Cooper Energy Ltd

ASX:COE

Earnings Call Transcript 2024-Q3

[Operator]

Thank you for standing by, and welcome to the Cooper Energy Limited Q3 FY '24 Quarterly Conference. [Operator Instructions] And finally, a reminder that this conference is being recorded.

I would now like to turn the conference over to Jane Norman, Managing Director and Chief Executive Officer. Please go ahead.

[Jane Norman, executive]

Good morning. This is Jane Norman, Managing Director CEO of Cooper Energy, and I'm joined this morning by our Chief Financial Officer, Dan Young; and our Chief Operating Officer, Chad Wilson.

This morning, we released our March 2024, 3rd quarter report with production and revenue once again up quarter-on-quarter, driven by improved Orbost performance I can also confirm that the BMG well decommissioning project is now approximately 80% complete, and I'll expand on that further in a moment. I will start with commentary on the quarter and then open the call for questions.

Total quarterly production averaged 63.1 terajoules equivalent a day, up 2% on last quarter and up 6% compared to the same quarter last year. This was driven by increased gas production at our Gippsland assets following improved performance at the Orbust Gas processing plant. Performance at Orbost was particularly strong throughout January and February, with multiple production records set. This performance was enabled by a successful combination of polisher performance and absorbed [indiscernible] configuration, including the snowflake packing and the installation of the 4 [indiscernible] spray distributor within [indiscernible] One.

Disappointingly, unplanned maintenance on the plant generators in March resulted in unstable performance and pulled down the average for the quarter. Notwithstanding that, Orbost production is still 7% higher than the previous quarter. Work is currently underway to return the plant to the operating mode of January and February, and we look forward to improved average rates in the near term.

In the [ Otway ], production at the Athena gas plant was also impacted by unplanned maintenance to the compressors as well as the planned shutdown. In late March, two mainline valve trips associated with the control card cause plant outages, resulting in around 43 hours downtime. These maintenance issues were unrelated to the historical compressor reliability issues, which were resolved in June 2023.

Gas market prices continue to remain strong due to declining gas supply in Southern states with average spot prices of $10.98 gigajoule compared to $10.22 gigajoule in Q2 FY '24. Additionally, stronger production volumes resulted in 1,084 terajoules of gas sold into the spot market, up 17% compared to the previous quarter.

As we look at the longer-term market opportunity, the latest AEMO GAAP statement of opportunities report indicates demand in Southeastern Australia will hold strong when compared to previous scenarios. AEMO now expects industrial demand in southern states to stay effectively flat due to lack of alternatives. Demand in electricity generation is now expected to increase as gas is required to support the integration of more variable renewables into the national electricity market.

AEMO continues to forecast limited avenues to fill the looming gas supply gap which supports the latest ACCC modeling pricing for firm volumes trending to mid-teens in dollars a gigajoule in the near term. Higher spot sales into a strong market and higher average contract prices of just under $9 a gigajoule lifted our average realized gas price across both basins to $9.24 gigajoule, up more than 8% compared to last quarter.

As I mentioned in our January call, the weighted average gas price across our gas contracts increased by 6% from 1 January. Sales revenue was $55.9 million, up 2% quarter-on-quarter and up 19% compared to the same quarter last year. Throughout this quarter, we have maintained our focus on our 4 business priorities for FY '24.

Firstly, to Orbost's performance. As I mentioned in my introduction, we were extremely pleased with Orbost's performance throughout January and February, which included record production of 67.3 terajoules a day across an entire day, 30 days at 58.2 TJs a day and 60 days at 55.7 TJs a day.

The time frame for these records is encouraging, and we see improved long-term trends. August performance again improved quarter-on-quarter as benefits from several of the improvement initiatives were realized. Production was up 7% quarter-on-quarter and up 12% compared to the same quarter last year. Unexpected maintenance of the gas generated during March resulted in unstable performance at the plant. With the generator maintenance issues now resolved, we look forward to more stable production and continued improvements through the June quarter.

Improved -- continued improvement in plant production has also mentioned increase in spot sales to over 1,000 terajoules for the quarter, up again compared to the previous quarter. The stable performance through March resulted in gas purchases of only 84 terajoules. The improvement initiatives continue to be progressed methodically and are now focused on replicating successful changes in both absorbers to return average plant rates to those seen in January and February performance.

The new Snowflake packing and a new type of spray distributor nozzle were installed in absorber one in late December 2023, resulting in longer run times between absorber cleans.

Replicating this and absorber [ two ] is expected to lead to further improvements in average production performance as the run time of both absorbers can then be extended. This is currently expected to be completed around the middle of the year following the delivery and installation of the required equipment.

Further in [ situ ] cleaning trials of the absorbers are also planned through April and May, with the aim of further reducing the time required for cleaning. We are also progressing work on insulation and heat tracing of the polisher to ensure optimal performance of the new media. With these improvement initiatives actioned through coming months, we expect Orbost production to reach sustained average rates of high 50 terajoules a day.

As announced to the market earlier this month, a final decision on the installation of a third absorber bed remains under evaluation as we progress the remaining improvement initiatives.

Secondly, BMG decommissioning. As announced in our market update earlier this month, we have successfully completed lower abandonment plugs on all 7 wells. This is an important milestone as it removes any future environmental risk from the hydrocarbon reservoir. We're now progressing with the upper abandonment work and the overall program is approximately 80% complete.

Commissioning of the Riserless Open-water Abandonment module known as the Rome, which is required to progress the upper well abandonment work scope has taken around a week longer than planned. This is a one-off delay to the program. With the testing and integration of the Rome now resolved, we remain focused on completing the wells decommissioning program safely and within the minimum time possible. As discussed in the report, we are currently tracking towards the upper end of the range for the mid-case cost estimate. The program is expected to be completed within the second half of May.

We remain well funded from existing cash balances, positive operating cash generation and our $400 million fully committed senior secured debt facility. We continue to expect to have headroom of close to $100 million under the debt facility at the end of the BMG world's decommissioning.

Thirdly, our cost out initiative. As discussed at our half year results, we continue to focus on delivering our cost-out target of more than $10 million of annualized savings. We continue to make positive progress on our identified opportunities, including the Orbost sulfur trial, which is expected to start in the second half of this month. We have agreed with the Gippsland Agricultural Group to undertake a 6-month trial to use our sulfur byproduct as a fertilizer component. A permit for the trial has been granted by the Victorian EPA.

If the trial is successful, it paves the way for commercial agricultural applications of our sulfur on an ongoing basis. This not only turns the costly waste into a potential revenue stream, it contributes to the local community and economy in which we operate.

Beyond FY '24, we see this cost-out program forming the basis of an ongoing continuous improvement program that will continue to reduce costs and improve value across the business. A more fulsome update will be provided with our full year results in August.

Fourth and finally, we continue to progress planning for our offshore [ Otway ] growth project, quoting AEMO's 2024 Gas Statement of opportunities, which was released late March. Gas will continue to be used by Australian households, businesses and industry and support the reliability and security of the electricity sector as Australia transitions to a net 0 emissions future. This is consistent with Cooper Energy's view on the strong market opportunity for gas in Southeast Australia.

Our offshore Otway growth project brings additional gas supply from the Otway Basin through existing invested infrastructure, both offshore as well as the onshore Athena gas plant. Gas from this project produced through existing infrastructure is the most competitive and lowest emission new gas for Australian customers. As we have previously announced, we secured the Transocean Equinox rig as part of a consortium agreement with 3 other operators. The rig is not expected to commence work in the Otway before the second half of 2025. We also continue to be actively engaged with our joint venture partner, and we'll update the market when the program has been agreed.

As we look to funding for Otway growth opportunities, we anticipate accessing the up to $120 million accordion, incorporated within the existing debt facility that was agreed with the bank group last year, along with ongoing free cash generation. We are also encouraged to see significant interest from a number of gas customers to support our new domestic gas supplier through a range of funding options, which could include prepayments.

To recap, Q3 has been a major step change for Cooper Energy at Orbost. January and February production performance was significantly improved as we realized several outcomes from our Orbost improvement project. We set multiple production records at Orbost including a maximum daily rate of 67.3 TJs per day as well as a 60-day record of 55.8 TJs a day. Despite reliability issues in March, we remain on track for our production guidance for the year and look forward to improving performance further in the June quarter through stable production as well as a further step-up in average production rates as we complete the [ Identianright ] improvement initiatives.

Revenue also continued to improve quarter-on-quarter driven not only by improved production and increased spot sales but also by increasing spot pricing and the increase in our weighted average gas contract price. We remain on track for our cost out guidance for the year, delivering more than $10 million in annualized savings and through the transformation program. The management team and I remain focused on driving business performance to deliver what we have promised. As we work to put the BMG wealthy commissioning behind us and turn our attention to unlocking our growth opportunities.

As discussed in the half year results, we are planning to hold a Capital Markets Day in coming months to provide more detail on our growth strategy following the completion of BMG. I would now like to open the line for questions.

[Operator]

[Operator Instructions] And your first question comes from the line of Nik Burns from Jarden Australia.

[Nik Burns, analyst]

Just the first one on the BMG decommissioning program and the issues you've encountered recently. I think you mentioned there was about a 1-week delay there. I'm just trying to get some more clarity whether those issues have been resolved? I'm just trying to get a sense from you on the risks around the program from here? And how confident are you that the final costs won't exceed the upper end of your range?

[Jane Norman, executive]

Yes. Thanks, Nik. When we finished the lower abandonment plug program, we had to change over the equipment that was being used to switch to the upper plug program. And so that meant removing all the equipment that was on the integrated riser switch string and swapping it out for equipment, including the Rome, which is going to drive the upper plug program. That integration of the Rome and test functional testing of it took around a week longer than we have planned, and that has certainly pushed us towards the upper end of the mid case cost estimate range. We have contingency remaining in the rest of the program, in particular for waiting on weather and nonproductive time. And on the current forecast, we are within the mid case cost estimate range.

To your question of whether there's a risk we go over that range, there is a risk with this program if we experience very severe weather and had to disconnect for a number of days or if we had equipment failure, that would certainly add to the cost of the program. But the engineering has performed very well on this so far. Yes, there's been a few frustrations with integration and setup taking longer than we had expected. But as of this morning on the [indiscernible] upper plug, which was the first in the [indiscernible] program. We've managed to pull 2,400 meters of tubing in the past 48 hours, and we're now about to complete the cement plug on that program which is the final step in that upper plug and then we'll move on to the remaining 6 wells and the upper plugs in those wells. So the engineering work is performing well, but there continues to be the risk associated with extended weather delays or equipment failure resulting in delays.

[Nik Burns, analyst]

Thanks for that extra color there, Jane. Just maybe a couple of questions on Orbost. You called out the changes made to the first absorber. You mentioned the run time between cleans was significantly longer than previously achieved. Can you just quantify what you mean by that and whether there's an opportunity to stretch the time between cleans any further?

[Chad Wilson, executive]

Yes. Nick, it's Chad here. So with the setup that we had on Absorber One with Snowflake packing and the spread distributor nozzles, we were able to get about 5 weeks between the cleans and that's what we'd be looking to replicate when we install the equipment on absorber two. We also looked at -- there was a potential to push it to 6 weeks. But due to the timing of the claims on Absorber two, we just felt that the 5-week mark was where we needed to make that decision in call.

[Nik Burns, analyst]

Got it. And look, you called out had a day in January, I think, where the plant average got reached 67 terajoules a day. If we look at the daily data and AMO since then, it looks like the peak rate was around 64 TJs a day. And in the last month, you've only really hit 62. Can you just talk about what the dynamics are occurring in the plant? Why aren't you getting back to 60, 70 TJs as a day again when everything is running well?

[Chad Wilson, executive]

Sure. So to get up to the 67 terajoules a day, we need to run 3 compressors and it just ends up becoming the difference between how much fuel gas we burn versus how much production we're getting. So when you're seeing it at the 64, 65 terajoules a day, that's with 2 compressors running.

[Jane Norman, executive]

Yes.

[Nik Burns, analyst]

Right. So -- but in the last month, it's only getting to around 62. Is there anything that's happening there that's not seeing you getting back to that 64, 65 TJ level?

[Chad Wilson, executive]

Yes. So we've started to see a deterioration in some of the issues that we talked about with generator sets. Since then, we've had some deterioration with our polisher that we're working on insulating that vessel, as Jane mentioned in the call, and that's to reestablish the upwards of the 64-plus terajoules a day.

[Jane Norman, executive]

Just to add a bit of color to that, Nik, there's an issue with free water condensing in the polisher at the moment. The plan is to install the trace heating and the insulation to maintain a higher temperature in the polisher and that will stop the compensation. then the polisher should revert back to the performance we saw in early January, where it really allowed us to push the plant harder. So those changes at the plant are happening in the coming 2 months.

[Operator]

Your next question comes from the line of Gordon Ramsay from RBC Capital Markets.

[Gordon Ramsay, analyst]

Chad, I'm just going to ask you a question about the third absorber. I believe the company was previously saying that decision is going to be made at the end of March, that's now being pushed out. Is it contingent on the work you do on the second absorber to get it up to the performance level of the first? And could I assume that the longer you take to make that decision on a third absorber, the more unlikely it will be that you will go down that path?

[Chad Wilson, executive]

Yes. So on the third absorber, what I can say is that we finished all the engineering work and we received our estimates back. The estimates actually came in on the very low end of our range that we had previously mentioned, which made it a bit more hard to make the decision based on the a combination of the improvement that we've seen. So with the increased rates that we've seen through Orbost and the low end of the cost estimate coming in, the project ends up becoming pretty line ball on if we make the decision to go forward.

So we just wanted to make sure that these improvements are sustainable for a longer period of time before we make the final decision. And also to see what we can get to with the second absorber hub and the new equipment in it as well. In the meantime, we can continue to progress with the project without any real costs associated with it. So that's how we're proceeding right now.

[Gordon Ramsay, analyst]

And just to confirm lower end of the cost range, that's around $30 million, is that right?

[Chad Wilson, executive]

Correct.

[Gordon Ramsay, analyst]

Okay. And James, just a quick one on the gas market. There are market observers saying that Melbourne, Southeastern Australia is going to have a gas surplus this winter. Can you comment on the near-term outlook for the gas market from your perspective?

[Jane Norman, executive]

I think it's going to continue to be finally balanced. We've seen spot pricing continue to creep up. It's around $12.45 per gigajoule per day. And we look at the [ Iona ] storage volumes, and they are below the levels at this time last year, which would suggest the market is tighter. And we have seen this seasonal swap of gas between Queensland and Victoria, where gas moved south in our winter months to meet that big residential demand in Victoria. So we expect the market just to continue to tighten up. And then what we hear about from our major customers is that the real gap in the market is starting to open up from '26, '27 onwards.

[Operator]

Your next question comes from the line of Henry Meyer from Goldman Sachs.

[Henry Meyer, analyst]

Just to expand a bit on the BMG decommissioning CapEx. I want to touch a bit on some of the opportunities you might have. Is there scope for things to go well where you could trend towards the lower end of the CapEx range as well?

[Jane Norman, executive]

Henry, thanks for the question. We have achieved scope simplifications and savings, including some revisions to the amp that we agree with in writing with [ optima ]. We have been able to deliver those as we've moved through the lower abandonment plug program. But they have been offset by waiting on weather and nonproductive time.

And in the remaining program, we -- now we've done the integration of the Rome and have started on the first well Basker 7. We anticipate being able to continue to move through the rest of that program at a pace, which keeps us within the mid-case cost range but trending towards the upper end because of the weak we've lost on setting up the Rome.

There are continued opportunities for efficiencies and savings that the team will chase. But as we're 80% through the program, those, of course, become more limited. So at this stage, the engineering is performing really well. We're happy with the progress, not [indiscernible] being engaged on a very regular basis with the program, and those communications are going well. So we've confident we're going to finish this in May.

We've guided to the second half of May now rather than early May because of the lost week on the Rome setup and integration. But if we continue to see the progress we've just seen on Basker 7, we should continue to deliver it within the revised -- within the mid case cost range.

[Henry Meyer, analyst]

Got it. And second question just on the cost out in the sulfur fertilizer trial, are able to quantify what sort of opportunity you might be looking at from a cost out or a revenue spread on that sulfur if it's already captured within the target or could be on top of the $10 million annual target?

[Jane Norman, executive]

Yes, Henry, it's a little bit early to say. It could reduce costs maybe by circa $0.5 million a year. And at this stage, we're not assuming we're going to get a new revenue stream for it, but we are pursuing that opportunity. It's really around reducing the costs we have today with this -- having previously been classified as industrial waste and requiring a contractor with that industrial waste capability to take it away.

So if we can find a beneficial use and generate a new stream of revenue, that would be a great outcome for this, but even being able to give it away to a local farming community would be a big improvement on treating it as industrial waste.

[Operator]

Your next question comes from the line of Dale Koenders from Barrenjoey.

[Dale Koenders, analyst]

Can I first ask Jane and team, how do they [indiscernible] to do cleaning trials that sort of happened over the last couple of months and what you've learned and what you're looking to do in the next set of trials?

[Chad Wilson, executive]

Yes, sure. So thanks for the question. The institute clean trials that we have done so far is the original ones were just based on a water wash. The water wash at cleaned the top end of the bed really well, but we have these trades in there that needed to be removed. And that was part of the spray distributor nozzle program is to remove that. So what we did in the meantime was we started to also look at a chemical solution wash. And with that chemical solution wash, we did a portion of the equipment in the plant. So there's a heat exchanger that we [ walked ] this chemical solution wash with in about February. And what we've seen at that time was that the performance of that heat exchanger went from completely followed to operating as if it was brand new. So in the meantime, we've been setting up to do a full plant absorber plant clean with the chemical clean in place. And that work is scheduled to be done towards the end of April, beginning of May.

[Dale Koenders, analyst]

Okay. And then secondly, how should we think about sort of the long-term goal of sustained production rate out of the plant with I guess we've got some very successful absorber tests and improvements. But even you have shown production rates, absolute maximum 67 terajoules a day, but now coming back towards more 62 to 65 before we think about unplanned and planned downtime. What should we be assuming longer term as an average rate or if everything works?

[Chad Wilson, executive]

Yes. So as Jane guided, it would be the high 50 terajoules a day from a long-term average. Obviously, on a daily basis, you'll see it continue like you see today, where we have higher in the mid-60s and then going down for a clean every so many weeks.

[Jane Norman, executive]

Yes. Dale, everything we're doing in the improvement project is trying to stretch out the time between the absorber bank cleans and the snowflake parking and new nozzle distributor should hopefully give us 4 weeks between cleans at least 4 weeks. And then the in situ washing is designed to significantly reduce the time taken for the clean from the 40 hours gas to gas we have today to -- we're saying somewhere less than 12 hours, but we really need to do the trials to see where that lands.

But as Chad said, we had a really good result on the heat exchanger we've just tested and that was a 5-hour exercise with half hour set up and reinstatement at the end of it and a 4-hour soak in the chemicals. So that's really encouraging, and we need to do that actual trial in the absorbed and see what results it gives us.

[Operator]

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

[James Bullen, analyst]

Just quickly, you've highlighted that weather store remains a risk for the P&A program. Is there anything in the long range with the forecast that you're concerned by?

[Jane Norman, executive]

James, nothing specific in the weather forecast. We just know as we head into the Victorian winter that they get from basin does get rougher. So the sort of risk around having to disconnect, it will increase over the coming weeks, but there's nothing specific that we're looking at that's a concern.

[James Bullen, analyst]

Great. And just looking at your uncontracted gas, you've got a bit there in '26. Would you be looking to contract that in the medium or longer term? Or is that going to set the spot sales?

[Daniel Patrick Young, executive]

Thanks, James. It's Dan here. So we'll continue to look across the portfolio in terms of where we can maximize price. So there's nothing I can say further around that specifically at this time.

[Operator]

[Operator Instructions] Your next question comes from the line of Rod Branson from Seven Degrees.

[Unknown Analyst]

This question relates to the Orbost plant. And I guess, stems from my experience with absorbing H2S circulating fluids and the fact that you having consistent problems with the deposits. To what extent has work been done regarding the extent to which short-duration gas and H2S flow rates affects the extent of absorbing deposits?

[Chad Wilson, executive]

Thanks, Rod. Could you maybe repeat the question?

[Unknown Analyst]

Yes, sure. The deposits from the reaction of H2S with circulating fluids is often affected adversely by rapid changes in the flow rate or the amount of H2S entering the absorber and that relates to flow rates. And I wonder whether you've looked at the extent to which your flow rate variations is affecting the amount of deposition of deposits in the absorber.

[Chad Wilson, executive]

Yes. Thanks for the question, Rod. Yes, that's exactly right. So what we've been able to see is that when we have a long prolonged stable production rate through the plant, it performs better, and there is less deposition over time.

What happened through the March period is that we were actually having a really great run of production with absorber -- with the deposition in the absorber being on the lower end and our sulfur treating -- or H2S treating being quite strong and good. And then it was an upset with our power generation equipment that actually caused the issues. So once we get to a stable production rate, you're 100% correct. Stable rates and stable performance through the absorbers tends to lead to less deposition and less problems.

[Operator]

Your next question comes from the line of Declan Bonnick from Euroz Hartleys.

[Declan Bonnick, analyst]

When you make the comment on the headroom of approximately $100 million at the end of the decommissioning program. Could you please just inform on how you think that impacts the current debt level and the current cash level?

[Daniel Patrick Young, executive]

Thanks, Declan. Yes, we've talked about ending the program, ending the financial year at around $280 million, $300 million of net debt. And that obviously depends a little bit on organic cash generation for the remainder of the year as well as exactly where we end up with the BMG wells costs as we complete the upper plugs, but that's roughly how we think about the position. So we have $400 million fully committed and available under the facility.

I talked about the redetermination at the half year and how successful that had been in terms of the underlying borrowing base being significantly above the $400 million. And so we have a very comfortable position today with the bank group and with the facility to fully fund this. And that's roughly how we see things ending at June 30.

[Declan Bonnick, analyst]

Excellent. And just to, I guess, go back to Henry's question on the sulfur disposal. I think you commented $0.5 million per annum, Jane, but I thought the cost of the sulfur disposal were a bit higher than that. What is the cost of sulfur disposal on a yearly basis in terms of OpEx?

[Chad Wilson, executive]

Yes. So it's a combination of trucking and a bunch of other things. And so really, what you are able to get rid of is the disposal part. It will still require the trucking total disposal costs, including trucking are around that $2 million per annum for cost. So that's part of what we would be targeting and the revenue stream is to offset the total cost.

[Operator]

There are no further questions, and that concludes our Q&A session. I would now like to turn the call back over to Jane for closing remarks.

[Jane Norman, executive]

Great. Thank you very much, and thanks for dialing in today and for the questions. We are very focused on finishing the BMG program over the coming weeks and progressing our wear offshore growth projects, and we will provide further details on those at our Capital Markets Day and also at the full year results in August. And that's it for today. Thank you.

[Operator]

This concludes today's conference call. Enjoy the rest of your day. You may now disconnect.