Cooper Energy Ltd

ASX:COE

Earnings Call Transcript 2022-Q2

[Operator]

Thank you for standing by, and welcome to the Cooper Energy Limited Q2 FY '22 Quarterly Report Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. David Maxwell, Managing Director. Please go ahead.

[David P. Maxwell, MD & Executive Director]

Thank you very much, Melanie, and welcome, everybody, to the conference call this morning for the Cooper Energy December quarter report. Before we get into it, we have picked up, I apologize, we have picked up a small error in the report, and we will be issuing a slightly updated report in the next hour or 2. The production for the quarter was 0.77 million barrels of oil equivalent, not 0.66 million barrels of oil equivalent. So it's a good correction, and humble apologies for that.The reason for the correction sits in the way the numbers were calculated when we cut over from the Iona Gas Plant, to the Athena Gas Plant. So it was a bit of a one-off glitch in the system.Again, thank you, everybody, for joining the call this morning, and we will issue an updated quarterly within the next hour or 2.So I've got 5 key messages this morning. And I'll summarize those key messages and then give the backup for each of them. The first message, the Athena Gas Plant, the successful upgrade in commissioning enables multiple opportunities and value-adds for Cooper Energy. The second message is the Orbost Gas Processing Plant and Sole production increases, and this is ahead of the main component of the Phase 2B works.The third message, of the significant positive increases in the key production, sales volume and revenue metrics for the first half of FY '22, and this increased trend is forecast to be maintained. The fourth message, gas supply in Southeast Australia remains tight, gas prices have increased, and our volumes available for spot sales are increasing. And then the fifth message, the momentum on the next wave of gas development in the Cooper Energy portfolio is now being increased.I'll touch on each of these points in the supporting information.I want to acknowledge the last 18 months has had its challenges with the issues APA has had, increasing the processing rate at Orbost. The team has maintained its focus on the fundamentals. And now, we are seeing the positive results come through. This is at a time when the market is seeking more gas and prices are relatively strong.The March quarter has got off to a great start. We also maintain our net zero CO2 position. This is our -- emissions are offset for Scope 1, Scope 2 and Scope 3, and this position [ is solidified ].If I now go to the 5 key messages in the back half behind each of them. Firstly, the Athena Gas Plant. The upgrade and commissioning of the Athena Gas Plant was completed in December. Our offshore Otway Basin gas is now processed at Athena instead of the Iona Gas Plant. Opportunity to acknowledge and thank Lochard Energy, who operate now in the Iona Gas Plant, for assisting us with a smooth and successful transition.We will now sell our Casino Henry gas on a firm basis, not an interruptible basis, as was previous. Our operating costs are lower. We have available capacity for the next wave of offshore Otway Basin gas developments. And successful Athena project completion illustrates and confirms the Cooper Energy capability to manage and operate gas processing plants.The second message is around Orbost and the Sole production increases. The Orbost production trend has been upward over the last 12 months, albeit lower than we had planned some time ago. In December and from 1 January, the gas processing rate was increased to 48 terajoules a day and then 50 terajoules a day. The time between cleans of the absorbers was also significantly increased, from 21 days, to 29 and 39 days in each of the absorbers.Orbost is currently operating at 50 terajoules a day, and this is after both absorbers were cleaned back-to-back in the last week. The APA plan is to maintain this until late in February when the plant is off-line for the Phase 2B works. We are confident there will be further processing rate increases after the Phase 2B works.These increases, together with the Athena start-up and the adjustments to the Sole contract with AGL, which we announced last year, mean that the need for backup gas supply arrangements is significantly reduced. This increases our margin per unit of production or sales. We expect we will also have more gas to sell on a spot or short-term basis. We have met and continued to meet all customer nominations, and the Sole field continues to perform in line with expectations.The third point, increases in the key production, sales volume and revenue metrics in the first half. Quarter-on-quarter, production and sales were down a little as the Casino Henry production was off-line while we completed the pipeline and associated infrastructure connections to redirect the gas from the Iona plant to the Athena plant. There have been significant increases in the year-to-date or first half metrics.Comparing the first half of FY '22 with the first half of FY '21, production is up by close to 30%, to 1.48 million barrels of oil equivalent, sales volume is up 67%, to 2.02 million barrels of oil equivalent and sales revenue is up 86%, to $95.4 million. We expect further increases in the second half, and at present, we are tracking towards the high end of our year-end guidance numbers.The fourth point deals with the gas market and gas prices. Gas supply in Southeast Australia remains tight, and gas prices have increased. During the December quarter, the Victoria spot gas price ranged from $6.88 per gigajoule, to $15.50 per gigajoule, with a quarterly average of $10.02 per gigajoule. This is occurring at a time when the Cooper Energy volumes available for spot sales are increasing.The fifth message, momentum on the next wave of Cooper Energy gas development is being increased. Otway Phase 3 Development, or OP3D, is in the developed phase and preparing to enter the detailed Front End Engineering and Design phase or FEED. The Athena plant start-up is a factor, an enabler for OP3D, and creates a pathway for other discovered gas in the region.Gas exploration prospects in the Otway and Gippsland basins are being matured for drilling. I expect we'll have more to say on this, particularly around the Otway prospect soon. Phase 2B at the Orbost plant is getting close, as I mentioned earlier.In summary, a quarter of very good progress in a number of areas. Further production and sales revenue increases are expected. And this is at a time when gas supply is tight and getting tighter, with gas prices having increased due to the tight supply and an increase in international gas and LNG prices generally.So that's the end of my formal comments. So I will now open the lines for any questions. And I'll note I've got members of the leadership team with me if needed. Melanie?

[Operator]

[Operator Instructions] Your first question comes from Saul Kavonic with Credit Suisse.

[Saul Kavonic, Research Analyst]

David, perhaps can you just help me understand the spot exposure in both the long and the short side? Just I guess, maybe a bit more color. I got a sense from the announcements of the recontracting with AGL, for example, that some of the upside spot exposure in the near term would have gone away with that. Can you help me just -- how should we think about what are the key drivers or sensitivities that we'll see, your obligations to purchase at spot versus -- you're talking about also the potential to sell at spot, and what could see you being net-long or net-short over the next 12 months?

[David P. Maxwell, MD & Executive Director]

Yes. Okay. Thanks, Saul. There's really 2 -- I mean, if I -- at the high level, and then come down from that and what influences, at the high level, there's 2 factors. Firstly, what's the total production that we have available on a day, and that's out of Orbost and out of Athena, lined up against our nominations on a day and particularly our nominations under the Sole GSAs. And with the -- and [ I'm going to now ] talk through some sort of before and after examples to illustrate. Prior to December, our -- or December and back, the last 6 months of last year, our nominations for Sole were consistently at around 59 terajoules a day. And Sole production was up and down a bit, but it averaged when both absorbers were online at 45 terajoules a day.Now when you increase -- and therefore, we had to make up the difference between the 59 and say, the 45, and our arrangements under the interim agreement, the APA, contributed to quite significantly to that makeup. We would draw that makeup from a number of sources we had, if we had any surface production over in the Otway, if we had arrangements to purchase gas from other gas producers, we store gas in the pipeline, and then if we needed, the last resort was to go into the spot market ourselves.Now you can imagine when the number is not 45, but the number is 50, and the nominations, is because we're off the peak period, is not 40 -- 59, the nominations are more 48, 50, 52, that made quite a significant difference. So it really is the sum of the nominations under the various contracts, particularly the Sole contract, and for production that we've got available within our portfolio.Now what we did last year, and we announced in September, was the 7 terajoules of our supply obligation to AGL was moved from Sole across to the Otway for a period. So what that does is it takes the obligation to supply out of Sole to a lower number as well. So if you put all of that together and there's a bit of a double -- there's a double-whammy benefit, if you like, the cost of backup is significantly reduced because you've got a lot less and on days you've got some surplus gas to put into the spot market, and we have been putting gas into the spot market through January. Does that answer the question?

[Saul Kavonic, Research Analyst]

Perhaps if I could just have a follow-on then, perhaps just to make it easier for us so we don't have to do all these variabilities ourselves. But...

[David P. Maxwell, MD & Executive Director]

Yes, and I appreciate it. No, it's not something you can rationalize into a simple formula.

[Saul Kavonic, Research Analyst]

Perhaps you can give us an indication maybe within your Cooper Energy's base case, do you see yourselves being net-long, net-short or pretty neutral to spot price exposure over the next 6 months?

[David P. Maxwell, MD & Executive Director]

A little net-long. What I mean by that is a little more surplus production relative to contractual commitments.

[Saul Kavonic, Research Analyst]

Perfect. And is that assuming a material uplift post the soon-to-be upgrades at Orbost?

[David P. Maxwell, MD & Executive Director]

No, no. That's working off existing known rates.

[Saul Kavonic, Research Analyst]

Perfect. That makes sense.

[David P. Maxwell, MD & Executive Director]

There is no uplift post Phase 2B. Look, I'll -- I mean, and maybe this is behind your question, but moving from 45 to 50 makes a material -- has made a material difference to the margin that we receive.

[Operator]

Your next question comes from Nik Burns with Jarden Australia.

[Nik Burns, Analyst]

Just a couple for me. Just the first one regarding the Orbost operational improvements, both the high rates and longer intervals between the absorber cleans. And you called out improved optimization and performance parameters driving that. It seems quite a large increase to achieve without any impact of any works undertaken. Given, I guess, the plant has been online for more than 18 months now, can you explain why it took the operator this long to optimize the performance parameters? And is there any more optimization to come here?

[David P. Maxwell, MD & Executive Director]

Firstly, I'll deal with the second part first, and then the -- [ and start ] in the first part. And I will also ask Mike to add any comments he wants to add. We do expect further increases of -- particularly off the back of the Phase 2B works.The first part of your question, look, being absolutely open and honest, Nik, I wish we knew the answer ourselves. I think, and it's quite evident, that as the operators have got to understand the plant, how to operate it and their ability to control different inputs, they have progressively improved the rate.One thing that we have seen in the last month or 2 is the significant reduction in the use of antifoam, and that has flown through to a significant improvement in the rate. It is about the operators understanding the plant better. And the benefits have come in 2 forms, have come extending the period between cleans. So reduced foaming means reduced fouling and then separately increasing the rates. Mike, I don't know if you have anything else you would like to add to that question?

[Michael Jacobsen, General Manager of Projects & Operations]

Yes. Thanks, David, and thanks, Nik. It's probably fair to say that this plant is it's a complex plant, the chemistry that's involved. The issues around the foaming and the fouling, they're not well understood. And it has been a long period of time for the operators to build the knowledge when they take an action, the reaction that one gets from that, to build the confidence to be able to reduce the amount of antifoam, as David mentioned.And one of the key sort of parameters, Nik, really has been the amount of antifoam that they have been using. They've built that confidence up over probably the last 6 to 9 months, and they've got to the point where they had the confidence to be able to take the rate up to close to 50.Like back last year, the end of last year, they asked whether we could take it up to 48. That would be the first step. They did that. And they saw the plant was stable at 48, and they kept going to 50. So yes, it has been a long learning curve for the operators. They have built that confidence. The Phase 2B works. We expect to take that rate up further. If we weren't doing the Phase 2B, would we get more out of the plant in its current form? Possibly. But certainly, we're waiting for the Phase 2B works, which we see will make a big difference as well.

[Nik Burns, Analyst]

That makes sense. I mean it's -- yes, it's interesting that the reduction in antifoam actually helps on the foaming side. Is this work coming out from -- I think you had hired a surfactant specialist to be involved here. Is this something that they've been putting into? Or is this something independent of that process?

[Michael Jacobsen, General Manager of Projects & Operations]

Yes and no. Certainly, the work with that chemist has sort of pointed out the potential upside with using less antifoam. So we -- yes, so yes, in that -- on that side of things. But so, certainly, the operations team was given -- really, it was recommended that they use less, and that's what they've been able to do.So -- but we haven't finished the work with that chemist. We want to get through the Phase 2B works. And we still want to get to the bottom of what's happening. And once -- our focus has been on the Phase 2B works over the last 3 months, so we will plan to get -- or we are planning to get back to that work to understand what is the root cause of the foaming and fouling.

[Nik Burns, Analyst]

Got it. And maybe just one more quick one...

[David P. Maxwell, MD & Executive Director]

So as you pointed out, [ Nik, I'll just say ], that as we progress the work, we do get less foaming and less foulings.

[Nik Burns, Analyst]

Yes. Fascinating. And just on the Phase 2B works, obviously that's just around the corner now. I think you've flagged the end of February start. Can you just remind us, maybe a bit more detail around, how long downtime, shutdown completely and then the ramp-up on the other side, how we should think about the output over the next few months?

[Michael Jacobsen, General Manager of Projects & Operations]

Yes, I can take that one, David.

[David P. Maxwell, MD & Executive Director]

Yes, please.

[Michael Jacobsen, General Manager of Projects & Operations]

Yes. So as you said, Nik, planning the shutdown in -- on the 26th of February at this point. The plan is due to start up again on the 13th. So the middle of -- [ so these are ] sort of exact dates. So they're sort of plus or minus from this planning point of view. So starting up again on the 13th of March, and we expect that to be a month period of ramp-up.The big risk here, obviously, is COVID. We've had some COVID outbreaks along the way. And having to work with that, they've got a very robust plan. But these are the dates that we're working to now. But there is risk around COVID outbreaks down at the plant or within the supply chains.

[Operator]

Your next question comes from Gordon Ramsay with RBC.

[Gordon Alexander Ramsay, Analyst]

Actually, I just got a lead into it. It's basically about the equipment required for the Phase 2B works, whether there's any supply chain issues that you are worried about, if anything is getting manufactured overseas or just in terms of delivery timing.

[David P. Maxwell, MD & Executive Director]

We -- thanks, Gordon. We -- there were some supply chain issues, that previously, you might recall this work was planned for the end of January, and it slipped just on a month because of supply chain issues. As Mike mentioned earlier, assuming no significant impacts from -- new impacts from COVID, our understanding is that equipment is arriving or has arrived. And the COVID impacts were taken into account when we announced, back end of last year, the Phase 2B works, which slipped about a month or so.

[Gordon Alexander Ramsay, Analyst]

Okay. And just another question, in terms of a long-term solution, you're obviously in discussions with APA. What would be your ideal solution in terms of turning this plan around and getting it working towards your ultimate capacity goals?

[David P. Maxwell, MD & Executive Director]

Well, the long-term solution -- the long-term objective is to get the plant up to 68 and above 68. There's no doubt about that. In terms of discussions with APA, we -- in response to a speculative newspaper article, we made a comment last year that there are conversations between ourselves and APA underway around the long term. And that long term has essentially got 2 alternatives. One is long-term gas processing arrangements, with APA as the owner. The other is the possibility of ourselves acquiring the plant. And it would be inappropriate for me to say any more on that at this stage.But I would say that the increase in the rate to 50, the increased confidence, capability of the operators to control the plant is encouraging. And we do see opportunity for significantly increasing the rates above where they are today.

[Operator]

[Operator Instructions] Your next question comes from Adrian Prendergast with Morgans Financial.

[Adrian Prendergast, Senior Analyst]

I appreciate it's not appropriate to talk or discuss the specifics around those discussions with APA. But just to get an idea on possible timing for the framework of those discussions, do you imagine that -- or do you have an idea on what the time line would be, I guess? And then secondly, if those talks, given the long-term implications, could really drag out, if it goes beyond the interim agreement, do you envisage that would be extended? Or do you then go to more of a spot basis or some other sort of framework in the meantime?

[David P. Maxwell, MD & Executive Director]

I think it would be speculative and probably inappropriate to answer too much of that, Adrian. I appreciate where the question is coming from, and I'm not being difficult. I just think people have to be sensitive to conversations, which are commercial conversations and quite significant commercial conversations for ourselves.The interim agreement runs to the end of April, and that's a date that's out there. I don't think I could say any more than what we -- the comments we made in response to that speculative article in the press last year.

[Adrian Prendergast, Senior Analyst]

That's fair enough. I've just been greedy. But...

[David P. Maxwell, MD & Executive Director]

No, I understand. You're doing your job.

[Adrian Prendergast, Senior Analyst]

On to the operational improvements, which have really been deeply encouraging, it sounds like APA are really on the right foot there. Just really interested in any sort of additional color as to what's changed. I know, previously, there are periods where APA were trying to ramp up that output rate. So just changes in the chemistry set or any sort of color on the technicals at Orbost that have allowed that antifoam to be reduced in the mix?

[David P. Maxwell, MD & Executive Director]

I'll make one comment, and then Mike might want to add a little bit more to what he said earlier. I mean this is -- the front end of this plant, of the sulphur recovery unit, is a chemical plant. And changes take a while to work their way through. And then so you'll make a change and then you see the benefit of that, or the negative of that, sometime down the track.And I think we've -- and that comes with understanding of the plant. And as Mike said, it is -- I don't want to make it sound more complicated and complex than it is, but it's not simple either. And it is understanding the plant and getting confidence to test oneself and stretch the boundaries. And I think we saw that when we moved from 45 to 48, and then we saw it again when that moved from 48 to 50. And there are continual adjustments that can be made to further increase the rate.Mike, from a operations and processing point of view, you have anything else you wanted to add?

[Michael Jacobsen, General Manager of Projects & Operations]

Yes. That's certainly, I guess, the physical side of it, but there's also the human side of it. The operators themselves, for the first time -- for many of them, this is the first time that they've operated such a process. And there was a period of probably 12 months where it was very much a firefighting period of time, trying to get the [ plant even to be able to produce ].They've had a -- the more recent period has been a lot more stable. So it's allowed them to -- just to get the feel. And as David said, if you push here, what -- how does it react, and that can take -- there's a time element there. So there's so many different parameters, chemistry parameters, pH parameters, temperature as well.So I wish we knew the answer, Adrian, to be honest. But the human side of it is just the operators building the confidence, building the knowledge, knowing how the push and pull works of this plant, and it has taken 18 months. It is a long time, we agree. But it's a function probably of the issues and the nature of this type of process.

[David P. Maxwell, MD & Executive Director]

I would add that we and the APA, at the technical and operations level, have had reasonably constructive exchanges. And our people, Mike and the operations team, have been helping and working with the APA [ both ] in a constructive way.

[Michael Jacobsen, General Manager of Projects & Operations]

But I think as well, David, if I can just add also, COVID, we don't like to use that as an excuse. But as an example, we haven't been able to get the providers of the technology, Shell, we haven't been able to get them into the country. So while I was there for, I think, the first 4 weeks, as the COVID sort of outbreak started here in Australia, that has played a big part as well, not being able to get what -- who we would want down to the plant to be able to assist in this.

[David P. Maxwell, MD & Executive Director]

Yes, that's true. Very true.

[Operator]

Your next question comes from Mark Busuttil with JPMorgan.

[Mark Busuttil, Equity Research Analyst]

Just interested in a little bit more color about the East Coast gas market. I understood what you're saying about a tightening of markets. But there [ have been since ] some interesting dynamics in terms of both the spot price, but also what's been happening internationally.Spot price-wise, we've seen some softening in recent weeks. So I was sort of interested to get some feeling about what's going on, on that basis. Obviously, internationally, the LNG spot price is $25 or above. So interested to know why we're not seeing a similar sort of strength in this market. And if you're aware of any sort of government intervention that's compelling the exporters to sell at reasonable prices.And then lastly, just the buyers were clearly up in arms when prices started rising a couple of years back. We haven't really heard a lot from the buyers this time around. So what are you seeing from the buyers of gas? And do you think there could be demand disruption?

[David P. Maxwell, MD & Executive Director]

Yes. There's a lot in that -- that's not one question. There's a few questions in there, Mark. And one of them was -- [ I'll put a perspective in what we've heard ] and then separately, what we're seeing and hearing on the ground and our conversations in the market.Firstly, the industry. And I mean, we, at Cooper, are focused very much on the domestic market. But the industry overall is very conscious of the need to maintain supply to the domestic market. The industry is not minded to turn its back on the domestic market at all, quite the reverse.Now that then has to be balanced with what's a fair gas price for the domestic sales relative to international markets. And there was the agreement between the Queensland coal seam gas producers, together with the federal government, that the coal seam gas producers would maintain supply to the domestic market. And at the same time, they would continue to export none of their contracts into the international market.And what we've seen, in the last 7, 8, 9 months, is a significant increase in coal seam gas transported to Gladstone and then out as LNG. I think they're up to well over 4,000 terajoules a day. On days, it's up around 4,200 terajoules a day. So they're obviously working hard to pull as much gas -- extract as much gas out of the ground to push it into the international market, at the same time, providing gas into the domestic market.And the spot market is still relatively thin. I mean on a day, it can be a matter of a few percent. And then on some days, it can be up to 15%, 20% of the domestic market. And we have seen the spot market track, and therefore the term gas market also in the domestic sector track, in a trend [ since ] the international price, but as you say, in no way get down to the equivalent. And I think that really is the industry being mindful of maintaining some semblance of balance in the market and not causing shock waves through the domestic market.The other thing I would say, and sometimes, this gets underestimated, is the supply in Southeast Australia is in decline, quite serious decline, particularly in the Gippsland. And to move gas from Queensland down into Southeast Australia, depending on who you are, there's an extra $1 to $2.So you've got 2 factors here. You've got the international pricing, and you've got supply in Southeast Australia. When we look at that, we continue to think prices in the sort of $8 to $9, and then $9 -- $8 to $9 to $11 gigajoules, city gate, Melbourne, city gate Sydney, city gate, Adelaide, are appropriate because at that -- in that price band, you are able to develop -- continue developing gas in Southeast Australia. And coal seam gas producers are earning a reasonable return, albeit not the return that they would earn out of putting that same molecule to the LNG market.So that's a long way around answering the question, but I don't know if there's any other questions you've got coming from what I've said.

[Mark Busuttil, Equity Research Analyst]

Just what we're hearing from the buyers. I mean have they [ now sort of priced at ] that level?

[David P. Maxwell, MD & Executive Director]

Well, we have focused -- you'll see that we focus our business very much on the utilities and large industrials, and negotiations are negotiations. But we have -- I mean, I think it's very indicative that, last year, our customers for the second half of the year maximized nominations at Sole to 59 terajoules a day. And the equivalent for this year is 52 terajoules a day because we've moved 7 across to Athena.And I think, I mean, I'm not speaking for and on behalf of the customers when I say this, but I'm assuming that the reason they maximized the deliveries under the long term or their term contracts with us is because it was well priced relative to the spot market. And what we've seen in the -- coming off the peak periods, it's come down a little bit, but notwithstanding that, the spot prices have held in that $8 to $10 range.We had a little blip last week, a couple of days, where it went down to $5, $6, but that was short-term surplus supply, very short term for a day or 2. I haven't had a look this morning, but last night, it was up in the -- it was in the 9s. And we are engaged with customers at the moment around new long-term contracts in that range that I spoke about. So in the $8 to $9 to $11 range. And these are for term contracts, term supply, with indexation. So I guess, that is probably the best feedback you can have, is what the customers are actually prepared to talk to you about.

[Operator]

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

[David P. Maxwell, MD & Executive Director]

Thanks very much, and thank you, everybody, for dialing and listening this morning. I think the questions have really highlighted the issues and where we're at, significant improvements at Orbost, which makes a material difference to our numbers on a look-forward basis. Athena coming online. I don't want to underplay that. It -- to have delivered that project essentially within schedule and pretty much within budget in COVID times, it's a huge tick commendation to the team.And as per the last question and discussion, we're seeing the external environment, tight gas supply, particularly in Southeast Australia, and very robust pricing. So on the back of the improved performance, we're looking to accelerate the next round of gas development for the benefit of our shareholders. So thank you very much.

[Operator]

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