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Thank you for standing by and welcome to the Senex Energy FY '21 Q2 Quarterly Update. [Operator Instructions] I would now like to hand the conference over to Mr. Ian Davies, Managing Director and CEO. Please go ahead.
Thank you, and good morning, and welcome to Senex Energy's quarterly results conference call for the second 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.
And I should say Happy New Year. It's going a little bit late in the day, but Happy New Year to everyone. I hope you had a rest and a safe holiday. We have another impressive set of results to report today, which demonstrate continued natural gas production growth in the Surat and also, of course, solid financial performance. I'll talk through some key highlights for the quarter, Mark will then discuss our financial performance, and we'll close, as usual, with Q&A. At the outset today, before we get into the detail of the quarterly report, it is really satisfying to recognize that just in the last week, we've achieved quite a significant production milestone of 50 terajoules a day or more than 18 petajoules a year of production. This is above the design capacity of our facilities when we commenced our Surat development activities over 2 years ago. And I'd like to acknowledge this achievement and the critical contributions of our people and partners in getting us to this point. I'll now turn to other highlights from the December quarter. Firstly, as you'll recall, in November, we announced the sale of our Cooper Basin business to Beach Energy for $87.5 million in cash consideration. We're progressing well towards completion of this transaction this quarter. The proceeds of the sale brings forward more than 5 years of free cash flow from the Cooper and will, of course, support the accelerated development of our 780 petajoules of 2P reserves in the Surat Basin. Clearly, balance sheet strength is top of mind also as we continue to build our business to provide cash flow stability for future dividends and growth, as highlighted in our investor briefing in November. And as I've also noted previously, it is with mixed feelings we exit the Cooper. And I'd like again to recognize the contribution of our team in the Cooper who have been with us for a long time and wish them all the best, and Beach Energy, all the very best. At our investor briefing on November 5, we set out Senex' transformation agenda aimed at delivering balance sheet strength, cash flow resilience, production growth and future dividends. Senex' target targeted a fivefold growth in annual production to 60-plus petajoules a year by end of FY '25 and is progressing low-risk organic growth options in the Surat Basin, including, of course, the continued expansion of our Roma and Atlas assets. In fact, a number of expansion opportunities are already in the FEED phase and are all progressing well. And we'll have some updates today with more progress expected in the coming months. On the gas marketing front, we finalized a number of gas sale agreements in the second quarter, covering over 6 petajoules of gas for supply in calendar years '21 and '22. And these include a 2-year sale agreement for 4 petajoules of natural gas with Alinta Energy, which we announced on the 26th of October. Turning now to operational results. And as I've mentioned already, it was another quarter of strong production in the Surat Basin. Total production was up 16% from the prior quarter to 4.3 petajoules in the Surat, with production peaking at 49 terajoules a day in Q2 and subsequently reaching that 50 terajoule a day milestone following quarter end. This volume of natural gas on an annualized basis represents the equivalent of 10% of Queensland's natural gas demand. It's also worth noting there's an increase of 225% on the December quarter from last year. In fact, as you can see also from the chart on Page 4 of the quarterly, the Surat has grown at a quarterly compound growth rate in production of 40% since the first quarter of FY '20. So all ticking along very, very well. Roma North performed consistently throughout the quarter at above 18 terajoules a day, constrained by the capacity of the plant, which, of course, we're expanding. Performance of both the reservoir and the gas processing facility continues to be excellent, supporting this expansion to 24 terajoules a day or around 9 petajoules per annum, which we announced FID in October. Lastly, in the Cooper Basin, oil and gas production was 157,000 barrels of oil equivalent, down around 8% from the prior quarter due to natural field decline and temporary shut-in in some marginal wells as we hold over for the sale of Beach. So that's a fairly quick overview of highlights since our last quarterly. I'll hand over to Mark to discuss some of the financials.
Thanks, Ian, and good morning again, everyone. I'll keep things pretty brief today. We've got our half year results coming up in February, and we'll provide an update on guidance at that point. As Ian said, there was another solid set of financial results this quarter with the adverse impact from the strengthening Aussie dollar offsetting gains from some higher volumes and improved oil-linked pricing. As you will have noted, as we work through the results, we've separated the Cooper Basin as discontinued operations throughout the report. And so we're talking primarily about the Surat Basin. You can start to get a sense for the continuing operations there. I'll start with sales volumes in the Surat, where we saw an increase of 18% from the prior quarter to 3.8 petajoules, excluding third-party purchases, largely due to continued production growth at Atlas combined with ongoing solid performance at Roma North. Sales volumes are up almost 250% on the previous December quarter. Just quickly on Cooper Basin sales volumes. We're basically flat on the prior quarter at 150,000 barrels of oil equivalent, helped by the favorable timing of liftings to offset lower production. Turning next to sales revenue. The growth in sales volumes, combined with improvements in oil-linked pricing from our Roma North GLNG contract, helped contribute to revenue growth of 26% this quarter to $27.9 million. As noted earlier, some of the gains in oil-linked pricing have been offset through the strengthening of the Australian dollar against the U.S. dollar through the quarter. Average realized gas prices, and we exclude hedging benefit in these calculations, were up 5% on the prior quarter at $6.20 per gigajoule largely because of improvements at Roma North with the lagged exposure to oil pricing benchmarks. Hedging benefits remained flat quarter-on-quarter. A total of 139,000 barrels of oil equivalent production is hedged for the 6 months ending 30 June 2021, using swaps with an average price of AUD 90 a barrel. Lastly, on liquidity and capital expenditure. Peak net debt of approximately $55 million was reached in Q1, and that reduced to $52 million in Q2. As we've noted previously, we expect to be net cash positive by the end of Q3, in line with the expected completion of the Cooper Basin sale to Beach Energy. Drawn debt reduced to $110 million in Q2, following a voluntary debt prepayment of $15 million. And it's important to note that this amount remains available for redrawing. Capital expenditure for the Surat Basin increased 23% to $8.1 million. Activity in the quarter included ongoing development planning work for the Roma North and Atlas expansions and finalization of Atlas water processing infrastructure. That's a brief snapshot of the financials for the quarter. So I'll hand back to Ian now for an update on our development activities and to wrap up the formal part of the call.
Thanks, Mark. Just some comments now around our growth agenda. As we announced on the 13th of October, the Roma North expansion to 24 terajoules a day or around 9 petajoules per annum reached FID and is expected to be online in the first quarter of FY '22. Key activities underway, including the execution of the gas processing facility expansion and detailed planning for the wells and gathering campaign. The planned expansion of Atlas to 48 terajoules a day or around 18 petajoules per annum is also continuing with current activities, including working with Jemena on FEED and long lead item planning for the gas processing facility expansion with FID targeted for later this financial year. In addition, the wells and gathering program is currently in FEED with long lead items and being prepared with execution targeted for Q4 FY '21, so later this financial year. I do have to say, however, and the issue of long-term and competitive natural gas supply has been well covered in the press, that for us upstream businesses to invest in production expansions, customers actually have to commit to term offtake. No doubt, we will cover this topic more in Q&A, and I'd welcome that. We've also commenced FEED activities for the expansion of the Roma North acreage to 48 terajoules a day, again around 18 petajoules per annum, with a view to a FID decision by H1 of FY '22 and a target online date of H1 FY '23. Key activities currently underway include gas processing facility site selection, our landholder discussions, of course, and preliminary well and gathering design for the campaign. So it's certainly been a great start to the new financial year for us. Continued production growth, strong financial performance and promising expansion plans certainly make for an exciting year ahead. And on that note, we'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 [ Daniel Levy ] at Citigroup.
You said you'd welcome the question, so I'll start with that straight away. So I'm just trying to get my head around the FID risks for that Atlas expansion. So you said obviously the expansion of facilities is contingent on signing some term contracts. Now kind of to get a bit of more clarity on that, what percentage of volumes would you want contracted before you take FID? And how far along in that process are you?
Yes. So I might expand the question up a notch because it's -- there's no sort of set percentage, et cetera. It's all obviously opportunity and upside and downside risk management, like any other part of our business. So let me probably answer the question in this way around the recent negotiations around the heads of agreement, for instance, which have been well covered only yesterday. It was announced by the Prime Minister up in -- all right, where he was, South32. And clearly, there was a very blunt expectation from consumers that there's going to be some sort of price trigger in that HOA. I'm not giving anything away. We weren't party to the negotiation, of course, but it was pretty well covered in the press during that time. And look, we're very obviously comfortable with the fact that the HOA provides a very clear mechanism for more gas supply to the market. But I think it's completely disingenuous of some participants in the market to have free rein on the sale of their product but want some sort of subsidy from upstream, the upstream producers. And obviously, we have no interest in being caught in that. And which then goes to the conversations that will continue to happen around this mooted code of conduct, et cetera. We're aware of the view, of course, that the market works, that there is supply to the market. And if you look at the demand forecast from AEMO, the market is actually reasonably well supplied for the medium term also. But for upstream producers, to invest hundreds of millions of dollars in the ground, it's actually quite reasonable to expect a commitment as to what the margin and returns that we could expect. And every upstreamer plays that same way. And I'd be asking those customers who are in the press asking for fairly draconian action by government to just get around the table. Now I think that's been pretty well covered also.
So I guess trying to interpret that, it's not so much about having a threshold of contracts signed. There's a bit of political risk here. You want to see how that plays out before this takes FID?
So look, we're not going to be able to take FID in the next few months anyway. So there's quite a bit of water to go under the bridge politically. We're confident that's both sides of federal government in particular really understand the economics of the industry, and they also understand that they want this gas-led recovery to help manufacturing and jobs. And everyone is actually on the same page. And there's a bit of a try-on by some -- and it's not all by any means but by some to just try and get a subsidy by stealth. And we want obviously that to clear and provide a clear pathway for us to invest material dollars for 20 years in facilities. So we'll do all the work to get it ready. We'll do all the work to get to an FID decision, and we'll lock contracts away in the ordinary course. And we're quite confident of just doing that.
Yes, understood. That makes perfect sense. And then just quickly, can I get an update on the Atlas ramp-up as in, when do you expect it to hit nameplate capacity this year?
Yes. So we've -- the nameplate is 32 TJs a day. We're currently at about 30. So we're almost there. So we expect the next month or 2. So it's -- yes, we're basically there. So the target across the entire Surat originally was 48 terajoules a day across both Atlas and Roma North. So 32 plus 16, and we're at 50 today. So we've got some overperformance at Roma, and we're 98% of the way there in Atlas. So the team's done a stellar job.
Yes, congratulations on hitting that milestone. That's all for me.
[Operator Instructions] Your next question comes from Adrian Prendergast from Morgans Financial.
Thanks, Ian and Mark, for that great rundown and obviously another good result. Nice consistent performance. But I guess just digging a little deeper into just talking about that local gas market, does it all change, from a strategic point of view, how you think about contracting the gas in terms of -- obviously, you've got a good relationship with GLNG. There's lots of options and buyers of gas who perhaps aren't trying to stealthily get angles on a better deal that's not realistic. So just keen to hear, are there other options you're considering if you're a bit frustrated by the process?
Yes. So in Roma North, we've got a contract in place with GLNG already for up to 50 terajoules a day and at our option effectively. There's quite a few mechanisms in place, as you'd understand, to nominate and reach those volumes. But we have the [ as of ] right to deliver volumes into that contract up to 50 a day. And we fully intend on doing that, which is why that expansion is in FEED now. So when we have everything finalized, you can expect a FID decision because the economics of the expansion are strong. In relation to Atlas or any other fields into the domestic markets that matter, which includes Roma -- the area outside of Roma North after 2022, it's pretty -- there's a number of different types of customers both in Queensland and southern markets. And it's clear that the southern markets are going to require additional supply. And whether it's commercial, industrial, whether it's REIT, gentailers or whether it's wholesalers, et cetera, I mean we've got good relationships across the board. And there's plenty of demand, and there's a lot of uncontracted buyers out there from calendar '23 onwards in particular. And again, that's all very public. So we see a real opportunity to lock away quite a lot of volume from that calendar '23 period onwards. And we're engaging with the market as we speak.
Just one other question. Obviously, you've done a good job managing the balance sheet and capital picture throughout that heavy development phase. And post that mutually beneficial deal on the Cooper Basin, you're going to be back in that cash position, as you said, on the balance sheet. Does the strength of the balance sheet into a recovering oil price environment at all bringing forward some of your longer-term goals, the Bowen or other regions outside Roma North? Is that at all realistic? Or is it just, given market conditions, it makes sense to not just remain patient with your development profile but also your balance sheet?
Yes. So it's a good question on -- and I'm glad you brought it up, I guess. The -- we'll be in a net cash position following completion of the Cooper sale to Beach. And the asset portfolio that we have sort of going from sort of lower risk to higher risk, if you like, the -- obviously, the expansions at Roma and Atlas we've already talked about. And that takes care of about 100 TJs a day when it's all said and done. So it's about 36, 37 petajoules a year. We've got a public target of -- to the end of FY '25 of 60 petajoules per annum. And the way that we intend to make that up primarily organically, outside of the Roma deal to GLNG, there's a lot of reserves. It's 200-and-something petajoules of 2P reserves just in that area. And there's obviously uncontracted reserves out of Atlas expansions also. But the more appraisal-type assets in Rockybar is what we're calling the Bowen asset. Artemis, of course, and others, we'll have an appraisal program starting in the next 6 months or so. And during possibly not half year but certainly not long after, you'll hear a fair bit more about those appraisal plans. We're certainly intent on bringing those into the mix, but they are not short-term development options. We need to appraise properly and, in some cases, explore actually in the case of the Bowen first, that we will be putting some funds aside for that.
[Operator Instructions] Your next question comes from James Bullen from Canaccord.
Congrats on another good quarter. Just given how well things are progressing and how your production is grinding higher, just wondering around if you're considering refinancing your debt position.
Mark?
Yes, sure. So refinancing and the consideration of our debt position is something that we'll think about in the context of what we decide to do on expansion. So the 2 expansions in front of us, Atlas will be relatively low CapEx commitment because that will be the Jemena facility. There'll be some drilling that comes with that if and when we proceed there. Roma North is a little bit different. And we've flagged in today's announcement that we're thinking about that gas processing facility either as something that we build, which we've done previously, or do we proceed with an infrastructure partner. And so there's a pretty significant capital commitment that comes with the decision to do that ourselves, which is an option we're keeping open. And so we are thinking about our debt facilities in the context of those choices.
Okay. Great. And just around Atlas expansion, are you flexible in terms of the pricing mechanisms that you're thinking about for the contracts? Or do you really want to chase down a more fixed price plus CPI deal?
Yes. I guess the way to answer that is we're intent on being a customer-led organization. And if the customer wants a particular pricing mechanism that has something that's attractive to them, that's attractive to us, then that's fine. I mean clearly, the fixed components traditionally, most recently, the last couple of years because we basically pioneered the fixed price because it was quite oil-linked before Atlas came along, primarily within reason. The fixed pricing component was actually what customers wanted back then. And the market's changing. You have LNG imports being mooted in New South Wales and Victoria, which will come with a degree, whether it's JKM or Brent or the like. So this -- we're actually quite open to the types of mechanisms that customers want. And ultimately, we'll look at it in the context of how the returns position of expansions is covered and how we manage that risk. And there's a thousand different ways to do that. And again, from a customer's point of view, I mean we'd asked that -- well, we're having the conversations, the open conversations about those type of mechanisms that the customers might want.
There are no further questions at this time. I would now like to hand back to Mr. Davies for closing remarks.
Ladies and gentlemen, thank you for listening in to the first quarterly of the year. And certainly, we're looking forward to a big year ahead. With that, I wish you a very good morning.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.