Beach Energy Limited (BPT.AX) Earnings Call Transcript & Summary

Thanks, Ashley. Good morning, all, and thank you for joining this conference call on short notice. I'm an Ian Davies, Managing Director and CEO; and with me is our CFO also, Mark McCabe.

Good morning, everyone.

This morning, we announced a very significant event for Senex. After more than 20 years of successful operations in the Cooper Basin, we've agreed to the sale of this Cooper Basin business to Beach Energy. The sale marks a complete exit from the Cooper for Senex. And as you'd understand, it was a strategic decision that we thought about very carefully. Our rationale is pretty simple: to crystalize the value of our Cooper Basin oil and gas assets so as to strengthen our balance sheet, accelerate development of our material Surat Basin natural gas asset position and pursue resultant capital management initiatives. This morning's call is an opportunity for us to provide an overview of the transaction and, importantly, answer any questions you may have. I'll talk through the transaction terms briefly, the rationale and balance sheet outcomes, and then we'll open the lines to Q&A. Firstly, a quick run-through of the transaction terms, which are pretty straightforward: The sale price is AUD 87.5 million, which I think represents a fair price for both parties. It's 100% cash consideration. All rehabilitation obligations will transfer to Beach also. The effective date is 1 July 2020. So everything as of that date is ours, and net cash flows from that date accrues to Beach. And the sale is subject to customary conditions, including Senex' financier's consent and regulatory approvals. And lastly, we expect the transaction to complete in early 2021. The transaction was a result of a short but sharp competitive process, but in the end, Beach proves to be the logical and [ the best ] acquirer of these assets. Beach has had extensive experience and success in the Cooper, is our joint venture partner in the Western Flank oil assets already and is obviously well placed to deploy material capital in these assets. And we'll obviously be working closely with Beach to ensure a smooth, transparent ownership of the business. So turning now to the strategic rationale. The sale follows a deliberate and considered review of our portfolio. The Cooper has generated significant cash flow for Senex over many years, with a lot more to be proud of. Over the last 10 years alone, we've paid South Australian business more than $100 million, so that's supplied to small businesses in South Australia. And we've contributed almost $80 million in royalties and payments to traditional owners, so a very significant contribution to the state that's been so good to us. And more recently, it obviously helped fund our Surat Basin gas development, so it was very, very important for that. And we have an amazing growth potential within our Surat Basin gas portfolio. As such, the decision to sell the Cooper Basin business so as to accelerate investment in the Surat makes quite a lot of sense. To demonstrate this over the past 2 years, along with our infrastructure partner, Jemena, we've invested roughly $400 million to successfully develop our Surat Basin gas operations. Over this period, we've commissioned around 20 petajoules a year of gas processing capacity, which has been obviously designed for further expansions; drilled 80 wells and brought all of them online; seen production ramp up to more than 16 petajoules a year; proved up the gas reserves position in the Surat, which now stands at around 780 petajoules or equivalent at 135 million barrels of oil equivalent and [ almost 1 Tcf ] of 3P reserves. We've been awarded additional acreage at Atlas, which clearly, I think, recognizes the fulfilling of promises and the success that we've had in developing both Atlas and Roma North. We've been awarded exploration acreage in the Surat and Bowen Basins, which expand and diversify our portfolio. And lastly, we've taken FID on the first expansion of production at Roma North by 50% to around 9 petajoules a year and announced plans for, again, 50% production expansion at Atlas to around 18 petajoules a year. So quite material in terms of the growth potential there. And obviously, you'll hear about [ this more. There's ] a lot more growth to come. Lastly, a few comments in respect of our balance sheet. The transaction value was AUD 87.5 million. And you may recall that our net debt position at the end of September quarter was $55 million, and this represented peak net debt also following the completion of our developments. So on a pro forma basis at 30 September and before transaction and completion adjustments, we're in a net cash position of around $30 million. We jumped our spending $400 million in the last 2 years, and it's a pretty fantastic place to be with the growth potential we have. So it does put us in a strong position to pursue both production acceleration and expansion opportunities in the Surat and also sustainable capital management initiatives to drive total shareholder return. You'll hear more about this and also our production guidance and earnings outlook at our investor briefing this Thursday. So we hope you can join us: 11 a.m. Daylight Savings Time, 10 a.m. Brisbane time on Thursday and a lot more to say then. So with that, I'm happy -- [ that was ] short and sharp. I'm happy to open the call to Q&A. Thanks. Ashley?

[Operator Instructions] Your first question comes from [ Daniel Levy ] with Citigroup.

Just 2 very short questions for me this time. First, I'm curious about the timing of this. If you guys are using a long-term oil deck at $62.50 a barrel, you obviously expect prices to go up from here. So why are you selling oil assets when Brent's $39 a barrel if there isn't a pressing need for the capital right now?

So there's a couple -- [ Daniel ], look, there's a couple of reasons. Firstly, it's more strategic about the portfolio. And point in time, actually, does matter. I agree with you 100%. And we think we got fair value at our deck. And we use a price deck, obviously. As we've outlined, we're pretty transparent about that. We also have rehabilitation liabilities that transferred with the asset, and we've obviously got the working capital -- the positive working capital adjustment at the start of the executive date. So it's a fair price for both parties. Ultimately, it wouldn't surprise you that these assets, if they're going to be loved, need material capital put into them. And we would be happy to do so if we didn't have material opportunities in our gas business to quite materially grow the reserves, production and returns position of the business. Clearly, reducing volatility in the portfolio plays a factor. We've got oil exposure through our GLNG contracts, which we're very comfortable with and looking to expand those assets also, and obviously, a lot of fixed exposure through Atlas with lots of expansion and acceleration opportunities that are capital intensive. And with the balance sheet position that we have, it made sense for us to rationalize the portfolio at a time that we can deploy material capital. And bear in mind, we say they're not going to need the capital today. Cash out the door, I agree with you, but putting the commitments in place for hundreds of millions of dollars of capital actually requires us to have a strong balance sheet and that financier relationship and conversation with our banks. So it actually doesn't make sense because we front run these things by 12 or 18 months just in the way we actually run the business as opposed to point in time. So I guess the point that could -- shouldn't we wait until oil prices go up? If you can tell me when that's going to happen, you're [ a better guesser ] than me. But look, we made the call. It's a fair transaction for the business. It's with a counterparty that makes absolute sense because they're already in the Western Flank. They have ownership in the pipeline. They're going to move up the business they're investing capital in. It's the best thing for South Australia in business and, frankly, the best thing for us.

Yes. Fair enough. And I agree: it seems like a mutually beneficial transaction. And then just second, and you touched on this, and you're probably just going to defer me to the strategy day. But what do you guys see as the best use of proceeds for this? So is it all earmarked for Surat growth? Or is there some real firepower for capital returns?

Yes. So whilst I will defer you, you're right, and I'm so sorry to disappoint. No, just -- let me answer this. We're pretty clear where we stand on full year results also. There are 3 priorities: one, strong balance sheet always; two, shareholder returns; and three, growth. And we're in a fortunate position on the back of today, balance sheet strengthened immeasurably; shareholder returns, you'll hear about substantially at the Investor Day. And we've been very clear. We've heard very clearly from both our investors. We've also been very clear that it's front of mind for us at the Board, and I've answered quite a few questions on this in previous calls also. So on Thursday, we'll be able to lay that out. And you can't really lay that out until we also lay out our growth aspirations in primarily our organic position in the Surat also. So very material production targets from the Surat Basin. We're obviously a believer in gas, and you're seeing gas prices increase spot-wise quite substantially, heading towards USD 7 an MMBtu. So I haven't heard anyone talk about spot Wallumbilla netbacks recently, so that might be why. So ultimately, we see it as an extremely good use of capital for us, but we've been very clear that we look after our shareholders as well.

Your next question is from Mark Samter with MST.

First question, if I can. Can we just get an actual number -- but I guess it's going to come out in the accounts anyway when -- after the deal's completion -- on the remediation liability, so we can get a feel of the effective EV of the transaction?

Yes. So the rehab that we have in our account is about $43 million.

$43 million. Okay. So that's it. And then...

And part of the reason it's important that we say that is that, obviously, the EV is important because some analysts and buy side as well accounts the asset value either on a gross or a net basis and have rehab elsewhere. So that's the transparency required.

Perfect. And I guess maybe this is -- this probably is a question for Thursday, but I'll try. Maybe we'll come back to it on Thursday. But do you think -- given the potential and exciting expansion plans, do you still think those can all be covered from free cash flow? So as...

So -- yes. It's sort of -- the question has about 8,000 assumptions to answer it, so I might defer it to Thursday when we actually put online the [ scene ] in terms of what the growth profile actually is. But during -- what we'll lay out on Thursday is around our priorities of balance sheet, shareholder returns and growth. We'll lay out the way we think about our balance sheet leverage, the way we think about shareholder returns and the way we think about production targets and growth profile. And you really need to hear them all together for all of it to make sense. So I might defer until then, if that's okay.

Yes. Perfect. Congrats again.

[Operator Instructions] Your next question is from Pete Liu with Crédit Suisse.

I have 3 questions here. My first question is similar to [ Daniel's ] question. So in terms of the deal, this transaction, was there any other buyers that are involved in the sales process?

[ There's -- one buyer didn't count ], and there's Beach. So in the...

Right.

Yes. So the transaction that we announced today is a transaction that we are planning on completing on. We've said in the -- in my previous presentation it was a short, sharp but competitive process and because we think we owe it to our shareholders as well as from a price discovery point of view. And we've done -- we've executed on the transaction that made the most sense for our portfolio and our business.

Okay. My second question is, now you exit the operations in Cooper Basin, what could be the potential cost reduction from a corporate overhead perspective?

So if you go back to our full year results, we outlined fairly -- it was actually maybe even before that. We outlined fairly dramatic cost reductions with the restructure post COVID. It was a pretty painful process, and I thank our staff for the professionalism that they showed during that process. And we separated the business into 2 business units, one being Surat and one being Cooper; and reduced our corporate overhead accordingly and transferred people into those business units. The sale of the business today, obviously means the delineation of the Cooper Basin out of the business. And clearly, they'll run the business very efficiently. From here, we're very focused on our Surat growth [ following ] shareholder returns.

Okay. My last question. In terms of your future M&A appetite, do you have any appetite for new assets or potential expansion plans beyond Queensland or even beyond frozen gas?

So probably a question best deferred to the broader context of our portfolio and strategy on Thursday, only to say we're very comfortable with this huge reserve position and strengthening gas market we have in Queensland. And from a position that we currently have, we're in a very strong position and very comfortable with it. And like, you look at everything else, [ Martlet North, Murta ], of course, it has been [ an inclusive ] strategy. Our strategy is pretty clear in terms of our upstream business. We're focused -- we are very focused on organic growth in the Surat. So we'll talk about more of those then.

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

Ladies and gentlemen, thank you so much for joining us on short notice. Obviously, a pretty keen milestone for Senex as we move into the next phase of development. I have to say it is with a little bit of a heavy heart considering we've been in the Cooper for 20 years. And I just want to say thank you to a terrific staff who've been involved in building that business over that time and also the incredible support that we've received from the South Australian government over that time also. So with that, I wish you a very good morning.