Full transcript of Nov 23 call with AnalystsBankers Petroleum Ltd M&A/Other Business Update Call
Event Date: 11/23/2015
Company Name: Bankers Petroleum Ltd
Event Description:Business Update Call
Source: Bankers Petroleum Ltd
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Business Update Call
MANAGEMENT DISCUSSION SECTION
Operator:
Good morning. My name is Heather, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bankers Petroleum Tax Assessment Update Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, we will have a question-and-answer session.
I will now introduce your conference leader, David French, President and CEO. You may begin your conference.
David Lawrence French:
Good morning and thanks for joining our tax assessment update call this morning. We thought it was important to keep the Street updated as all information is available. Subsequent to our announcement on Friday, the ICC, International Arbitration Court Tribunal, has granted Bankers' request for a stop order, ordering the Albanian Tax Department to reverse its attempts to collect the announced tax assessment which includes revoking its suspension of the Company's Albanian bank accounts. This stop order will remain in place until the ICC Tribunal decides otherwise.
The next step in the ICC Tribunal process will be for Bankers to submit an application later today for a longer term injunction which will be heard by the ICC Tribunal in due course. The company's operations were not interrupted by last week's events, and they continue as usual in Albania. The ICC Tribunal's involvement supports the independent handling of this process in accordance with applicable international principles.
As previously announced, Bankers, the Albanian National Agency for Natural Resources, AKBN, and the Albania Minister for Energy agreed to seek a third party international audit firm to resolve the Company's eligible cost recoverable expenses in 2011, which were under dispute by the AKBN. This process continues as expected and in line with the terms of reference agreed to at the end of September.
It has been agreed upon by both parties that Deloitte carry out the third party audit, which is expected to be completed over the next couple of months in parallel to the ICC injunction process. We will keep the market briefed if there are any major changes to the current plan. We expect the third-party international audit process to run its course and to reach agreement between the parties. The ICC process simply allows this effort to occur without interference and gives a backstop if it doesn't work, which is exactly what we discussed with the Street.
In addition to today's announcement, we would like to take this opportunity to address some questions that unfortunately appeared to be circulating in the marketplace last week. There was the question of the difference between disputed expenses for cost recovery as they did an AKBN audit of $251 million and the $57 million tax assessment.
The AKBN audit dispute asserts that $251 million to both capital and operating expenses spent in 2011 may not be eligible as a cost recoverable expense. Bankers denies such claim and will demonstrate via the third-party international audit how those expenses were accounted for in our petroleum operations as allowed for by the stated definition of a cost recoverable expense in our petroleum agreement.
The actual tax assessment is a premature calculation by the tax department asserting that if AKBN's arguments were to be true, Bankers would have fully utilized its 2011 cost recovery pool balance of over $200 million and be subject to an additional $57 million profit tax assessment, plus the recent additional assessed interest and penalties.
To be clear, the $250 million cost recovery matter is not a separate potential tax liability to Bankers. Instead, it is simply the amount of allowable costs that must be resolved first between the parties before any assessment of profit tax for 2011 can be made.
Second question, there was a question of what the deferred tax line in financial statements actually represents. In Bankers' financial statements, we mention a deferred tax liability line item which represents a provision for future tax dollars to be paid based on the existing cumulative oilfield investment.
When the company reaches a profit tax payable position, which is currently projected to be between 2018 and 2019, the profit tax paid at that time will primarily be representative of the deferred tax position. This provision is subject to future capital requirements, and payment is based on our balance at that time of capital and operating cash once we're in a profit taxpaying position.
Third question is there was a question of whether there are any subsequent audits. While it can be expected that further cost recovery audits will run their course for the following years, 2012 to 2015, Bankers has not been notified by the AKBN of any additional tax assessments for those years. It's worth noting that for the very same type of audit conducted for prior years, no more than 3% of eligible expenses were contested by the AKBN, the majority of which were less than 0.5%.
Also, the methodology of the third-party audit will set a good example for how to think about our petroleum costs and ease future audit disputes since our typical operations are repeated with high frequency. Over the past 11 years, Bankers has worked hard to become a major contributor to the Albanian economy, representing a 20th of the GDP of the country.
The government's fiscal take is roughly 50% of our net operating income. And to be clear, Bankers has paid over $500,000 million in taxes. Those taxes are just labeled differently, such as royalties and excise tax as opposed to the current disputed profit tax. We are very proud of our history and contribution to the country. I recognize this has been a difficult series of days for investors.
We operate a world-class asset with a leading operating cost structure and a capital plan that continues to bear fruit even in tough prices. We firmly believe that this audit process should and will reach resolution with AKBN and bring about a dialogue to allow both parties to get back to normal development of the field.
Bankers has operated in Albania for 11 years and has three interactions with the government over fiscal terms, 2008 and 2013 over fiscal structure, and this year's tax review. In both earlier instances, the parties disagreed, worked through a commercial solution and then got back to work. We believe this instance will be no different.
We are now open for questions.
Q&A
Operator:
Your first question comes from the line of Christopher Brown with Canaccord. Your line is open.
<Q - Christopher Brown>: Thank you, guys, for taking our questions. I'll just leave it to two questions and let others ask further questions. My first one has been one that was of a circulated rumor I'd like Bankers to address, having to do with are there any aspects of this audit that involve fraudulent claims or claims that are not accounted for by Bankers or unusual claims that you have not submitted before?
I have my opinion on this, obviously, because I'm very trusting of the management of submitting only appropriate capital cost claims in their tax recovery. But could you just make a company statement towards that if there's any criminal aspects of this investigation or is it solely just on the tax side?
<A - David Lawrence French>: Doug, I'll let you take that. I know how strongly I believe about this, but I'll let you speak from a CFO's role.
<A - Douglas C. Urch>: Certainly. Yeah. Morning, Chris.
<Q - Christopher Brown>: Good morning.
<A - Douglas C. Urch>: Yes, I could certainly clarify that there are no issues involved at all with fraudulent issues of these claims. These are the same type of costs we've been incurring over the prior years of capital and operating cost.
<Q - Christopher Brown>: Fantastic. Thanks for that, Doug. And then second, so the claims they're disputing seems to be essentially your entire 2011 CapEx budget, capital program. So this would assume that the particulars of this review are like drilling costs, completion cost, the basic tax, the recoverable ones that you would have on any international contract globally. Are these the same ones that they're disputing, they're drilling down to saying that your drilling costs are not even submittable for recovery?
<A - David Lawrence French>: So I'll speak first and I think I'll turn it over to Doug. I guess in my view, Chris, I'm in the same place you are and that, to be honest, a very significant portion of the expenses for 2011 are disputed in this. So you can imagine, it's pretty much all expenses associated with the finding, developing, producing and selling hydrocarbons in Albania. So, we feel very comfortable that if you look at the definition of hydrocarbon cost, that once this is looked at by an international auditor, we feel comfortable that those will be viewed as very typical and regularly recurring operations costs.
I don't know, Doug, if you want to add anything to that.
<A - Douglas C. Urch>: Yeah. What I'll add to that is just that these are the same types of cost that we've incurred in prior years, and it's the same drilling program and operations philosophy. I would like to add, though, that it does represent the pre-approved program that was already agreed to by the Albanian authorities and AKBN inclusive back at the end of 2010. So this does represent the continuation of the programs we'd already put in place.
<Q - Christopher Brown>: Okay. I apologize, just one additional question on that then. Would that imply that - was this a change in the people involved in the Albania tax authority that there are new people in place than others than previous years, that's probably leading to some of the lack of understanding on their part?
<A - David Lawrence French>: That's exactly right, Chris. So you got to realize this was the first audit conducted after the change in departments post the Rama administration. So, you had new heads of departments as well as new heads of audits in each department. So, the reason why we're excited about or we think the ability to bring in international auditors and look at our costs from a perspective of an operating company that is familiar with operations of this type is that it will give opportunity for us and for them to really understand how the definition and the taxonomy and the terminology works for our business. I think it'll be very constructive for both sides.
<Q - Christopher Brown>: Okay. Well, thank you very much for taking my question and thanks again for hosting the conference call for clarity. And I'll hop off for others to ask additional questions. Thanks.
<A - David Lawrence French>: You bet, Chris.
Operator:
Your next question comes from the line of Shahin Amini with TD Securities. Your line is open.
<Q - Shahin Amini>: Good morning. Thank you for hosting this call. It's very much appreciated. My first question, I mean you've laid a very strong case here, factual, very clear. Well, let's look at the worst-case scenario and assume that there is a $75 million liability to be taken care of. How would you fund that? Would that potentially cause any near-term liquidity issues for you?
And the second question is has the third-party audit commenced? And if yes, and once you have the report in hand, and let's assume you go to arbitration process, how long would you expect that process to take to get a final decision from the ICC's court?
<A - David Lawrence French>: So, I'll probably take the - I'll take the second of those two, and I'll turn it back to Doug on the liquidity side. But I think we're in a good shape there in what we would do. As it relates to the third-party commencement, I think the process itself, we think, will take one month to two months or so. Deloitte has already been named by both parties. The books have been prepared for them to view. We are looking for a final movement on both sides to get the team going forward. But there's been progress made in the preparation of documents. It still will take, I would guess, five weeks to six weeks for it to complete.
Once that is done, it really looks like a mediation process. So, both parties will review the results of that report. We obviously have an ICC process that is running in parallel to that. I have an expectation that both AKBN and ourselves will look at that report and essentially look at whether or not the answer is a determined answer for both parties, and I expect it will be a reasoned approach to the audit.
We still, obviously, as part of the dispute resolution mechanism in the agreement, if we can't agree to that determination as a way to move forward, then the backstop in the agreement actually, and it's conceived of in the agreement, is to go to arbitration. Obviously, we already have that process in place. So that report as well as the broader dialogue would then move to the international court for a final resolution, but I don't expect it will ever get there. I think we will use that report as a way to agree to terminology to understand what the costs were in 2011, set an excellent benchmark for forward discussion between the parties and move on from there. And obviously, once we agree the expert determination is signed off, the arbitration falls away because there's no party disputes to be heard in Paris. Doug, do you want to handle the first?
<A - Douglas C. Urch>: Yeah. Certainly, just with respect to the liquidity issue, if we had to fund that kind of liability, certainly, I think, first of all, there's a method to challenge that huge increase that we saw from $57 million to $75 million, being the interest and penalties. But even with respect to the $57 million, we do have a strong cash position at the end of Q3. We still reported over $60 million of cash and restricted cash. But nonetheless, there are also other avenues one could look at. Currently, the government of Albania owe us about $70 million, of which $30 million is the VAT that's outstanding, another $40 million with respect to some other taxes that are at various levels of dispute. So I think there still would be a discussion to be had on that front before we'd have to look at any other issues.
<Q - Shahin Amini>: Thanks for that. So just on the second question that was answered first, just a concern, AKBN remains totally committed to the third-party audit process even though that you've gone to Paris and approached ICC.
<A - David Lawrence French>: Absolutely. Every indication we have from them is I think both parties would prefer that answer, because clearly a judgment on either side is not really in the best interest of them or really for us having to pursue going all the way to the trouble of actually all of the court time to go through this and resolve itself. I think both parties will prefer this simply be approached in a way that makes the most sense. So AKBN is 100% committed to the expert determination process. I believe we'll see positive progress.
<Q - Shahin Amini>: Thank you very much.
Operator:
Your next question comes from the line of Darrell Bishop with Haywood Securities. Your line is open.
<Q - Darrell Bishop>: Hey. Good morning, guys, and thanks for the call here this morning. I understand under the Petroleum Agreement, I know the ICC is the designated agreed third party for resolution here in terms of disputes. Want to get your perspective on, first of all, when you expect to hear a response from the government with respect to the stop order. And just playing the devil's advocate on the other side of that, if the government does not comply, when would you expect to see any impact on your operations there, or if at all?
<A - David Lawrence French>: So I apologize, guys. We're not on the same spot so I keep handing off to guys as we go. On your first answer, Darrell, I think we expect to hear in the next day or so without a doubt. I think they're going to receive both the judgment to all of the departments and so we anticipate quick reversion of that. I think it would be very atypical for that not to occur. And so, obviously, we anticipate they will be able to update the Street very shortly on the results of that.
As to the second piece, I think we've had a very thorough look at our operations and what we would do in terms of if this continues on for a period of time. And I think I'll probably turn it over to Suneel just to give you a little bit of sense of the breadth and scope of I think the dialogue there. In general, I think we have a pretty good plan. But I think we don't expect to ever have this be an issue.
<A - Suneel Krishan Gupta>: Yeah. Good morning, Darrel. So, yeah, with regards to operations, right now, it's business as usual. We do have capacity in our infrastructure including the port facilities to produce for about a week without having to make any significant payments from our bank accounts. So we are in a pretty good stage right now, and we're continuing to operate. If there is any adjustment to that, we have in the past been able to phase down operations to deal with other conditions.
So with that, we do have a plan in place in case we need to enact it, and then we can resume activities in the field and get back to normal levels over a period of time. So at this stage, at the current stage, so it's business as usual.
<Q - Darrell Bishop>: Okay. Great. Thanks. And no risk of government stepping in to freeze oil that's sitting in inventory or anything of that nature? I know that would be the extreme.
<A - David Lawrence French>: I would say we don't anticipate that at all, yeah.
<A - Suneel Krishan Gupta>: Yeah. Okay.
<Q - Darrell Bishop>: Great. Thanks, guys. My other questions have been asked already.
<A - Douglas C. Urch>: Yes. With respect to that, I would suggest that the stop order from the ICC Tribunal will also extend to something like that, too.
<A - David Lawrence French>: Yeah. The stop order is specific to not only what's occurred already, but anything that would be a change in the existing status quo.
Operator:
There are no further questions at this time. I will turn the call back to Mr. French for closing remarks.
David Lawrence French:
Thank you, guys. I appreciate everyone being on the call this morning. I know this has been a pretty difficult time over the last couple of days. I want to thank everyone for joining us. We do look forward to this dialogue over the next couple of days to tell you how this progresses. And as a couple of questions on the call mentioned, we do expect a very quick response from the government. We expect to go back to normal business. And we expect this issue to resolve itself.
I wish everyone a great day, and we look forward to the open dialogue over the coming days and look forward to getting back to normal business just like we talked about in my opening. Take care of yourselves. Enjoy the day. Bye.
Operator:
This concludes today's conference call. You may now disconnect.
This transcript may not be 100 percent accurate and may contain misspellings and other inaccuracies. This transcript is provided "as is", without express or implied warranties of any kind. Bloomberg retains all rights to this transcript and provides it solely for your personal, non-commercial use. Bloomberg, its suppliers and third-party agents shall have no liability for errors in this transcript or for lost profits, losses, or direct, indirect, incidental, consequential, special or punitive damages in connection with the furnishing, performance or use of such transcript. Neither the information nor any opinion expressed in this transcript constitutes a solicitation of the purchase or sale of securities or commodities. Any opinion expressed in the transcript does not necessarily reflect the views of Bloomberg LP
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