© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Thank you for standing by, and welcome to the Senex Energy Q1 FY '21 Quarterly Report conference call. [Operator Instructions] I would now like to hand the conference over to Mr. Ian Davies, Managing Director and CEO. Please go ahead.
Thank you, Tal, and good morning, all. Welcome to Senex Energy's quarterly results conference call for the first quarter of FY '21. I'm Ian Davies, Managing Director and CEO. And with me is our Chief Financial Officer, Mark McCabe.
Good morning, everyone.
We had another set of strong quarterly results to talk to today, which highlights strong financial performance and continued gas production growth in the Surat Basin in particular. This morning, we also announced the final investment decision for the expansion of Roma North natural gas production by 50% to 24 terajoules a day or about 9 petajoules a year. I'll talk to our Roma North pit to begin with and then touch on highlights from the quarter. Mark will then discuss the financials, and we'll close with Q&A, as is customary. Just to note also that Senex is planning to hold a virtual investor briefing on October 28 to provide a bit more insight into our production expansions and other growth opportunities. We'll release details of this in due course. So hopefully, you had a chance to read our Roma North announcement from this morning. We've discussed this expansion before, but we can now provide a bit more detail having formally sanctioned this investment. The key point to note is that this investment is a great example of the highly attractive opportunities available to Senex now that our hub-and-spoke infrastructure operating model has been established. Firstly, it's a low-cost investment to expand production at Roma North by 50%. About $20 million will be spent by Senex on drilling up to 15 wells in infrastructure and gas gathering and water management. It's also a high-returning investment, which is to be expected from incremental expansions of this hub-and-spoke infrastructure asset base. Our estimated IRR for the project is about 60%. It will attract a greater than 15% reduction in the unit cost gas processing tariff payable by Senex across the full Roma North production stream due to simple economies of scale. The investment also has a short line of sight to free cash flow. So that time to cash is just critical given the expansion is expected online in less than a year's time. Lastly, it's a long life investment. Roma North will have a 32-year 2P reserves loss at the expanded 9 petajoules a year. So clearly, we're in for more expansions here. Jemena is planning to construct and fund the Roma North compression facility expansion, and Senex will drill up to 15 wells commencing late this financial year. This investment represents a highly attractive destination for shareholder capital. We hope the first of many such investments to come. Furthermore, the expansion is also great for the local economy and job creation, which is just all too important at the moment. We estimate it will create 50 new construction jobs, which follow the 250 construction jobs created from the foundation Atlas and Roma North development projects. These foundation developments saw $400 million invested over the last 18 months, which benefited more than 50 businesses in the region. During the quarter, we also announced that planning is underway for the 50% expansion of Atlas gas production to 48 TJs a day or approximately 18 petajoules a year. This expansion is being planned thanks to Senex being awarded additional Atlas acreage as part of the Queensland government's domestic gas tender process. The valuable block at Atlas immediately adjacent, it will actually become project Atlas, not a separate block. And it's bounded by, again, high-producing prolific gas acreage. Given its location and our knowledge of the resource, the 2P gas reserves that we have booked, we have an uplift of 41 petajoules that will be booked upon granted title. And I should mention that we have actually received the authority prospect of the ATP. This expansion will be another example of our ability to leverage the hub-and-spoke infrastructure model we have established to deliver accelerated production of our extensive gas reserves position. Also as part of the government's tender process, we are awarded a high-potential exploration acreage in the Bowen Basin. A little bit of a step-up for us, but it's on trend with the Scotia and Meridian gas fields, our high-quality fields. The application for the block was submitted based on potential for similar development to the Scotia field. That is an anticlinal gas structure. It's still coal seam gas, but we hope that the permeability enhance similar to the Scotia field. This Bowen Basin acreage adds further scale and diversity to the natural gas portfolio that we hold. Senex' portfolio now comprises material existing gas production at Roma North and Atlas, so 2 hubs. The development-ready expansion at Roma North and Atlas, which I've touched on, and appraisal and exploration opportunities in the Western Surat project [ down of this ] and this new Bowen Basin acreage. Once again, we'll have more to say on our outlook for production development and exploration at the investor briefing later this month. Turning now to the operational results and another strong quarter of gas production growth. Our total production is up 13% from the prior quarter to 803,000 barrels of oil equivalent, which included a 22% increase in Surat Basin gas production to 632,000 barrels of oil equivalent. At Atlas, production ramp-up continues as expected. We just hit 25 terajoules a day of production and fast approaching our initial capacity target of 32 terajoules a day. Roma North has produced constantly throughout the quarter at above 80 TJs a day, which is above nameplate. Performance of both the reservoir and the gas processing facility has been outstanding, which clearly supported today's financial investment decision announcement. Lastly, Cooper Basin oil and gas production was 126,000 barrels of oil equivalent, down 13% from the prior quarter on natural field decline and temporary shutting of some wells, which we're doing some work on. So that's a fairly quick overview of highlights since our last quarterly. I'll hand to Mark to talk through the financials.
Thanks, Ian, and good morning, again, everyone. It's another solid set of financial results this quarter despite headwinds from materially lower oil-linked gas prices. I'll start with sales volumes, which saw an increase of 10% from the prior quarter, up to 724,000 barrels of oil equivalent. Gas and gas liquids sales volumes were up 17% to 599,000 barrels of oil equivalent, with this outcome partly affected by planned maintenance work at Roma North in August. Around about 165 terajoules or 28,000 BOE, were not available for sale as a result of this work. Oil sales volumes saw a decline of 18% from the prior quarter to 117,000 BOE, broadly a function of field decline and some wells being shut in, as Ian just mentioned. On sales revenue, despite the higher sales volumes, revenue saw a decline of 8% this quarter to $31 million, largely due to the lag pricing effect of our oil-linked Roma North gas sales agreement with GLNG. Pricing was impacted by materially lower JCC oil prices during Q4 of the 2020 financial year. Sales revenue was also impacted by the Roma North maintenance works that I mentioned. Realized oil prices were broadly in line with the prior quarter at [ $80 ] a barrel, which includes the benefit of oil hedges that we have in place. Turning now to capital expenditure and liquidity. A significant reduction in CapEx and peak net debt coming in below guidance were key financial highlights for us this quarter. As we've already announced, our foundation Roma North and Atlas gas projects were mostly completed late last financial year. And as a result, our capital expenditure was down 77% this quarter to $7.9 million. So with CapEx for these projects now behind us, we reached peak net debt during the quarter at around $55 million to great outcome and materially below guidance. You may recall that we originally guided towards peak net debt of less than $80 million, then revised this down to less than $60 million, thanks to the realized drilling efficiencies late last year and the reduced well count. So we're in a strong financial position. With cash reserves at quarter end of $70 million and supportive lenders, we're well placed to fund future growth programs and capital management initiatives. As Ian mentioned, we'll be holding an investor briefing on the 28th of October, and we'll provide more detail on these topics then. It's a brief snapshot of the financials for the quarter, so I'll hand back to Ian to wrap up the formal part of the call.
Thanks, Mark. So certainly, a great start to the new financial year for us. Continued production growth, strong financial performance and expansion plans obviously make for a pretty exciting year ahead also. With our hub-and-spoke infrastructure operating model now established, Senex is uniquely positioned to contribute to Australia's gas-fired recovery from the COVID-19 recession and deliver production growth and jobs creation for years to come. So on that note, I'll hand the call -- I'll finish the formal part of the call and hence, open the lines to Q&A.
[Operator Instructions] Your first question comes from [ Daniel Levy ] from Citigroup.
I'm going to squeeze in 3 very short questions, if that's okay. Sorry about that. First, we noted you specifically said that, that basin is now free cash flow positive. Is that true for the whole group as well? And if not, when do you expect the group to turn as positive?
Yes. Mark here. That's a statement across the whole group. So from this quarter forward, cash flow positive, yes.
Fantastic. Congratulations on that.
Thanks.
Second, another congratulations, obviously, on the FID of the Roma North expansion. Now I noticed you guys have earmarked the gas from the expansion to go into the existing GLNG contract. I was curious as to where the gas from the project is locked into that contract. Or if you've got the option to sell into, say, a more competitively priced domestic CPI into contract assuming one was available?
Yes. Look, [ Daniel ], it's a good question, and it probably gives me the opportunity to recap on the structure of the deal that we have with GLNG. And if you remember back in 2014 -- I don't expect you to, but if you want to go back the charts and the releases, please feel free. Interesting to note, when we were trying to get this project off the ground, it was widely seen as subeconomic and pretty ordinary, except by us, of course. And the only customer, the only customer in the entire East Coast of Australia that would support us was GLNG. So that's probably an interesting point in the current market when you're talking about supply and demand dynamics. Secondly, the beauty of the transaction with GLNG was because they've got this enormous sort of [indiscernible] Gladstone, call it, LNG plant that clearly is struggling to be full. And I think that's quite well understood. The -- it was structured as almost a put contract. So it allowed us the flexibility to ramp up quite flexibly without having the normal liquidated damages and the things that you'd put in place because it was -- the ramp-up profile was fairly difficult to predict a few years ago. And the other part of the contract has lots of flexibility on expansions, which is seen in the FID today. So we can nominate a higher production curve and -- as they always [ support ] and deliver that into that contract. We have the ability to do that up to 50 TJs a day. And we're currently -- we've just FID-ed 24 today, so we're basically halfway there. And that's exclusive. So that in return for all that flexibility -- and frankly, quite a good price on an oil-linked basis with quite good downside protection at low oil prices, which we saw in spades when oil was below $30. We traded away exclusivity for the bottom 4 blocks of the Roma North acreage, which is Glenora, Mimas, Tethys and Eos. That's where the production is coming from, which means we know that every expansion that we do within those 4 blocks will go exclusively to GLNG. And if we don't like the economics, we just won't expand. I mean that's clearly not the case with the economics you're seeing today. Long-winded but probably worth a bit of background for everybody.
Yes. No. No, that was very informative. That answers everything I need. Okay, last one, and this one might be pushing the bench up a little. But circling back to FCF. So after you guys have finished with the Atlas and Roma North expansions, how should we think about the level of steady state free cash flow at your commodity deck?
Yes. So if you go back to -- why don't I give my comments, and then Mark, you can add if you need to. If you go back to the full year results, I think we've got pretty much the most transparent deck in the market around the way we see production, EBITDA and free cash flow. We've disclosed our deck that we use. We've disclosed sensitivities to our deck at various prices. Now the way we talk about it -- because we have lots of growth options in the portfolio, the way we talk about it, we need to put a line in the sand somewhere. So we talk about this foundation, asset-based concept, which, for the Cooper Basin, is effectively producing our 2P reserves over time and also sustaining 3 million barrels a year in this previous 24 TJs a day expansion at Roma, this 3 million barrel a year production in the Surat maintaining plateau. So all the capital required to reduce 2P reserves at Surat and maintain plateau, what we call sustaining CapEx in the Surat, are included in there. And our deck and our forecasts and targets are done on that basis. And then that leaves the market to be able to lock in a foundation, which is why we call it the foundation asset base, and then build on their own view of how they see growth working. And in -- on the 28th of this month, we'll talk through in a fair bit more detail in terms of how we see different growth options organically in the portfolio coming through. So we forecast $70 million to $90 million of free cash in FY '22, $20 million to $30 million in FY '21. And we're certainly -- under the foundation asset base, that's locked in, and we'll update the market again on the 28th.
Your next question comes from Peter Liu from Crédit Suisse.
Congratulations on the FID. I have 3 questions, if I may. Now the first one, perhaps the question goes to Mark. I want to ask specifically about the instant asset write-off that has been announced by the latest federal budget. Given that Senex will invest heavily in the Surat Basin essentially in FY '21 and FY '22, do you expect to see material cash flow benefit as a result of the instant asset write-off?
Yes. So a couple of things there, Peter. And the first thing just to bear in mind for us is that we are -- we have significant carryforward tax losses and so we're not expecting to pay tax for a few years. That's a statement in our -- in the context of our foundation asset base. So with the growth options ahead of us, that will change slightly. And we do think that the announcement is a real positive for industry. But for us, we've got to work through those tax losses first. Other thing that's relevant is those growth options are between now and FY '22, which is the backstop date for the incentives. So we're right in the time line there. And then the last point probably is that a portion of this expenditure will be incurred by Jemena. And so it's partially a question for them as well. But I would just let support to that. I think it's an absolutely fantastic initiative. And this isn't a political statement. This is simply investment. If we want to get jobs moving, if we want to get investment delivered, which obviously supports a lot of blue-collar workers, supports local industry, then money needs to go on the ground, and having an investment allowance like this is one of the best ways of doing that. And notwithstanding our tax loss position, which can change under various scenarios, we're firmly behind it because it makes good business sense for us regardless, and we will get a benefit to that into the asset write-off.
My second question is related to the FY '21 guidance. Now in the quarterly report, I see no mention of any guidance change. But now if Senex starts drilling the Roma North expansion wells in late FY '21, will you expect any sort of material increase to the FY '21 CapEx? Like how should we think about -- how much of that $20 million CapEx will be spent in FY '21 versus FY '22?
Yes. Peter, Mark here again. The drilling will commence sort of through the middle of calendar '21. So we probably will incur some expenditure towards the back end of the financial year, but not significant amounts.
Okay. Fantastic. My last question is related to ESG and carbon emission. Now yesterday, one of your dom gas peer, Cooper Energy, announced they fully offset their FY '20 sort of carbon emission. Does Senex have any specific plan in terms of setting similar targets for the near future? This is just for the ESG and carbon sort of discussion.
Yes. And look, it's a really important discussion to have. And I noted with interest what Cooper did, and I think that's fantastic for them. And the industry -- and I can tell you, being sort of Vice Chair of AP, the industry is absolutely behind Paris and behind doing all we can to support the sustainability of society, notwithstanding the fact that fossil fuel is going to be here for a long time to come by virtue of the fact that we have a society reliant on them notwithstanding the transition. So from that point of view, we've outlined a pretty clear road map. If you look at our sustainability report in the annual report, we've got a pretty clear road map that outlines a multiyear pathway for us to continue that sort of journey and that complexity, and we're doing more every day. So we're not ready to make an announcement such as Cooper yesterday. I applaud that -- what they did. I think it's fantastic. And every company is going to make their own decision on these things, and we laid down a road about a couple of years ago that we're following to the T.
Your net question comes from Mark Samter from MST Marquee.
A couple of questions if I can. Maybe first one might be a bit more for Investor Day later in the month, but I guess, even with Roma North expansion and the [indiscernible] numbers on the ways you've got to drill with the Atlas expansion. Is that -- I mean, that should be comfortably, comfortably covered by free cash flow over the next 18 to 24 months as you spend that money. I mean, again, pick an old debt, but probably on your old, you're probably net cash by the end of FY '22 even with this growth. Can we have any updates or thoughts on what you think about balance sheet management and how that might relate to return of capital to shareholders? Or we have to wait for Investor Day?
Look, it's a bit of both. Let me reiterate what we've already said, and then I'll make you wait for the rest. Ultimately, we're very focused on balance sheet strength and strong balance sheet always. And you'll hear us talk about leverage targets and the like that the market can get their head around in terms of our growth aspirations. We're focused on shareholder returns. We've said it in the last 2 investor mornings that we've had. It's -- we're very focused on the fact that shareholders supported us to spend an awful lot of money, and we've been very good custodian of that capital. And shareholder returns are front of mind, and you'll hear more about that at the end of the month also. And then thirdly, growth. We have huge organic growth opportunities in our existing portfolio. Just look at our reserve base. And your reserve to production ratio is still out of whack, and we need to bring that back to something that makes sense, which means more expansions of production supporting this recovery. So that broadly is what we've said before and what you'll hear more about in detail on the 28th.
And then second question, just on gas bars and potential gas sales. I think we probably both agree, there's been a lot of misnomers out there about the gas market. But I guess, even, to be honest, if you look at the ACCC netback LNG price for most pricing points in calendar year '21, that netback price has risen between $0.50 and $1 a gigajoule over the last 3 or 4 months on just these netback forecasts. Do you think buyers are starting to realize that they need to be careful what they wish for in maybe the rise in that same month contract price? Does that get them thinking? Or have we still got a while to go before the realization dawns?
Look, I think we operate in a cyclical industry, and you can't say cyclical and then only hope for the downside as a buyer. There's always going to be times when prices are low and prices are high. And I think, ultimately, what we're focused on is having a very large portion of fixed price exposure in our portfolio. And you can see the work we've done over the last couple of years. Reducing that reliance on oil -- on true oil price exposure and putting a very large degree fixed in the portfolio has been a real feature of what we tried to do. And from the relationship that we have with customers, we're very focused on that customer relationship because we're a seller, they're a buyer. And ultimately, customers are going to decide what they want. Do they want to reduce risk and lock in a price that they're offloading risk? Do they want to take a lot of risk and therefore, potentially pay less but potentially pay more because things go wrong? I mean that's the nature of the risk/reward formula. And look, we're open to all those sorts of things. Ultimately, there is a fair price that offers a fair return for a fair risk transferred, and we're focused on that. So I think you're right. Both customers and suppliers, and depending where you are in the cycle, should be careful what they wish for because ultimately, you need to be profitable through the cycle at every price, and that's what we're focused on.
[Operator Instructions] Your next question comes from Adrian Prendergast from Morgans Financial.
And congratulations on another solid quarterly, just getting here the same every time.
Thanks, Adrian.
But obviously, the tariff saving is another incremental positive on that -- across the Roma North volumes. Is there any difference at all at Atlas in that contracting? Or should we expect a similar economies of scale to also benefit future years there, is my first question?
Yes. So I'll probably defer the quantum part of that until we're closer to an FID. But certainly, the relationship that we had with this -- with Jemena, which is an infrastructure provider. And infrastructure providers, if I talk about the class of investor rather than Jemena themselves, they're focused on a post-tax rate of return on their investment for a given risk profile. And that risk/reward equation that I was alluding to in the previous question with Mark, you can see it quite transparently with -- there will be partnership between upstream and infrastructure. And you're seeing that there's countless examples in Australia and around the world of where the upstream takes all the risk upfront. And when that risk is removed, you can lock in a very competitive post-tax rate of return with the infrastructure provider, simply what's a locked-in rate of return with very low risk. And on that basis, it's been up to the upstreamer to increase as much volume as possible over that fixed cost and thereby, reducing unit cost to the upstreamer, but guaranteeing the same return to the infrastructure provider. So one of the beauties of this relationship that we have. So hence, we see this hub-and-spoke infrastructure operating model being so powerful for us.
Fantastic. And you've obviously got that really nice free cash flow profile that has now emerged, obviously, ex that development program. And that could easily carry those very low-risk, low-cost expansions, like you've announced today and also at Atlas. But -- as well as potential future capital management, as you highlighted, is being discussed in the company. Just where you see that the Bowen exploration really getting into, I guess, a heavier sort of phase? Is that -- should we expect that sort of in the next 2 years? Or is it more sort of a 3- to 4-year sort of story?
It's a 3- to 4-year story in terms of heavy expenditure. But in saying that, the way to think about this acreage is twofold. One, we actually see -- we have an obligation as part of the Queensland investment community upstream, without wanting to throw this bow too long, to not only just go after the Hollywood stuff, but actually do some heavy lifting in some areas where it's higher risk, higher return. But don't -- what you don't want is buyers' remorse. So the bid we put into the acreage is actually quite small. It's some 2D seismic well. And we have a specific investment thesis in terms of how the play might work. We'll prove it with that or we won't, and it's a pretty low downside with very material upside if we can prove something like Scotia. That's why we bid on it. And we'll be doing work in conjunction with our Atlas exploration, which you'll hear more about at the end of the month, around -- and Atlas, we're partnering with UQ. We're actually sponsoring a masters student to help us with some of all work -- funky subsurface work because it is a bit tricky as it deepens and you get less permeability. How do you try and create permeability? It's a bit of a holy ground in the Surat because there are Tcfs of gas subject to the same sort of [indiscernible] and no one has been able to crack it.
There are no further questions at this time. I'll now hand back to Mr. Davies for closing remarks.
Ladies and gentlemen, thank you for joining us for our results and obviously, the discussion on our expansion at Roma North. Wish you a very good morning.
That does conclude our conference for today. Thank you for participating. You may now disconnect.