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Thank you for standing by, and welcome to the Senex Energy Q2 FY '20 Quarterly Report Conference Call. [Operator Instructions] I would now like to hand it over to Mr. Ian Davies, Managing Director and CEO. Please go ahead.
Thank you, Tyler. Good morning, everybody, and welcome to Senex Energy's Quarterly Results Conference Call for the Second Quarter of Financial Year '20. I'm Ian Davies, Managing Director and CEO. And with me today is our CFO, Mark McCabe.
Good morning, everyone.
It's great to have Mark on board actually. So I’m joined at what is a very exciting time for the company. I know he's looking forward to meeting as many of you as possible over the coming months. We've got another great set of results to talk to this quarter, highlighted by production outperformance in the Surat Basin and initial gas sales from Project Atlas. If you saw yesterday's ASX release, you would have read that gas production in the Surat Basin has reached 20 terajoules a day. This is an outstanding result demonstrating the quality and potential of these assets.At Roma North, production exceeded 13.5 terajoules a day and is closing in on the plant's initial capacity of 16 terajoules a day or around 6 petajoules per year. This is an extremely good performance from the field, and we're seeing the existing wells continue to ramp up with initial production from 10 new wells brought online from the current campaign with another 16 wells start to produce in the coming weeks. Roma North's growth trajectory is set to continue.At Project Atlas, the first 23 wells are online and producing above 6.5 terajoules a day during the early ramp-up phase. This rate of initial production is extremely encouraging particularly as most of the wells had been online for less than 9 weeks. So with Surat Basin gas production of 20 TJs a day, we're well on our way to hitting an initial plateaued production of 48 terajoules a day or around 18 petajoules a year, which is a very material amount of gas.Yesterday, we also announced significant milestones for Atlas gas sales. During the quarter, we delivered first gas molecules into the domestic market ahead of schedule in what we believe was a record time for a greenfield project. Initial volumes was sold to CleanCo, which is the Queensland government's power generator company from December, and sales to CSR and Orora started on 1 January as planned. We've signed a number of new smaller gas sales agreements with domestic customers also, and we expanded our agreement with Orora. This will see us deliver over 13 petajoules of natural gas to Orora through 2027. So a long-term gas sales agreement with material volumes to a manufacturer. We'll now have more than 32 petajoules of Atlas gas contracted, which includes a large portion of expected 2020 production. Contracting is also an ongoing process. We'll announce new material contracts as and when they are signed. So with Roma North and Atlas performing very well, it's provided a great foundation for an excellent quarterly result. I'll touch on the highlights briefly and then hand over to Mark.Firstly, rounding out production, we saw a total volume up 35% to 447,000 barrels of oil equivalent. Gas was obviously the driver, but it was also great to see oil production in the Cooper Basin holding firm. We've been active with workover activity in the Growler and Spitfire fields, and improved performance from these fields is more than offsetting natural oil field decline. It's also worth noting that gas production overtook oil production this quarter and is now set to become increasingly dominant in the production mix, which of course, is our strategy.In the field, our operations team continue to have great results. With our drilling partner, Easternwell, we are now well into the campaign and continue to see material efficiency gains. 26 wells were started during the quarter, and in total, we have drilled and completed 49 wells. The rig is currently drilling at Roma North and will return to Atlas next month. Our infrastructure partner, Jemena, also continues to deliver great outcomes at our gas processing facilities. Excellent uptime rates at Roma North are supporting our production performance. At Atlas, construction of facility was completed during the quarter and commissioning will be finished in the coming weeks. So a truly great result.Turning to the Cooper Basin. We have made great progress in building our inventory of future exploration and development prospects. Firstly, the Gemba field came online, and we achieved first gas sales during the quarter. This is another example of Senex delivering on its promises to commercialize new gas for the domestic market. We're now reviewing follow-up appraisal activity for the field.Secondly, we completed the free-carry drilling program with Beach. 3 wells successfully cased and suspended with an almost 3-kilometer horizontal appraisal well in the Growler field. We're now reviewing results from the campaign to determine follow-on activity particularly in the Growler and Spitfire fields. Lastly, from an exploration perspective, we completed the survey and interpretation of the Westeros 3D seismic survey in the southwest of the Cooper Basin in South Australia. This survey, the south of the western flank, and to be honest, we're quite excited about a number of material targets identified in the Birkhead and Murta Formations and also Namur, McKinlay. We're beginning drilling these projects in early FY '21.Over recent times, the Cooper Basin has delivered what was asked of it, cash generation to assist with the Surat Basin program to build a material gas business. Now that we're nearing completion of the Surat campaign, we look forward to getting active again on the Cooper with a reinvigorated project seriatim. So with that fairly concise overview of the quarter, I'll hand over to Mark.
Thanks, Ian. And again, morning, everybody. It's great to be here at Senex. And as Ian mentioned, I'm looking forward to meeting more of you in the coming weeks and months. Turning to the quarterly. It's certainly a pleasure to be reporting on such a great set of financial results for my first quarterly report with Senex. The increase in production that Ian mentioned flowed through the sales volumes and revenue. Overall, sales volumes are up 25% to 400,000 boe driven by a 61% increase in gas sales, and oil sales broadly flat, as Ian mentioned. And Ian also noted the gas volumes exceeded all volumes this past quarter, which is quite a milestone. It's worth noting that larger than usual differences between production volumes and sales volumes were experienced this quarter, largely attributable to flaring a gas at the Atlas Project while construction of the processing facility was completed.Sales revenue was also up materially, 23% increase to $29 million. A 12% uptick in realized oil prices supported a 9% increase in oil revenue to $20 million, and gas revenue was just shy of $10 million. It's great to see gas making a meaningful contribution to overall revenue, and obviously, this trajectory will continue if gas production continues to ramp up in the coming months. With regard to hedging, no new oil hedges were placed during the quarter, although we do continue to actively monitor that position.Turning to liquidity. In December, we fully drew our senior secured debt facility to make sure we've got ready access to capital as we complete the Surat Basin work program. So our overall liquidity position remains strong with closing cash reserves of $123 million, including the proceeds from that debt drawdown. And then lastly, CapEx of $39 million tracked broadly in line with last quarter, with the bulk of that spend relating to activities at Roma North and the Atlas project. We also completed the drilling component of the free-carry program in the Cooper Basin, and $5.7 million of the quarter's spend was carried by Beach. There'll be some minor spend incurred next quarter as we complete connections and associated activity there. So in closing, it was a fantastic quarter for the company, and a real credit to the team here. I look forward to sharing more financial information with you when we release our half year results next month.And on that note, I'll hand back to Ian to wrap up the formal part of the call.
Thank you, Mark. As I said in yesterday's -- as we said in yesterday's release, we're delighted with our operational production performance to date. We are now well on track to becoming a material supplier of gas to the East Coast market. We've successfully delivered most of our Surat Basin work program and production performance is reinforcing the quality and the exciting potential of the acreage. And on that note, I'll conclude the formal part of the conference call and open the lines to Q&A. Thank you.
[Operator Instructions] Your first question comes from Mark Busuttil from JPMorgan.
I just had a question in regards to East Coast gas markets. I think in the last 5 to 6 months, we've seen price had collapsed pretty hard. And there seems to be an awful lot of gas coming through, whether it's from your sales or the ramp up of your Queensland assets. Santos yesterday was talking about high production out of GLNG and Cooper. We've got the [ sole ] project coming online in about a month. And even Victoria in offshore seems to be supported going into 2020. So can I get some views, firstly, in terms of what you attribute the decline in prices to? Is it just that sheer volume of gas that's coming online?
Yes. Mark, look, as you know, with East Coast gas prices not all things are created equal. And the information that various sources either come out with or get or quote are very rarely apples and apples. So let me take a step back for a moment around the way we're approaching our business. So first of all, the point in time spot market prices that you're seeing are variable, and they've been quite low. They're probably around the middle of the range of what you'd expect at the moment. They're certainly lower than they were, yes, 6 or 7 months ago because of new supply coming in specifically from APLNG in particular, but also other projects in Gladstone, into Wallumbilla. And clearly, we're providing additional volumes as well. To your point, we do see an initial softening of those spot prices. But spot and contract, very, very different risk arrangements, very, very different pricing arrangements because you look, we -- and we in particular, have had a strategy which was very well flagged of our partnering with customers that we can -- our Orora transaction is a 7-year deal. And the contract prices you will see coming through next quarter, bear very little resemblance to existing spot market prices. We have contracted the vast majority of our expected 2020 production. So we actually foresaw the potential risk in spot prices. We're not seeing that come through in negotiations or discussions around material contracts, term contracts, because the risk/reward regime, and certainly the uncertainty in future years is just very different. So we're very comfortable where the market sits. We're very comfortable with our own contracted gas position and you'll see those numbers flow through next quarter.
Okay. So my next question was going to be about the exposure to these -- to spot prices, which I think you've answered. But just one last thing, I guess, I mean, the spot price in the STTM in Brisbane is like 5.5, and I don't think that Queensland gas can make much money at 5.5. So do you see potentially some sort of production response through the course of 2020 as CSG production maybe says it's not really worth exporting at current prices or selling to the domestic market given the amount of new capacity coming on and the impact that's having on prices?
Yes. So if I think about the -- well, 2 things, one is the industry response, and secondly is us. The industry response, which is, I guess, code for the LNG projects, they always have a decision to make around CapEx utilization, and is it worth drilling additional wells because there are thousands of wells to drill over the next decades. So whether they drill flat out this year or hold back a bit, I mean that's a decision for them. And you'd expect a rational response to lower domestic prices because there is a very long tail of production required just to fulfill their LNG contracts. So that's probably point one. From our perspective, if you refer to our comments previously, we've contracted the vast majority of 2020. And we also have some bespoke contracts from a risk management point of view in place. So making sure that we're always able to get our gas away. And clearly, economics is a very important thing for us, especially when you're ramping up. So we've proven over time we've a pretty good weather eye to risk and we've covered those risks off fairly substantially. So we see the next 12 months as fairly plain sailing for us regardless of what the price does domestically. But I should say that this is also proof, and just on a macro level for a moment with all the policy debate going on, it's also a proof of the market actually working. When you provide and when governments provide a clean run for the market to do its thing, you're getting a supply response into the market and you're getting a lot of prices as a result. And this is just proof that that's working.
Your next question comes from Saul Kavonic from Cr?dit Suisse.
A few questions, if I may. Just following on from the comments you just made. Appreciate relatively fully contracted this year. Next year you got some uncontracted volumes. I just want to ask, are you envisaging your currently uncontracted volumes for next year are going to ultimately be contracted into longer-term multiyear deals? Or could some of or a material amount of them under your planning end up being contracted under shorts, which I'd call sub-2-year deals?
Yes. Okay. It's a good question because the thing I failed to answer on Mark's as well, was make the point that, of course, Roma North is 100% contracted under the U.S. JCC pricing to GLNG. So whatever we produce, we sell at an oil-linked price. So we're sort of -- it's very much oil dependent -- oil-price dependent rather than spot prices. But I acknowledge there is a link. In relation to Atlas, our strategy is to partner with end users and grow together. And we are very focused on, as a smaller business, making sure that we partner with customers that we can work with. I have no interest in dealing with people that don't appreciate having a partner of material substance and be able to work together. We're not a business that just does transactions for the sake of it, and being mercenary about it, we're growing a business that's going to be here for decades. So those partnerships are very important. Now why I say that is that links very distinctly into the needs of those customers. And the feedback in the market, which are very well publicized, is customer -- is some quarters of the market keep saying they can't get term contracts. That is patently incorrect. And the case in point of Orora for a 7-year deal is a case of that. So with our own strategy, we would envisage seeing 2-, 3-, 4-, 5-year deals at all points in the cycle. We would also envisage seeing shorter-term deals for the margins because prices go down, prices go up, and you've got to manage your risk exposure from a production perspective as well.
Great. Another question, just on Roma North. I mean the outperformance you've talked on and it looks like we're well on track to reach the target 16 TJs a day, well ahead of completion of the drilling campaign. I was wondering, how much -- is there any indication of if there is much flexibility in the plant itself and the possibility of seeing above 16 TJ day levels are reached in the second half of the year? Is that something that's out of the question or that's a possibility?
It's not out of the question. The plant 's been designed to reach a nameplate capacity of 16 terajoules a day at given input pressure and flows and output pressure and flows. So as your output pressure, for instance, is lower than design, which we're actually seeing at the moment, you will get higher flow rates from a capacity point of view being able to put through the plant. Because, from memory, it's 15 MPa is the maximum input pressure into the GLNG pipeline. So if we can get into that pipeline at a lower pressure, which is general, then you can get higher throughput with the given amount of horsepower in the plant. So the answer is maybe. If -- we would expect to be able to produce more, but it's not guaranteed because of those constraints. And clearly, when it comes to production potential from the field, once you got the kits in there, you produce to its maximum. So we'll be doing that.
That's a good sign. Also, with the Jemena, the Roma North processing facility sale and leaseback, the funding from that sale, has that or has that not been incorporated in the cash balance within December? And if not, when are you envisaging that comes in?
Yes, it's there.
Got it. And just lastly, in the release yesterday, you spoke of Roma North coverage well rates exceeding 0.3 TJs a day, is that also an indication of what proportion or percentage of the wells are kind of at the sub-0.1 TJ a day level? And if you see risk to, I mean, essentially having to potentially shut some of those in because they can't cover ongoing costs, once you reach the major workover stage?
Yes. It's actually a good question, and it goes to fundamentally what CSG is. I mean CSG is a statistical resource play where you have some stars and you have some dogs and you have to hold it in between. And that's a difficult concept to get your head around when you're kicking a major project off. But once you're up and running, things become far easier. So to answer your question, very few wells are below 0.1. And frankly, they are still performing, and the reservoir is dynamic. So as you dewater and as you change -- in-reservoir pressure changes across the field, you will, all of a sudden, get big kick outs in wells that you might not expect. So when we've seen that across numerous parts of the field. So in the early days, you keep pumping. Secondly, the rule of thumb in CSG, and this is a very basic rule of thumb as opposed to our curves, 20% or 30% of your production does -- of your wells, does 80% of your production. And so -- and that's just fundamentally the way it works. So we have some extremely good quality wells that keep improving and we have some middle-of-the-road wells that are improving nicely, and we have some low-performing wells, which will produce exactly the same amount of gas over time, just over a different duration.
Your next question comes from James Bullen from Canaccord Genuity.
Congrats on the results. So with production now over 20 terajoules a day, you previously provided us with that guidance of an exit -- FY '21 exit rate of about 48 terajoules a day. Are you thinking about bringing that forward given the performance? And also are you tempted to provide FY '20 production guidance?
Tempted is probably the right word to use because, again, and I was pretty clear about this right up front, it's a bit of a mug's game picking CSG ramp ups and having a 30 June arbitrary date associated with it. It's a very, very difficult exercise and the key to an unconventional play is you get the wells on and you keep them producing, and what will be, will be. And we've -- we're very happy with the production performance today. We are looking -- during the half year result, in about a month's time, we'll certainly be putting some effort into how we provide more guidance or more certainty into the market around various metrics including future programs, et cetera. And at this stage, we've got no real change to make, albeit, we're very, very happy with current production performance.
Great. And just around reserves, I mean, are you going to stick to doing those annually? Or are you going to look at providing an update on 2Q reserves this half?
Yes. It's a good question, one we've been exercising our mind about internally also. As you know, for the last decade, we've produced -- we've done annual certification of reserves because it's actually quite a time-consuming and expensive process because we take that external certification rather seriously. And that's the base case as of today. But it's some work we're doing internally around how we -- that are a little more dynamic, whether it's even internal or external. So I'll take [ no ] notice if that's okay? Thanks, James.
[Operator Instructions] Your next question comes from Stuart Howe from Bell Potter Securities.
Yes, a great quarter. I guess following a bit on from James' question. I think you've now drilled about 50 wells in the current campaign, are you still looking for around 100 wells [ all obviously built ], so about halfway there? Or has there been any change in that number? And I guess secondly, the gas processing facility at Project Atlas, I was expecting that to have been commissioned during the quarter. It seems like there's been some slippage there, perhaps if you can just run through what might have caused that.
Yes. No, that's fine. So to answer your first question on wells, we'll have more to say on that at the half year. Again, it's sort of a dynamic process. We've got a base case in place, and we're sticking with that until we're not. So we'll have more to say on that in about a month's time. In relation to Atlas, the wording's a little tricky to get right in a piece of paper because it's actually 5 trains of 8 terajoules a day, and we're progressively commissioning the plant. It's the entire plant that's not fully commissioned, the actual trains themselves are progressively commissioned. So we're basically right on track. Although I do recognize the wording is a little tricky because the whole balance of plant isn't formally finalized commissioning.
Your next question comes from Gaarika Raju (sic) [ Taarika Raju ] from Morgans Financial.
Congrats on a great quarter. I just wanted to -- with the good ramp up in early gas production at Atlas wells, I was just wondering if this is indicative of the good location in the Surat?
Look, it definitely it is. And it's nice to be vindicated on a couple of things occasionally because when we're awarded this block, I mean, there are 300-odd wells next door. It's a very well-known geological area. And notwithstanding, there was no production from the actual 58 square kilometer piece of acreage. There was a lot of production next door. So we were always very confident around that production capacity and the resource in the field. But like all these things, how fast it ramps up, who knows. So I think we're happy with the good results to date. But there's no doubt, it is a top-tier piece of acreage that we're driving very hard.
Thank you. There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.