Cooper Energy Ltd

ASX:COE

Earnings Call Transcript 2023-Q1

[Operator]

Thank you for standing by, and welcome to the Cooper Energy Limited Q1 FY '23 Quarterly Report Conference. [Operator Instructions]

I would now like to hand the conference over to Mr. David Maxwell, Managing Director. Please go ahead.

[David Maxwell, executive]

Thank you very much, and welcome, everybody, to this morning's quarterly -- first quarter FY '23 report for Cooper Energy. This is David Maxwell. And I'm joined this morning by some members of our leadership team. What I'm going to do is make a few introductory comments and then hand over to Q&A. I think that's really where the value is now that the quarterly is out.

We released our first quarter results this morning for the 2022/2023 financial year. It was another set of strong results, supported by record quarterly production, with sales volumes and gas prices together delivering revenue -- quarterly revenue of $55.4 million. It's pleasing to be able to talk today about the continued momentum that we've carried into the financial year as we continue to build on the achievements we delivered in FY '22, which was a transformational year for Cooper Energy.

There's a number of highlights, 5 in total in the quarter, and I'll just make a statement about each of the highlights and then a little bit of backup on each. Firstly, it was another quarter of record performance. As I just mentioned, September quarter was another record-breaking quarter of production, beating the prior quarter by 15% and beating our previous record, which was in Q3 FY '22 by 13%. Sales volumes were up 10% compared to the previous quarter. However, sales revenue was down 11% compared to the previous quarter. This was due to a lower average realized price, down 14% compared to the fourth quarter of FY '22 and a one-off change in the way oil revenue is recognized under a new tolling agreement with the South Australian Cooper Basin joint venture.

Cooper Energy remains a net seller of surplus gas in calendar year 2022, with a further 588 terajoules of gas sold into the spot market during the first quarter of FY '23. We had no third-party gas purchases during the quarter, and this is a testament to the increasing rates at Orbost and our ability to optimize our portfolio across the 2 hubs, namely in the Otway and the Gippsland basins.

The second heading or second sub point, if you like, is we've seen continued momentum at Orbost. Processing rates continued to show an improvement in both relative stability and in the overall average rate. The plant averaged 51.4 terajoules for the March quarter, which is a 33% increase on the same quarter a year ago. For the month of September, the plant averaged just a tick over 56 terajoules a day, which included reaching the throughput in the mid-60s terajoules a day with the benefit of the polishing unit when it was online.

Following an increase in the differential pressure across the polishing unit when a compressor was brought back online at the end of September, the decision was made to take the polishing unit offline for a media change out. The operations will continue -- the operations team of Cooper Energy will continue to work with APA to optimize the media change cycle of the polishing unit, and we expect a change in the media of the polishing unit will be required every 45 to 60 days. On this basis and taking account of absorber cleans, the average rate in the very near term is expected to be between 52 and 53 terajoules a day or in that order.

The integration work at Orbost is in full swing. We've got a dedicated team working closely with APA and the regulator to ensure the transition process remains firmly on track. And this includes the transfer of the major hazard facility license from APA to ourselves. We're confident of achieving this milestone and Cooper Energy becoming the operator at Orbost, and this occurring in the first half of next calendar year, the first half of calendar year 2023. The tie-in and commissioning of the sulphur removal package, this is the filtration package, remains an integral part of our plans at Orbost. We anticipate undertaking this when Cooper Energy is the operator. The sulphur removal package, the filtration package commissioning will be performed at a time that minimizes the commercial impact of the result in downtime and having regard in balancing the market and customer needs.

The third point or the third sort of subheading, if you like, is that, we've continued to advance our growth plans in the Otway Basin. In mid-May of this year, we set out in further detail our growth plans for the offshore Otway. This is the Otway Phase 3 development project or OP3D, for short, and that's based around any and low-risk short-cycle time exploration drilling. The approach being pursued is designed to optimize capital management and maximize economic return. Discussions are underway in forming a rig consortium with other operators in the area. This will reduce costs associated with the mobilization and the demobilization of the offshore rig. Front-end engineering design is planned to start this quarter with a final investment decision targeted for the first half of next calendar year. The long lead item orders have been placed with first gas targeted by the winter of 2025. As ever, this remains subject to a number of items, including joint venture approval and the timing of rig availability.

The fourth point or subheading is that, we have, meanwhile, continued on the decommissioning of BMG planned for late next calendar year. Detailed planning and ordering of long-lead equipment for the BMG abandonment project commenced in the June quarter. We've contracted the Helix Q7000 intervention vessel to perform the works, I think we've communicated on that previously. The cost to complete the well abandonment activities is expected to be approximately $165 million over the term of the project. That's a total cost or 100% cost and includes contingencies and allowances with activity split across 2 phases. Cooper Energy has a 90% working interest in this project. Pertamina has the other 10%. We plan to decommission and abandon the BMG wells in the first phase, that's the $165 million that I referred to earlier by 31 December 2023. And during the second phase, we'll remove the remaining infrastructure, and that will be done by the end of calendar year 2026 as the plan.

The fifth point or subheading is that, we have also continued to high grade our portfolio. On the 1st of August, we closed the divestment of our interest in the Worrior oil field to Bass Oil, along with a number of other noncore Cooper Basin exploration permits, and that was for a total consideration of $650,000 and include a transfer of all of the decommissioning abandonment liabilities. The transaction excludes -- specifically excludes our 25% interest in PEL92, which provides the majority of Cooper Energy's oil production and revenue in the Cooper Basin.

I'd also just like to note that our Annual General Meeting is scheduled for 3 weeks from now. Our 2022 Annual General Meeting will be held on Thursday, the 10th of November, at 10:30 Australian Central Daylight Time. Details of how to attend in person or online are available in the quarterly report or on the company's website.

It has been a busy quarter as we carry the momentum of a transformational FY '22 forward into FY '23. I can confirm also that based on performance to date and our outlook, we're able to reaffirm performance consistent with the guidance range that we announced as a part of our annual results. All of the foundations are set for a successful and growing domestic gas business. We continue to benefit from improved performance at Orbost, alongside ongoing and reliable performance at Athena and in the Cooper Basin. This, together with our strong balance sheet and the outstanding gas market dynamics in the Southeastern Australia, if you are a gas producer, places the company in an excellent position ahead of the next exciting phase of growth.

Against this background, and it's with perhaps mixed emotions that I advised the Board on the weekend of my intention to retire next calendar year. And the next phase of the succession process is now underway. I want to reinforce to all investors, it is business as usual. I have committed to work with the Board to ensure a smooth transition through the next period.

Thanks for joining, and now I open the lines for any questions.

[Operator]

[Operator Instructions] Your first question comes from Dale Koenders with Barrenjoey.

[Dale Koenders, analyst]

Firstly, congratulations on the career, David, and all the best for future moves. I guess, 2 questions. Just wondering if you can provide some insights into what you're seeing in spot gas markets in Victoria at the moment, noting that the price realization was a little weak in the quarter?

And then secondly, how are you thinking about the ongoing contract discussions?

[David Maxwell, executive]

Thanks, Dale, and thanks for the comment there. When you say the ongoing contract discussions, I'm presuming you're talking about gas customer contract discussions. Is that right? Yes. Okay.

[Dale Koenders, analyst]

Correct.

[David Maxwell, executive]

Yes. Look, what we -- and I'll go back a quarter, first of all, go to the July quarter FY '22, and obviously, the middle of winter, we saw prices in the 30s and 40s and then they got capped in Victoria at $40, and that was pricing for an extended part of that quarter. When that cap mechanism came off and since and what we might call the shoulder season, we've seen prices in the sort of high-teens, $18, $19 spot up to $23, $24, $25. I haven't had a look this morning -- $22 this morning. And it's been relatively stable around that -- in the low-20s. That's on spot prices.

And maybe I'll just talk a little bit about how we see that playing out. I think what we saw this winter was a very tight market, tight supply and the number of interruptions from electricity supply, which bumped up gas demand. Everything we've seen, everything we've heard in conversations with customers have people more worried about next winter. And I know that the Gippsland, the Longford, Esso operated facilities, we're working as hard as they possibly could through this winter. And I think they're really going to be tested next winter. And I am expecting, to be honest, quite a bit of volatility in gas pricing. We -- as a reflection, we expect -- our forecast for the shoulder period is a price lower than where we are today. So prices in the spot market today are higher than what we had forecasted when we put our budget and forecasted together and they're higher in the order of 50% higher than what we had previously -- what we were forecasting, we thought around 15% in the shoulder period and here it is in the low-20s.

In terms of term contracts, I'll make 2 comments on that. We have had a lot of inbound inquiries from utilities and industrials and large industrials, and they are talking -- they are wanting contracts 4, 5, 6, 7 years plus and the contracting for that, obviously, there's different combinations of pricing, but typically, they're in the mid- to high-teens. So $15 to $18, $19 is what -- is the space that people are prepared to talk about, indexed in different forms and contracted for the longer -- and contracted for that 4-, 5-year period. And many of these people at the moment are saying: "Well, hang on, I'm going to stop buying gas on a 1- or 2-year basis. I now want to buy gas on a 5-, 6-, 7-year basis." And trade off a little bit of what they might see as opportunity on the downside for certainty over the longer term. And that's almost to a customer that we're speaking to the feeling that people are getting.

Does that answer the question?

[Dale Koenders, analyst]

It does. And has anything changed your view around sort of what level of contracting you want from sort of gas projects going forward and what level of spot price exposure do you think is appropriate?

[David Maxwell, executive]

Yes, not really. Not over the next 1 or 2 years. We will be releasing an updated investor pack in the next few days. And in that, we are showing how our contracts roll off or how our contracts have price reviews and when those price reviews kick in. So you'll see our existing portfolio, and we're able to freshen or refresh, if you like, or freshen the prices in the existing contracts.

What -- and I'll answer the question from 2 perspectives. We've used take-or-pay contracts with creditworthy customers as a foundation together with debt, bank debt as a means of enabling the next phase of growth. So for us, contracting 70%, 75% of a new development under take-or-pay contracts at locked in prices is very valuable in terms of the funding that that affords us together with bank debt. If we didn't put in those take-or-pay price levels, financiers typically will assume quite significantly lower prices. They will -- the doomsday scenario is the way they would think about it.

So that's why we think about it that way. Now, that will change with time. And as we have to rely less on foundation contracts and bank debt for our future growth, I think you see us opening up and putting a little bit more into the spot market. But at the moment, it's in the order of 25%, 30% is held back for the spot market, and that's really more a reflection of where we are in the growth cycle. But as we move through post 25, 26, I can see us being in a position where we can afford ourselves a lot more flexibility. So the company can afford itself a lot more flexibility as to how much it puts in the spot market relative to the term market.

[Operator]

The next question comes from James Bullen with CG.

[James Bullen, analyst]

And congrats, David, just echoing Dale's thoughts there. Just a quick question. The solid filtration unit and commissioning of that expected timing, if you can?

[David Maxwell, executive]

Yes. I'm going to pass it to Mike, and he can also, I think, give -- Mike Jacobson, I think he can also give a bit of an update on when we expect the polishing unit to be back online based on very recent -- as in a few hours ago advice. Mike?

[Michael Jacobsen, executive]

Yes. Thanks, David. Thanks for the question. So in terms of the solid removal package, the expectation is, we won't be turning that on, commissioning that on until at the earliest the MHFL, the license -- the MHF license is transferred to Cooper Energy. And then at that point, we need to balance the market what our gas customers are needing in terms of gas and take a view on when is the optimum time to then turn that on because it will cause some upsets in the plant for a short period of time. It's a new part of the process. So it will take some time to stabilize, and we're talking sort of 2 to 4 weeks to stabilize, and we don't want to do that as we go into winter next year, certainly. So sometime in calendar year '23 is probably the expectation there.

And in terms of the polisher unit, yes, as David mentioned, we've been advised recently that APA planning to change out the media, probably starting on Monday now of next week, and the expectation is it will take them 7 to 8 days to change out the media.

[James Bullen, analyst]

Great. And so, just to understand why do you need the MHFL in order to install or commission the solids removal unit?

[Michael Jacobsen, executive]

Yes. So the MHFL dictates who the operator is. So at the moment, it is APA, who is working under that license. And while they are the operator, it's -- they don't have a desire to turn on the solids removal package during that time. Just with everything going on with the license transfer, the preference is not to do that work while they are the operator and they wish to wait for us to take on the license.

[Operator]

Your next question comes from Nik Burns with Jarden Australia.

[Nik Burns, analyst]

And I'd like to echo Dale's comments about your career, David, really well done. Look, just a couple of -- maybe I'll follow up with the question just around the sulphur removal package, just the timing. You talk about getting the licenses transferred in the first half of calendar '23. Is there a scenario where if that happens, say, earlier in the first half, you could actually slip that commissioning of that removal package into the sort of March, April shoulder period? Or should we really be thinking more like sort of this time next year as when it's more likely to occur?

[David Maxwell, executive]

Look, I think if we got the MHFL earlier than our current base case, we certainly would look at the timing. So if it was in the sort of months that you're talking about, we would certainly look at it and make the assessment to get instability for a short period, look at where the spot prices were at and have a conversation with the customers to determine whether we do it before winter or after winter. That would be the -- I mean, look, I'm saying something there. And maybe I just hand to Mike and see if he wants to correct me or add anything to what I've just said there.

[Michael Jacobsen, executive]

No, I think you've covered it, David. Certainly, our base case for the license transfer is in that period, the March, April period. If we can get it earlier, then there is an opportunity. But certainly, on our base case, it's looking like March, April transfer license and then do this turn on the solids removal package sometime after that when we can -- when the market conditions suit.

[David Maxwell, executive]

Yes. It's probably right also to just make another comment around the plant itself. Mike and myself and a few others were down there early last week. And I'm going to make 2 comments. One is, you are seeing gradual improvement week-on-week, month-on-month. And that's just improving the operating control of the plant. And I would expect that the polishing unit, as they get to better understand that, we'll also deliver progressively more sustained periods of higher processing and then nudge the rates up a little bit as well.

We've identified a few opportunities for what you might just call simple process, low cost, small step improvements. So I'd expect the trends that we've been on over the last few quarters to continue, maybe not 10%, 15% per quarter type growth, but smaller amounts. The important thing is getting more stability and increased stability then allows you to gently nudge up the rates and removing -- extending the time between cleaning cycles and ultimately removing the cleaning cycles makes a huge difference to the average rate and the operating cost. It's not a -- each time you change out the media and each time you're cleaning out an absorber, it's an incremental cost over and above steady state operations. We've factored that into our guidance, not the improvement, but where we are today, we've put into our guidance. But we see opportunities for small step change improvement progressively. And then there's obviously the more stepwise changes such as the sulphur recovery package.

[Nik Burns, analyst]

Got it. Thanks for that clarification, David, and Mike. Just -- further just on the gas polishing unit. If we go back a couple of months ago, I think you've talked about the challenges that APA had when they first turned it on, they got some good rates initially and then they had issues with the media there, you then undertook root cause analysis, I believe, to understand what went on. You've then now turned it back on and now it looks like you're also having issues with the media. I'm just wondering if that root cause analysis was correct or whether there is something else going on with the unit.

[David Maxwell, executive]

I think there's a bit more work to be done on the root cause analysis. We have addressed part of it. But I don't think it's all been addressed. Mike, would you want to...

[Michael Jacobsen, executive]

Yes, certainly. I mean, the root cause ultimately is solids and sulphur getting from the absorbers into the polisher and that was identified, but there was a few changes made within the polisher. And I think when those changes weren't always -- they weren't at 100% going to fix the recall. So that was known when that happened. And really, what we've seen over the last month is probably a repeat of what we saw when the polisher was turned back on initially. So I think the root cause, as David said, there's some more work to be done on how to actually address that and stop the solids and the sulphur getting into the polisher, so more work needs to be done there.

[Nik Burns, analyst]

Got it. And just a quick clarification. You talked, I think, about changing out the media will take a number of days to do so. Will there be any impact to production during that change out?

[Michael Jacobsen, executive]

What was the...

[David Maxwell, executive]

You can go ahead, Mike. Yes.

[Michael Jacobsen, executive]

What we'll see is, mostly a continuation of what we're seeing now. So 54 terajoules when we're not doing an absorber clean and down to 35 when we start doing absorber clean. So they can bypass the polisher while they're doing the media change out.

[David Maxwell, executive]

Yes, you switch it on and switch it off, Nik. It's -- it doesn't -- you're not offline for 0.5 day, a day or 2 days or anything like that as we are with an absorber when that's being cleaned.

[Operator]

[Operator Instructions] Your next question comes from Gordon Ramsay with RBC Capital Markets.

[Gordon Ramsay, analyst]

David, just like everyone else, I've known you for quite a few years. I just want to wish you all the best on your pending graduation from Cooper Energy. Just very quickly on some of the political statements that are going around in the media right now about potentially price caps. Can you comment on that? Have you been approached? Or has there been any discussion with government officials about pricing -- gas pricing going forward and what might be done to that to kind of alleviate some of the pressure on the manufacturing industry in Australia?

[David Maxwell, executive]

Yes. And thanks, Gordon, for the comments. I -- my read, and we have been involved in conversations with other colleagues on the producer side with customers. And then earlier this week also with federal -- I've been involved in conversations with federal politicians. I think there's a bit of -- well, I don't think I know there is a bit of political push me, pull me going on. On the one hand, government's realize that you can't go in and change fundamental industry structure issues, particularly when foreign investors have made very significant investments and the government's very conscious, acutely conscious of that. At the same time, you've got some industrial customers for their own reasons, jumping up and down and being very vocal.

I -- we do have a price cap mechanism at the moment, and we -- and that clicked in, in this winter. And the way it works is, over an extent -- over a continual period, if the sum of prices hits a threshold, then there's a cap imposed and that's what we saw this winter and the cap imposed was $40. And if that's what people are talking about as a cap, well, yes, we can live with that. I think that some of the businesses that are in complaining loudly and I'll probably get myself into trouble for saying this are probably not globally competitive and have been living off pricing, which is less than what you might call international benchmark pricing. So in some respects, have been subsidized or there have been assistance provided by gas price for gas-intensive industries. So there is a natural tendency when that happens for people to make a lot of noise.

My feeling on it is, if the government and the regulators impose a pricing mechanism, which is similar to what we had this year, then that's workable. We can live within that. But I think there will be a lot of attention and a lot of noise if they try to put in place a pricing mechanism, which capture prices at levels much lower than that. I think you'll then see a complete recoil from industry. Well, if that's what you're going to do, then don't expect us to invest, you don't expect us to invest, you've got a bigger problem coming because you can't magic guess. It doesn't just appear.

And I think sometimes the issue is easy to beat up the gas producer. But even if there was a price cap and the price was available today, you're going to -- at the peak -- on the peak days, you are really pressured to meet 100% of demand in the Southeast. Pipelines from Queensland down to Australia are near full. Reservoirs and plants can only produce at their maximum. They can't go above that in the Southeast. And most of the facilities and particularly the Gippsland, Esso operated facilities are in decline. So there's a reality that people have got to accept.

I mean, that's a long answer to a short question, isn't it? But I think it's unfortunate, it's been played out in the public space and the way it is. But what I've observed in the last week is that, there's now starting to be written articles that maybe we just have to accept a little bit more fossil fuel, a little bit more coal, a little bit more gas in the system to get the balance right between transition to renewables and what's cost-effective. And that, to me, is inevitable. So we will end up. The sooner that becomes realized by the communities at large, the better in my view, because arguing about it, aren't going to fix it. That's a long answer, isn't it?

[Gordon Ramsay, analyst]

No, that's good. Just very quickly on rig rates and you're talking about going into a drilling consortium for OP3D. I mean, I'm just seeing what's happening in other parts of the world. Are you seeing higher rig costs coming through? And I know the goal is to share it with other companies to minimize certainly [ mold and demold ], but I'm thinking more day rates as well. Is that an issue from a cost viewpoint that you're a bit worried about? Or is it being addressed?

[David Maxwell, executive]

No, it is cost -- rig rates have gone up. We've recently revised -- we've gone out for tender and updated our costs on OP3D. And obviously, we're in -- out tendering for services at the moment also for the BMG decommissioning. And we've got contingencies and allowances. And I'm pleased to say that the BMG decommissioning numbers that we're carrying, they were -- as it relates to the vessel that was fixed some 2 years ago. But rig rates today are quite a bit higher than they were 1 or 2 years ago. And it's not right to say they've gone up, but you can't generalize and say they've gone up by X percent because it's a function of the nature of the rig and the length of the program and different rigs have got very different rates.

What we're looking to do with the consortium, and we're talking about a program which is in the order of 2 years altogether between us and 3 others, 3 other offshore operators in the southern basins. And that's a program of firm wells approaching 2 years. And it's a bit like contracting gas. People like certainty, and you get slightly better rates and certainly, you can spread the [ mo and de-mo ] when you've got a program of that size. So, yes, it's not a straight answer with an X percent attached to it, but rig rates in general have gone up.

[Operator]

There are no further questions at this time. I'll now hand back to Mr. Maxwell for closing remarks.

[David Maxwell, executive]

Yes. Thanks very much. Look, I'll just make a couple of points. Firstly, last year operationally and in terms of the key stats that we look at production costs, safety, et cetera, we had a stellar year, and that's continued into this quarter. What I didn't mention in the quarterly was -- we mentioned the quarterly was, our safety and environmental stats have been maintained at the 0.0 levels. So the momentum that we were building has continued.

The second thing I would say is that, yes, the big event for us in the last quarter was closing the transaction with APA to acquire Orbost, and we're seeing real opportunities to steadily improve that. Mike touched on some opportunities for step change such as the sulphur recovery package. But outside of that, we're seeing real opportunities just for small incremental changes as well. And this is happening at a time when the market wants as much gas as it can get, and prices are still healthy.

Expect to hear from us in the next month or so about progress on OP3D and some key contracts which are related to that. And we'll keep everybody informed on the performance of Orbost and watch out for an investor pack, which is coming out in the next couple of days because there's a few things in there, which I think will point to some useful information for people. So on that note, many thanks for listening.

[Operator]

That does conclude our conference for today. Thank you for participating. You may now disconnect.