Beach Energy Ltd

ASX:BPT

Earnings Call Transcript 2018-Q3

[Mark Hollis]

Thanks, Christian. Good morning, all, and welcome to our third quarter results call for FY '18. With me is Matt Kay, Chief Executive Officer; Dawn Summers, Chief Operating Officer; and Jeff Schrull, Group Executive, Exploration and Appraisal; and other members of the executive team.We will discuss our results and then open the lines for Q&A. Matt, I'll hand over to you to start with an overview of the quarter.

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

Thanks, Mark, and welcome, everyone, to the call. It's been another extremely active quarter for Beach, a historic quarter, in fact, as financial close of Lattice completed. Reporting on the new asset portfolio for the full third quarter, Beach delivered record production of 6.6 million barrels of oil equivalent, record sales volumes of 6.8 million barrels of oil equivalent and record sales revenue of $393 million. $133 million of free cash was generated by the business, helping to decrease net gearing to 29% at the end of March, well ahead of our original estimate of 35%. At quarter end, Beach held cash reserves of $147 million and had available liquidity of $647 million, clearly putting us in a position of financial strength which, as you know, is a core pillar of our strategy. The transformation of Beach is evident in the reported results, but by no means is it complete. Work is well underway, and we are on track to achieve our synergy target of $50 million per annum by the end of FY '19. Turning to our operations. Safety is integral to what we do at Beach, so I'm very pleased to report the safe and seamless transition of ownership of all assets onshore and offshore. Through this transition, our offshore assets have delivered steady performance, continuing to perform in line with expectations over the quarter. This included an increase in average daily production from our offshore Otway Basin asset. We undertook fieldwork at the Yolla gas field in the Bass Basin, which saw a 4 to 5 terajoule per day uplift in production at the end of the quarter. And in New Zealand, Kupe had a nice, steady quarter, with stable operations and an overall increase in gross average daily production. Moving onshore. The Cooper Basin continues to deliver. Not only do you see the step-change from increased ownership of the Cooper Basin joint venture, but underlying that is the reward of dedicated and active fieldwork across both operated and non-operated permits. We recorded a 20% increase in oil production from our 100%-owned ex PEL 91 acreage, achieved largely through the artificial lift campaign, where 7 artificial lifts were installed over Q2 and Q3. In our liquids-rich ex PEL 106 acreage, we recorded a 6% increase in production even while under processing restrictions from Moomba in March. This clearly demonstrates the value Beach can add as an operator.During the quarter, construction also commenced on the Phase 1 expansion of the Middleton facility from 25 million to 40 million scfs of raw gas per day. This is well on track for completion in FY '18. With another solid production result and steady operations across onshore and offshore assets, we are able to tighten our pro forma, meaning 12 months Beach plus 12 months Lattice, full year production guidance range to 26 million to 27 million barrels of oil equivalent. This was previously 25.5 million to 27.6 million barrels of oil equivalent. It's important to note that Beach will consolidate the Lattice assets from 1 January 2018. And on this basis, reported production guidance translates to a range of 18.1 million through to 19.1 million barrels of oil equivalent. Moving on to exploration and development. In the onshore Otway Basin, initial testing of Haselgrove-3 completed during the quarter. Flow rates achieved during the production test were generally in line with the rates previously reported, and we remain encouraged by the discovery. We were beneficiaries of a $6 million grant from the federal government under the Gas Acceleration Program, also known as a GAP grant. This grant will assist Beach in efforts to commercialize the Haselgrove discovery and supply gas to the east coast market. In the Cooper Basin, we continue to perform well with the drillbit. We achieved an 89% drilling success rate for the quarter, bringing our success rate to 85% for the financial year-to-date. Drilling success in the quarter included 3 horizontal oil development wells. You have hopefully noticed the increase in horizontal drilling activity in the Cooper in recent quarters, with Stunsail incorporating 4 horizontal wells into its McKinlay field development program, Beach drilling 2 Stunsail horizontal wells and Senex drilling the Growler horizontal. This drilling technique applied to the right targets and executed successfully is able to achieve superior economics to a vertical well development plan. And with the results to date supporting the concept, we are focused on identifying as many targets as possible for FY '19. We'll have more detail when we release the FY '19 guidance in July. To this end, Beach is undertaking its annual asset review and reserves order process. This is always a fulsome process, but this year is even more so with the new expanded portfolio and opportunity set from which to drive our value. The focus of the asset review is to apply Beach's low-cost fit-for-purpose operating model to all of our assets, including the new offshore asset base. We will determine the optimal capital programs, project ranking and sequencing of our entire portfolio. While the asset review is underway, we are prudently deferring noncore maintenance capital projects at our offshore locations while of course ensuring safety and stable operations are not compromised. This, in conjunction with continued drilling and capital efficiencies across the Cooper, have helped us to reduce our FY '18 pro forma capital expenditure guidance to $370 million to $400 million, down from the previous $405 million to $455 million. We consider this reduction to be value-additive to the business. The results of the asset review will feed into our FY '19 guidance reporting, which we expect to release at the end of July, and our reserves and resource reporting at the end of August. At these reporting events, you can expect further updates on our Perth Basin and Otway Basin development plans. Both are well underway and a key focus for our team. Finally, I want to mention the agreement reached subsequent to quarter with Senex. Beach and Senex have agreed to redirect up to $43 million of committed expenditure associated with the Senex, Lattice, CBOS joint venture, transferring that spend to the ex PEL 104/111 acreage. This acreage has proven producers and most recently achieved exploration success with the Marauder oil discovery in 2017. This agreement is a strong win-win for both parties. And on that note, I'll pass to our Chief Operating Officer, Dawn Summers, to discuss the operations in more detail.

[Dawn Summers, Chief Operating Officer]

Thanks, Matt. It's a pleasure to be here this morning and to talk about a very strong quarter for operations. Production for the quarter was 6.6 million barrels of oil equivalent, and we achieved this whilst maintaining safe and reliable operations across all of our onshore and offshore assets. Our priority during the transition was and will continue to be to ensure our teams remain focused and do not become complacent and let anything distract us from safety, always our #1 priority. So let's talk about some of the best parts from the quarter. The Cooper Basin performance was a true highlight, where we hit an all-time production high in the Western Flank in February of around 14,000 barrels of oil per day net, thanks to the integrated active management of the assets, focusing on efficient new well delivery, implementation of enhanced oil recovery options and maximizing facility uptime. And our 100%-Beach-owned ex PEL acreage at 91 acreage, primarily the Bauer and Hanson fields, the work undertaken over the last 2 quarters, which comprised of 4 artificial lift installations in Q2 and a further -- and further 3 in Q3, supported by the incremental impact of new wells, drove a 20% increase in our oil production, a fantastic result. Near term, we are currently installing artificial lifts in our Stunsail-6 and 7 wells, whilst reviewing options for additional artificial lift opportunities across the basin.In our operated Middleton acreage, we continue to optimize production in line with current processing restrictions imposed by the Moomba facility whilst it undergoes repair and maintenance work on one of its CO2 processing trains and as such, operating with reduced processing capability. Important to note that Beach benefits from high liquids content in our ex PEL 106 Middleton permit, which allows us to optimize the mix of our producing wells to maximize liquids production and reduce the amount of raw gas requiring processing at Moomba during this period. This active management has helped produce a 6% increase in liquids production for Middleton, with liquids production reaching about 1,000 barrels per day max, another great result. As Matt mentioned, construction work has commenced on the turning of the Middleton to Moonanga export pipeline, which will increase gas processing capacity in the Middleton facility from 25 million to 40 million standard cubic feet per day. This is on track to be completed by the end of this financial year.In the Cooper Basin JV, we are seeing the results of the third drill rig and the production optimization work. Gross average daily oil production increased by 7%, and gross daily gas and liquids production almost offset natural field decline, recording a small 2% decline over the quarter. On a net basis, production net to Beach from the Cooper Basin JV increased by 59%, principally due to the increased ownership stake in the joint venture.Moving to the newly acquired assets. The third quarter was characterized by steady, safe production, delivering in line with our expectations. In Victoria, average daily production rate at Otway Basin was up 4% on a quarter-over-quarter despite 8 days' unplanned downtime at the Otway gas plant for molecular sieve maintenance and further impacts resulting from the unfortunate bushfires in Southwest Victoria, causing some unplanned power outages. Whilst at BassGas, a successful [ welling ] program undertaken to improve production from the Yolla field -- the Yolla wells resulted in a nice uplift in production late in the quarter, which added a bonus of approximately 4 to 5 TJs per day and the work being completed ahead of budget, on schedule. Over the water, in New Zealand, our Kupe asset continued to experience high customer demand and improved condensate yields following successful [ plant ] trials and delivered increased gas and liquids exports throughout the quarter.Looking ahead to 4Q, as Matt mentioned, with operations performing to expectation, we have confidence in tightening our pro forma FY '18 production guidance to 26 million to 27 million barrels of oil equivalent, reflecting our continued focus on maximizing productivity whilst maintaining safe and reliable operations. As we continue to implement Beach's low-cost fit-for-purpose operating model, with focus on HSE, our people, productivity and performance, we have made great progress in the third quarter in identifying opportunities to reduce our direct operating costs and our stay-in-business capital, improving our overall cost performance, whilst at the same time, maintaining our safety and production performance. In last quarter's call, I communicated that on top of the integration and synergy savings, we have set a $15 million operating cost reduction target for FY '19. We're making good progress here, and some examples of what we've achieved so far are organizational efficiencies, where we've integrated the South Australia and the Western Australia operating businesses, with the intent of implementing a successful Beach operator-maintainer model across our WA assets. We've also retendered a number of key high-value operations and maintenance support [ staff back ] across our Victoria and New Zealand assets. And we've commenced a best-in-class risk review -- risk-based review of equipment and maintenance strategies, which are resulting in a number of activities being either eliminated or deferred from our work-on budget.And finally, identification and implementation of synergies with our partners. Examples such as logistics optimization, i.e. our helicopter and boat sharing across the Bass Strait with other operators, including the Taranaki Basin and also operational improvements with our -- at Cooper Basin JV partners. So in 4Q and FY '19 and beyond, we will continue the journey to become sustainably cost-competitive. That's all for me. So I'll now hand over to Jeff to talk about exploration and development -- exploration and appraisal.

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

And development. Good morning, everyone. It really is a pleasure to discuss Beach's new asset base. I'll start with the technical integration and the way we're going to organize ourselves going forward. We're putting together combined teams of ops development and E&A personnel to put together basin development plans for our new -- 5 new basins and also the Cooper Basin. And the focus is to sustain and grow production in our fields in a highly profitable manner. Matt mentioned the reserve review that is currently underway, and I'm working with Geoff Barker and his team to identify projects where we can move 2P undeveloped to developed, 2C and 3P reserves to 2P developed and undeveloped. A big focus on the fields, growing and sustaining production, and also E&A drilling programs to add production in a profitable manner. So every basin will have a team that's just completely dedicated to one of those 3 things. Now I'd just like to go through each of our basins and give you some highlights, and there are quite a few. In the Cooper Basin, as a whole, we've added 27 new development wells, both operated and non-operated. On the Western Flank -- and congrats to Dawn and Kevin and the team for the new production record, year 8 of production, I think, in the Western Flank, and we hit a record. That doesn't happen very often. It's great to see. The focus for drilling was on field development drilling at Stunsail and also appraisal drilling. We drilled 2 vertical Namur producers that were pilot holes for 2 horizontal wells, one in the Birkhead Formation, one in the McKinlay Formation. The Stunsail-6 well had a 34% net over a 585-meter drain, the first Birkhead well we drilled in a horizontal fashion. That was a great result. Look forward to get it online. The McKinlay well was an amazing result. The geosteering really worked well, and we had a 96% net to gross over a 528-meter drain. So it's great news. On the appraisal front, Kalladeina-3 and Kalladeina North extended the McKinlay play quite a distance, north of Bauer. Added reserves, it's added a development project. And most importantly, it calibrated our new high-tech depth conversion methodology, which we spent a lot of time and money on. And we discussed that in the past. In the Senex-operated 104/111 area, the Growler-15 H well, over 1,000-meter drain, came online at 1,850 a day, doubled the field production, really good news. They also drilled an appraisal well at Marauder, which proved -- which showed that the accumulation wasn't as big as we hoped, but it was sidetracked and will be the second producer in the Marauder field. A bit of detail about the CBOS deal, where we moved up to $43 million into basically a drilling fund for -- with Senex for PEL 104/111. Two of the highlights to be on the lookout for are the Harrier and Flanker exploration wells, which are hot off the press from the new Liberator survey. It's always great when you get a new 3D and you get some high-impact wells. And those are combination Namur and Birkhead structures. And also, we'll be using some of the money to drill some more horizontal development wells at Growler. So look for a landmark year for PEL 104/111 next year. The Cooper Basin JV. Santos have their 3 rigs busy, busy, busy. 20 new producers. Some of the highlights. We drilled a 4-well Cocinero oil development and appraisal program that added 800 meters of gross oil production, 4 wells at Gooranie that added 8 million to 10 million cubic feet a day. We're not sure about some of the rates of the wells. And then a new -- another horizontal technology in the Tirrawarra Formation, which is a deep, very tight formation, they landed -- beautifully landed, and on time and on budget, a 1,000-meter drain, and they're planning a 10-stage frac. So this will be the first horizontal frac Tirrawarra well, and several of our fields have this as an opportunity. And I think it's good now that the JV has 2 parties. We've discussed in the past our strengthening, our cooperative technical approach with Santos, and we'll continue to do that. So moving on to the Otway. We put together first pass, but fairly close to what the final answer is going to be for the Otway offshore development, field -- basin development plan. It involves 5 development wells and 2 exploration wells, and the intention is to mix every drilling campaign with an exploration and a development opportunity. And as Matt said earlier, we're looking for a partner to fund down the 30% that wants to take part of this very exciting business opportunity. Importantly, in the first quarter, we moved Enterprise and Artisan, the 2 exploration wells, into the drill-ready category. Both have chances of success of greater than 50%, and we're quite excited about them. I can't give you the volume metrics yet, but hopefully, we can do that in the very near future. And right now, we're moving Enterprise and Blackwatch. Blackwatch is a development well, an ERD well, and Enterprise will be an exploration well. We're planning that to be our first Otway drilling. In the Penola Trough, where we made the Haselgrove-3 discovery, we're currently taking -- remapping the field because we had pay at 2 different levels and coming up with a drilling strategy to appraise the accumulation and come up with a long-term development strategy based on the appraisal outcomes. And part of that appraisal strategy will be when and the timing of hooking up Haselgrove-3. We're -- the plan is to integrate potentially any appraisal drilling in Penola with the exploration drilling that we have planned. Dombey was a PACE -- a well we got an exploration PACE grant for. We're already looking at other deep Sawpit exploration targets in the basin. So looking forward to some really exciting drilling in the Penola Trough in the coming couple of years. In the Bass basin, the Yolla field added 5 million a day of production from one of the infill wells. We're going to -- Trefoil is a potential -- and Yolla is a late-life field, but there's several discoveries, including Trefoil, nearby that we're going to look at different development options and see if we can make those commercial developments. Moving to New Zealand and the Taranaki Basin. The focus is on the Phase 2 development, which, at a minimum, will include a compression installation. We'll move into feed in FY '19, and the focus there is to sustain production. We've got a fixed-term contract, and the compression will help us extend the plateau for quite some time. But what I'm excited about is the new seismic repro. We've got -- data will be here probably in about 2 months, all the offset cubes that you need for a field like this. And we're going to be looking at near-field exploration and infill development and appraisal opportunities to see if we can find some more gas with the high condensate rates that we see in the Taranaki to put through our plan. In the Perth Basin, the team is working on a -- with the operator and putting together a basin development plan that includes all types of Waitsia development concepts, includes the exploration potential in the basin, especially Beharra Springs Deep, and also how we maximize utilization of the 2 existing plants at Beharra Springs and Xyris. Moving on to the -- our frontier exploration portfolio, starting with the Ironbark prospect. Our farm-in deal with Cue is contingent on BP exercising an option with Cue to take 42.5% of the well. They recently announced an extension until October 2018 to exercise that option. And we remain very hopeful that the Ironbark well will be fully funded before the end of this calendar year. Really exciting prospect. The 2 basins that we augmented our frontier exploration portfolio, be it the Lattice acquisition or New Zealand, where we have 3 permits, 1 in the Taranaki, 2 in the Canterbury; and also Bonaparte, where we have 4 permits with our predominant JV partner, Santos. And each of those basins have potential for 2-well programs targeting impact prospects in different multiple types of plays, some oil or liquids-rich, some gas, some LNG backfill, some standalone. And we're busily trying to work those basins and see if any of those opportunities meet our technical and commercial thresholds. So in a nutshell, what the future looks like for Beach is -- I see us continuing to be very busy and very successful with the drillbit, that's always a good way to grow an oil and gas company, and adding maximum shareholder value in the process.

[Mark Hollis]

Thanks, Jeff. With that, Christian, we'll open the lines to take questions.

[Operator]

[Operator Instructions] Your first question today comes from the line of James Byrne from Citi.

[James Byrne, Research Analyst]

I just wanted to dissect that free cash flow number of $133 million a bit, just noting some of the moving pieces around Lattice. So should I assume that, that is free cash flow from the 1st of January onwards, including Lattice? Or is it from February onwards and adjusted for a closing adjustment? How should I think about that number?

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

That's combined Beach and Lattice for the full quarter. Obviously, the cash transfer point is -- was last year, so we've been receiving all the cash since 1st of July. So free cash flow that you're seeing this quarter is from beginning of the quarter to the end.

[James Byrne, Research Analyst]

Got it. All Right. And with the gearing having come back down under 30% quite quickly, your share price also at 3.5-year highs, how should we think about inorganic growth at the moment, particularly in light of the asset review as well?

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

Yes, look, James, we're really pleased with obviously the way the assets are performing and the acquisition has performed. Obviously, we made a number of commitments to the market when we came out with our gearing ratios, and we've outperformed those, which is really pleasing. It shows how well the business is performing. We've still got a lot of work, frankly, to do to optimize this portfolio, a, from a synergistic point of view but also from the number of developments that Jeff was just talking about. So we've got a lot of activity happening right now. So I don't think you should think about us as being heavy-loaded on the acquisition front right now. Are we opportunistic in terms of bolt-ons and other things? Of course, we are. But right now, we've got a lot of delivery to happen on our core acreage. So I wouldn't expect us to do a Lattice-like acquisition in the near term.

[James Byrne, Research Analyst]

Yes. Got it. All right. And when should we expect an update on the asset review?

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

When we come out with our capital guidance for next year, so in July, we'll give you some more guidance on where our planning is around spend for next year, which will obviously give you more guidance around, obviously, appraisal development and exploration going forward in the near term. And then reserves will be in August?

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

Yes.

[Operator]

Your next question comes from the line of Adam Martin from Morgan Stanley.

[Adam Martin, Research Analyst]

Can you just update on the Otway asset? Obviously, production up a little bit, but the last quarter was down a lot. So it's going to be still trending a bit below 2017. Can you just provide sort of update there on that asset? Will that [ lift more now over the rest ] of '18?

[Dawn Summers, Chief Operating Officer]

Yes. It's Dawn. So Otway, in terms of the Q3, obviously, we had some unplanned things that are associated with the molecular sieve and the bushfire events in Victoria, which impacted on our production. However, we are actually up in our production rates from the previous quarter. If I compare this half's production to last half's production, the Otway performance is actually, steadily, very, very similar. So it's about 20 PJs of production from Otway in this first half of last year, and we've actually produced the seam in the first half of FY '18. So Q3's production was unfortunately lower due to the unplanned outages, but we are -- we're tracking as per plan. And what I would expect in 4Q, as we head into the winter months, we expect our customers to nominate their contracts towards the lower seasonal demand, and we will deliver according to our gas contracts.

[Adam Martin, Research Analyst]

So on a full year basis, the asset is roughly doing what it was doing last year. Is that the right way to think about it?

[Dawn Summers, Chief Operating Officer]

Yes. Absolutely, yes. If you look at the numbers, they're very, very close, at about 20.5 for the first half of PJs equivalent for the first half of FY '17 and 20.6 for the first half of FY '18. And as I mentioned, Q3, this last quarter, has been unfortunate given the downtime that we experienced. But we're very much on track to deliver our FY '18 target. And hopefully, we'll pull back production and optimize in some areas. And as mentioned, the gas contracts were then delivered as part of the ACQs and the daily nominations required, et cetera. Hopefully, that answers the question.

[Adam Martin, Research Analyst]

Okay. No, that's good. Moving over to the onshore portions. So Haselgrove, I think you initially provided flow rates. They look pretty good. I get an impression that there's been further. Can you give just give us a sense of where those further flow tests came in at?

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

Can you repeat the question? I got the first half.

[Adam Martin, Research Analyst]

So just on flow rates, can you provide the latest flow rates on the Haselgrove? Was there reduction? Or were they still at those high levels?

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

At the end of the flow period, we flowed the well for 6 days. And it was still over 20 million cubic feet a day at the end of the flow period.

[Adam Martin, Research Analyst]

Okay. Okay. And when do you expect to update on the size of that resource?

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

Well, when we have an appraisal plan that we're going forward with and an idea. The gross volume is still the same size, as we announced predrill, which I think was 32 Bcf, something like that. But it's just a matter of how much of the total accumulation this one well would have been accessing. I think the key to the well, it's the first-ever Sawpit discovery in the Penola Trough. It's a big -- the closure that we drilled at Haselgrove Deep is quite a big closure and could hold considerable volume in just what sort of development plan. And there's also exploration targets at both Dombey and Katnook Deep for the Sawpit. So what's got us excited about the play is the -- it's kind of a basin-opening play right in the middle of a bunch of infrastructure that's connected to the east coast gas market.

[Adam Martin, Research Analyst]

Okay. Okay. And just final question, moving over to WA, can you just sort of update there? Obviously, corporate transactions, et cetera. Can you update on the next 6 months, what the plan is, what you're focused on?

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

Yes. Adam, I think we'll come out with more guidance on that in July when we come out with the work program. Obviously, there has been some core productivity there. We're really pleased to see Mitsui in the venture. Having dealt with Mitsui a number of times personally, they're a quality company and they will be focused on value, I expect, just as we are. And I'm -- so really looking forward to working with them. So I think it's probably best to wait until they've settled into the shoes a little bit further and we come out with our capital guidance for next year to give you some more guidance around that. But I think the technical work, information work, et cetera, is obviously still progressing, as you'd expect.

[Operator]

Your next question comes from the line of James Redfern from Merrill Lynch.

[James Redfern, Vice President]

All of my questions have been asked already, but I just wanted to go back to Waitsia. I'm just wondering if you could sort of provide a bit more detail around when we can expect some news flow on the GSAs to be signed for Waitsia Stage 2 and when a decision will be made on whether to choose the [ EBT ] or build-own-operate model for the development, and then I've got another follow-up.

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

Great. Now all good questions, James, although I'd probably just refer back to the answer I just gave Adam which is, obviously, there has been some corporate activity there. The technical work and commercial work has been continuing despite that activity. We really came to work closely with Mitsui. They're a quality outfit. So I think you will see more coming from us in coming months, particularly when we come out in July with our spend forecasts and outlooks and some more of our development plans. So you just have to hold on for a few months for that one, I think, is the best way to think about it.

[James Redfern, Vice President]

Yes. And what about timing for FID? Like is that still the second half calendar year '18?

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

Well, that's obviously owing to the progress and discussions that we have with Mitsui. So again, I think I'll get back to you in August. Look, we're still targeting similar first gas base to what we always have, so in a way, we think...

[James Redfern, Vice President]

Do you think in 2020?

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

Well, it's a 2021, FY '21 top number. It's a quality asset. It's a really high-quality resource. We're pleased to be part of it. No surprise that we saw a number of parties clamoring for it. It's a high-quality resource.

[James Redfern, Vice President]

Yes. Absolutely. Absolutely. Now just in terms of the planned farm-out of the -- of a gas project, can you remind me of what percentage you're looking to sell down and what the timing on that is?

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

Yes. Look, I think as we talked about before, the reason for that farm-down is really just to balance our portfolio. As you can see from our net debt levels, there is no need for us to actually do it from a financial perspective. Given it is a material development with material opportunities going forward, our preference is to have a high-quality partner with us to collaborate, support us technically and commercially. So we're probably thinking it's around the 30% mark that we'd farm down. The process is underway. We've got a queue of quality parties talking to us right now, and as that progresses, we'll give more guidance to the market on time.

[Operator]

Your next question comes from the line of Daniel Butcher from CLSA.

[Daniel Butcher, Research Analyst]

Matt, I was just curious whether you'd care to -- I know you've been under the hood probably for a couple of months to give an update on any nuance around your synergies target and whether you think there's more upside to that and particularly from what area specifically you might see more potential to come out there and secondly, related to that, what you think on restructuring costs, timing and that -- for the second half of this financial year and into next financial year.

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

Yes, thanks, Daniel. Look, in terms of the synergies, we came out with an early number of around 20 million. We had expected and hoped that there would be more, but we really didn't want to come out with a higher number until we'd had a chance to, a, have the keys and fully have open discussions with people who were working with the Lattice assets and sitting in the Lattice shoes. So now that we've done that, we're very confident of our $50 million target, so it's per annum, by the end of FY '19. We're making very good progress in terms of integrating the business -- restructuring the business, some office closures and other things. So we're putting the right people in the right places for the right resources. So I think, at the moment, the best I can say to you is we're very confident with our $50 million number. We would not have come out with it otherwise. Do we think they can be more than that? Yes, we do. That's just about continual optimization across all of our assets. As you see in what we've done in the Cooper, we still think there's more in the Cooper. I think it's fair to say the team has done an outstanding job to get the Cooper to where it is. But there's still some more there, and we're going to take that same approach to every single asset, frankly, to drive value.

[Daniel Butcher, Research Analyst]

Sure. I understand the target's by the end of FY '19. I'm just wondering whether that's a net target and whether you're going to start shipping some of those synergies sooner, but they'll be offset by restructuring costs. Or is it just a matter of -- it's a long process to get there and there's restructuring costs to be taken out of that?

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

Yes. Some of those targets are already starting to be achieved, but yes, that is a net target for us. So that's the run rate -- per annum run rate by the time we get to that period.

[Daniel Butcher, Research Analyst]

Sure. Sure. I was just curious with the Cooper Basin, Western Flank. Obviously, a great boost in production this quarter, partly due to artificial lifts. Do you have a sense for how long that boost will last before it goes back into sort of a faster decline?

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

Well, I think the key thing to remember is that we have very extensive development and appraisal programs planned for all of our Western Flank fields. But obviously, as these wells produce in the local area, the water cuts are going to go up, and individual wells are going to go down. But our plan is to fully develop the McKinlay and the Birkhead and the Namur over the coming couple of years to, hopefully, not only sustain but grow production.

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

One of the areas, Daniel, is obviously we've got more artificial lift targets. There's another 2 Stunsail horizontals that we're planning to have on pump coming up. And then there's another 3 existing targets beyond that. So there's already 5 further artificial lift targets. And I think the other thing to note for the Western Flank is obviously the horizontal drilling changing the game for the Western Flank right now in terms of development we're driving.

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

Yes, and we're also hoping, as I said earlier, that with this 43 -- up to $43 million drilling fund for PEL 104/111, that we can turn that into a growth business as well with Senex. Or Senex can turn it into a growth business, they're the operator.

[Operator]

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

[Andrew Hodge, Research Analyst]

First question, just about CapEx. And I just wanted to ask about the PACE grant you guys have got to be able to try and put in the new gas plant to be able to try and do Haselgrove. Is that money meant to be spent in FY '19? And I noted that it's targeted that the plant's going to be 10 TJs a day, and I just wanted to see, is there potentially upside from that just given your comment before about it being a potentially [ basin up in well ]?

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

Okay. Maybe just a quick comment on the PACE grant. So it's not necessarily FY '19 spend. We're still working with the government on when the timing of that spend takes place. So I don't have a definitive timing for you right now.

[Andrew Hodge, Research Analyst]

Okay. And then the second part of that question then, is there a potential to, I guess, spend more above what was initially there if you guys think that there's a -- and grow the size of what that plan could be?

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

Well, as I said earlier, we're linked pretty closely to the gas market on the east coast of Australia, so our plan will be to size the project that's commensurate with however much gas we find and can sell. But we're quite close to the SEA Gas Pipeline that goes from Victoria to South Australia, so we could potentially have a material project size.

[Andrew Hodge, Research Analyst]

Yes. I guess I mean I was just kind of thinking about -- there's a lot of other guys near there as well who are drilling and just thinking about the potential upside for you guys if you build a bigger plan to tie in other people as well.

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

Yes, that's always a possibility, and we'll be trying to do a rig share with Rawson, who's the operator of the Nangwarry prospect that's going to be drilled also with some PACE grant funding in the same campaign that we're going to drill Dombey and whatever drilling around Haselgrove that we decide to do.

[Andrew Hodge, Research Analyst]

Okay. And then the second part, tied into upfront CapEx, is just trying to [ send ] the deferral of CapEx. I think you guys said at the half year, you deferred a lot of the long lead items already. And so I just wanted to get kind of an idea about what was kind of the commitments that you guys deferred? Was some of it some of the Senex carry from this year, just to get kind of a breakdown of what's going on there?

[Dawn Summers, Chief Operating Officer]

So I think I'll handle the SIB CapEx. I'm talking on behalf of both Jeff -- Jeff, Matt and myself here. We're doing a deep dive into all of our capital spend to understand what's being spent, what's the value that we get back from every dollar that we invest. And from a SIB capital perspective, we have actually taken some action to defer some capital into FY '19. And an example of that would be the work that was going to be carried out in the Kupe offshore campaign, project maintenance campaign that we've actually deferred into FY '19. So we're looking at everything from a value perspective, and based on clear criteria in terms of what we get back from every dollar that we invest, there's quite a rigorous review of everything across our portfolio. Jeff?

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

That's it, mainly. The CBOS money wasn't actually a deferral, it's just -- because I think it needed to be spent by the middle of 2019 or something. It was just a transfer of the funding obligation from the basin-centered gas play to the Western Flank oil play.

[Andrew Hodge, Research Analyst]

Yes. Yes. Okay. I just wasn't sure if it was -- any of it was being included in the CBOS next year. And then I guess as part of that, I guess we'll find out later on, but just any kind of update around the potential Middleton expansion?

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

Well, certainly it's on track at the moment. So basically, works have well and truly commenced. And by the end of FY '18, we expect to be up to circa 40 million scfs a day of raw gas. And we're continuing to assess, given our drilling results, whether we go beyond that and when. But right now, we're very confident by end of FY '18, we'll be at 40.

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

Yes, so we've added 4 new producers with the drilling campaign this year. The rig is currently drilling the Permian Edge exploration play. And we're moving from Lady Bay to Ulladulla. After that, we have 4 more wells planned in the Southwest Patchawarra, which is right in the Middleton area. So fingers crossed. We're hoping to add somewhere between 2 and 4 new producers with these other 4 wells that we're going to be drilling in the remainder of this financial year.

[Andrew Hodge, Research Analyst]

Okay. And I was just going to check to see if the artificial lift -- are you guys -- is that being powered by sort of burning your own gas or using diesel? Just because I remember [ Santos ] saying before that they've stopped burning their own gas, and [ instead of -- taking mains power ] so that they can try and get extra gas.

[Dawn Summers, Chief Operating Officer]

Yes. No. It's our own crude -- it's powered by 2 -- our own -- no, [ I'll just see ].

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

Well, it's actually a good thing, but the crude in the Western Flank has no associated gas, which makes operating costs low but you don't have any associated gas to run the facility. We're considering, somehow, Kevin's group's considering getting the Middleton gas somehow to the Western Flank to power, but it's -- but right now, we're just burning our crude, as Dawn said.

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

As you can imagine, given the -- to wrap it up, just the way that we're getting on production out of the artificial lift, that they're paying out in around circa 6 months.

[Dawn Summers, Chief Operating Officer]

Some of them [ haven't yet ].

[Andrew Hodge, Research Analyst]

Okay. And I guess the last question maybe just for Jeff. I just wanted to see -- it sounds like you're kind of most excited about the Sawpit as opposed to Pretty Hill for looking at Haselgrove in the surrounding area.

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

Well, the Pretty Hill is a mature target in the fields. That was a primary producer at Katnook and Ladbroke Grove and Haselgrove. We found the lower Pretty Hill formation at Haselgrove-3, but a well hadn't been drilled that deep. But the Pretty Hill is an objective at Dombey because it's -- that's a completely undrilled trap. I'm excited about any gas that we find, to be honest, Pretty Hill or the Sawpit.

[Operator]

Your next question comes from the line of Ewe Jin Tan from Churchill Capital.

[Ewe-Jin Tan]

Just on the Cooper Basin, if I may. Does Beach have any preemptive rights to some of the assets that are currently operated by Santos?

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

Look, we don't comment on the terms in our commercial agreements. So unfortunately, that's one I'm going to have to pass on, Ewe-Jin.

[Ewe-Jin Tan]

Sure. No worries. And I guess my second question, are you currently looking at potentially acquiring any of the Cooper Basin assets [ from Santos ]?

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

Look, obviously, Santos is in a process at the moment with a non-binding offer from Harbour and moving through DD. Obviously, given that's a core part of our business, we're keeping a close eye on that. And obviously, for us, the key is that we want whoever comes in to the basin to be focused on value, and delivering on value [ as well as the operators have ] in the last 2 years. So that's the main thing, is we want to keep up the [ force on to any value ] out of the Cooper.

[Operator]

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

[Mark Hollis]

Thanks, everyone, for joining the call.

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

Thanks, all.

[Dawn Summers, Chief Operating Officer]

Thank you.