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Ladies and gentlemen, thank you for standing by, and welcome to the Senex Energy Q3 FY '19 Quarterly Report. [Operator Instructions] Now I'd like to hand the conference over to your first speaker, Managing Director and CEO, Ian Davies. Thank you. Please go ahead.
Thanks, Tara. Good morning, all, and welcome to Senex Energy's quarterly results conference call for the third quarter of FY '19. I am Ian Davies, Managing Director and CEO, and with me today is our CFO, Gary Mallett.
Good morning.
We've got another great set of results and progress to talk to today. I'll give you an overview of recent activities, and Gary will talk to our financial results also. So to set the scene, Senex is making really good progress on our promises and taking some great strides as we develop our Surat Basin natural gas projects. Since our last quarterly report, key milestones have included the receipt of all regulatory approvals for Project Atlas, the signing of our first domestic gas sales agreement, locking in our drilling contractor and continuing to progress construction of our gas processing facilities and civil construction ahead of drilling. What this means is that we firmly remain on track to deliver our gas projects on time and on budget. The key remaining execution deliverables are commencing the integrated drilling campaign in May with continuous drilling through the middle of next year, commissioning of Roma North gas processing facility in the middle of this year and commissioning of the Project Atlas gas processing facility by the end of this year, and delivering first gas from Project Atlas to our gas customers on the 1st of January 2020.As we've said many times, 2019 is the year in which Senex delivers the foundation for a step change in production earnings and cash flow, and we are certainly progressing to plan. By the end of this calendar year, a significant amount of drilling will have been completed, and our gas facilities will be operational. Gas production will then be ramping to our initial production target of 48 terajoules per day, equivalent to around 18 petajoules per annum or around 3 million barrels of oil equipment per annum. Roma North will contribute 16 terajoules per day with potential for rapid expansion to 24 terajoules per day, and Project Atlas will contribute 32 terajoules per day initially. We expect to hit our production run rate of 48 terajoules a day by the end of FY '21, and then we have established Senex as an important player in the east coast gas market.With that as a same set, I'll now turn to the quarter's operational results and project milestones and then hand over to Gary to discuss the financial results in more detail. As I've said previously, we've delivered an excellent set of results this quarter including increased production and sales volumes and have benefited, of course, from rising oil prices. Roma North continues to grow production volumes. This quarter, production average is over 6 terajoules per day, and ongoing well optimization activities or uptime rates maintained above 90%. This saw quarter-on-quarter production growth of 21% as we continue to ramp. In the Cooper Basin, oil production was up 22% from the previous quarter. This was underpinned by full quarter contributions in the recently connected horizontal development wells in the Growler field and the Snatcher North-1 exploration well that is now online. In total, production for the quarter was 334,000 barrels of oil equivalent, representing a 21% increase from the previous quarter.And we've successfully achieved a series of milestones during the quarter on our Surat Basin gas development projects. Firstly, in January, we satisfied final regulatory requirements for Project Atlas. We spoke to this in the last quarterly report but just a reminder that we are now proceeding with full-field development of the acreage. And I'll reiterate that we satisfied our regulatory requirements ahead of schedule which reflects a tremendous effort from our team in the high quality of our submissions.In February, Jemena was awarded a petroleum facilities license for construction of the Project Atlas gas processing facility. So construction work obviously has now commenced. In March, civil works for the drilling program commenced. This includes lease pads and access roads across both Roma North and Project Atlas. Work is now well underway with activity sequenced to enable continuous drilling through to completion of the program. We're pleased to have awarded the civil works contract to an experienced local service provider, T&W Earthmoving, helping to sustain our strong focus on local content. And in April, we announced 2 major contracts: firstly, the award of our drilling contract to Easternwell. The contract covers the entire program of up to 110 wells across both Roma North and Project Atlas. So we announced it to commence drilling in May with continuous drilling through to mid-2020. And as we've talked about, the contract value is in line now with the capital expenditure guidance previously provided to the market. Secondly, we signed our first domestic gas sales agreement with building products manufacturer, CSR, and this will be one of a number of contracts within what we expect to be a portfolio of gas sale agreements for Project Atlas. The CSR contract is supply -- is to supply volumes of up to 3.25 petajoules of gas commencing on 1 January 2020. The gas will be used in domestic manufacturing to make bricks, plasterboard and insulation. It will play a small but important role in helping to ease the supply challenges in the east coast market. The gas will be supplied at the Wallumbilla Gas Hub in Queensland at a fixed price in line with current market levels and indexed annually, and this type of agreement is what you should look forward to seeing more of.So that's a summary of key progress since the last quarterly. I'll now hand over to Gary.
Thanks, Ian, and good morning again. Turning firstly to our headline numbers. We recorded increased sales volumes in line with higher production and increased sales revenue which was assisted by higher oil prices. Sales volumes were up 22% to 321,000 barrels of oil equivalent, and sales revenue was up 62% to $28 million. It should be noted that the increase in sales revenue was in line with our accrual accounting treatment. So to expand, per our oil sales, revenue is accrued at the provisional prices when oil is delivered to the SACB joint venture at Moomba. This is the point at which title is deemed to have passed, and thus, revenue is accrued and recognized. However, final pricing is determined when oil is actually shipped to the end customer around 70 days later. An adjustment is recorded in revenue to reflect pricing at this time.As a result, in a rising oil price environment, the average realized sales price in a quarter may be higher due to the final pricing of the prior quarter's accrued volumes. This occurred during the current quarter which was part of the 40% increase in the average realized oil price to AUD 109 per barrel, up from $78 per barrel in the December quarter. The opposite effect can occur in a declining oil price environment.Turning to capital expenditure. We incurred $27 million of expenditure after accounting for the Beach Energy free-carried program. This is similar to the December quarter. Expenditure primarily related to: the Roma North gas processing facility, the Westeros 3D seismic survey in the Cooper Basin and preexecution drilling expenditure across Roma North and Project Atlas. For the 9 months ended 31 March, around $11 million of exploration expense has been charged to the income statement. Our full year FY '19 capital expenditure guidance remains unchanged at $110 million to $130 million. We do expect to incur an increase in expenditure in Q4 as drilling in Surat Basin commences and civil works progress.Turning to liquidity. We maintain a sound financial position and are funded to deliver our Surat Gas Basin Projects. At quarter end, we had cash reserves of $58 million and drawn debt of $35 million. Subsequent to quarter end, we placed an additional 262,000 barrels of oil swaps at a weighted average price of AUD 90 per barrel over a 24-month period. We now have locked in pricing for a reasonable proportion of our oil-linked production from Q4 FY '19 through to the end of FY '21. This provides cash flow certainty during the upcoming period of heightened capital expenditure in the Surat Basin.Lastly, it's worth noting that the change to the Petroleum Resource Rent Tax was passed by the Australian Parliament in April. This will remove onshore oil and gas projects from the PRRT regime effective 1 July 2019. Prior to that, Senex had received confirmation that Project Atlas and the Western Surat Gas Project could be combined for the purposes of PRRT. However, the changes just passed will permanently relieve our projects from any PRRT exposure. On that note, I'll hand back to Ian to conclude the formal part of the conference call.
Thanks, Gary. So I'll just briefly summarize the key activities for this year and beyond. In the Surat Basin, drilling is set to commence in May. Now we'll drill initially at Roma North with the rig moving to Project Atlas in the third quarter of this calendar year. Why? Well, our rationale for sequencing, very logical, is to balance delivery of first gas under our gas sales contract being 1 January 2020 with our desire to minimize the flaring of gas, which is obviously just a waste, before commissioning of the gas facilities being towards the end of 2019. This sequencing allows gas for the new wells drilled at Roma North to be sold under the existing rural gas sales agreement up until commissioning of our gas processing facility in midyear in Roma North. Once the gas facility is commissioned, of course, we will receive a step-up in pricing after the sale of processed sales gas. So field work is ongoing and will keep us on track to deliver the key goals for 2019 I mentioned earlier, these being commissioning of the Roma North gas processing facility by midyear, commissioning of the Project Atlas gas processing facility by the end of the year and delivering first gas of Project Atlas under our new gas sales agreement from the 1st of January 2020.Turning to the Cooper Basin. It's been a very active FY '19 with a large portion of the free-carried program with Beach completed. Successful outcomes have been achieved and are evident in this quarter's results with oil production up 22%. There are still 3 wells remaining in the free-carried program, and these will be drilled in FY '20. It is important to note that Senex' immediate priority is the delivery of our Surat Basin projects, obviously. These will transform the company into an important supplier of gas to the east coast and deliver a step change in production earnings and cash flow. To do this, of course, it requires an investment of $220 million to $250 million from FY '19 to FY '21, with a significant portion to be incurred in FY '20. Consequently, in addition to the remaining free-carried expenditure from Beach, there will likely be limited discretionary expenditure in the Cooper Basin in FY '20, with natural field declines to be expected for this period.We continue to assess the results from this year's free-carried program and complete the additional interpretation of the Westeros 3D seismic survey. This will ensure an inventory of drill-rated prospects when Roma North and Project Atlas deliver the expected step change in cash flow generation.So in closing, it was certainly a great quarter across both our operations and projects. Momentum continues to build in the Surat, and we're looking forward to further announcements of milestones in the coming months. We're delivering on our stated promises and are firmly on track to becoming an important provider of gas to the east coast. So with that, that concludes the formal section of the conference call. I'd like to now open the question -- open the lines to Q&A.
[Operator Instructions] Our first question comes from Mark Samter from MST.
Just a quick question maybe on the contracting strategy for Atlas, if I can. We saw yesterday one of the import terminals got its government approvals. It doesn't mean it happens, but I think common sense, hopefully, says it happens. But certainly, when you read the press, it's been the industrial bars that have been more reticent to believe support that as that progresses, and it probably cements in everyone's rather than just the rational person's mind that prices are international prices. How do you think about how much you want to contract in the profile with risk or lack of risk you wanted to take on in the book?
Yes. So look, it's a good question. It's obviously something that we put a lot of thought into. And you'll see -- you've seen our first contract which is relatively small but important, and CSR is a great customer. I'll see CSR like other contracts like that on a fixed plus CPR basis ex Wallumbilla. So obviously, being Queensland-based, in terms of supply, Wallumbilla's the nearest hub to the east coast market, so it makes sense to sell ex Wallumbilla because we can obviously get to that point through our Jemena contracts. So we expect to see a number of domestic C&I to commercial and industrial customers, call it, 40%, 50% of the book, if you like. This is very, very broad terms, by the way, in terms of just more theoretical portfolio analysis.We would also expect to see room for a retailer for a portion of the book. Now why a retailer? They have access to smaller C&I customers and other customers on distribution networks as well and also clearly have a deep portfolio and clearly need gas. So that makes sense as part of the portfolio. And we would expect to see some of our portfolio free, and that includes through the cycles. So there's obviously a working spot market at Wallumbilla. There's a more liquid market to get gas through swaps, both location and time swaps, into other periods and other markets -- other parts of the market. So we would expect to play an active role in that, albeit small volumes from a total market perspective but material volumes from our perspective.So I think the import terminal, if it does get up and I think they're obviously -- I've been on the record of saying I believe import terminals are required, and I say terminals rather than terminal, but one will do to start, and Sydney's not a bad place for it to be. I think it is required. I think it will sort of cap high prices. I don't think it necessarily brings low prices into a given market, but it certainly gives a bit of certainty because it creates a far more liquid market for customers to play in as well. So I fully support that getting up, and I think there's plenty of market to go around.
Our next question comes from Adrian Prendergast from Morgans Financial.
I had a similar question, but my other question was just on the Cooper Basin. Obviously, it's given you a lot of value over the last for the company but also more recently with the horizontal joining as well. And just interested long term how you think about it strategically. I know you're going to put further investment on the back burner as well. You're really stepping up with Surat drilling, but just you have a lot of options around what you do with it. Is it some way where you come back to it post gas ramp-up and for future investment? Or is it something you actively consider potentially monetizing at some point or just your thoughts around the area?
Yes, Adrian. So look, I'll start with a really trite comment, that everything is for sale all the time when you're a public company. I mean our job is to realize value for shareholders. So -- and that's more of a theoretical trite comment, as I said, to start with. In saying that, the Cooper Basin has delivered huge value for us over the last decade. In my view, it will continue to do so. The western flank, in particular, is, I think, roughly 90% of production of reserves these days, and we see lots of growing room in the western flank still. And -- but as you know, conventional oil is a bit like a hamster wheel. If you don't continually invest, you're not maintaining growth production. And given the love and attention in CapEx that the Cooper has received over the last decade and given the FY '20, FY '21 massive CapEx program we've got to build the gas business, it's time for the Cooper to give back a little bit to deliver free cash flow whilst we've got that large expenditure period happening in the Surat.So yes, we do expect to see natural declines. We do have 3 free-carried wells from Beach still, so we'll see what that brings. But we do expect to see natural declines on a like-for-like basis, but we also do expect to -- yes, continually to invest post FY '20 in a reasonably material way.So the Cooper is still near and dear to our heart. During that period, I mean, we are going to be a very, very different company and have lots and lots of options to deploy capital organically, both Cooper and Surat. So I think the Cooper Basin is a fantastic place to be and remains so, and we're building a great gas business in the Surat.
[Operator Instructions] And our next question comes from the line of James Bullen from Canaccord.
Congrats on the results. Just on Roma North, I was wondering if you could let us know how you're going versus budget there on the gas front and also whether you think it's something that you're going to hold on the balance sheet?
Yes, James. So it's basically bang on. I think we -- I didn't know this number a couple of weeks ago. I think we're in like 1-point-something percent of budget, so it's bang on. The guys have done an amazing job. And we have materially weighed through the S curves. I think we're in the high 80 percents from memory. So look, the bulk -- I was out there last week. The bulk of it's done in terms of construction. So we're now -- we'll be pretty rapidly heading into precommissioning and commissioning. So the guys have done a fantastic job, but it's a really nice clump.Now your second question around do we feel a need to hold it. Well, clearly, Project Atlas, we -- our recent agreement with Jemena for a sale leaseback, for lack of a better term, so at the tolling model where they build on and operate the plant and we pay a toll, that model, when you're using a relatively high cost of capital to build infrastructure which you can arbitrage into a lower cost of capital whilst maintaining all the operational flexibility you need, I mean, that makes sense to us. So that's been a stated goal from the start. But we clearly -- it's either generally at the start of construction before you construct or at the end of construction when it's commissioned are the 2 times that you generally do that sort of transactions from a risk transfer point of view. Doing it in the middle is pretty difficult, so we would expect for that to happen in the fullness of time.
[Operator Instructions] There are no further questions. I'll hand back to your speakers for closing comments.
Thanks, Tara. Ladies and gentlemen, thank you again for listening in. It's been an excellent quarter for us, and the next 1.5 years is going to be a fairly transformational time for Senex. So thank you with that, and good morning.
Thank you so much. Ladies and gentlemen, that does conclude the call for today. Thank you so much for your attendance. You may now disconnect.