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Ladies and gentlemen, thank you for standing by, and welcome to the Senex Energy Q3 FY '18 Quarterly Results Conference Call. [Operator Instructions] I must advise you that this call is being recorded today, 26th of April 2018.I would now like to hand the conference over to your first speaker today, Mr. Ian Davies, Managing Director and CEO. Thank you, and please go ahead.
Thank you, Shell. Good morning all. Welcome to Senex Energy's quarterly results conference call. I'm Ian Davies, Managing Director and CEO; and with me today is our CFO, Graham Yerbury.
Good morning.
Together, we will be taking you through our achievements for the third quarter of the 2018 financial year before opening the call up to questions.Before I dive into the report itself, I'm pleased to say we've made significant progress across the business this quarter, hitting milestones in our East Coast gas development projects, drilling our first horizontal oil development well on the western flank and announcing a win-win agreement with Beach Energy to redirect capital to the western flank of the Cooper Basin.In February, we announced to the market that we had completed a comprehensive asset review, which will see Senex focusing its capital and attention firmly on our core assets, and we are delivering against that. Delivering on our core assets will translate to a step change in production, earnings and cash flow.Financially also, we remain in a very strong position with $83 million in cash and remain on track to finalize our corporate and development financing in mid-2018. And in the macro environment, we are continuing to see a rising oil price as well as continued very strong domestic gas pricing. So I'll begin with our East Coast gas business, where it's been a solid few months for both Project Atlas and the Western Surat Gas Project, together our Surat Basin gas business.On Project Atlas, we were granted a Petroleum Lease, which is extremely important, actually providing a tenure over this valuable block. In addition, we received our preliminary environmental approvals, which allows access to the site to progress, environmental surveys, scanning activities, et cetera, for gas development wells and associated infrastructure. Basically, we can get boots on the ground and start making headway on developing the field for the domestic gas supply market.During the quarter, we commenced our competitive process with infrastructure providers for the processing and transportation of gas from Project Atlas and expect to finalize the tolling agreement in the coming months. Overall, Senex remains on track to achieve all of the key milestones and deliver on -- gas to the domestic market in late 2019.On the Western Surat Gas Project, production from Phase 2 gas wells is in line with expectations and currently averaging above 2 terajoules per day, continuing to trend upwards as dewatering continues. Now preempting about your questions we're probably going to get on this, we're currently producing around 2.7 TJs a day, which is about a 40% increase over the last few months to the trend it was doing previously. So it's continuing very much in line with expectations. During the last quarter, we successfully rectified an issue we're experiencing in the gathering system. In order to fix the problem, we undertook a rolling program of well site and flow line modifications, requiring well by well downtime. Since resolving the issue, we have seen well uptime markedly improve and expect to see this in production going forward.We also expect to receive all remaining regulatory approvals for the development of this project by mid-2018. In the meantime, the business is working towards the next investment decision on the future phases of the project in parallel with the finalization of our corporate and development financing process. So let me now move the focus across in our oil business, where we delivered significant value this quarter. In February, we articulated our commitment to focus on our suite of core assets. This quarter, we've delivered on that commitment. We have reached an agreement with Beach Energy to transfer their remaining free-carry commitment from our joint venture to unconventional gas projects in the western flank -- to the western flank. This is the free-carry commitment that Beach acquired in the Lattice Energy transaction with remaining spend of up to AUD 43 million. This is a very sensible, win-win transaction for both Senex and Beach, enabling us to focus on our highest-ranking joint opportunities in the western flank oil assets.What this means is investment of up to $43 million in lower-risk, higher-return oil opportunities and the freeing up of cash to Senex that will be redirected to our East Coast gas development projects. The joint venture will commence in a grade work program in early FY '19. That includes at least 3 horizontal development wells, 7 exploration wells and associated infrastructure over around an 18-month period. The significant untapped potential in this prolific oil region is evidenced by the success we've already achieved this year on the Marauder and Growler fields. On that note, let me talk a little more around our latest development well, Growler-15. This is Senex' first horizontal well within the Birkhead formation on the western flank, and it was drilled to develop reserves and accelerate production for the mid-Birkhead reservoir. The well produced an initial rate of around 1,850 barrels of oil per day and is continuing to perform ahead of expectations with minimal decline, and that's after some 40 or 45 days. This is an excellent result and demonstrated -- demonstrates the remaining potential of the western flank.The success of our first horizontal well and the impressive speed with which it was brought online, which were days rather than weeks, bodes well for other horizontal well candidates in the portfolio. And the medium-term production performance at Growler-15 will provide great insight into future development of our producing western flank fields. I'll now hand over to Graham.
Thanks, Ian. Many of you will have seen the announcement that I'm leaving Senex in a few months' time, so this will be my final quarterly results call. My focus for the remainder of my tenure at Senex will not only be ensuring a smooth hand-over to my successor but to finalize the corporate and development financing by mid-2018, and I believe that we're well on track to achieve this.The strong momentum in oil price has continued this quarter, with Brent now trading at USD 74 per barrel overnight. However, this quarter, we saw the impact of accrual accounting, reducing the realized oil price together with marginally unfavorable movements in the foreign exchange rate. Moving on to our oil -- production result. Senex delivered net production of 190,000 barrels of oil equivalent for the quarter, with our base oil performance -- portfolio performing in line with expectations. In the Surat, gas volumes from the Western Surat Gas Project increased from the previous quarter, and we expect this upward trend to continue. In terms of capital expenditure, Senex invested $11.1 million this quarter, predominantly on progressing the Western Surat Gas Project and on drilling the Marauder-2 and the Growler-15 wells.In summary, Senex is on track to achieve both production and capital expenditure guidance in the 2018 financial year. It's pleasing to report that, as we approach the end of the financial year, Senex' financial position remains strong with $83 million in cash at 31st of March 2018. And with that, I'll hand back to Ian.
Thanks, Graham, not only for what will be the last financial overview for you for Senex, but also the contribution to the company over the last 3 years. Mate, you've been fantastic with Senex, and you'll be missed.
Thank you.
I'm very confident of smooth transition, as Graham has been working with myself and the board to effect the hand-over to our new CFO, Gary Mallett, who joins us in May, only a few weeks' time. Thank you for that also, Graham. An experienced finance professional, Gary Mallett is joining Senex from his most recent role as acting CFO at Origin Energy and Group Financial Controller for 10 years before that. He's at Origin for around 12 years. He's, therefore, very well versed in all the opportunities and all the challenges that are offered by a changing industry at this time. So in conclusion, it's been a very busy quarter for Senex. We've achieved some critical milestones, and we'll continue to achieve them. And the coming months are set to be very exciting. We want for the business, and we look forward to reporting our final quarter results to the market in July. So with that, I'm happy to take questions.
[Operator Instructions] Your first question comes from the line of James Byrne of Citi.
Just a couple of quick ones for me. Just firstly on western flank, congratulations on the Growler-15. That's a really good result. Just wanted to be crystal clear on the work program going forward around the cost carry that you've managed to negotiate to be allocated to the western flank. So the 3 horizontal development wells and 7 exploration wells and the infrastructure, is that incremental to what you otherwise have planned? Or is that in total, including the cost carry?
So we haven't been through the business planning and budget process for FY '19 onwards. That's happening now. So the timing of the agreement with Beach actually coincided with our internal budgeting processes for both ourselves and Beach. So what this does, it means that the work program that we've agreed, basically as we normally would during our joint venture agreement processes, becomes the work program that we've outlined.
Got it, all right. And then with the Surat Gas Project, noticed you're already ordering long-lead items prior to taking an FID. So is the way we should think about an FID really you're just waiting for those final approvals and then we can expect an FID pretty much thereafter?
So as you would understand, an FID is not an FID until it's taken. And there are numerous paths to bring into that. The reason we bought it long lead is we're confident in the resource base, and this gas will be produced one way or the other. The ingredients, of course, going into the FID decision with the board is, firstly, the resource, which we -- is continuing to produce well, and we're actually producing raw gas into the GLNG network, and we've got an agreement to continue to do that prior to a compression project coming online. Secondly, the structure, which is a critical piece, and we have the physical option of either towing through an existing plant or building our own. And the agreements both with GLNG and in the other agreements we would have requires having self gas capability. So this is just a building block in that. In ordering the long leads, it's a low-cost way of making sure we achieve our schedule that we want to achieve. Thirdly, the market. As you know, there's a GLNG put option contract and there's a number of commercial arrangements to complete to enable the FID decision. And then, lastly, financing. And we're in a good position with $83 million in cash, so we're certainly covered for the early stages of our cash spend. Of course, we now have Project Atlas, and we've outlined quite clearly that we're in the market on a Corporate Development finance process going very well, we expect to close in mid-'18, as we've said previously. So there is the 4 ingredients that go into it, and every one of them has to come together for the board to be comfortable in making FID decision. And that's not to do with the Western Surat in particular, any FID decision requires those 4 ingredients.
Yes, got it. Right, Ian. And Graham, best of luck for the future, mate.
Thank you. Cheers.
The next question comes from the line of Adrian Prendergast of Morgans Financial.
Yes, just a couple of questions, also just on the western flank and the free carry being transferred there from Beach. Is it really seeing it as just the best way of squeezing value out of that existing agreement for both sides? Or is there really opportunity for more corporations beyond that stepping up? Or how do you see it?
Look, I see there's a couple of points to your question. One, the remaining carry -- I mean, Beach is -- I think I can say this openly. I'm not speaking for Beach, but I think they've been pretty open with this as well, that their strategy is not unconventional gas. And when they acquired the Origin interest, which is Lattice Energy, it came with the existing agreement. And so I think it was in both of their interest to try and move forward in one way or another. And where we've been able to get to is we've got a western flank position, which we're keen to grow. There's joint venture partner in that exact same position, so 60% us and operator, and them, 40%. Now the joint venture carry in the unconventional gas also happened to be 60-40, so it was sort of made to be a little bit. So it is quite sensible and, I think, aligns the parties going forward. Now I think the other thing to note is we actually will get 100% of that acreage back. So Beach will remove themselves from the JV in the unconventional gas acreage, and we'll seek to create value out of that in the coming, probably, years, to be honest. I wouldn't expect anything in weeks or months. Now the second part of your question around future corporation. Look, they're growing, and in the East Coast gas market and oil. We're growing in the East Coast gas market and oil. There's always room for cooperation, and one of the great things about the oil and gas industry is you're competitors and friends. And all of those things in one, it's sort of a quirk of the industry. And we're always, as you know, very keen to create as much value as we can. And we're pretty -- we're not bad on the commercial side of things. I think what we could say, so to the extent there's value to create with partners, we'll do it.
That's fantastic, Ian. And a question for Graham. Obviously, the oil price is pushing up into really attractive quite levels. So are you sort of actively thinking about forward hedging at all?
Look, we -- yes. We -- as you're aware, Adrian, we've fully hedged our production for calendar '18, and we've hedged 50% of our production for the first half of calendar '19. We were able to take advantage of spikes in the oil price a couple of months ago to secure that. So we got reasonably good premiums and we managed to lock in pretty good put rates. So we're obviously pretty comfortable with where we sit for this year and probably, at this stage, are pretty happy with the first half of next year. We will, of course, continue to keep a watching eye on this to the extent that the oil price drifts towards $80, I think it does present opportunities for us to get lower-cost put premiums. As you're aware, we are totally focused on having that insurance policy that enables us to fund our stay-in-business CapEx across the cycle, and we would clearly take advantage if it came to us. The other thing that we've got on the agenda also is that we're potentially going to be selling JCC-linked product in FY '19, and that's something that we're also keeping a watching eye on.
Great. And just one last question for me, just on the Western Surat. Just really good step up in those Phase 2 wells, and it's -- obviously, it's very typical that you're going to make learnings as you go and really refine your process. Is there any change to your view on profile for the average typical well that you'd expect? Or is it really just cleaning up and looking very much as you planned?
Yes, look. It's following the profile as it currently stands. I mean, as you know, with -- coals and gas, it is, by definition, heterogeneous. It is, by definition, a statistical play where you have some fantastic wells, you have some pretty ordinary wells and you have a whole bunch in the middle. So as time goes on in this area, we'll be refining it. But at the moment, we've got no reason to. There's a large performing vertical well.
Yes. Great. Very great progress across the field, and another good deal in the quarter. So that was good, guys, and good luck, Graham.
Thank you. Cheers.
Thanks, Adrian.
Your next question comes from the line of Andrew Hodge of Macquarie.
Just a few questions. First one is just to finish up on the hedging side first. I guess, just given that you've got -- put the hedging below prices where we're thankfully a long way away from right now, I just wanted to get an idea about how much it's cost you guys to be able to try and do the hedging.
Look, they vary depending on time. So I think our average has been a couple of bucks, U.S., so -- and we're pretty pleased with that. You'll recall that a couple of -- well, probably 12, 15 months ago, we were paying up to $5 to $6 of put, and so we're in a significantly better place now.
Yes, that's why I was asking that. It's a fantastic way to answer that.
Yes.
And is that also true for the FY '19 numbers as well?
Look, they're slightly higher. But that just reflects the length of financial exposure you've got there.
On average, you're a little bit less than $2, right?
Yes, yes. [indiscernible].
And then, second question's just on CapEx and how we should be thinking about sort of there's been -- dividend exit a while. And I guess, just given where you guys are with Phase 2, I guess, just -- and the previous guidance, you guys are still maintaining -- just given you have moved ahead in the next Phase 3, how we should kind of be thinking about how much CapEx to kind of change if you -- as you guys get to achieving financing and approval.
We'll look at -- we're sticking to our guidance of $80 million to $100 million for the year. And as Ian said, one of the critical decision points we're waiting for is full steam ahead on the production license for the Western Surat and associated approvals. But we haven't fundamentally changed our view on CapEx as we go into the financing process.
Andrew, let me expand on that just a touch as well. You would note, in our quarterly, we've talked about infrastructure negotiations ongoing. So that is obviously a part of -- the critical part of both Atlas and Western Surat. And as I said before, your FID decision's coming up. We're getting all the ingredients lined up to enable that. And at that time, we'll be able to give very clear guidance as to what that is.
Okay. And the third question I was going to ask was just about like what we should be kind of thinking about Growler and sort of on the decline over the field. Just, I guess, given you've brought the horizontal well online, what -- we can get, again, an idea about what the profile for that starts to look like now.
Yes, it's a good question. We've -- the reason we didn't announce the flow rate right up front is because we wanted to see the IP30. And it's gone from about 1,850, all-in initial rates, and the almost 2,000 initial rates. I think we're still doing 1,650 or something after 45 days with minimal water cut. So look, it's a very good result, but we do need -- it's our first horizontal. There's about 500-something meters of net pay in the section, obviously horizontal, across the section which is a great job. The team did an amazing job, actually, of steering and keeping it to the top of the reservoir or whole way along. It was a nearly-a-kilometer section. So look, time will tell. We don't have -- well, we're still building our models for this because it's early days.
Okay. You guys -- I mean, Matt was saying yesterday on Beach that they think that prolonged drilling could sort of change the way people will kind of think about the Cooper Basin. I just wanted to check to see sort of how -- you guys are obviously pretty focused on Queensland right now, but just wanted to see how you guys are thinking about the Cooper.
Well, thinking about it enough to agree $43 million free-carry from Beach. And we are very, very focused on our operating acreage there to grow it. It's all about focus as opposed to lack of attention to that part, I guess. We've said very clearly, we're in a massive position in the Cooper, and we really -- given what we've got going in the East Coast gas business, we really need to focus in on the areas that fundamentally make us the most money in the Cooper. And 85% of our production reserves are in our position in the western flank. So that's where we're focusing. That's where the free carry is being directed towards, and we'll be working very diligently with Beach on our operated position to grow production reserves very aggressively.
Okay. Last question. Matt's sort of saying 30% of what was up for sale. Would you guys kind of be interested in that? And if I can sneak in a last one, just, I guess, like a change in South Australian government, do you think that the PACE grants have ended?
Has the PACE grant ended?
As in like, do you think with the change in government now, there's not going to be any more PACE grants?
To be honest, I don't know. I think we're still getting our head around portfolios. And the minister that's come on to the energy portfolio, I mean, he's been in the opposition on -- in the same portfolio, he's been [indiscernible] telecom. Good guy, knows the industry. In terms of government policy, to be honest, it's a bit early to say. But I think commentators from both sides of the aisle have openly expressed that the PACE grants have worked very well in terms of getting money spent in the areas that may not get spent on and getting gas flowing into the East Coast market and South Australia, in particular. So we would expect it -- we would hope it to continue because we think it's good policy, and it actually delivered results. The first part of your question, I mean, you can expect the answer. We would look at everything, and we -- our business is very fairly focused on Cooper oil and gas and an $8 billion East Coast gas business. And to the extent it fits that strategy, I mean, of course, we'll look. But we've got a lot of competing interests currently, so we'll see how it goes.
Your next question comes from the line of Adam Martin of Morgan Stanley.
Yes, I just want to go back on this horizontal drilling. I just wonder if you had sort of more capital available for the Cooper, whether you would get after that a bit more. Obviously, Beach talking about that oil prices are up a lot the last 12 months. I think you've previously talked about the merger having potential. Just -- yes, just give me thoughts on horizontal drilling in the Cooper.
Yes, okay. So 2 higher -- 2 points to make. Firstly, the reason we agreed to transfer our free carry was to enable us to have enough capital plus expansion capital on success. So it's a win-win transaction with Beach. I think it's quite convenient from that point of view, also. And we're very focused in growing production reserves. As you say, oil prices are moving up significantly. So our breakevens, including all of our corporate costs, in the Cooper assuming there's no gas business at all and all the corporate costs that we have, even supporting gas business were just over on oil production, is trending down towards USD 30 a barrel. So -- and with oil prices being $75 or so, obviously, it becomes an extremely good opportunity to make additional margins through additional volumes. The other thing I'll say quite fortuitously as well is we could double or triple volumes in the western flank or the Cooper without adding $1 of fixed costs. So it's very, very scalable, and we think that it represents a huge opportunity for us to increase volumes in the Cooper. And to the extent additional capital is required, if it represents a good opportunity, then we'll do it.
Are there any sort of formations -- I mean, historically, let's talk about the Murta, are there other areas that this top drilling could work or you're focused on?
If I -- Murta and the Birkhead are obviously most of the discoveries in the western flank as it currently stands. We've got a couple of Namur producers. Namur, it's a massive Block E sand with almost infinite permeability that just produces. The thing you got to watch there is obviously that increase in water cut get over time with a prolific production. So there may or may not be -- enhanced production from the Namur is always a misnomer, actually. So it really is enhancing production from those slightly less permeable areas, McKinlay and Birkhead, in particular, and Murta could exist. And we don't see a lot of potential at Murta on the western flank, but clearly, there is a lot of potential elsewhere, which I've outlined previously. So we are very focused as a joint venture on getting best bang for our buck and doubling CapEx to triple production is always a good return profile.
Okay, okay. And just final question on Project Atlas. What do you think is the most likely, ever sharing with other infrastructure? I know you're building your own. I thought it was more building your own, but I just want to get a sense of what's most likely here.
Yes, I'm not sure we're in the position to call likely. But what we've outlined pretty clearly and accordingly, we're discussing with both existing production plants. And you can look at a map, there's [indiscernible] 10 -- 5 kilometers away, which is a plant producing -- processing around 660 million SCFs a day of gas. So it's a very large plant. And secondly, there's the option to build a new piece of infrastructure tying into the -- physically tying into the East Coast gas market. Both of those 2 are on play, and we'll see how it goes. But either way, we see the -- a way forward to negotiate an effective tariff for us for Project Atlas.
The next question comes from the line of Craig Brown of Petra Capital.
Just on the Beach deal. In terms of the $43 million carry, are you -- is there ability to -- for the work program to move forward at all, or is -- to take advantage of the oil price? Or is it pretty much set in stone?
So we've -- the way the deal's structured is we've already agreed basically a work program. There's some flex in it, but we already agreed a work program. And we're discussing, as a joint venture right now, that early FY '19, with only a couple of months away, that we're off to the races with that. And there's -- the practical reality is getting rigs locked in, giving infrastructure agreements locked in, et cetera, which will take at least a couple of months, anyway. So we're moving as fast as humanly possible on it, and Beach will probably support it.
And in terms of the $43 million spend, is there -- what time frame do you think that's all going to be allocated in?
So we see the work program over around an 18-month period, so FY '19, start of FY '20. And on success, there's always room for expansion. I mean, we're both focused on growing production and reserves because it's very low-cost barrels. So if you think about a horizontal well, it takes in the order of 20 days to drill, sometimes more. And you've got 3 of those, then you've got a bunch of other exploration wells, et cetera, et cetera, but time adds up, anyway. You add some infrastructure and development drilling, you can get to 18 months pretty easily with this work program. So we think it's a good balance between going as fast as we can to take advantage of oil prices but also from bitter history and some good history as well, making sure that we do it really efficiently in what is a growing market or a heating up market, I should say.
Sure, thanks . And then the other question in terms of, you're maintaining your full year guidance currently?
Absolutely.
Yes. It is -- do you see that being at the lower end of the range, based on the existing 3 quarters that have already taken place?
Yes. Look, we'll be in a position to give more on that in the coming -- in the next few weeks, sort of probably more like June because of a few moving parts around it. We're definitely giving guidance, and we'll give more when we're able to.
[Operator Instructions] And there are no further questions on the line. Please continue.
Ladies and gentlemen, thank you for your time and thanks for listening, and I wish you a good morning.
Thank you. Cheers.
Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating, and you may all disconnect.