Cooper Energy Ltd

ASX:COE

Earnings Call Transcript 2021-Q4

[Operator]

Thank you for standing by, and welcome to the Cooper Energy Limited Q4 FY '21 Quarterly Report Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Derek Piper, Head of Investor Relations. Please go ahead.

[Derek Piper, Head of Investor Relations]

Thank you, Melanie, and good morning, everyone. Thanks for joining the call this morning. I'm here with the executive leadership team, and we're both in Adelaide and in Perth. And this morning, we'll have David Maxwell talk through a summary of our results. And we also have Mike Jacobsen, General Manager of Projects and Operations, who will give a brief overview of the next stage of works we've got planned at the Orbost plant. So -- and then after that, we'll open the lines to Q&A as usual. So on that note, David, I'll hand over to you.

[David P. Maxwell, MD & Executive Director]

Thanks very much, Derek, and welcome, everybody, to the call this morning and also those that will join later on. The introductory piece said at the presentation, there's not actually any slides. It's all words. And as Derek said, then we'll open it up for Q&A. I've got a series of points I wanted to make, there's seven in total, and then backed up each one with some supporting comments. And then I'm going to pass across to Mike to give us a bit of an update on Orbost. So the first message is that the fourth quarter was an active quarter, which recorded -- which ended a record year and illustrated the transformation that's underway. This is notwithstanding the challenges and frustrations at the Orbost Gas Processing Plant. The preliminary full year results illustrate our long-established gas strategy, which was predicated on supply shortfalls and illustrates that, that strategy is now playing out as we'd expected, and gas prices are increasing. We had record full year production, up 69% to 2.6 million barrels of oil equivalent; record full year sales volumes, up 94% to 3 million barrels of oil equivalent; record full year revenue, up 69% to $132 million. Orbost was reconfigured, and performance is improving with a lot more to come. All gas -- all the Sole Gas Sales Agreements commenced with long-term quality customers, and a strong financial position was maintained. Second message is that during the quarter, there were operating challenges at both gas plants, and this impacted our results. Total production was down 14% to 0.66 million barrels of oil equivalent compared with the previous quarter. At Orbost, scheduled maintenance in April and continued fouling constrained processing rates. At Iona, that's the Iona gas processing plant, tightening market conditions and the significant increase in demand for gas from storage in part due to the impacts of the interruption to electricity generation at the Yallourn Power Station in Victoria and the Callide Power Station in Queensland meant the processing of Casino Henry gas was interrupted during June. Despite these challenges, we achieved record quarterly sales volumes of almost 1 million barrels of oil equivalent. That's up 17% on the prior quarter, and we recorded quarterly revenue of $47 million. That's up 30%. These results demonstrate the significant opportunity and imminent value that will be delivered when we increase the gas processing capacities at these gas plants: Firstly, by improving rates at Orbost through the upcoming capital works, further operational improvements and ongoing optimization; and secondly, from commissioning Athena, which gives us control of our Otway Basin gas processing. It allows us to sell firm, non-interruptible gas sales, lowers our operating costs, and we're able to produce at higher rates. The third message. We've delivered the steps to strengthen our foundation cash flows and position the company for further growth. We agreed adjustments to our debt facility to align the facility with the lower production levels at Orbost. And this is lower than 68 terajoules a day, which is the nameplate capacity for the plant, thus preserving liquidity and flexibility. We agreed the supply of 8 terajoules a day from Casino Henry into the valuable Sole Gas Sales Agreements, and we reduced exposure to third-party gas purchases from FY '22 in a tightened market. We agreed the next phase of capital works at Orbost. This was following promising test results for the solids removal equipment. And as I said at the start, Mike will make some comments on this in a minute. We continue to focus on cost control and value across all parts of the business. On growth, the Athena Gas Plant upgrade is on schedule and on budget. It's 80% complete at the end of the quarter. Detailed checks and reviews are underway before we commence the commissioning. Once commissioned, we then switch processing of our offshore Otway gas from Iona to Athena in October. We continue to progress OP3D, that's Otway Phase 3 Development, and expect to have more to say on this later in the year. The fourth message is our approach to managing the source and offtake for our gas sales agreements is delivering very good results. In a gas market which is becoming increasingly tight and with events such as the Callide and Yallourn Power Station outages, the small team has done a great job in securing access to cost-effective third-party volumes to meet Orbost processing shortfalls. To mitigate the risk of gas supply shortfalls and ensure all customer nominations are met in the peak winter demand period, we entered into additional gas purchase agreements and increased volumes held in gas pipeline storage. As noted earlier, we also agreed supply of 8 terajoules from Casino Henry into the Sole GSAs. Despite a significantly higher requirement to purchase gas this quarter, in total, about 1.9 petajoules, we satisfied all customer nominations and preserved very good margins. The average cost of third-party gas purchased net of contribution received from APA was materially less than our average realized gas price, and the average realized gas price was $7.54 for this quarter. The fifth point. Our financial position is sound. And as I noted, we agreed adjustments to our debt facility to align with the rebased production levels at Orbost, thus preserving liquidity and flexibility. We're now finalizing the documentation with our lenders. Revenue continues to grow. Our cash reserves at 30 June are $91 million. This represents a decline from end March, and the decline is due to the significant working capital requirement for third-party gas purchases during the quarter. This is -- the third-party gas payment terms are shorter than the gas sales agreement payment terms. Gas margins remain very healthy despite the backdrop of higher spot gas prices, which we mitigated. Our Otway Basin earnings profile will improve post-switchover to Athena. The sixth point is carbon-neutral certification, which is net zero, was a great achievement during the quarter. Cooper Energy has been officially recognized as Australia's first carbon-neutral domestic gas producer by Climate Active. Climate Active is the partnership between the Australian government and Australian businesses to drive voluntary climate action. Climate Active audits and certifies businesses that have achieved net zero carbon emissions. As our business grows, our goal is to continue to fully offset our Scope 1, Scope 2 and controllable Scope 3 carbon emissions, recognizing the long-term benefits to our business, environment and the communities where we operate. So seventh point and in closing, we're cognizant of our recent share price performance, which has been extremely disappointing. I put this down to the below-target performance of the Orbost Gas Processing Plant. This has and will further improve. Separately, we have significant value within the asset portfolio, and we're working actively to crystallize and grow it. We got roughly 300 petajoules of 2P gas reserves, which is low cost and very competitive, associated with our current producing fields. In these fields, the capital has mostly been spent. Gas supply is tight, and prices are increasing. Assume, just for example, a $3 margin on these reserves. That's the reserves in the existing producing fields. That's $900 million of margins to be earned in the existing assets alone. From a cash flow perspective, getting Orbost to average just 45 terajoules a day, that's $50 million of annual operating cash flow for Sole alone, assuming that same $3 margin. An extra 10 terajoules a day will deliver an extra $11 million on annual operating cash flow. I note that our existing agreements with APA are for 68 terajoules a day. I also note that the margins and indicative numbers that I've cited here are very conservative, very prudent, when one considers -- especially when one considers recent gas prices. So this has been added to the Casino Henry gas production and the Cooper Basin oil production. And then there's the next round of development from both the Otway and Gippsland Basins. We acknowledge the opportunity cost of this financial year of lower production relative to our earlier expectations. Reserves not produced this year remain there to be produced and sold in future years. We'll have more to say on unlocking the latent value when our full year results are released, including our earnings guidance for FY '22. I'm now going to hand over to Mike Jacobsen, the General Manager of Projects and Operations, to take us through a little bit more on Otway progress and in particularly, the next round of development at the Otway -- at the, sorry, the Orbost project and to take us through the next round of development at the Orbost Gas Processing Plant.

[Michael Jacobsen, General Manager of Projects & Operations]

Thank you, David, and good morning, everyone. As we announced today, we have provided our support and approval to APA for the Phase 3b works. And I'd just like to spend the time to go through what that means and what we've been doing over the last period. Plant performance has been impacted by sulfur fouling and forming within the absorbers. Since the completion of the Phase 2a works in December last year, plant performance has improved but is still limited by the sulfur fouling in the absorbers and foaming. Fouling limits the absorbers' ability to remove H2S from the gas. Foaming limits the gas rate that can be run through the absorbers. Foaming and fouling have a complex interrelationship. Reduce one, and it is likely the other will also reduce. Cleaning the absorbers has been necessary to maintain gas production on spec. Cleaning cycles have been variable and have been unpredictable over the last months. APA has now reduced the cleaning frequency for each absorber to every 2 weeks to ensure predictability of gas production volumes. This has improved the stability of the processing rates. Clean absorbers have repeatedly demonstrated that they can produce on spec gas at good rates. The Phase 2b work preparation activities over the last quarter has been focused on testing filtering technologies to remove sulfur before it enters the absorbers and minimizes foaming. APA has employed technology providers to test the latest filtering technologies that are designed to remove the solid sulfur before it enters the absorbers. Results of these tests have demonstrated a number of filtering technologies are capable of removing those solid sulfur particles that are contributing to the fouling. The testing program has been thorough and has taken time in order to demonstrate the sustainability of the filtering technologies, and APA has also designed new internals within the absorbers that spray liquid into the top of the absorbers to minimize foaming. This equipment will be installed in August and September of this year. We expect to provide more details of the filtering technology in the coming weeks. Based on the encouraging results of the sulfur removal testing carried out to date, Cooper Energy provides -- sorry, provided its approval for Phase 2b works last week. The cost and schedule for the Phase 2b works are within the expected range, and we can provide more information on this within the coming weeks. The next steps are to finalize the supply contracts for the Phase 2b equipment, which includes the construction contracts. Once the key contracts are awarded, we will confirm the overall cost and schedule information, which is -- as I said, which will be inspected -- which is expected in the next few weeks. At this stage, we plan to provide a much more detailed briefing of the filtering technology and why we believe this is very encouraging as a means to improve plant performance. On that note, I will hand back to David.

[David P. Maxwell, MD & Executive Director]

Thanks, Mike. We can now open up for any questions on the quarterly and the comments that myself and Mike have shared this morning. And note also that we've got other members of the leadership team with us to answer questions as well.

[Operator]

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

[Nik Burns, Analyst]

First of all, well done on preserving your margins and your gas sell-through. It was a very tight Victorian gas market in the June quarter. We haven't seen that tightness continue into July. In fact, we've seen some -- even higher spot prices. Can you confirm that you've been able to maintain your margins over the last few weeks?

[David P. Maxwell, MD & Executive Director]

Yes. Thanks, Nik, and thanks for the commendation. That really goes to the small team of folks that have managed this for us who really understand the market. And I can confirm that, yes, we have met every nomination on every day, and we have maintained the margins over the last couple of weeks. And the outlook and the arrangements that we have in place give us confidence that we will be -- we ought to maintain the margins through the rest of this higher demand period.

[Nik Burns, Analyst]

Very good. In terms of the higher volatility we've seen in the East Coast market over the last few weeks, have you seen increased level of customer interests in our Otway volumes for contracting? And should we see this flowing into pricing expectations?

[David P. Maxwell, MD & Executive Director]

Thanks. The short answer is yes. And what -- we have been engaged with a couple of customers, but what we have seen in the last couple of months is more inbound inquiries. And we expect to be in discussions with our existing customers and any new customers over the next month or 2. That's been deliberate on our part. We want to see the Athena plant approaching commissioning -- sorry, approaching the cutback switchover from Iona to Athena. And once that's online, expect to see us very active in negotiations for the additional volumes out of the Otway.

[Nik Burns, Analyst]

That's great. Look, just one quick final one for me. I understand you're still to confirm Phase 2b works for Orbost. Just thinking about between now and when those works are completed, how should we think about production from Orbost? Yes.

[David P. Maxwell, MD & Executive Director]

Yes. Yes. Firstly, we have confirmed Phase 2b works and what's planned. And as Mike said, there's 2 parts to it: One is the distributor caps at the top of the absorbers, I mean, that's August, September; and then the filtration or the solids removal kit, which we'll provide additional information on in the next couple of weeks. That would be, we expect, January, February of next year online. Sorry, and your question around that was...

[Nik Burns, Analyst]

Just how we should think about ongoing production before that's completed?

[David P. Maxwell, MD & Executive Director]

Yes. What we've seen in the last couple of months and particularly in the last 5, 6 weeks is the plant operating reliably with absorber -- each absorber being cleaned every 2 weeks and then 1 absorber down each week. So what that says, when both absorbers are operating, it seems to operate very stably at around 45 terajoules a day. And then with 1 absorber down, it drops down to about 34 terajoules a day. And that's for typically 2.5 to 3 days of a week, and then you average that out. And that's the performance that -- that's the base case that we're using for our forward planning until we get the nozzles installed in August, September, and then we'll see what impact that might have and then clearly, the solids removal work that's proposed for that to be up and ready for that January, February period. And we'll see -- we'll reforecast the processing capacity at that point.

[Operator]

Your next question comes from Gordon Ramsay with RBC.

[Gordon Alexander Ramsay, Analyst]

Great results, David. Just kind of interested in how you can capture some of the high spot gas pricing that we're seeing right now. And I guess my question relates around the Iona storage issue. And would there not be a preference to sell as much of that gas as you can into the spot market and use your other agreements to supplement Orbost, which I assumed you would have locked in some pricing out? Or were they at spot as well? I'm just trying to see how you could capture some of those higher pricing values and margins from the spot market.

[David P. Maxwell, MD & Executive Director]

Yes. Thanks, Gordon. We have, on a day, captured a little bit of it. If there's a surplus few terajoules on a day, that goes into the spot market. But let me just step back a minute and sort of outline our thinking in the way that we approach this. First of all, I mean, we've built our business on the long-term gas sales agreements with our customers and the high -- relatively high 90% take-or-pay. We service those first. And the team has done a great job in managing that and meeting every nomination on every day. I think pretty much since May, the nominations for Sole has been up at the maximum in each of the contracts. And we worked with the transition agreement, which we negotiated with APA, and that runs to May next year. So what we've done is looked at the forward profile, what we know we can produce, fill the gas sales agreements first and then any surplus we make available for the spot market. Now clearly, with Orbost not running at the nameplate rates, that means that we're not getting the exposure on -- to the high gas prices that we'd previously expected or we would have liked. But most important for us has been that we supply the gas sales agreements. So as the volumes increase at Sole and as the volumes increase at Athena, we'll then have more gas to put into the spot -- we'll have more gas to put into the spot market. The reference I made in my comments to transferring some of the gas sales agreement out of Sole into the Casino Henry, the 8 terajoules a day, that was really to shore up and make absolutely certain that we were going -- even in the worst circumstances, we were going to continue to service the gas sales agreements, which has been really important to us. Now as Sole volumes increase, then we will have volumes available to put into the spot market. So you could think about it as that 8 terajoules. But as that certainly comes up out of Orbost, then we would have 8 terajoules of surplus to put into the spot market. So that's the way that we've thought about it. For the last 12 months, to be honest, the most frustrating thing is that we haven't been able to capture some of the upside value that the underlying strategy was set up for and we knew was going to come. And as we've said, we've put most of that down to just that Orbost was -- has not been producing at the rates that we've previously planned. Does that answer your question?

[Gordon Alexander Ramsay, Analyst]

That's good, David. Just one other one from me. Just the further Orbost work, I'm assuming that will be gross cost of over $20 million and -- of which you'll be able to draw down some of your escrow funds to cover. Can you give us a feel for the, I know you haven't given detail yet in this presentation, but feel for what some of this filtering technology might cost? Is it...

[David P. Maxwell, MD & Executive Director]

We're not -- it's very much within the costs that we had previously indicated. We're not in a position at this point to advise the final costs because we and APA have agreed that they are under discussions with the tenderer -- with tenderers. So until those discussions are closed, then it would not be appropriate for us to make a comment. But as Mike flagged, in a couple of weeks, what we intend to do is to share a lot more information, including the technology and the process that is proposed and the reasons why we've very encouraged by what we've seen. I don't know, Mike. Do you want to add anything to that?

[Michael Jacobsen, General Manager of Projects & Operations]

Yes. I think part of our consideration, Gordon, was obviously cost and schedule. And so we have a range that was acceptable to us, and what we're seeing from the tender is within that range. I think just the commercial confidence conversations that are going on at the moment, that's why we're a little bit reluctant to give too much more, as I'm sure you can appreciate. But certainly, in the next few weeks, we will confirm those costs and the schedule with some more detail.

[Gordon Alexander Ramsay, Analyst]

Okay. I said last question, but I'm going to throw one more at you. Just in terms of volumes out of the plant, you've obviously said this filtering technology looks quite promising. That with the work -- and if you add the work that you're talking about doing in terms of the solids removal involving the new equipment and the liquid distributor within each absorber, are you increasingly confident, and maybe this is a David question, of getting to that 68 number because clearly, the plant is struggling to get above 50 right now, terajoules a day?

[David P. Maxwell, MD & Executive Director]

I have expected this question. Look, we've become very cautious about making forecasts which we can't then absolutely stand behind. We've chosen the word very encouraging. I could -- also said increasingly confident. Now as to what that level might ultimately be, I'm not going to speculate publicly at this point. But certainly, I think we'll be in a better position to say more about that, but we definitely will be in a better position to say more about that in a couple of weeks when we share the information on the technology and the reasons why we used the words encouraging. And we are confident. But as to what the level is, whether it's somewhere in the 50s, somewhere in the 60s or somewhere in the 70s, we have to wait and see.

[Operator]

[Operator Instructions] 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 thanks, everybody, for joining this morning. Look, I'll just do a couple of quick summary comments. I want to acknowledge -- the organization, the Board and the leadership team wants to acknowledge that the last 12 months have been frustrating and, as I noted, that we've put most of that down to Orbost not performing at the levels we had expected. Notwithstanding that, the underlying strategy has played out. Every one of the gas sales agreements have been -- that we've met every nomination on every day. Our banks and our customers, I want to thank both of them, both groups for their support. And as you would expect, the banks have seen -- been kept fully up to date on everything, they've seen everything, as it relates to Orbost and taking all that into account of accepted and agreed adjustments we've proposed to the facility. Having said that, and you stand back and look at just the numbers for FY '22 off the back of what we reported for the fourth quarter, absolute material increases in sales, revenue, which is the key number for us, production and cash flows. And we've got ourselves in a very good position with respect to the gas market, which is looking increasingly tight. And I think if -- and we'll come out with guidance and more information as a part of our full year results. So on that note, thanks very much.

[Operator]

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