Central Petroleum Ltd

ASX:CTP

Earnings Call Transcript 2023-Q1

[Leon Devaney, executive]

Welcome to our 2023 March quarter presentation. My name is Leon Devaney. I'm the CEO and Managing Director of Central Petroleum. I'm joined today by our CFO, Damian Galvin, who will present our quarterly results, and I'll provide an update on other highlights since we presented our half year webinar back in mid-March.

As usual, at the conclusion of the presentation, we'll open it up to questions, which can be submitted by selecting the questions tab on the bottom right side of your screen.

Let's start with our highlights. There are 3 highlights to focus on today. First, we had a very solid quarter in operations with an increase in both our average gas price and sales volume following the restart of the Northern Gas Pipeline, which was not operating for most of the prior quarter. Second, we completed the peak farmout, which crystallizes plans for a near-term sub-salt exploration program in the Amadeus Basin consisting of 3 wells targeting high-value Helium, natural Hydrogen and natural gas. And finally, the federal government recently released its proposed Safeguard Mechanism and Code of Conduct for the gas industry, which has been an area of enormous uncertainty for both gas buyers and sellers.

Let's begin with Damian, who will cover our quarterly results.

[Damian Galvin, executive]

Thanks, Leon. Look, the March quarter certainly been one of our strongest for some time. Our revenues were up 50% on the December quarter at almost $11 million, reflecting both higher volumes and higher weighted average price. Now the volumes were up 25% quarter-on-quarter. But let's remember the December quarter volumes, prices and revenues were all adversely impacted by the temporary closure of the Northern Gas Pipeline for much of that quarter. But nevertheless, from a volume perspective, this quarter was our highest quarter since we sold down half of our interest in the second half of 2021, and that's driven by that first full quarter of production from the Palm Valley 12 well, which was brought online in late November last year. Our aggregate production volumes actually would have been higher, if not for a scheduled 8-day maintenance shutdown that we had at Mereenie. And there was another shorter temporary outage on the Northern Gas Pipeline in March.

So on a field-by-field basis, Mereenie gross gas sales volumes were 11% higher than the previous quarter, and that was despite the impacts of the scheduled maintenance. That's a temporary outage of the NGP and natural field decline. Palm Valley was our star obviously, fuel production there was averaging 12.8 TJ/d over the quarter. Our share is half of that 6.4 TJ/d, and that's 73% higher than 7.4 TJ/d average that we saw in December, and that really reflects the impact of that new Palm Valley 12 well this quarter. The Dingo gas production was pretty steady, in line with demand from the Power Station.

In terms of pricing, you can see that middle chart on the slide there. The average portfolio sales price was up 20% on the December quarter, similar to the preceding September quarter. Now the high average price was not necessarily due to stronger market prices this quarter. It's more a reflection of the pricing differential between the Northern Territory and Eastern markets. And so remember that we were cut off from [indiscernible] and the East Coast markets for almost the entire December quarter, and we were forced to sell into the thinner Northern Territory market, and hence, the lower pricing in the December quarter.

The good news is pipelines open, continuing to see strong spot prices as we get closer to winter. There's still plenty of upside for us between that March quarter $8.15 per gigajoule average, and the much publicized $12 price cap. So it's that combination of higher volumes and higher prices, which resulted in that 50% increase in revenues from the previous December quarter. Our highest quarter for revenue since 2021 when we had twice the interest in the field.

So we see ongoing strong demand for gas domestically and notwithstanding the regulatory headwinds that we have obviously seen in recent times. We are continuing to invest in further production capacity this year to capitalize on these conditions. Now after our focus last year on Palm Valley, we're actively working this year on Mereenie to increase production. So we've currently got a rig on site. It's reentering and recompleting 5 existing wells to access gas from known shale-producing zones, which had already been intersected by these wells, but they're currently behind pipe. So we'll be opening those up to access gas resource.

With 2 new development wells planned for later in the year, we've got a final investment decision pending with our joint ventures on that. And we've got our new compressor in transit from Canada that was going to facilitate the recovery and the sale of gas, which up to now has been flared from the existing production facilities. Those will reduce our emissions as well from Mereenie by up to 25%.

So the results this quarter really clearly illustrate benefits that have come from increasing production in the current market. Now that strong performance in the March quarter lays our foundation just now for funding the next wave of investment in various growth and exploration projects that we've got planned for later this year and early next year. So we had a net cash inflow in the quarter. We had $14.2 million of cash on hand at 31 March, and this translates to a net debt of about $15.1 million with a loan balance sitting at 29.3% at the end of March. So in addition to our working capital, we've also put in place a number of facilities and other arrangements to fund these upcoming investments. We've got a further $11 million that we can draw down under our existing debt facility to fund the development work at Mereenie. There's $2.1 million remaining from the NZOG transaction at 31 March, and that's going to be applied to our share of the Mereenie recompletion cost and the flare gas recovery project.

And then, of course, we've got the Peak Helium farmout, which completed on 31 March, and that's going to provide $10.6 million towards our share of the cost of that 3-well high-impact sub-salt exploration program, which you're going to target helium, naturally occurring hydrogen and natural gas. And in addition to that, we're looking to bring in some other partners to fund work at Mamlambo and Zevon.

So in summary, I think we've had a pretty good start to the year, and we're pretty well positioned now to benefit from strong markets going forward. We've also now have the foundations in place to participate in that exciting exploration program that could really add significant additional resources and diversity to our portfolio.

So back to you, Leon.

[Leon Devaney, executive]

Thanks, Damian. Picking up on our sub-salt exploration. Following completion of the peak farmout, the joint venture is moving quickly towards drilling 3 major sub-salt exploration wells at Dukas, Mount Kitty and Mahler, which are targeting high-value helium, natural-hydrogen and natural gas. We currently expect to commence drilling around the end of this year or early next year, which is quickly approaching. This will be Central's most significant exploration program and for our shareholders getting a successful sub-salt test at Dukas and testing the helium discovery at Mount Kitty are important investment milestones. There are 2 reasons why I say that Central's upcoming sub-salt exploration program is its most significant exploration program ever. First, you may have seen that we recently released our estimate of the resources that we are targeting from the 3 prospects, which is stand out is the sheer size and potential value of the resources we are going after.

To put it in some context, global bulk helium prices are currently north of $200 per 1,000 cubic feet or mscf. That price equates to over $200 million in revenue per billion cubic feet or bcf of helium. Across all 3 prospects that we're going after, we have a target mean perspective in 2C helium resource estimate of about 75 bcf. That figure is net to Central, and it excludes any sales of natural gas or hydrogen. So you can see how big the potential upside could be for the company with just some success from this exploration program.

Second, the Mount Kitty prospect also called Jacko Bore, has already discovered helium with high concentration of 9% based on previous testing. This is the reason Mount Kitty has been described as a contingent resource rather than a prospective resource. When you think about it, there aren't many large discoveries in the world with 9% helium concentration that are about to be drilled. Plus the Mount Kitty discovery supports our view that there is a working helium system throughout the Amadeus Basin, which we also plan to explore at Dukas and Mahler, as well as at our other large sub-salt prospect, Zevon, which is receiving positive attention through our farm-out process. This is going to be an exciting program for Central, which I think will become more and more visible to the market as we get closer to the commencement of drilling at the end of this year or early next year.

Moving on to gas markets. The federal government finally provided regulations for the Safeguard Mechanism and draft mandatory Code of Conduct, which extends a $12 per gigajoule price cap and allows the government to periodically revisit the price cap and influence the volume of LNG export to be diverted back into the domestic market. On the positive side, the reasonable pricing mechanism has been removed in the small gas producers like Central that supply the domestic market appear to be exempt from the $12 per gigajoule price cap. Unfortunately, the government and the ACCC appear to retain an ongoing ability to influence the market clearing price for domestic gas, which creates uncertainty for the exploration and development of new gas resources that take decades to find, appraise, develop and recover as an investment.

In any event, the regulation does provide some clarity for gas market participants, which has been a roadblock for investment in the sector. As a small domestic producer, we appear to be exempt from the formal price cap and should be in a relatively good position to navigate this market intervention, particularly given our current activities and exploring for significant helium resources through sub-salt exploration.

We also have a lot of other important activities underway, which I'd like to briefly comment on. First, we are in active discussions to farm-out Mamlambo and Zevon, where we hope to secure a near-term exploration well at Mamlambo, as well as seismic and a fourth sub-salt exploration well at Zevon. Both of these prospects are potentially game changers for Central. So closing out this farm-out process is another priority for us at the moment.

We have recently kicked off our 5-well recompletion campaign to give us a boost in production at Mereenie over the next few months, which in the current market would be very welcome. We are also progressing 2 development wells spent for later this year, all of which is designed to maximize near-term gas sales into a strong East Coast gas market, which ultimately helps us fund the other various growth activities we have going.

With regards to Range, we continue to test our Range pilot wells in the hopes that recent positive trends in gas production can continue over the coming months. This would give us a real boost in demonstrating how the Range gas project can be a commercial success. The joint venture continues to evaluate our pilot testing and are looking forward to coming up with a plan in terms of how best to progress that particular asset.

And finally, our strategic review. In parallel to all of the activity I've just talked about, our strategic review continues to make good progress. And with recent price cap regulations now proposed, market uncertainty has been reduced, which should facilitate that process. Again, timing for shareholders to get some visibility on the strategic view remains around midyear.

In wrapping up, we continue to demonstrate solid operations with a strong focus on safety and are progressing several high-impact near-term growth opportunities, all whilst working to keep costs contained and ensuring we have sufficient capital and cash flow to achieve our growth objectives. This is going to be an exciting year, and I think this excitement will build if we can introduce new funded exploration through farm-outs and particularly as we move forward to the fast approaching commencement of our major sub-salt exploration drilling program. I look forward to sharing this news flow as we progress. And on that note, I'll open up the presentation to questions.

[Damian Galvin, executive]

Okay. Thanks, Leon. So we will take some questions today, of course, by the usual method. [Operator Instructions] Leon, we do have one question here already from a shareholder who is not happy with the share price. But we just say, will we consider a small dividend, say, $0.005 per share to lift our share price. So it's around dividends.

[Leon Devaney, executive]

Sure. Well, certainly, I understand your position on share price. It's something that we're not happy about either. It's something we're certainly working towards both with our current activities to increase production, but also the growth activities that we're investing in. And in particular, the focus on farming out and trying to get the sub-salt exploration wells drilled as quickly as possible. So recognize that and appreciate your comments with regard to share price.

In terms of dividends, that is a topic that the board and myself are very aware of. It is something that we are actively considering in the context of the strategic review. At this point, obviously, the strategic review process is still ongoing. I can't say though that, that is on the radar as something to be considered. And how that can eventuate or what that might look like is all part of what we're doing under the strategic view. As we've mentioned before, clarity and some visibility on where that strategic review will end up and might go, we're targeting, again, the middle of this year for that communication. So what I suggest is, hold tight until then. And at that point, I think there will be a more comprehensive discussion about where the company is going and opportunities for dividend, both in the near and longer term.

[Damian Galvin, executive]

Okay. Another one here, Leon. Thanks for the presentation. Great results. Can you share any insights into Peak Helium?

[Leon Devaney, executive]

Well, certainly, Peak Helium is -- and we've provided this in our previous ASX, a private company. They are focused on helium exploration and developing helium assets into production. They're a good partner for us in the Amadeus. They already have an existing prospect called [ RAMSI ], which is down in our southern part of the Amadeus Basin. So they're familiar with the geology. They're familiar with the assets. Good alignment as a joint venture partner. Again, the joint venture is with ourselves, Peak and Santos. Santos is an operator as they have been. Beyond that, I'm not really probably in a position to talk about their strategies. I think that's something that you can certainly ask speak representatives. But from our perspective, the joint venture is fully aligned.

We've got a farm-in arrangement completed with Peak. The scope of work for that farm-in is very well defined and does include those 3 wells that we've talked about during the presentation between ourselves, Santos and Peak. I think things are working very well at the joint venture level, and we're keen to get drilling underway as soon as possible towards the end of this year or certainly early next year. And again, we're pursuing efforts under the Zevon prospect. So hopefully, there'll be a fourth well for sub-sell drilling for Central in the near term.

So look, I think the joint venture is functioning very well. We're excited. Everything's got a green light, and we're moving ahead as fast as possible. And obviously, working closely with both Peak as another joint venture partner, but also Santos as operator.

[Damian Galvin, executive]

Another question here. This is actually from one of our more mature investors. She said, "Look, I'm 92 years old, I like Central." Will your big success come in time for me to enjoy that is not too many years away?

[Leon Devaney, executive]

Well, I certainly hope so. We're doing everything we can to implement our growth strategy. Obviously, I think we are in a bit of a trough. We've had a very difficult exploration program with PV-12 this past year. We are in the run up into a very substantial, I consider really the most significant exploration program for Central with our sub-salt drilling coming up towards the end of this year or early next year. So my hope is that the enthusiasm and the visibility of the potential of our sub-salt exploration program starts to increase as we get towards that drilling activity, which, again, as I've mentioned, is really in the context of where we're at, at this point, not too far away. So certainly hopeful, obviously, we need some success in exploration.

I think other dynamics such as the market and production adds and things we're doing at the asset level to create value there has been positive. But again, to get the kind of real bump in share price, the real values that I think our long-term investors at Central are looking for, we're looking to get, obviously, exploration success. And I think the 3-well program that we've got in our sub-salt plays as well as the farm-out activity that we're working towards to add another well in Mamlambo and potentially another well at Zevon. If we can get that sort of spread over the next near medium term, I think that's a real good opportunity for the company to really reset itself in terms of share price and strategy going forward.

[Damian Galvin, executive]

I've got another question here from one of our analysts. Can you just clarify what influenced the ACCC/government maintains over pricing in the market?

[Leon Devaney, executive]

Well, I think that's yet to be determined, and it's quite opaque in my view at this point. Essentially, and what I've talked a little bit about during the presentation, they've set a price cap. They call it a price anchor. We certainly think that Central is in a good position going forward with respect to those regulations.

What is unclear and what I see as a bit of uncertainty that still remains in the market after the regulations is the extent to which in the nature by which the government and the ACCC might influence the amount of export LNG that is diverted back to the domestic market. I think that's a bit of an unknown.

On the counter though, and this gives me quite a bit of confidence in terms of our strategy moving forward to increase gas production and look for new natural gas resources. The cost base for production across the Eastern Coast and the opportunities for high-quality new gas exploration and development are all moving in a direction where I think the price of gas will have some upward pressure, notwithstanding any market intervention with the government. It simply will cost more, given the regulations, given the nature of the assets that are remaining for development, and given the cost structure and price increases that we've seen really across the economy, I mean that's particularly within the oil and gas sector, all support higher pricing as we move forward.

Certainly, the uncertainty in the regulations have not helped the supply demand dynamic in the sense that I think it has slowed down investment in supply. And in the longer term, that again will add to upward pressure on prices. So I guess the short answer is, it's still to be determined. The final regulations have not been tabled. But I think there are a number of market dynamics that would suggest that gas prices certainly have some opportunity for upward pressure notwithstanding the uncertainty around on the regulations.

[Damian Galvin, executive]

Another question here. Would the merger be a way to increase market presence and improve funding options?

[Leon Devaney, executive]

Certainly, capital is an issue for everybody in the sector. I think with the gas prices that we've seen, it's not surprising, M&A has been fairly active and could continue to remain active within the space, particularly where you can bring parties together that have complementary attributes, whether it's capital or technical skill sets or portfolio diversification, that sort of thing. It's something that we are always considering and we've always been open to looking at. And as you would expect, it's part of the strategic review, and that will be worked through at that level. And again, we get our targeting around midyear for some communication on where that's going.

[Damian Galvin, executive]

I think, I've got a slightly different angle on that same strategic question is, would you consider selling one of your joint ventures to get rid of debt and boost cash reserves?

[Leon Devaney, executive]

As we've mentioned in the strategic review, when we announced it, everything is on the table, we are looking at all options. It does depend on the market. It really depends on what opportunities are there. I wouldn't say anything ruled out. What we're ultimately trying to do through this strategic review is, find the best way to crystallizing realized value for our shareholders, and that can take a number of paths [ and forms ]. So we are looking at everything. The strategic review is open to considering all of those sorts of things and certainly is taking a look at that. But again, no decisions have been made, and we'll start to get some clarity on where we're headed, again, probably in the midyear sort of time frame.

[Damian Galvin, executive]

A question here about the Range gas project. I noticed that we didn't [ have been ] say a lot in the presentation today. What's the latest view and what are the like-for-like plans for this project going forward?

[Leon Devaney, executive]

Yes. I think, Range in particular, as it is in a joint venture with Incitec Pivot, there has been some I guess, thought about what the regulations might mean for that particular project. Those have now been clarified, which does take a road block out of the way in terms of uncertainty for how to move forward with Range. The pilot testing results that we've seen over the past few months have been encouraging. So we have seen some good acceleration in gas rates, particularly from our Range 10 well. We want to continue to test that well and see where we can get it. That will provide us a lot of information in terms of the commercial liability across the block, and in particular, the size of a potential project and give us a lot more confidence in terms of what a commercial development might look like. So I think we're getting a lot of information, a lot of good information from the single pilot wells that we're testing at the moment. It's premature to draw on the definitive conclusions from that testing.

And I think at this point, the joint venture is looking forward to continue testing over the next few months, see where that well can go and see what technical information gives us. And at that -- again, at that point, start drawing some conclusions about the path forward for the particular asset. It does coincide obviously with timing for the strategic review, which is not coincidental.

[Damian Galvin, executive]

Question here. Is it likely that Zevon joint venture negotiations may complete in time to utilize the rig from other sub-salt drilling?

[Leon Devaney, executive]

That's certainly something we'd like to achieve, if possible. The challenge is that the regulations and environmental approvals for drilling have not gotten shorter, if anything, they continue to extend and be more difficult to achieve in a concise time frame. So that will be the challenge. We are looking at potentially doing seismic first and how that is structured and the timing that we're able to achieve on the seismic program might drive that. Zevon is a much more shallow target than the likes of Dukas and the pressure regime is not anticipated to be of that extremely high pressure that we had concerns about when we were drilling the Dukas well. So we have the opportunity to use more common drill rigs with common well designs for Zevon, which allows us to have a bit more flexibility on when and how we drill that.

Obviously, it'd be ideal to tag it on as a fourth well. It is something we're working to do. But again, it is difficult given the regulatory environment and environmental approvals that we need to make that happen. So it's an aspiration. I'm not going to say it's definitely going to happen, but it's something we're working towards. If not, we will be looking to drill that as quickly as possible, and I don't see it being too much after the program that we have for the other 3 sub-salt wells if we can connect it as a fourth one.

[Damian Galvin, executive]

Another question here. Please, what can you tell us about helium and hydrogen prices moving forward?

[Leon Devaney, executive]

Well, certainly, there's -- it's a volatile market, quite exciting, obviously, high value. And if you look at the charge, it's been ramping up. There's been a number of factors driving that. Ukraine war, for example, has influenced it. It is high value. When we talk about prices of $200 per 1,000 standard cubic feet, very significant multiples of what natural gas sells for the same volume, so very high-value stuff. There has been a lot of volatility in the market recently. I think there's been some spot market trades that have been well over double that price over the past few months. So it is potentially very lucrative. It's a very attractive commodity to go after. There is a shortage of supply at the moment. And obviously, demand for it remains robust. It's a very difficult commodity to replace, particularly in high tech and other applications.

There are supply opportunities longer term that could come into the market. So it's difficult to say where the long-term pricing will settle. But certainly, it is a high-value commodity. We're comfortable that if we're able to find it, it will provide a significant revenue stream to any sub-salt development that we're successful in the Amadeus Basin. So quite exciting and something that's obviously a focus for ourselves and our joint venture partners as we go forward in -- to our sub-salt exploration program.

[Damian Galvin, executive]

Leon, I think that brings us to the end of the questions today. So nothing -- no other questions. I guess it's -- trying to wrap it off up and leave people to their weekends.

[Leon Devaney, executive]

Great. Well, thank you, everyone, for attending, and look forward to catching up the next webinar.

[Damian Galvin, executive]

Thanks very much.