Senex Energy Ltd

ASX:SXY

Earnings Call Transcript 2018-Q2

[Ian Richard Davies, CEO, MD & Director]

Thank you, Jade. Good morning, everyone, and happy new year. Welcome to Senex Energy's quarterly results conference call, the first for 2018. I'm Ian Davies, Managing Director and CEO, and with me today is our CFO, Graham Yerbury.

[Graham Kenneth Yerbury, Chief Financial Officer]

Good morning.

[Ian Richard Davies, CEO, MD & Director]

This morning, we'll be taking you through our achievements for the second quarter of the financial year 2018, and then we'll open the call to questions.So on a macro level, we're seeing optimism creep back into the energy markets and stronger pricing for oil. When combined with improved production, we've been able to deliver a strong result for the quarter, and Graham will talk through that shortly. Overall, Senex Energy finished the 2017 calendar year on a high, hitting several significant and critical milestones on our Surat Basin projects whilst planning for the next phase of material growth activities in the Cooper Basin.I'll begin with the Surat, where you'll recall, we have 2 key projects that are central to us delivering our strategy of building an East Coast gas business, both Project Atlas and the Western Surat Gas Project.So let me start with Project Atlas, the prime coal seam gas acreage awarded to us by the Queensland government in September last year. Already, we have submitted the Environmental Authority application to the Queensland government, which is a precursor to Senex being awarded a Petroleum Lease over the block, which we expect around the middle of the year. And for clarity, without a Petroleum Lease, we cannot begin development. So we're moving those ahead as quickly as we can.We're continuing to prioritize all critical path items to allow us to access the block as soon as possible, including working on our field development plan and also our physical path to market.Let me be clear, this is P1 acreage containing more than 200 petajoules of recoverable gas capable of delivering more than 30 terajoules a day at plateau into the domestic market. We are very focused on delivering on this great asset, bringing together all the lessons we've learned so far in the Surat Basin and delivering material gas to the East Coast in 2019.So moving on to the Western Surat Gas Project. At our full year results, I told you we would deliver 30-well Phase 2 investment program by the end of the calendar year 2017 at an all-in cost of AUD 1.2 million per well. Today, I can confirm that we have delivered on that commitment. We were determined to demonstrate strong cost control in this first material phase of investment on the project, and we have done so. The Phase 2 wells came on strongly, and as we expected, the production rates have since stabilized to around 2 terajoules per day of sales gas, which is ahead of run rate expectations for this program. We are working through some initial teething issues with the commissioning, but these are nothing out of the ordinary for a brand-new development. And we'll be applying all of the lessons learned to the next stages of development to come, and I'm happy to talk more about that in Q&A.We continue to make excellent progress on other related fronts also. Gas produced in the Phase 2 wells is now being sold to GLNG on competitive terms on an as-available basis. This is a real win-win outcome for both parties and faster period to the alternative option of clearing gas. Senex also reached milestones on full field development during the quarter. We received the environmental authority from the Queensland government to fully develop the Western Surat Gas Project acreage. This keeps us on track to receive all remaining approvals in mid-2018, after which we will be ready to sanction the next material phase of drilling investment.In preparation for reaching these milestones, the next phase of 40 to 50 wells to be drilled on the Glenora and Eos blocks have, in fact, been identified already.So now moving to the Cooper Basin. We have a number of exciting opportunities in the funnel. Our upcoming drilling campaign includes the horizontal well on the Growler fields, the first of its kind, and follow-up drilling on and around the Marauder field.Looking to future campaigns. The interpretation of the Liberator 3D seismic data has yielded a significant number of prospects. The western flank is clearly our priority area for capital spend in the basin in both the near and medium term.Finally, we have made great progress on our gas projects with our Vanessa field to come online in the coming months, thanks to the new connection pipeline which is under construction as we speak and partially funded by the South Australian government. We've also received more financial support from the South Australian government during the period to progress our Gemba gas opportunity, which you'll see us drill during the second half. And we're continuing to work with Lattice and Planet Gas on follow-up drilling opportunities on our unconventional gas project in the Cooper. We still have around $45 million to spend on the farm-in arrangements, which we plan to deploy this calendar year.So moving on to our production results. And overall, Senex delivered approximately 200,000 barrels of oil equivalent this quarter, up by around 11%. Oil production held steady and the contribution from Marauder-1 offsetting natural field decline. Our base oil portfolio continued to perform in line with or ahead of expectations. Growth in production was driven by the Western Surat Gas Project Phase 2 wells coming online, and we expect to see them ramp up throughout this year. And as a result, we are on track to deliver production guidance with the final outcome to be influenced by the success of further drilling which we had planned in the western flank over the next few months. In addition, we expect the Vanessa gas field online through the second half of FY '18.So with that, I'll now hand over to our CFO, Graham Yerbury, to take you through other parts of the report.

[Graham Kenneth Yerbury, Chief Financial Officer]

Thanks, Ian. So we've had a strong quarter, thanks to the increase in the oil price and higher volumes of oil sales. Our realized oil price of AUD 95 per barrel for the quarter reflects higher Brent pricing at around USD 61 on average, the benefits of the revised sales agreement with the SACB and the revaluation of oil in transit. As a result, our sales revenue increased by 33% over the prior quarter.We were also assisted by the Aussie dollar being slightly weaker during the quarter, averaging $0.77 compared to $0.79 in the prior quarter.Last week, we took advantage of strong Brent pricing by locking in hedging for the majority of the forecast volumes for the 2019 financial year. In doing so, we guaranteed minimum pricing of USD 56 per barrel on average for the year while maintaining full upside participation in a higher oil price environment.In terms of capital expenditure for the quarter, $17.8 million was invested mainly on the Western Surat Gas Project. This included spend delivering the remaining 9 wells of the Phase 2 campaign as well as early works on the next phase of drilling. With stronger pricing for oil and gas, we'll expect to maintain this positive momentum into the third quarter.At this point, halfway through the financial year, Senex' financial position remains strong with $82 million in cash at the 31st of December 2017. We continue to progress our whole of company finance solution that will fund the future and continued development of our Surat Basin projects. On track to be delivered in the coming months, this program of works supports our goal to deliver more gas into the East Coast gas market.And with that, I'll hand back to Ian.

[Ian Richard Davies, CEO, MD & Director]

Thanks, Graham. So in conclusion, we've reported some strong results and great progress to date. We have an action-packed year ahead and look forward to delivering the milestones on our 2 key projects in Queensland as well as continuing to create value from our western flank oil position in the Cooper. We will be reporting our half-year results to the market on Tuesday, the 20th of February. As usual, conference call details for that session will be posted to our website ahead of time.And with that, I'd like now to open the call up to questions. Thanks, Jade.

[Operator]

[Operator Instructions] Your first question comes from the line of Dale Koenders from Citigroup.

[Dale Johannes Koenders, Director and Analyst]

A couple of questions. Firstly, you mentioned about completing the FEED process on processing facility for Western Surat Gas Project. I was hoping you could provide an update on thinking whether you'll build, own and operate or access third-party facilities or have someone else lease that back to you. How are you thinking about CapEx outcomes across the new line with thoughts going into the process? Or are they slightly higher or lower? And what are you thinking about capacity?

[Ian Richard Davies, CEO, MD & Director]

Dale, thanks for the question. It's one of the things we're at the final stages of working through and have an update going to our board the next month or so. So without precursoring that too much, suffice to say there are 2 options that are available for physically getting gas to the market, culling through nearby infrastructure or building our own. And ultimately, I mean that decision, as I said, will be made very shortly. And we've gone through the FEED process where we've started detailed design also of that infrastructure on the occasion that we actually reach an FID decision to do it ourselves, which is not unlikely. The CapEx outcomes are in line with our previous thoughts, albeit some moving of the chess pieces around in terms of where the sales gas pipeline would go, et cetera. But it's a very economic outcome under any scenario, so we're feeling quite confident about our way forward there.

[Dale Johannes Koenders, Director and Analyst]

And -- okay. In terms of capacity, how are you thinking about what access to capacity you'll need for future development in the field?

[Ian Richard Davies, CEO, MD & Director]

Yes, so it's interesting, the Western Surat -- well, let me take a step back. Given the Tier 1 nature of Project Atlas, then we have a very fortunate position that we have the ability to prioritize capital expenditure across basically 3 areas: one, Cooper Basin, western flank, and also, that includes the CBOS expenditure with Lattice; the Western Surat Gas Project; and also Project Atlas. So the 3 buckets to think about is that obviously. Project Atlas is likely to be the most economic under every scenario. I think that's pretty well understood in the market, and we'll be talking a lot more about that as we get closer to our approvals. So clearly, that is a prioritization project for us. On the Western Surat, coming back to your question, the thinking is that the next phase of development will get us to plateau of around 16 terajoules a day, which is around 1 million barrels a year. And then we'll make incremental investment decisions following that to increase that plateau. Now that ties into the incremental nature of the field development planning and gas sales agreement that we have with Santos GLNG. And it also ties in with -- if we do indeed reach an investment decision on processing infrastructure, the units are 8 terajoules a day each. So that's why 16 -- so think of it as 16, 24, 32 and so on. And the modular nature of the plant allows us to stage that increment and stage those investment decisions. So we're actually in a very, very fortunate position. The key to this, as you know, is getting the reservoir data to match expectations -- at the moment, it's above expectations -- and also the financing solution to allow us the balance sheet capacity to walk and chew gum at the same time to move all of these good-quality projects ahead at once.

[Dale Johannes Koenders, Director and Analyst]

Am I right that -- saying the next 40 to 50 wells will only get you to 16 TJs a day?

[Ian Richard Davies, CEO, MD & Director]

No. So the way the field development planning -- as you're aware, we said we've identified 40 to 50 locations because that's a function of land [ whole] as an area. What the actual investment decision is, is still a subject of debate internally as to how aggressive we go towards that first phase. So you'll hear more about that not only in our full year results but also the planned Investor Day for early March. So without preempting that too much, there's quite -- a little bit of water to go under the bridge yet around reaching that target and what the capital investment decision and indeed timing of that is. So I wouldn't read too much into that at the moment.

[Dale Johannes Koenders, Director and Analyst]

Okay. Finally, could you talk a little bit more about the, I guess, the challenges in the ramp-up, the teething issues which you've mentioned, noting that your field rate had dropped from 4 TJs a day to 2? That's halved. Appreciating a lot of that was flash gas, but what are those operational issues? And what has been the impact to the field so far?

[Ian Richard Davies, CEO, MD & Director]

Yes. So look, I'm glad you brought it up. We've been trying to take a pretty transparent view with everything actually in these projects, which I think is hopefully a nice change for everyone. The work that we've done for the Western Surat Gas Project, ironically, is indeed designed to flush out all the teething issues of the new development. So the 30 wells now, as you -- if you recall, back to the investment decision on 30 wells, why did we decide 30 wells instead of a 5-well pilot or 2 5-well pilots? We decided on 30 wells because it's enough of a initial development to do every single part of the value chain. And as I said, ironically, part of the reason for that was to make sure that we had every single part of the value chain executed so that when we do 100 or 200 wells, we're not discovering what may or may not go wrong at that particular point in time. So from that point of view, we're actually pleased that the teething issues are coming out now. The lessons learned, we've done are things like -- and I think you'll be aware of this, too, Dale, considering your [ note ] and your experience on commissioning. The -- things like high-pressure events in pipelines, so flow assurance, your pressure valves, the placing of the ESP, the sizing of the stators and the rotors and the PCPs, et cetera, et cetera, et cetera, all of these things are being noted out. And it's -- one of the pleasing things about it is nothing that we've come across is either unexpected or unable to be rectified very easily. And in conjunction with our relationship with GLNG, we're making great progress in that collaboration to make sure that we're learning together in anything that comes up.

[Dale Johannes Koenders, Director and Analyst]

So am I right that there are long surface teething issues? I guess my concern is that Roma's had probably [indiscernible] the other field to the south of you. Is that 5 years of subsurface teething issues? I just wanted to make sure that you feel really confident that problems will be behind you very shortly.

[Ian Richard Davies, CEO, MD & Director]

Yes, no, we're very confident of that. In fact, the lessons -- we've got access to all of GLNG's data, as you might know, in the Roma field as part of the GLNG gas sales agreement that we have. So the initial work that we did around this program is making sure that we learned effectively from all that. So we're not seeing any subsurface -- any outlier subsurface issues at all. We're seeing the reservoir perform above our P50 expectations for dissolved gas. There was a bit of flash gas there as you know, which we were quite clear about when we announced it prior to, and there's a bunch of surface issues, which we're working through. So we're not expecting ongoing reservoir issues at all.

[Operator]

[Operator Instructions] There are no further questions at this time. I would now like to hand the conference back to today's presenters. Please continue.

[Ian Richard Davies, CEO, MD & Director]

Thanks, Jade. Well, thank you very much for your interest in Senex and listening, and look forward to updating you again at our full -- our half-year results. Good morning.

[Graham Kenneth Yerbury, Chief Financial Officer]

Thank you.