Cooper Energy Ltd

ASX:COE

Earnings Call Transcript 2022-Q3

[Operator]

Thank you for standing by, and welcome to the Cooper Energy Limited Third Quarter 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 Maxwell, executive]

Thank you very much. Yes. And as per the introduction, this is David Maxwell, the Managing Director of Cooper Energy. And I'm joined this morning by some members of our leadership team as well. I'm just going to make a few introductory comments and then hand over to Q&A. I think that's really where the real value is.

As reflected in the announcements, we released our third quarter results this morning for the 2021, '22 financial year. A short summary of these results. It was a further set of strong results, evidenced by the record and year-to-date increases in production, sales volume and revenue of 24% to 71%. We had steady improvements in the processing rate at the Orbost Gas Processing Plant, which is operated by APA. Together with the first full quarter of processing of our Otway gas through our owned and operated Athena Gas Plant.

The improved Orbost Sole production, together with the commencement of the resculpted AGL -- together with the commencement, sorry, of the resculpted AGL take-or-pay contract, has created a significant reduction in the quantity of gas -- backup gas supply, and this reduction has been from some 1.3 petajoules or 1,300 terajoules in the previous quarter to 252 terajoules in the third quarter. And that's created the opportunity for some 846 terajoules of gas to be sold into the high-price spot market.

This is perhaps best illustrated in the graph, which appears on Page 3 of the quarterly, where the gray area illustrates the backup gas supplied into our Sole Gas Sales Agreements and the green area illustrates the spot sales. And a quick look at that graph and you can see the contrast before and since 1 January.

Gas supply into Eastern Australia continues to be tight, and prices are increasingly influenced by international LNG prices. The current spot Victoria and Sydney gas prices are circa 2x what they were this time last year. The outlook is for higher spot gas prices as we come into winter when gas demand peaks.

The Orbost Gas Plant was shut down from the 25th of March for the Phase 2b works and has returned to service on the 11th of April. This included a few days delay due to flooding of the access roads, not flooding at the plant. After the shutdown, APA took it steady and went to 45 terajoules a day and 47.5 terajoules a day and is now producing at 50 terajoules a day. And it's important to note that this is before the commencement of the policy unit, which was installed by APA, and before the -- and separately, the solids removal package, which is now in place, and we expect will be commissioned later this year.

In the offshore Otway, the well configuration and rates are still being optimized. And during the quarter, we announced a significant upgrade to the low-risk offshore Otway prospectivity. And earlier this month, we advised we've been awarded a new prospective Gippsland Basin permit that's VIC/P80, which includes the Wobbegong opportunity. You can expect to hear more about our exploration plans as a part of the next drilling campaign, which is being built around the OP3D development project, which is focused in particular on developing the Annie field we discovered in September 2019.

We have maintained our guidance for production, sales volume and underlying EBITDAX and capital spend. And as mentioned in the quarterly, our current year-end forecast is at the upper end for production sales volume and revenue of the ranges that we provided for guidance, and we are going to review that again in the next month.

Yesterday, we and APA signed and announced an extension to the transition agreement that we have in place, and this is an extension out to the end of June. We and APA are working closely on the long-term arrangements for Orbost and the processing of our Sole Gas, and this extension provides the time to finalize these terms.

In the Cooper Basin, together with Beach, we're drilling 2 exploration wells in the area formerly known as PEL 92. The first well, Bangalee-1, commenced yesterday, and this will be followed by the Hummocky exploration well.

And finally, it's worth noting we're engaged with our banks regarding a new finance facility to replace the existing facility established to support the Sole development. The purpose of the new facility will be to support and enable the next growth phase for the company.

So on that note, I'm happy to open the lines and take any questions. And I'll also use the support of a few on the leadership team, where appropriate, for answers.

[Operator]

[Operator Instructions] Your first question comes from Nik Burns from Jarden Australia.

[Nik Burns, analyst]

Just a question on the extension to the transition agreement with APA. I imagine you and the team have been working hard with APA on -- to get -- achieve a mutually agreeable outcome for Orbost for a number of months. Are you able to comment at all on what the key issues are that meant you are unable to get an outcome by the end of April, why you're confident you can achieve an outcome by the end of June? I'm just wondering if that delay relates in any way to your permanent CFO not commencing until next month. Cheers.

[David Maxwell, executive]

Thanks, Nik. Look, the delay is really just things are taking a bit of time. It -- the environment that we find ourselves in over the last 2 years is different to the environment that was contemplated when these agreements were initially put in place. And it's important that they'd be the appropriate commercial balance in the [ rigid ] long-term arrangements.

What I can say is that we and APA are working very closely together. And it is about increasing the rates, increasing stability and the long-term arrangements, which work for both parties. And it would probably be inappropriate for me to say any more than that at this stage other than that I'm confident that within the next month or so, we'll have the opportunity to sign it off. And we'll, at that point, be obviously fully embracing of describing the new arrangements in place for processing of our Sole Gas through Orbost. Sorry, I can't be more specific, Nik.

[Nik Burns, analyst]

No, I appreciate that. I thought I'd try anyway. Look, I might just turn to Phase 2b works. I was interested in your comment around APA installing a gas polishing unit, but that you didn't endorse that work. Can you just talk a bit more about this? Why didn't you endorse it? Did you pay for it? What impact does APA expect this unit to have on plant operations? Cheers.

[David Maxwell, executive]

Yes. Look, there was a proposal by APA, and we couldn't see the economic merit of proposal that APA own and operate the plant. They wanted to install it. And so they continue to do just that and funded it 100% as opposed to a solids recovery unit, which we could see the value in most definitely. It was -- and we supported that and funded effectively 50% of that.

The polishing unit is just outside of the sulfur recovery unit, and it literally just takes off the last few ppm if the H2S starts to stray up towards pipeline spec. And in terms of the technical information around what's involved in the polishing unit, I'm going to pass across to Mike Jacobsen, who can describe it and also add anything to the answer that I've provided.

[Michael Jacobsen, executive]

Yes. Thanks, David. And Nik, thanks for the question. I think when we look the original investment for the polishing unit, we just didn't see the return on the investment. It was a substantial amount of capital. And what this does, it takes out the highs when -- so what it does, it basically absorbs the H2S that is in the gas. And it can only deal with low levels of H2S. And we just couldn't see over a longer period of time or a long period of time that it would have a material impact on the amount of gas that the plant would export.

So when we balance the cost versus the extra gap that it would produce, we just couldn't justify the investment APA [indiscernible] view, and they -- from an operations point of view, they felt it was a unit that gave more operational flexibility, more operational stability, and they saw it different to us. So that's how we've got to where we are.

[Nik Burns, analyst]

So does that mean if they're correct, you should see more upside -- uptime from the plant going forward?

[Michael Jacobsen, executive]

Yes, I think certainly stability. As -- and we may -- what it also may do, it gives us -- it may give a longer period between the cleans. As we get closer to the cleans, we see the H2S rates start to go up. So there is an argument to say that it can stretch that period out slightly longer. But yes, time will tell.

[Operator]

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

[Gordon Ramsay, analyst]

Good results, David. Nice to see the plant continuing to improve in terms of Orbost Gas Plant. I just had a question about the gas price and the ranges that you're seeing in Victoria where you've said spot ranged from $6 to $12.76. I'm assuming the higher price is the more recent price and the average of $9.47. What can you do to take advantage of this and capture some of this high spot pricing in your revenue stream going forward, assuming it could be a little bit higher potentially in the winter period?

[David Maxwell, executive]

Yes. Thanks, Gordon. What we can do quite simply is get the rates for, in particular, Orbost up as high as possible. And as Mike touched on, it's the daily rate and extending the frequency between cleans.

And stability is important. You will have heard us say that the solids recovery plant has been installed, but we haven't yet commissioned it. And what we -- then I'll give you a little bit of the thinking behind that. What we're -- as we come into winter and you look at that graph that we have on Page 3 of the quarterly, we're expecting that the gas prices will be high. And what we're wanting to do is to make us -- to have available as much gas as we possibly can to put into that market. And it really comes down, in this case, to Orbost and getting as much gas to Orbost as possible.

The reason we're holding back on actually commissioning the solids recovery kit is it might take a week or 2 for the system to stabilize post commissioning, and that's a week or 2 that can be very valuable in terms of both spot sales opportunities but also gas into our term contracts to our customers who really need it during winter. I think it is as simple as getting the processing rates up as high as possible at Orbost. And then separately, over at Athena, continuing to optimize the cycling between the 4 wells that we've got.

At any point in time, we've generally got 2 wells online and 2 wells shut in, and then we use -- because these wells are nearing the end of their life -- or, sorry, the well -- the field is nearing the end of their life. We're using flush production and synchronizing between wells and the number of wells on to maximize the throughput. So those are the 2 things, really: Orbost processing rate; and the synchronizing, optimizing, the offshore cycling in the Otway.

[Gordon Ramsay, analyst]

You kind of answered my second question about the delay with the second part of the -- what we call the SPR for the Phase 2b works. I appreciate that.

[David Maxwell, executive]

Yes. I don't know if Mike wants to add anything to that because there was quite a lot of thought that went into the timing of the commissioning of the solid recovery kit.

[Michael Jacobsen, executive]

Yes. No, I think you've covered it, David. Just adds really about -- I think we don't want to -- I mean the rates are good at the moment. And we do expect when we do the commissioning, there will be periods of time where there is some instability, and we didn't really want to do that, as David mentioned, as we lead into winter and with the gas prices where they are. So I think you've covered it, David.

[Operator]

Your next question comes from James Bullen from CGS.

[James Bullen, analyst]

Very confident that you're going to finalize your revised financing facility in the June Q. I was just hoping that you could share a bit more color as to why you're so confident that's all coming together well, particularly given you've had to extend out the transition agreement?

[David Maxwell, executive]

Yes. Look, the confidence comes from the nature of the conversations and the level of support that we're receiving from our relationship banks. And we are in discussions with them and those discussions are what gives us the confidence. And it is around the terms and that's progressing well. I don't think I can say too much more than that on direct response to the question.

What I can say, though, is that it was always our intention and our relationship banks always understood that was our intention that once we had Sole up and running and commissioned, albeit at the moment, it's not quite at the 68%, our intention was always to refinance the existing facility. And so it is something that was always intended from both our perspective and also the bank's perspective.

I mean, obviously, we held it off for a while because Orbost was a little bit later than we had desired and planned. But now that it is stable, those conversations have been going on for the last month or so and making good progress. And it's off the back of that, that we've got the confidence.

[James Bullen, analyst]

That's great. And just, I guess, a small question. So polishing units, so that was to APA's account, and Cooper hasn't contributed to any of the CapEx associated with the polishing unit. Is that correct?

[David Maxwell, executive]

That is correct. Yes. Yes. We contributed to Sole's recovery package, but not to the polishing unit. And polishing unit was funded -- is being funded 100% by APA.

[Operator]

Your next question comes from Nick Palethorpe from Origin Capital.

[Nick Palethorpe, analyst]

David, rig availability, how do you read it at the moment given the global events that are occurring?

[David Maxwell, executive]

Good question, Nick. It's -- we're engaged at the moment, was exactly where the rig operators on exactly that question. There's the odd window a few months here and there, but the extended periods, 3, 6 months, is '23, '24, probably more likely '24 than '23 at the moment.

And then in our case, we're very keen to make sure that we're drilling or we're operating offshore not in the rough weather period, which is typically winter. So summer and then either side of summer is ideal for us. So at the moment, it's 2024. There have been a number of opportunities, they're now being explored at the moment. But I think the more likely scenario is that it will be some time. If there's a rig of opportunity for a nonwell in '23, where -- and it works, we'll certainly take it. But the more likely scenario is '24.

[Operator]

Your next question comes from Stuart Howe from Bell Potter Securities.

[Stuart Howe, analyst]

David, just back on the solids removal packaging and commissioning. I actually missed when you said that would be commissioning. But just confirming that you -- with current rates being quite good, you want to maintain that consistency of supply over the winter months. But then you also made the comment around the polishing enabling a longer period between cleans. So I guess what I'm coming to is once the SRP is commissioned, I've got the understanding that cleans won't then be required because that basically reduces the family. Could you perhaps just provide a bit of clarity around those topics?

[David Maxwell, executive]

Yes. I'll say a few things and then certainly invite Mike to add to it. The purpose of the solid recovery kit is to remove the heavier particles, which has been causing the failing. And so if you can remove the heavier particles, remove the failing, then you don't have the need for cleaning. So you don't have the need for cleaning, on a regular basis that is, you may be -- ideally, you'd clean once a year.

What we're very focused on is -- and it comes back to the earlier question, is getting as much throughput as we can through the plant through winter. And so the solids recovery package is sitting there, it's installed, but not yet commissioned. And the decision on when to commission that, our hope, our desire, our preference would be after this winter.

In that scenario, we're running at steady rates, predictable rates, 50-plus, and putting gas into the spot market. And then we interrupt processing in a down period, say, sometime in spring of this calendar year. So that's the thinking behind it. Mike, would you like to add anything to that? And maybe also just to talk on the polishing unit and how it supplements the SRP.

[Michael Jacobsen, executive]

Yes, Stuart. Yes. I mean I think in terms of the polisher, when I said it extends -- may extend the cleans out, talking probably 1 or 2 days. Its main purpose is to take out those when we get a [ triple on ] H2S. Or when there's other sort of issues that go on and we see a spike in the H2S, the polisher is that sort of catch. It will be a fallback in those types of circumstances.

So it's not really designed to stop the fouling or to extend the cleaning. It is purely to act as a backstop and when we see spikes in H2S. What has happened previously in those cases, the plant has to shut down, which it takes time to get back. So that's what its purpose is.

The SRP, the solids removal package, we expect that it -- by taking the solids out, then as David mentioned, we don't expect to do any cleans during the course of our -- with our normal maintenance program. So whether it's once a year, probably that's what we expect it to be. So that's the 2 sort of differences. Yes, but you're right about we want to do that commissioning. And so [ tie in ] when we see the gas market is not as tight as it currently is.

[Stuart Howe, analyst]

Yes. Okay. And just secondly, obviously, good to see the step-up in production of Otway following the cutover to Athena. With those cycling between the wells now, what sort of production profile should we expect going forward from -- a quarter from the Otway business?

[David Maxwell, executive]

It's going to be up and down a bit, and it depends which wells are on. But you'd expect it to be in the range -- and this has not yet been optimized. So there may be a little bit more upside on this. But you'd expect it to be in the range some days down around 25, 26 terajoules a day. And then when you've got your 2 best producers on it early in the cycle, up in the low 30s, 32, 33, so in that range. And there's work ongoing to optimize that.

[Operator]

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

[David Maxwell, executive]

Thanks very much. Look, just a couple of final comments. As I said right at the outset, we are now starting to see the solid results come through, both on the back of increased production and increased revenue, revenue also being compelled by increased pricing.

Coming into winter, I think we're in for a fascinating winter 2022. When you look at LNG prices, where they're at, no sign of them coming back in the next 12 to 18 months. Tight supply in Southeast Australia. Gas demand holding and, in some cases, increasing supply very tight from the other producers into the domestic market.

Therefore, our focus is very much on getting as much production as we can through both Orbost and Athena. And I think we've set ourselves up well. We might look back in a year or 2's time and not think that the deferment was quite the curse it was because the delay has occurred at a time -- it pushed us into a time when prices and margins are quite a bit higher than they were 18 months, 2 years ago.

I think the next quarter, the fourth quarter is going to be very interesting for Cooper, and I expected just a -- and we're already seeing it in the April results further built on the growth in the third quarter, which will lead to a good year-end result and set us up well for 2022, '23.

So on that note, thank you for your attendance. And if you have any questions, don't hesitate to give Eddy Glavas or myself a call. Thanks a lot.

[Operator]

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