is currently being connected for gas and offloading processes. The subsea developments are also progressing well, with All Seas announcing the completion of deepwater pipelines installation, reaching a major milestone. Remaining work includes the installation of jumpers, expected to conclude by the end of the second quarter. As for the FPSO, preparations and inspections are underway at the Tenaris shipyard, and repairs to the fair leads have been found to be relatively minor. The FPSO is expected to leave at the beginning of next quarter to be positioned, followed by the mooring and hook-up operations. This timeline aims to achieve the first gas in the third quarter, followed by LNG in the fourth quarter. Thus, the critical path remains focused on the FPSO. The operator's commitment to this project is strong, and achieving milestones during this extensive process helps to mitigate risks as we progress throughout the year. We have made considerable advancements in the last three months and anticipate further milestones ahead.

Operator, Operator

Our next questions come from the line of Charles Meade with Johnson Rice.

Charles Meade, Analyst

Andy, I have a question about EG. I think you mentioned in your prepared comments that the upper end of your guidance assumes the return of a rig and some work being completed in 2024. Could you share the likelihood of that happening? Also, do you need a special type of rig to carry out that work, or is it a more standard requirement that has a higher chance of occurring?

Andrew Inglis, Chairman and CEO

Yes. I think it's a bit early to provide detailed insights on that. We are currently reaching out to the market to assess available rigs. The specifications for the rig are not different from what a fixed generator can accomplish today. The key factor is that it needs to be completion ready, as we are currently drilling and completing infill wells. Additionally, if we go deeper, it will simply be an exploration well. So, it’s too soon to pinpoint exactly how this process will unfold. However, we aimed to ensure our guidance was clear and comprehensive. We haven't factored in any contributions from the infill program into our production guidance, but we have accounted for a potential outcome of the rig being part of our activities in 2024. I believe that is the right way to approach the situation now. We will keep you updated as we progress in our discussions with the market regarding available rigs.

Charles Meade, Analyst

Can you provide an update on the new proposed work scope submitted to the government for TEN in Ghana? What is the timeline for its approval and implementation? Additionally, what impact might it have on production in that field or related fields?

Andrew Inglis, Chairman and CEO

The write-down on TEN was primarily due to a couple of issues. Firstly, the recent well performances did not meet our expectations. Secondly, we need government approval for the future work program. Currently, we haven't planned any significant future projects in TEN. If we do receive a breakthrough on the plan of development, the associated capital expenditure would have to be justified within the capital framework we discussed earlier. I feel comfortable with our current position. However, predicting when the plan of development could be approved is challenging, especially with the upcoming election year in Ghana, which adds uncertainty to timelines. It's essential to note that we have a rich set of opportunities in our portfolio, particularly in Equatorial Guinea, the Gulf of Mexico, and Jubilee in Ghana. This year, our reserve replacement ratio of 104% was largely driven by Jubilee's performance, offsetting the decline in TEN. Jubilee is a significant field that is poised for expansion, and I see us prioritizing capital investment there. For now, TEN is on hold, and I am fine with that. Our focus is on allocating our base capital to the best opportunities, and Jubilee is definitely a top priority.

Operator, Operator

Our next questions come from the line of Bob Brackett with Bernstein Research.

Robert Brackett, Analyst

Returning back to the GTA FPSO and the issue around the repair of fair leads. Has that FPSO been turned over from the contractor to the operator? Is there some sort of recourse in the same way as say Tortue issues, Jubilee or even the pipeline vessel issues? Will you go back to that contractor and say you didn't deliver the FPSO on time and on scope?

Andrew Inglis, Chairman and CEO

The detailed answer to your question is it has not been turned over. So I think which ultimately answers your subsequent questions.

Robert Brackett, Analyst

And an easy follow-up, contrast the challenges around GTA with sort of the process of getting Winterfell up and online in the Gulf of Mexico and talk to your relative conviction there?

Andrew Inglis, Chairman and CEO

You just walk us clearly in the different scale and you're doing something which is sort of establishing a first phase of a larger project with GTA. It is a greenfield project. It's got both got wells. It's got an upturn or it's got an LNG facility and it's got an FPSO. So yes, multiple segments of the project. Winterfell much more simple sort of tieback. It's in a basin that has the supply base and therefore access to equipment easier and its well subsidy tie back to an existing facility. So, just an ultimate different order of magnitude. And I think it's a great question because it sort of brings you back to the fundamentals of the company. We're investing in short cycle, fast payback ILX type opportunities on the oil side that deliver very different economic outcomes and actually risk profiles. But you create the longevity for the business in terms of building out a gas business. Now, we're having established Tortue Phase 1 and Phase 2 is a brownfield, it comes with a very different execution risk. So, it's hard to get started and I think we clearly struggled with Tortue to get it there. But with the end in sight, the next phase is Tortue has got a very different risk profile. So, relative confidence in which we'll study up, yes, it will be at the beginning of the quarter, flow back both of the wells, it will be accompanying that with the third well to follow. And actually, the interesting thing about Winterfell is not just that first phase of development, its subsequent phases. I think it will be ultimately be a much larger resource pool. So it's got not only a short cycle front end to it, but it has that development opportunity to follow-up.

Operator, Operator

Our next questions come from the line of Subash Chandra with Benchmark Company.

Subash Chandra, Analyst

Can you confirm if Tortue volumes are included in the '24 guidance?

Andrew Inglis, Chairman and CEO

Neal, do you want to cover that?

Neal Shah, CFO

Yes, we are assuming it aligns with the detailed guidance presented, which indicates some entitlement volumes in the third quarter and then approaching the full rate in the fourth quarter. This translates to approximately 2,000 to 3,000 barrels a day of BOEs net based on the forecast. While this won't impact the full year average, it does get close to the full rate in the fourth quarter.

Subash Chandra, Analyst

I was just curious, is the OpEx included in the guidance? I was a bit confused about the footnote compared to the guidance for the year.

Neal Shah, CFO

Yes. So the OpEx, so it's not included in the per barrel metric. So the per barrel is basically on the base business with the OpEx just for the MS portion.

Andrew Inglis, Chairman and CEO

The reason we've done that is because as we transition from the project phase to operations, there is a significant commissioning element involved. Therefore, the total figure accounts for this transition, including some of the commissioning costs as well as the operating costs related to the field as it becomes operational.

Subash Chandra, Analyst

And finally, I guess, just apples-to-apples for CapEx last year versus the '24 guide, how much cap interest is included?

Neal Shah, CFO

It's about $25 million a quarter, Subash. If we look at the guidance, we're only assuming it happens in the first half of this year and then goes away in the second half of the year. So interest is why we have the $25 million in contrast to the full year $150 million guide.

Subash Chandra, Analyst

And so last year, was that $100 million of cap interest?

Neal Shah, CFO

Exactly. It's about the same, yes, annualized.

Operator, Operator

Our next questions come from the line of Matt Cooper with Peel Hunt.

Matt Cooper, Analyst

So just firstly, I wonder if you could comment on the current Jubilee production rate and other two wells brought online in 1Q performing per expectations.

Andrew Inglis, Chairman and CEO

Yes, Matt, regarding Jubilee, the main points to consider are that the year's performance will rely on two key factors. The first is maintaining the base, which involves voidage replacement. We faced challenges in this area during the third quarter of last year, but since about November, we've been injecting water at unprecedented levels, achieving 100% voidage replacement. Prior to that, our rates were as low as 40% when water injection was reduced. I'm optimistic about the base's performance as we start the year and have seen positive results in the first two months. Additionally, we've added more well stock, including one water injector and one producer. In fact, today, we're bringing online a second producer. Once that is operational, our production will exceed 100,000 barrels per day, which is a significant milestone for us. We're also planning to add two more wells: an additional producer and an injector. As we assess this year and its performance, I believe the wells have performed well. The operators are likely to complete the wells six months earlier than expected, which is why we're considering a break sooner to allow for rebuilding. Ultimately, our focus remains on water injection and the voidage replacement that supports this pace.

Matt Cooper, Analyst

And just to confirm. So those first two wells, I think you said they went in early 1Q. The injection and the production that you're seeing from those is in line with expectations at the moment?

Andrew Inglis, Chairman and CEO

Yes, it's in line with expectations. The base is likely a little better than what we observed, but fundamentally it aligns with our expectations. With the second producer starting up now, our goal is to exceed 100,000 barrels a day, and that's what we anticipate. The start of the year has been solid. The key focus for us is to ensure that the base is properly supported.

Matt Cooper, Analyst

Just finally, I just wanted to ask on EG. I wondered how much strip in the infill drilling out reduced 2024 production? Just kind of thinking about how much upside there could be there if you do procure a rig this year? And then kind of the flip side, about how much risk is there that the new rig will be at a higher cost?

Andrew Inglis, Chairman and CEO

Yes, Neal will revisit the production numbers. The other contract was likely negotiated at a more favorable time in the market, so we might expect a slightly higher rig rate. However, while it's often treated as a key figure, it's important to remember that it represents only about one-third of the overall spread rate cost. Therefore, even a small increase gets less significant in that context. Additionally, we need to consider how to minimize non-productive time. As a result, the absolute well costs will increase. So, while we will see a somewhat higher rig cost, it won't substantially impact our capital guidance or the economics of the wells.

Neal Shah, CFO

Then just on the production, the guidance we have for EG is around 8,000 barrels a day net for the year. If we drill as planned, we could get closer to 11,000. That gives us about a 3 million barrel a day impact. There is potential for some upside if we end up drilling this year, but that is not included in the base guidance.

Operator, Operator

Our next questions come from the line of Mark Wilson with Jefferies.

Mark Wilson, Analyst

Can you clarify the catalyst for this year and the capital expenditure after completing Tortue? Specifically, could you share insights on the physical work related to the $550 million annual budget and its maintenance allocation? Are you anticipating an ILX well in the Gulf of Mexico each year starting in 2025, considering the successes with Winterfell and Tiberius as part of that capital expenditure? Additionally, are you planning to bring a rig back to Jubilee in 2025 and thereafter?

Andrew Inglis, Chairman and CEO

So if you sort of conceptualize it yes, if you look at the base and the maintenance of the base, we're looking at three quarters of a rig year in Jubilee. Now clearly, as it were that being sort of rollover. So yes, the rig would return in '25, might be drilling '26, and then a break and so on. Yes, if you sort of figure it out that there's probably three quarters of a rig year that makes sense, whereas actually this year, we'll have sort of half of a rig year in Ghana. So yes, it does include that. It includes a similar sort of drilling program in Equatorial Guinea going forward, sort of, yes.

Neal Shah, CFO

Yes, but once every 18 months.

Andrew Inglis, Chairman and CEO

About once every 18 months and maybe a package of sort of three wells. Those are the primary base pieces. Then in the Gulf of Mexico, yes, probably at a sort of 30% working interest sort of one ILX well per year. We sort of run the $20 million or $30 million. That would be in the growth pre-sell.

Neal Shah, CFO

That would be in that $200 million to $250 million of growth versus the $300 million to $350 million in maintenance, which really cover the Jubilee EG and occasionally some GoM maintenance drilling.

Andrew Inglis, Chairman and CEO

I would like to confirm that all the physical aspects for the startup have been addressed. Are there any commercial arrangements that need to be finalized before the first LNG delivery? Additionally, what are the expected outcomes or impacts from that? You mentioned that the contractual discussions should be completed by mid-year. What should we anticipate regarding that timeline? Yes. The timing of the arbitration for the cargo divisions is expected to be around mid-year, with the hearing taking place in the second quarter. Typically, a ruling is received a couple of months later, so likely around mid-year. In terms of the contractual arrangements, they will not hinder the project's completion; rather, it is the execution of the physical work that is driving the timeline.

Mark Wilson, Analyst

There was a question during the call about any updates on Phase 2 and how it compares to other projects in Senegal or the long-term timeline.

Andrew Inglis, Chairman and CEO

As we've said in the past, Phase 1 is about building out the infrastructure. I think what I would say is there's a real push from the NOCs to find the right next concept for Phase 2 that fully utilizes the infrastructure that's been laid in and that is a new conversation that's occurring now with the NOCs. So partly, on the back of the work we're doing on the Yakaar Teranga, both SMH and PETROSEN are interested in seeing how we can accelerate the timeline for Phase 2; it's clearly in the country's interest and actually is the interest of the partnership ahead of the day that BP had previously guided. So that's the conversation that's going on there, Mark.

Operator, Operator

Thank you. Since there are no further questions at this time, I want to bring the call to a close. Thanks to everyone joining today. You may disconnect your lines at this time and thank you for your participation.