Japan Petroleum Exploration Co.,Ltd. Q3 FY2026 earnings call

• Overall Business Positioning

  • JAPEX is a diversified energy company founded in 1955, listed on the Tokyo Stock Exchange since 2003, operating in 7 countries with 1,653 employees. Its core legacy business is E&P, and it is transitioning to a comprehensive energy company balancing E&P and carbon neutrality activities.
  • 2024 full year results: Total revenue 389 billion yen, business profit (operating profit plus equity method investment gain) 61.8 billion yen, with 161.4 billion yen deployed in annual growth investment.

• E&P Segment Operations

  • The company prioritizes new business development in the United States, Norway, and Indonesia. In the U.S., it currently holds interests in tight oil projects producing ~20,000 barrels per day, and has established the local subsidiary Peoria Resources with M&A-experienced partners to pursue additional operator asset acquisitions.
  • In Norway, it rebalanced its asset portfolio to swap slow-to-develop assets for near-term production assets: the Berdandy field will start production soon, and the Alvheim Nord field targets production start around 2027 via 100% owned local subsidiary JAPEX Norge.
  • In Indonesia, it sold its stake in the mature Kangean block and acquired a stake in the Gubon block to develop the Sichanggang gas field, targeting new production growth.
  • In Iraq, it maintains production of ~170,000 to 180,000 gross barrels per day at the Garraf project partnered with Petronas, despite political instability. Domestic Japanese oil and gas fields are in natural decline, with test drilling for a new offshore gas field off Hidaka, Hokkaido scheduled to start in March.

• Infrastructure & Utilities Segment Operations

  • The segment includes natural gas supply, LNG terminal operations, and power generation. The 50MW Tahara Biomass Power Plant started commercial operation in April 2025; JAPEX controls the full fuel supply chain to improve investment efficiency and profitability.
  • The small-scale Mihama Storage Battery Plant started operation in August 2025, which is performing better than expected, and its operating experience will be applied to the 2027 scheduled Tomakomai large-scale storage battery plant. The company is targeting participation in Japan's new wholesale power capacity and balancing markets to add value from energy storage, and may pursue third-party tolling operations to scale up.

• Carbon Neutral Segment Operations

  • JAPEX leads 3 of Japan's 9 government-approved Advanced CCS Projects, located in Tomakomai (Japan), Higashi-Niigata (Japan), and Sarawak (Malaysia, which plans to store CO2 exported from Japan). It also participates in CCS-linked projects in the U.S. and Indonesia, including a project that combines natural gas/helium production with CO2 storage, and a negative emissions project for biomass power in Indonesia.
  • The Tomakomai CCS project is the most advanced, currently in the test drilling phase, targeting annual storage of 1.5 to 2 million tonnes of CO2 once operational.

• Mid-Term Management Plan Progress

  • The JAPEX Management Plan 2022-2030 targets 50 billion yen business profit and 8% ROE by 2030, with an equal 5:5 profit split between E&P and non-E&P segments to hedge against long-term oil price risk. The plan originally projected 300 billion yen operating cash flow by 2026, but actual cash flow has already reached 400 billion yen, doubling the original target, so growth investment and shareholder return allocations have been increased significantly from original plans. The 2026 intermediate target is on track to be met, but management still views the long-term business base build-out as incomplete and plans to allocate additional capital to growth investment.

1. E&P (Exploration & Production) segment: Contributed approximately 70% of total corporate profit in 2024. Net total production volume is over 40,000 barrels of oil equivalent per day, with overseas production volume more than double domestic production, but profit contribution is roughly equal between domestic and overseas operations. 2. Infrastructure & Utilities segment: Contributed approximately 30% of total corporate profit in 2024. The segment holds 800km of high-pressure natural gas pipeline, the Soma LNG terminal, 10 power plants with total generation capacity of 1.4 million kilowatts, and has added new renewable energy and energy storage assets in recent years. 3. Carbon Neutral segment: No material revenue contribution yet, the company is in the pre-commercial demonstration phase of CCS/CCUS projects.

• 2025 full year forecast: Net income attributable to parent shareholders is projected at 36 billion yen, a large decrease from the prior year's 81.1 billion yen result; the decline is entirely due to the absence of the prior year's over 4 billion yen special gain from selling policy-held shares, and core business operations remain on track.
• Key forecast assumptions: Crude price sensitivity: every $1/bbl increase in crude price raises annual operating profit by 70 million yen; exchange rate assumption is a conservative 140 JPY/USD, with every 1 JPY of depreciation against USD raising annual operating profit by 320 million yen.
• Shareholder return guidance: Maintains the target 30% consolidated payout ratio. For 2025, the interim dividend is set at 20 JPY per share, and the full year dividend guidance of 40 JPY per share is maintained, with a final decision to be made at year end. No fixed timeline or target for share repurchases, with decisions made based on ongoing market and business conditions.
• Long-term E&P guidance: The company will continue expanding E&P investment, particularly in natural gas, as it expects gas supply shortages to emerge after 2030 in Japan. It will focus additional E&P growth only on the U.S., Norway, and Indonesia, with no plans to enter new regions currently.
• Long-term CCS guidance: Once commercialized, annual CO2 storage volume will be a core KPI for CCS operations, and the company aims to demonstrate commercial viability through its three leading flagship projects to enable broader scale-up.

• E&P project risks: E&P is inherently a high-risk business, with exposure to technical risk, economic risk, geopolitical and political risk (including host country energy and environmental policy changes), and commodity price volatility.
• Macroeconomic and market risks: Profit is highly sensitive to crude oil prices and foreign exchange rates. Long-term policy shifts toward defossilization could lead to permanent oil price declines, and the growth trajectory of storage battery demand depends on overall electricity demand growth, AI adoption progress, nuclear power plant restarts, and renewable energy deployment, all of which could change market value for grid balancing services.
• Competitive risks: The grid-scale storage battery market is attracting growing new entry, leading to increased competition, and early market entry is viewed as critical to success. Offshore wind investment conditions in Japan have deteriorated significantly compared to original expectations.
• CCS commercialization risks: CCS business profitability depends on policy support and sufficient fee levels from CO2 emitters, and it remains unproven at large commercial scale; returns are not expected to be extremely high, so the company is focused on ensuring risk and return are balanced before full-scale investment.

Q: What considerations underpin the current 5:5 target E&P/non-E&P profit split, especially given current high E&P profitability? Why cap E&P investment at its current level? / A: The 5:5 target was set when societal pressure for defossilization was very strong, to hedge the risk of accelerated defossilization leading to long-term oil price declines. It does not mean shrinking E&P: JAPEX still aims to grow absolute E&P profit, just grow non-E&P faster to reach the 5:5 mix. Recent geopolitical events have renewed focus on energy security, shifting policy expectations around carbon neutrality, so there is now more room for continued E&P investment. The company still sees gas supply shortages emerging after 2030 and will continue investing in E&P, while prioritizing CCS investment over offshore wind given poor Japanese offshore wind investment conditions.

Q: What is the commercial outlook and expected scale of JAPEX's CCS/CCUS projects? / A: JAPEX's priority is to deliver its three government-authorized flagship CCS projects, which are designed to demonstrate how commercial CCS can work for private Japanese companies once market conditions are ready. As a storage operator, JAPEX will earn a per-tonne fee for CO2 stored, so profitability depends on securing sufficient margin within that fee structure. The Tomakomai project is the largest, targeting 1.5 to 2 million tonnes of annual storage. If it achieves 1,000 JPY gross margin per tonne, that would equal 1.5 to 2 billion yen in annual gross profit, and scale can increase if more storage capacity is added. Management does not expect very high returns from CCS, but will proceed as long as risk matches return.

Q: How does JAPEX mitigate the impact of crude price and exchange rate volatility on earnings? / A: JAPEX uses derivatives to partially hedge commodity and exchange rate risk, but cannot eliminate these risks entirely. The company is focused on growing non-E&P businesses to reduce overall volatility: power generation has much lower exposure to oil and gas price swings, and commercial CCS would generate long-term stable cash flow. The company also prioritizes the Indonesian Gubon gas project because it can support fixed-price domestic gas sales in Indonesia, which further reduces price volatility.

Q: What mid-term KPIs should shareholders focus on, and what are the priority investment areas? / A: ROE is JAPEX's core overarching KPI, and E&P investment is prioritized because it has a large direct impact on ROE. The company does not set a target for total reserves, because low-profitability reserves do not add value, but shareholders should monitor whether annual reserve additions exceed annual production depletion, and track annual production growth as a direct measure of E&P investment success. Once CCS is operational, annual CO2 storage volume will be a key additional KPI.

Q: What is JAPEX's process for evaluating new overseas E&P investments to manage risk? / A: JAPEX has a dedicated Investment Assessment Committee that evaluates every project from multiple angles: economic viability, ESG factors, and geopolitical risk, before submitting recommendations to formal decision-making bodies like the management meeting and board of directors. The process has four steps: confirm the project aligns with corporate strategy, assess all categories of risk (technical, economic, financial, commercial, political), clarify which risks JAPEX can reasonably accept, and only move forward with projects that pass all filters.