Beach Energy Ltd

ASX:BPT

Earnings Call Transcript 2018-Q2

[Derek Piper, Former Investor Relations Manager]

Thank you, Jane. Good morning, everyone. Welcome to the call. With me is Matt Kay, our Chief Executive Officer; Jeff Schrull, our Group Executive, Exploration and Development; and other members of the executive. I will be talking through our second quarter results this morning and our revised FY '18 guidance, which we released. And then, open the lines for some Q&A. So Matt, I'll hand over to you.

[Matthew V. Kay, CEO, MD & Director]

Thanks, Derek, and welcome, everyone, to the call. It's been an active quarter for Beach with another solid set of operational results, strong financial performance and the Lattice acquisition ready for financial close today.A brief update on Lattice to begin with. It is pleasing to report that Lattice has performed well this financial year. An estimated cash flow generation of approximately $155 million from 1 July to the end of December 2017 has exceeded our expectations.With an effective date of 1 July '17 for the acquisition, strong earnings and cash flow will reduce our completion payment and thus the level of debt to be drawn. We now estimate that Beach's net gearing on financial close of the acquisition at today, 31 Jan '18 will be less than 33%. This means we're tracking below our previous gearing estimate of 35% at end of March '18.During the quarter, all conditions precedent for financial close of the acquisition were satisfied. We're on track to settle later today. We'll make an announcement at financial close at that time along with details of the completion payments and resultant liquidity.We acknowledge that information in relation to financial performance and plans for Lattice assets have been limited to date. Obviously, Beach has not been in a position to disclose details of assets that it was yet to own. With financial close today, we look forward to providing more disclosure and reporting in due course. An information update will accompany our half year results on the 19th of Feb '18.Beach has been transformed through the Lattice acquisition and it's been appropriate to also transform the executive team for the new asset base and our future growth expectations. An extensive search and recruitment process was undertaken. This morning, we announced 4 new appointments. Dawn Summers will commence tomorrow as our Chief Operating Officer. Dawn has more than 25 years industry experience, including more than 20 years of Global Operations with BP, reaching the position of Global VP for upstream production operations. Dawn has also been managing operations for the Lattice assets for the last 2 years.Geoff Barker will commence in February as our Group Executive of Development. Geoff has more than 30 years' experience and has been a subsurface development and value enhancement specialist with risk consultants for the past 20 years. Geoff previously held senior technical roles in both Woodside and Shell.Brett Doherty will also commence in February as our Group Executive of Health, Safety, Environment and Risk. Brett has more than 30 years' experience, most recently leading HSE at INPEX Australia. Brett was, for more than a decade, Chief of Health and Safety, Environment and Quality at RasGas, the second largest LNG project in Qatar. This is a clear demonstration of the importance of HSE at Beach.Lee Marshall commenced recently as a Group Executive of Corporate Strategy and Commercial. Lee brings approximately 20 years commercial experience across Asia Pacific, Africa and the U.S. Lee was mostly -- recently the Head of Woodside's London office.I'm very pleased that we've assembled an executive team of such high caliber. Our new appointments and current executives brings decades of upstream oil and gas experience from leading global energy companies. They also bring with them significant offshore and onshore experience to complement the new portfolio.Turning now to our results for the quarter, and there are a number of highlights to touch on. Firstly, our field activity in the Cooper Basin continues to offset natural field decline as we successfully work towards our objective of maintaining Cooper Basin production levels. Production for the quarter was up 3% to 2.6 million barrels of oil equivalent, supported by a strong production from 5 new wells in PEL 92 and 5 artificial lift installations in PEL 91. These activities were completed late in the quarter and provided initial incremental production of approximately 4,000 barrels of oil per day.Drilling efficiencies and results continue to improve. We achieved our higher successful well count since the March 2015 quarter with 22 of 25 wells cased and suspended as future producers. For the first half of FY '18, 48 wells were drilled at a success rate of 83%, which is materially above our beginning of year expectations. We now expect 98 wells to be drilled for the full year, which compares to our beginning of year expectation of 78 wells and last year FY '17, 58 wells. These results have provided confidence to increase Beach standalone production guidance to 10.6 million to 11 million barrels of oil equivalents from the previous 10 million to 10.6 million barrels. Jeff will speak shortly to our revised guidance. Another highlight was completion of the Haselgrove-3 well in the onshore Otway Basin and subsequent announcement of exciting initial flow rates. Upcoming production testing will provide much-needed information to assess well deliverability, resource size and our development plans. The results today provide confidence in the potential to commercialize the material gas resource in the region. Also in the Otway Basin, we were pleased to receive a second PACE grant from the South Australian Government totaling $6.9 million. The grant will assist with drilling of the second exploration well in the region and plans are now underway to drill Dombey-1 approximately 20 kilometers west of Penola.We're excited to be continuing our activity in the Southeast in partnership with the Penola community, and we appreciate the ongoing support of the state government.We've spoken previously about Beach's inherent leverage to rising oil prices. And this is evident in our results this quarter.Our average realized oil price increased by 25% to $97 per barrel, which delivered a $30 million increase in quarterly revenue to $208 million. With an ongoing focus on cost and operating efficiencies, such increases greatly improve bottom line profitability and our free cash flow generation.Turning briefly to other progress made against our growth strategy. During the quarter, we announced the potential farm-in to the Ironbark prospects in the Carnarvon Basin offshore Western Australia. For some time, we've assessed multiple high-impact exploration opportunities to add to our growth portfolio. And we believe it's delivered [indiscernible]. It's consistent with our growth strategy, provides an attractive risk-reward profile and we believe will support ongoing shareholder value creation.We also announced the acquisition of a further 5% interest in the Otway Gas Project and a further 11.25% interest in the BassGas project.This will deliver strategic advantages post completion of the Lattice acquisition. In particular, a 100% ownership of the Otway Gas Project provides flexibility and control over future work programs. It also makes the process for the introduction of a new joint venture partner easier and allows efficient management of joint venture arrangements and other commercial negotiations.To reiterate, it was a very active and we believe a very successful quarter. Both Beach and Lattice assets have performed very well, with cash generation in the first half well exceeding our expectations. We now look forward to completing the Lattice acquisition today with net gearing in a stronger position than originally anticipated.This is a truly transformational period and an exciting period for our company. I'll now hand over to Jeff to talk through the operations in more detail.

[Jeffrey L. Schrull, Group Executive of Exploration & Appraisal]

Thanks, Matt, and good morning, everybody. As Matt said, we're really pleased with our Cooper Basin oil and gas operations and I'll start with giving everybody a bit of a more detailed look at that. 2.6 million barrels is up 3% from the last quarter. And it's nice when your efforts coincide with an increase in oil prices. So that was very positive. And our technical and operations groups are very keen that we can meet our flat production through FY '20, well on our way. Can't do it without the efforts of the project teams, both Beach and Santos and Senex. The exploration teams, the development teams that come up with the wells, the drilling teams that drilled the wells and the ops teams that hookup and operate the wells. So kudos all around.I'll start -- a bit more detail, I'll start with our Southwest Patchawarra operated gas, which goes to our Middleton facility. Earlier, about 6 or 7 months ago, we have the Mokami and Crockery discoveries. The ops guys have them online and they're very high liquids, which led to a 300,000-barrel oil equivalent production for the quarter, which is up 4%. December was a record month for Beach gas production of 150,000 BOE. Four new gas discoveries that we've announced recently, Lowry will be on stream in Q3 this financial year in less than 6 months from discovery to hookup. And these new discoveries are bringing more liquids, and we're keen that we can meet our production targets with that associated liquids yield. We now have 14 development well inventory, 3 more to hookup. And we're confident that the 40 million cubic feet a day expansion from 25 to 40, we can collect comfortably keep full for an extended period of time with our new inventory of wells. So hats off to the gas team at Middleton.The operated Western Flank oil production and the Namur and Birkhead fairways has also performed well. We've hooked up 6 new wells and installed 7 new beam pumps and a couple ESPs and production is up 1% over the previous quarter.A highlight is Bauer-26 has ramped up with the ESP that was Beach's first horizontal well. We're now producing close to 900 barrels a day from the Bauer-26 well, that's a great contributor. The other well we hooked up is the Stanleys Birkhead well, very close to Kangaroo. It's making 100 barrels a day, which is a little bit above our expectations and is water free at the moment, and we're keen that, that's going to give us information about the whole Birkhead play that we look forward to developing.We're currently developing the [ new -- full field dominant ] Stunsail, 2 vertical or directional Namur wells and 2 horizontal wells, 1 in the McKinley and 1 in the Birkhead, which will be our first Birkhead horizontal producer.So good things ahead in the oil play fairways as well. Facilities optimization projects also help maintain these production rates and help us meet our targets. Flow line expansions and rerouting and just basic debottlenecking helps the oil producers produce more, especially with the new higher fluid rates with the wells that are on pump. We've got water handling expansion studies in place to handle more water as the fields mature and the water cuts go up. And the facilities guys at Middleton managed to get 30 million a day through the Middleton separator and the compression there. Not sure exactly how, but they managed to do it. So they're over [indiscernible], which was 25 million. So that just shows how much effort we're putting into maximizing our production. In non-op production in the Senex operated part of the Birkhead play fairway, the Marauder well produced the entire quarter and we saw an increase of 6% production over the previous quarter.Santos continues in the Cooper Basin JV to do a great job. Production was up 6%, mostly because of well hookups, great success with the drill bit. So because of all that, from our Cooper Basin operations, we're quite confident to give guidance of 10.6 million to 11 million barrels as -- just in summary, as a function of new well hookups and new added inventory, high drilling success rates, work ongoing and the infield production optimization performance by our 2 other operators, Santos and Senex. And we're hoping to have annual financial year record for Beach legacy assets.So including the Lattice prorated full year production, the new guidance for the Beach combined portfolio will be 25.5 million to 27.6 million barrels BOE. Very healthy number. Glad to see Beach getting into the mid-tier ranks of oil and gas companies from the production standpoint.From the exploration and development front, our operated gas drilling continues, 4 new producers from 5 wells in the Southwest Patch play fairway. The rig has now moved. It's in -- drilling at Stunsail in the oil play fairway. After that, we'll come back and drill 5 more wells before the end of this financial year. Those wells are going to -- we're going to take a bit more risk and look for bigger upside 2 of the -- 2, maybe 3 of those wells will be at the Permian Edge play fairway, which are high risk, high potential, and we stated earlier that we saw that as potential exploration growth arena for Beach Energy. The Spondylus 3D survey, which was acquired last year, is almost -- it's a bit late, but it's almost delivered and we'll be working that. And we've budgeted for 7 wells to be drilled in financial year '19 as result of the inventory from that survey.Onto the onshore Otway Basin. Haselgrove-3 was drilled. We've made the release. I can talk a long time about Haselgrove-3, but I'm going to keep it brief. We found 2 new reservoirs for the basin, the lower Pretty Hill and the Sawpit. Excellent shows over both zones, especially in the Sawpit. The well, as per our plan, was completed as a potential producer. So it was a production test, not a DST that was run. We got 25 million a day for over 100 minutes. It was constrained by the tubing size, and the well ultimately virtually rose because high grades were formed because of the high flow rates and pressures. So we released the rig. A workup unit is going to come in. We're going to do the initial production test as planned over the coming weeks. And by the end of February, we should have that information. With that information, we'll come up with a range of resource estimates, come up with a field development plan that will probably involve a fast track of just hooking up that one well and then a potential appraisal program to just see how big the prize is.And we're -- the flow rate was at the far end of our expectation pre-drilling. Sometimes, you get a little bit lucky in this business and you find the upper end of your distribution. The other activity will be the Dombey exploration well. We got a PACE grant as Matt mentioned, and we'll be drilling that exploration well in FY '19. And any appraisal drilling that we may decide to do at Haselgrove would be part of that campaign. So watch this space.In the oil play fairway, as I said, we're drilling the Stunsail fulfill development. So our approach for these oil fields in the Western Flank is to map it all and go develop it all. So Stunsail will be fully developed after this program, 2 Namur producers, the horizontal McKinley and horizontal Birkhead. We're excited to see the results of those. The well will then appraise the greater Kalladeina field area, which is mostly a McKinley play. It's very flat. There is not a big column in the Namur, but we think the McKinley in that area has significant potential if we apply horizontal drilling. So we've got 2 wells to calibrate our velocity models ongoing. The Cooper Basin JV delivered 18 new producers with a 90% success rate. They've got 3-rig program, long term. Their drilling rates are coming down. Still have further to go as do ours, but things are very encouraging in the Santos-operated acreage. One highlight is the McKinley oil development. They drilled 4 horizontal wells with a total drain length of almost 3,000 meters. One of the wells they left is a barefoot completion, which is a trial to see if we can do the development on these directional -- horizontal wells, excuse me, cheaper. And we're anticipating over 2,000 barrels a day from those wells once they're hooked up. And we'll have 33% of that production. So we're really looking forward to that. They currently have 22 wells that are unconnected in their portfolio. They'll all hopefully be connected by the end of this financial year, early next year, half gas and half oil. So to meet our production targets, we said that we're going to invest capital in our Cooper Basin fields. And along that line, we've increased our guidance by $30 million to a range of 255 to 285. Large percentage is the Cooper Basin third rig the Santos has taken on. That will increase our total number of wells for the Cooper this year from 78 to 98. And I'm -- we're most likely going to end up with 80 to 85 new production wells. And that's what this game's about, more producers means more production. Bit of extra capital. Our success rate is actually higher than we thought. So we're spending more money hooking up wells, but those are easy decisions to make. And then, we have some production optimization of facilities projects that we needed a bit of extra capital for.In the Beach acreage, we'll continue to focus on the proven play fairways at the Southwest Patch and the Namur and Birkhead for the oil and our exploration play that we're continuing to chase is the Permian Edge gas play fairway on the Western Flank. Moving on to bit about Lattice. We're obviously excited about the future. We can give more specifics on project plans in half year. But I'm just thrilled to have the people and the assets. I think I'm just as excited to work with some of the people at Lattice as I am to have their assets -- have the assets in the portfolio. We've started working together. Some excellent people, I'm looking forward to the -- to creating the new Beach. Two of our focuses, I will say are going to be on optimizing the Otway full basin development plan, including the exploration portfolio, the production -- the existing production development opportunities, facilities enhancement, et cetera. And also the Perth Basin wide development plan with the Waitsia discovery, the field of Beharra Springs, exploration portfolio and everything. So the Perth Basin and the Otway Basin are going to be 2 key focus areas.We have -- the Lattice guidance has been lowered a bit from what we said during the acquisition. It's been lowered to 180 to 200, mainly because of the deferral of the Otway phase for offshore drilling campaign. We've decided to defer the drilling and come up with a more optimized Otway gas plan for the whole basin. And we think there's some exploration and development opportunities that will deliver lower unit, technical cost gas and will phase in the offshore development that was planned at the appropriate time.There's also bit of less capital because Waitsia -- post-Waitsia-3 and 4, the FID decision really needed to be deferred until larger project sizes were considered. Great flow rates from those 2 wells. So some of the capital that we have for front-end engineering has been deferred. There was also a 3D in Bonaparte that was deferred because of lack of permitting. In conclusion, Matt mentioned the Ironbark prospect. It's a giant Mungaroo gas prospect in the Carnarvon Basin, targeting the Gorgon PACE which hadn't been drilled north of [indiscernible]. We're optimistic that BP will exercise their option and will move forward and put together a JV to get that well drilled. We now have frontier exploration positions that are material in the Bonaparte Basin. And in New Zealand, via the Lattice acquisition and we'll take a good hard look at those. And if those assets fit our strategy then we'll drill up some of the prospects. If not, we'll come up with a different strategy and way forward. In the meantime, we'll continue to look at every opportunity in this part of the world to augment our portfolio with material, exploration prospects that can help grow the company. Thank you.

[Derek Piper, Former Investor Relations Manager]

Thank you, Jeff, and thanks, Matt. That concludes the overview. So open the lines for Q&A, please.

[Operator]

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

[Dale Johannes Koenders, Former Director & Analyst]

Couple of questions. Just firstly, I guess, the final statement of looking at every opportunity to grow the company. You spoke about the incremental well drilling activity, high success rates in the Cooper, yet you're still talking about the outlook production being flat to FY '20. Where is the disconnect in that? Should we be thinking that wells are recovering less or is there a lot of potential for growth in production that comes through from the Cooper?

[Matthew V. Kay, CEO, MD & Director]

I think obviously, Dale, one of the issues that we've talked about before is keeping the Cooper Basin flat over the next few years and that is obviously offsetting the decline. And as you would recall, the market, we turned back the clock a year, was expecting pretty significant declines in the Cooper Basin, and we came out and said that's not what we're seeing in our plans or in our results. So certainly, at the moment, we're seeing it flat. We have talked about the fact that we're going to increase the well count from 78 up to 98 if we see current success rates that we are of over 80% and there is a good chance we will start seeing incremental increases in production coming forward. Obviously, we're getting a lot of success with gas in 106 as well with -- we're obviously increasing our ability to deliver [ raw ] gas through Middleton by increasing the scale of Middleton. So we'll give more guidance as the successes come through from our exploration drilling both on oil and gas in the Cooper.

[Dale Johannes Koenders, Former Director & Analyst]

[ And if ] success continues, we could see growth, but just hold our expectations for now?

[Matthew V. Kay, CEO, MD & Director]

Correct, yes.

[Dale Johannes Koenders, Former Director & Analyst]

Okay. On Waitsia, obviously, delay for -- in terms of the CapEx guidance and also AWE talking about delaying gas marketing expectations. How are you thinking about timing of that? And how is it influenced to really we'd see your partner could be on that resource?

[Matthew V. Kay, CEO, MD & Director]

Yes. One thing -- it's a good question. One thing I would flag there is I wouldn't assume delay means destruction in value because what you've currently seen from the recent well result is the significant uptick obviously in the resource, which certainly from a Beach perspective was not unexpected. We've been following the Waitsia resource for a long time and very comfortable and confident in it. I guess what was a surprise for us was the flow rates from those last couple of wells, which were certainly on the high side of expectations. So that really remains now a consideration on the optimal development plan and obviously, we got a larger resource than people have considered a year-or-so ago. And we're looking forward to working with whoever the party is that steps in and obviously as you'd expect we're positioning in discussions around that to make sure that the interest of Beach shareholders is protected whatever happens in those outcomes. So at the bottom -- end of the day, it's a great resource. It's exceeded expectations of the current 2 wells, and we're looking forward to progressing it. We'll give more guidance obviously once the operator and the joint venture is known and as we progress through the results with the current drilling.

[Dale Johannes Koenders, Former Director & Analyst]

Sounds like you're very committed to moving asset forward and delivering that. But I guess, there is 3 dance partners looking for an interest in a stake, and only 2 of you on the dance floor, seems to be 1. Would you actually consider selling it to another bidder? And if not, what is the incremental value that you think you can deliver by holding onto that asset?

[Matthew V. Kay, CEO, MD & Director]

Obviously, we don't comment on the commercial elements for that happening through the Beach phase at the moment. But all I would say is, we are very confident in the resource, very comfortable with it, that is a high-quality resource. And we're positioning to ensure that Beach shareholders are protected.

[Dale Johannes Koenders, Former Director & Analyst]

Okay. And then, finally, in a way, you mentioned about obviously good success first well, I am looking at the Dombey-1 well. Can you give us any steer on expectations for resource like now or do we still wait for the end of February, on the first well or even the second well? What are your pre-drill estimates for that well would be?

[Matthew V. Kay, CEO, MD & Director]

I'll let Jeff comment on some of the details of the results for the well. But certainly, at the moment, given that we have not taken a testing, we don't want to put numbers out to the market until we properly tested the well. So you have to wait a month or 2 until we actually come out with more guidance on definitive -- more definitive guides on size and development concepts. Jeff, you might just want to comment on some of the positivity from the well?

[Jeffrey L. Schrull, Group Executive of Exploration & Appraisal]

Yes, the flow rate, as I said earlier, was at the high end of our expectation, and generally big flow rates have some -- give you some indication of the size of the price. We also found some gas in the zone that we -- was kind of surprising. So we've gone back to the drawing board and we're remapping the entire field, I'm just trying to figure out exactly what the trap size is. And as I said earlier, looking for wet places that we can possibly drill some affirmation appraisal type wells, which would all be drilled as production wells, by the way, to see just how big it is. But for the time being, we're pretty confident that we'll move pending the IPT results, be able to hook up this Haselgrove-3 well and get to a 10 terajoule a day project before that end of 2019 deadline that we have as per our PACE grant.

[Dale Johannes Koenders, Former Director & Analyst]

Okay. In terms of the reservoir quality, what you think so far? Is it high-quality conventional? Is it flat gas? Is it unconventional?

[Jeffrey L. Schrull, Group Executive of Exploration & Appraisal]

Well, it's loaded 25 million constrained by tubing. So it didn't frac anything. As we have said, we have no plans to frac anything in the onshore Otway, it's just conventional oil and gas completions. So I think the flow rate speaks for itself. We had some problematic conditions for getting open hole logs, but I think the flow rate speaks for itself.

[Matthew V. Kay, CEO, MD & Director]

The other element, Dale, which is obviously important in the Otway is inerts and the initial testing is showing a very low level of inerts. So we're hoping to confirm that through the next phase of testing as well.

[Operator]

Your next question comes from the line of Ben Wilson from Royal Bank of Canada.

[Benjamin Wilson, Analyst]

I just had 2 questions. I wanted to drill into your comment about the Lattice first half free cash flow generation. I was just wondering whether you could maybe provide a -- effectively like a field EBITDA number to go along with that? I'm just trying to drill into the variability, the allocation of CapEx against those assets and essentially try and work out a little bit on a go-forward basis what we're thinking about CapEx? And secondly, a related question, I'll ask them both now, the synergy guidance that you previously given, the $20 million. I just want to be keen to know whether that incorporates savings from the origin-operated assets within Lattice with respect to what we've always known to be some fairly sizable head office charge backs for those assets or whether you'd see those type of savings as being incremental to your existing synergy guidance?

[Matthew V. Kay, CEO, MD & Director]

Yes. Thanks, Ben. Look, on your first comment, we'll give more guidance at the half in relation to the financials of Lattice and the strategic direction of Lattice obviously is not until this afternoon that we officially own the asset. So we'll give more guidance at the half announcement. So what I can tell you about the cash flow number. So that's basically operating cash flow less stay-in-business capital and less growth capital. And as I said, we're pleased with the way Lattice has performed for the first half. All of the assets have performed very well. So obviously, despite the seasonal downturn at the Otway gas plant in the last quarter [ and at the half ] Otway is in line with expectations and the entire asset package is in line with or ahead of expectations. So we don't have any elements of core performance from an asset perspective across the entire Lattice business. So we're pleased with the way it's been performing. In terms of synergies, again, we'll give more guidance at the half. There are a number of elements of synergies. And obviously, one is where there is duplication of roles across Beach and Lattice. The other is obviously rather than -- where Lattice has historically drawn upon corporate services from Origin where Beach will actually substitute those corporate services and trying to draw up the costs and efficiencies through on that front and then obviously in terms of operations going forward as well. But we'll give much more guidance around that going forward once we officially own the assets, and we can speak to it openly.

[Operator]

Your next question comes from the line of Nik Burns from UBS.

[Nik Burns, Executive Director and Lead Energy Analyst]

Look, just a couple of questions from me. First one, just in relation to the production guidance. The reasons given for the increase in production guidance seem to me more around oil than gas. Just wondering if we should attribute about 0.5 million BOE increase to oil rather than gas?

[Jeffrey L. Schrull, Group Executive of Exploration & Appraisal]

This is Jeff, Nik. I think it's probably going to be closer to 50-50. A lot of the increased production in the Cooper Basin JV is the gas wells that we're planning to hook up. We drilled 6 development producers at Namur. And obviously, the extra liquids we're getting with the gas through Middleton is helping, but the extra -- we're up to -- close to 30 million a day now. And -- so I'd say about 50-50.

[Nik Burns, Executive Director and Lead Energy Analyst]

Okay. That's fair. That's good. And Matt, just before you were touching on, I guess, the market's expectations on Beach standalone production outlook declining fairly rapidly in your comments last year around sustaining those levels above 10 million BOE. Just thinking forward from here. You flagged an increase in drilling activity. You're allocating more budget to the Cooper. Can you give us any sense at all around -- whether this is for Matt or Jeff, but just in terms of your ability to have a higher run rate there on wells? Is there an inventory of prospects and undrilled well locations you're confident that you can maintain a high drilling rate over the next 3 years?

[Matthew V. Kay, CEO, MD & Director]

Yes, I'll touch on a few elements, Nik. Obviously, one is being more active with the drill bit, but it's also the success rate. So as you've seen year-to-date, we're running at over 80% success rates, which is obviously above our initial expectations. And the Cooper Basin JV is doing similarly. And obviously, we've got the third rig running now as well. We'll also, obviously, as we've talked about the -- changing Middleton and expanding it to 40 million scfs a day of [ raw ] gas compared to the current 25. In terms of drilled and uncompleted wells, I think we're now sitting at a portfolio of about 25 as of today, as well as are ready to be hooked up. So there's certainly an ability to definitely sustain current levels of production. And what we're looking at the moment is the ability to increase and become more incremental going forward. Jeff, would you like to expand on that?

[Jeffrey L. Schrull, Group Executive of Exploration & Appraisal]

Yes. What the -- especially our Western Flank field, the McKinley, as we've said, has never been targeted. And there's quite a bit of oil left in that reservoir. That's why the Bauer-26 well was such a pleasing result. We have a multi-well follow-up campaign just at Bauer but several of the other fields also have McKinley targets. So the story there is how do we get these horizontal wells landed and completed as cheaply as possible? And I mentioned that Santos is doing the same stuff in their acreage. So we're sharing lessons learned for these horizontal wells in the McKinley. They make virtually no water. There is no offer of support. So it's important that you get the ESP size right or the pump jack size right so we optimize the production. So Bauer-26 was treated like a little baby. We ramped it up slowly, slowly, slowly and 900 seems to be an optimal rate for the drain length, the PI for the well and the pump that we've got on it. And our next McKinley horizontal, I think the drain is going to be 800 meters at Stunsail. We drilled the 2 pilots. It's -- it looks extremely promising. So -- the answer -- shorter answer is yes, Nik. We've got a very low-risk portfolio of drill opportunities. And oil and gas on the operated acreage in the Western Flank and Santos has a obviously very big portfolio, enough to bring on a third rig full-time.

[Operator]

Your next question comes from the line of Andrew Hodge from Macquarie.

[Andrew Hodge, Research Analyst]

Just 2 quick questions. One was just around Otway, just to get a bit of -- a better idea about what you're talking out there in terms of discernment. Just I guess, given the falloff in production just how [indiscernible] works? And [indiscernible] what that kind of means as an outlook? And then secondly was just around gas pricing -- the Lattice gas pricing for the quarter came in sub-$6, which is lower than the number that you talked about at the acquisition time, which was greater than $6.10. So I just want to get sort of a bit of clarity around -- are we just not seeing sort of a kick-in yet of the contracts?

[Matthew V. Kay, CEO, MD & Director]

Yes, Andrew. I will start with the second. On gas pricing, what you're seeing in the last quarter is obviously seasonal decline on the Otway, which has obviously led to a more proportionate [ hire ] of portfolio outside of the Victorian assets in that gas pricing. So that's what caused the gas pricing drop off in that quarter. So it's the seasonal waiting issue. And just on the Otway, I'll let Jeff talk about some forward planning in a second, but I wouldn't call it a decline in production. That's a seasonal change. So if you look at the half, Otway is entirely in line with expectations and budget. In fact, it is above budget. So that's a seasonal decline and the fact we had a 7-day shutdown -- plant shutdown on Otway in the quarter. So that's the reason for those numbers relative to the previous quarter. In terms of capital, Jeff can talk to it in more detail, but this is the beginnings of what we'll talk about in coming months around the Beach discipline on capital allocation and where we believe capital needs to be spent and when starting to implement on the new portfolio. And I think you'll start to hear a lot more of that in coming months. Jeff, you want to touch on some of the things?

[Jeffrey L. Schrull, Group Executive of Exploration & Appraisal]

Yes. The permit without sacrificing long-term production forecast. I guess that's a key point. The extended reach drilling that we're planning involves the development well at Black Watch. We moved it forward in the queue and there is an exploration prospect called Enterprise that can also be drilled from onshore and hooked up back to the Otway gas plant. So we're going to be trying to develop a 2-well campaign there and get those cheaper molecules on stream as soon as possible. The Enterprise well is very low risk. We view it almost as an appraisal well type risk instead of pure exploration type risk. There is also a compression project for the Halladale, Speculant and Black Watch area to get some incremental recovery there. Offshore, there is a prospect called Artisan that we're very keen on. It's in shallower water. It's got amplitude support. So we'll put that into the plan and then obviously, the development drilling down the line at Thylacine and Geographe. So we're just trying to sequence the drilling to maintain that production profile and facility projects like the compression to maintain an optimal throughput with the lowest unit technical cost gas.

[Andrew Hodge, Research Analyst]

Jeff, if I'm hearing you correctly, it sounds like you're saying that you've accelerated the onshore Black Watch and you're not going ahead with what Origin had proposed for Geographe-3, Thylacine and the other development wells. And I just want to say, because I think 50% of the reserve's undeveloped at Otway. And I thought that was sitting with the offshore stuff, not the onshore stuff?

[Jeffrey L. Schrull, Group Executive of Exploration & Appraisal]

I don't want to talk about the split. There is some undeveloped reserves across all the assets. We haven't -- we're not differing in forever the offshore stuff. We still see those as undeveloped reserves at Thylacine and Geographe. But there is no reason that we can't wait for 4 or 5 years to bring those wells online because they'll be more expensive and -- because we will start with the cheaper stuff first. And we -- our risk for the exploration -- the 2 exploration prospects, Artisan -- this is a key difference. We think Enterprise and Artisan have a sufficient risk profile that it's worth seeing what's there before we commit to a very expensive offshore floater rig campaign at Geographe and Thylacine. But -- we're not unbooking the reserves. They're still economic. We just think there is more economic options than starting with those.

[Andrew Hodge, Research Analyst]

Okay. And do you have to, therefore -- does that mean then you have to try and book like some kind of payment for canceling the drilling then with Diamond offshore?

[Jeffrey L. Schrull, Group Executive of Exploration & Appraisal]

No. I just gave you the short answer. It was an offshore contract, and we just didn't exercise the option. So there was no back-away payment at all.

[Operator]

Your next question comes from the line of James Bullen from Canaccord.

[James P. Bullen, Senior Energy Analyst]

Apologies, this is [indiscernible] now but just around the gearing and the sub-33% guidance. I was just wondering if that includes cash outflows for the additional equity in the Otway and the Bass Basin.

[Matthew V. Kay, CEO, MD & Director]

No, not as yet because that number is as at today. So it's a 31 Jan number and those payments haven't been made yet. And our initial guidance of 35% at the end of March or sub-35% at the end of March didn't include those numbers either because obviously those transactions weren't undertaken at that point in time.

[Derek Piper, Former Investor Relations Manager]

It includes [indiscernible]...

[James P. Bullen, Senior Energy Analyst]

And just...

[Derek Piper, Former Investor Relations Manager]

[indiscernible] not the [indiscernible].

[James P. Bullen, Senior Energy Analyst]

Okay. And just why haven't you disclosed the pricing around those assets? And is it still your intention or the potential for you to introduce a third-party there? Is that still the plan?

[Matthew V. Kay, CEO, MD & Director]

Yes, look, in terms of the plan, as we've sort of flagged, one of the key issues here was to get control of 100% of the asset so that we could determine a, the work program going forward, but also some of the commercial agreements around the assets which have been problematic historically. And yes, the plan is to bring in a strategic partner going forward and more -- give more guidance to the market as that progresses. But obviously as Jeff had mentioned, we're making what we believe are some optimization changes to what was the previous development planning and then we'll talk to some parties [indiscernible] on that.

[James P. Bullen, Senior Energy Analyst]

Right. And is that the reason why you haven't disclosed the pricing is because you intend to on-sale?

[Matthew V. Kay, CEO, MD & Director]

That is one of the reasons, yes. As we've said, there is nothing unusual about the pricing. It's in keeping with other transactions around the asset historically.

[Operator]

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

[Derek Piper, Former Investor Relations Manager]

Thanks for that. Well, again, thank you, everyone, for joining the call. As always we're available to answer the questions you may have. Have a good day and we'll speak to you soon. Thanks.