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

Thank you for standing by, and welcome to the Beach Energy Limited FY '25 Half Year Results. [Operator Instructions] I would now like to hand the conference over to Mr. Brett Woods, Managing Director and Chief Executive Officer. Please go ahead.

Good morning, everyone, and welcome to Beach Energy's FY '25 Half Year Results Presentation. Joining me today is Anne-Marie Barbaro, our Chief Financial Officer. Together, we will take you through our half year results and provide an update on the outlook for the remainder of FY '25 before we open up for Q&A. Before I begin, I'd like to acknowledge the hard work and dedication of the entire Beach team. You'll recall that we announced our strategic review towards the end of last financial year. And since then, we've been extremely busy with the organizational reset and implementing a range of strategic initiatives while keeping focused on safe delivery of operations and major projects. Today, it's pleasing to announce a set of results, which reflects initial outcomes from that strategic review. I believe the results demonstrate good solid progress and early signs of what is ahead for Beach; production growth, cost reductions and increases in earnings, cash flow and dividends are key themes for today. Importantly, we have achieved these results with outstanding safety and environmental performance. Slide 2 sets out our compliance statements, which I'll leave for you to read at your leisure. Slide 3 lists the key milestones for the first half. The organizational elements of the strategic review have been completed. The business has been restructured, and we achieved our target 30% head count reduction. In fact, we've exceeded that target and currently have 32% less head count than at our peak last year. The appointment of my executive leadership team is also complete, and I'm glad that many of you got to meet them during the Waitsia site visit in December. It is great to see the vigor in which the ExCo are chasing out opportunities in implementing our strategic initiatives. In the field, this half saw a completion of 2 major projects and progress on Waitsia. Successful connection to the Thylacine West wells and completed the offshore Otway program, and commissioning a ramp-up of Moomba CCS completed this landmark emissions reduction project. I'll talk to our major projects in more detail shortly. Another great outcome was the success we had in the Bass Basin with our wellbore descaling initiatives. We first trialed this at Yolla 6, which greatly improved gas flow and subsequently followed it up with 2 other producing Yolla wells. This is a low-cost initiative at roughly $60,000 per well, which has delivered a material uplift in production. This past week, we've averaged over 25 terajoules a day of sales gas production, which compares to around 9 terajoules a day last financial year. This additional gas is going into the spot market to help ease current East Coast supply constraints. This is a great example of our operating philosophy for noncore assets. Our selected capital investment in this instance has delivered material value uplift. Turning to Slide 4, and our headline financial results. This half, we recorded an uplift across all key metrics, which, as I mentioned, is a solid outcome following on from our strategic review. Production was up 15% from the prior corresponding period. In the Otway Basin, we saw more than doubling of production from higher take-or-pay arrangements and increased well deliverability following connection of Enterprise and Thylacine West. The Bass Basin also provided a meaningful contribution to growth, thanks to the descaling issues. On the earnings front, in addition to stronger production, the great work done by our commercial team in the Waitsia joint venture part of Mitsui in securing gas swaps for early LNG cargoes contributed to revenue growth. Two Beach LNG cargoes were lifted in the first half and delivered $139 million of revenue and supported 5% increase in total sales revenue to approximately $1 billion. Reductions in costs, including a 20% reduction in unit field operating costs also underpinned our results. These factors combined to drive a 20% increase in the underlying EBITDA to $587 million and a 37% increase in underlying NPAT to $237 million. With higher production, revenue and earnings, our cash flow and liquidity position strengthened. Liquidity increased to $631 million. Net gearing reduced to 10% and pregrowth free cash flow increased tenfold to $431 million. In recognition of first half performance, the Board has declared a $0.03 per share fully franked interim dividend. Whilst our free cash flow for the first half of FY '25 has been strong, we've taken a balanced approach on the interim dividend to recognize the seasonality of gas demand on the East Coast as well as the upcoming offshore abandonment activities that we'll be kicking off in the second half of FY '25 as part of the Equinox campaign. Turning to Slide 5, which shows our continued solid outcomes across safety and environment performance. We again recorded no Tier 1 or Tier 2 process safety events and no environmental spills of more than 1 barrel. Unfortunately, over Christmas, we had 1 recordable injury, which ended our record 12-month run of being recordable injury-free. An employee's hand was pinched in a pulley during maintenance activity. He has fully recovered and -- as expected, and we're implementing measures to prevent such incidents in the future. We are fully committed to a safety and well-being culture pursuing continual improvements in Beach's business. On Slide 6, we show the key highlights from our offshore Otway Basin development program and Moomba CCS project, both of which were completed during the half. In the Otway Basin, the 6-well development program concluded with the connection of Thylacine West 1 and 2. The Thylacine West sales have performed in line with expectations since coming online. Beach has invested in the Otway basin to restore well deliverability for the Otway Gas Plant and bring much needed new gas to the East Coast market. It's great to see the plant operating at higher rates and knowing that we have additional gas available for the market when our customer needs it. On the emissions front, I was in the Cooper Basin last week with our joint venture partner, Santos, along with the Premier of South Australia, Peter Malinauskas, and the Minister of Energy and Mining, Tom Koutsantonis, to our Moomba CCS facility. The committing process and ramp-up of CO2 injection well exceeded our expectations, which is an absolute credit to the project teams. At capacity injection rates, the emissions reduction delivered by Moomba CCS is equivalent to taking roughly 700,000 petrol cars off the road each year. So we're making a real contribution to Australia's emissions reduction journey. The success of Moomba CCS strikes a tolling blow to the naysayers who are choosing anti-gas ideal over science. Turning now to Waitsia on Slide 7. The key milestones of mechanical completion being construction of the plant was achieved during the first half and the completion of the Phase II development drilling scope is now done. We are now in full final commissioning phase and continue to target first sales gas from the plant in the first quarter of FY '25. In December, we announced some quality issues at the valve station for the Xyris to Waitsia flow line. Most of the valve rectification works have now been completed. However, there are still some components which we're expecting delivery this month -- mid this month. While this delayed the introduction of Xyris fuel gas into the plant to support commissioning activities, we've maintained our first sales gas target. In conjunction with the operator, Mitsui, we have established plans to introduce temporary power and hot water supply to progress critical commissioning such as the amine tower. This would previously only been undertaken once Xyris fuel gas was introduced to the plant derisking the schedule. Beach now has in excess of 20 senior professionals seconded into the commissioning team to support Mitsui. Mitsui's operators controlling the commissioning schedule and activities with Clough personnel taking traction from Mitsui now. We acknowledge frustration in the length of the delivery time for this project. Beach is nonoperating is doing what it can to support this process. Despite the challenges, a real positive has been our ability to sell gas via time swaps to fill early LNG cargoes. In addition to the 2 cargoes in FY '24, Beach lifted another 2 cargoes this half and has delivered $293 million in revenue at a healthy average price of over AUD 18 per MMBtu. These gas swaps have been a great initiative with key advantages being -- bringing forward revenue and cash flow, which would otherwise been dependent on Waitsia plant start-up, benefiting from strong commodity pricing and the pricing inherent in Beach's LNG contracts, utilization of committed processing costs at the Northwest shelf, which are payable regardless of whether volumes flowed or not, and the strengthening of our financial position, thanks to significant cash contribution from these cargoes. With 4 cargoes listed today and a fifth in January, the material contribution of Waitsia will provide once running at full rates is now evident. Holding all else constant, and ignoring factors such as debottlenecking upside, we would expect 8 to 10 Beach LNG cargoes per year. Now turning to Slide 8 for a quick look at our second half focus. Commissioning the Waitsia gas plant is clearly a priority. And though we're not operating the Waitsia joint venture, Beach will continue to deliver support to Mitsui in bringing the plant online. In the Perth Basin, we have also some exciting drilling coming up. The Arenaria gas exploration will be drilled from the L1 permit meaning any discovered volumes could be directed to the Waitsia export license. Beharra Springs Deep 3 development well aims to convert undeveloped 2P reserves and will help inform future development plans for that field. Two other important work programs will commence this half. First, we've been planning the next phase of the offshore Victoria activity for some time, and we will soon commence that program. I will take you through that campaign in more detail shortly. But in the fourth quarter, we aim to plug and abandon 2 wells and drill 1 exploration well in the offshore Otway. In the Western Flank, we have a 10-well oil development and appraisal campaign ready to go with the rig negotiations entering their final stages. I'll provide detail on both of these programs after we hear from Anne-Marie on our financial performance.

Thanks, Brett. Good morning all, and thank you again for joining us today. Our headline financial metrics is set out on Slide 10. As Brett mentioned, our results for the first half of FY '25 reflect good progress towards our strategic review initiatives. Production and sales volumes were up 15% and 12%, respectively, which underpin growth in earnings and cash flow. Underlying EBITDA was up 20% to $587 million, underlying NPAT up 37% to $237 million, and operating cash flow up 88% to $659 million. While we recorded 2 Waitsia LNG swap cargoes, our revenue mix rotated from liquids to gas, thanks to a more than doubling of production from the Otway Basin and a 67% increase from the Bass Basin. For the half, liquids accounted for 55% of sales revenue and gas accounted for 45%. For reference in the prior corresponding period, the split was 67% liquids and 33% gas. Also of note is the 18% increase in our average realized gas price to $10.50 per gigajoule. This partly reflects a tightening market, which we've long anticipated as well as our strategy to expose more of our gas to spot and shorter term pricing. Repricing of the Otway and Cooper Basin GSA and the new Enterprise GSA also contributed to stronger realized prices. Slide 11 steps out our underlying NPAT, which as mentioned, was 37% above the prior corresponding period. Strong revenues for the half were largely driven by an uplift in production in our Victorian Offshore gas assets, which Brett outlined earlier and LNG revenues. Lower cash costs contributed to earnings growth with a reduction in field operating costs driven by cost out initiatives, which are progressing well and lower third-party LNG purchases recorded. Partially offsetting these reductions with higher North West Shelf LNG tolling charges as well -- as a result of additional LNG cargo this half. Slide 12 shows movement in cash during the financial year, which resulted in closing cash reserves of $251 million. Operating cash flow of $659 million was 88% above the prior corresponding period, thanks to higher production, Waitsia LNG swap cargoes and cost-out initiatives. Lower income tax payment and lower financing costs as a result of lower drawn down debt also contributed to higher operating cash flow. Cash capital expenditure of $413 million was materially below the $603 million recorded in the prior corresponding period. Cash outflows from growth activities reduced from [ $298 million ] to $191 million through completion of some of our major projects while cash outflows from sustaining expenditure reduced from $305 million to $222 million. Sustaining capital expenditure is on track to hit our FY '25 target of less than $450 million. This will be achieved through a number of activities, including our cost-out programs and work program optimizations. On Slide 13, you'll see a much improved financial position. Higher free cash flow generation during the half saw us pay down $115 million of debt and end the period with net debt of $389 million, net gearing of 10% and available liquidity of $631 million. In recognition of the half year results and strong cash flow generation, the Board declared a $0.03 per share fully franked interim dividend. This is a 50% increase from the prior dividend and marks the first step in Beach's journey towards paying higher sustainable dividends. It should be noted that if you apply our capital management framework and dividend policy to the first half's pre-gross free cash flow of $431 million, you'll arrive at a dividend that is higher than $0.03 that we've declared. Our policy is applied over a full year free cash flow, and we're taking a prudent approach to the interim dividend, noting that in the second half of FY '25 we'll be conducting abandonment in offshore Victoria and commencing our Western Flank development drilling. Our aim is to deliver sustainable long-term dividend growth. I'll close by reiterating that Beach is in a strong financial position as reflected through our strong results for the first half of FY '25. This allows us to maintain flexibility as we balance investment in growth while sustainably increasing our dividends to shareholders. On that note, I'll hand back to Brett.

Thank you, Anne-Marie. Now looking more at the outlook for the remainder of FY '25 and beyond. Slide 16 sets out our production and capital expenditure guidance for FY '25. We have narrowed what was wide production guidance range of 17.5 million barrels of oil equivalent to 21.5 million barrels of oil equivalent to 18.5 million barrels of oil equivalent to 20.5 million barrels of oil equivalent. With first gas from Waitsia now expected in the fourth quarter, we will no longer be able to achieve the top end of the original guidance range. However, solid nomination in the Otway Basin, strong reservoir performance in the Western Flank, and a marked improvement in the Bass Basin in the first has given us confidence to also lift the bottom end. Key assumptions by basin are noted on the slide, it is worth pointing out that despite a higher Otway Basin take-or-pay volume set for calendar '25, we have chosen to remain prudent with our guidance and assume 150 terajoule a day on average throughout the year. Other assumptions remain relatively constant with the exception of a much improved outlook for the Bass Basin. For the capital expenditure, we are tracking to our original guidance and thus made no change to the $700 million to $800 million. The second half of the year, we'll see some additional spend on the Western Flank drilling campaign and the Otway Basin exploration well. It is important to know that abandonment activity is not included within this capital expenditure guidance, and I will touch on our abandonment campaign shortly. Progress against our FY '25 targets is set out on Slide 17. As Anne-Marie mentioned, we have made great strides in driving cost out of the business, which is reflected in field operating cost and sustaining capital expenditure. For the first half, we achieved a 20% reduction from the prior corresponding period in field operating costs on a per BOE basis. This puts us well on track to achieve our FY '25 target. Our sustaining capital expenditure reduced materially and is also on track to achieve our FY '25 target. For our free cash flow breakeven oil price, the additional cash flow from the high-margin Waitsia LNG swap cargoes has reduced that figure to close to 0 for the first half. We are well on track to achieve our full year FY '25 target. Turning now to an important work program, which will commence in this half. The harsh environment semi-submersible Transocean Equinox rig will soon be mobilizing to offshore Victoria, allowing us to commence our next phase of offshore Victoria activity. The Equinox rig campaign will kick off activity for the Offshore Gas Victoria project, which I have been planning for some time. The Equinox rig has been contracted as a part of consortium with 3 other operators for a total of 380 days plus options to extend, if required. Beach's share of the rig campaign is roughly 240 days, which will allow us to undertake a comprehensive program of drilling abandonment and intervention activities. The Equinox rig campaign is expected to include a range of activities. We will drill the Hercules exploration well and complete it and in a success case. The Hercules prospect is a large scale opportunity, which aligns with our inorganic growth strategy. We plan to drill and complete the La Bella 2 development well. This follows our unsuccessful efforts to farm down the Mavis exploration well and a decision not to progress that opportunity at 100% equity. La Bella was previously [ conducted ] borderline from an economic perspective. However, with the original and alternative development pathways assessed, the project is modeled to have the potential to meet our required investment hurdles. The previously discovered Artisan field will be completed. We have the potential for a well intervention at Thylacine to optimize production performance. And lastly, we'll be abandoning 5 suspended wells, 2 in the Otway Basin and 3 in the Bass Basin. These activities will position us to undertake a program of subsea developments and connection of wells to the Otway Gas Plant with the view of achieving first gas in calendar year 2028. We expect to start the first phase of activity in the fourth quarter of FY '25. This will include the 2 Otway Basin well abandonments and Hercules exploration well. For FY '25 capital spend of $40 million to $45 million for the Hercules well -- Hercules drill is included in our guidance. The 2 abandonments, $40 million to $45 million of restoration expenditure is expected to be incurred, and as mentioned previously, is excluded from FY '25 guidance. After this activity, we'll have a break while other operators utilize the rig. We, therefore, expect to recommence work program from mid-FY '26, while we plan to drill the La Bella 2 well, 2 completions at Artisan and La Bella and conduct abandonment of 3 wells in the Bass Basin. Further details on this part of the program and related expenditure will be provided later this year. It should be noted that all activities are subject to various regulatory approvals, including environmental approvals. Slide 19 provides a bit more detail on the Hercules gas exploration well. This is a large prospect with an assessed mean size of well over 100 bcf, which if successful, could extend production at the Otway Gas Plant for many years. The prospect is just south of the Artisan discovery, and we are targeting the same Waare C reservoir within a 3-way fault bounded structure. It has seismic amplitude support, which has proven to be a key part of past exploration test in the Otway Basin. If the Equinox rig mobilization and the drilling of Hercules progress is planned, we will look forward to sharing the outcomes with you before the end of this financial year. A quick wrap-up before we begin the Q&A. I trust you agree that today's results demonstrate good progress against our strategic review initiatives. It is certainly pleasing to report the completion of the 2 major projects. Structural cost out being taken out of business, growth in production and earnings and a higher dividend reflecting stronger cash flow generation and financial position. There is still, however, much work to be done. Our key priority is clearly the Waitsia gas plant and navigating the final commissioning stage with the operator, Mitsui. As our early LNG swap cargoes have demonstrated, once the plant is online and fully delivering, Waitsia will provide a step change in earnings and cash flow. With activity ramping up in our second operated acreage across the offshore Otway Basin and Western Flank, we will be continuing our diligent focus on safety and environment as we deliver these important programs. We look forward to providing updates as these activities progress. With our progress from the first half and in particular, commissioning of Moomba CCS, Beach continues to play an increasingly important role in Australia's gas supported energy transition. Our existing infrastructure and acreage positions and established presence in the East and West Coast markets underpin our value proposition. We will now open up the line for some Q&A.

[Operator Instructions]. Your first question comes from Tom Allen with UBS.

Brett, Anne-Marie, and the Board of team. Given the first half free cash flow and the balance sheet are in good shape, can you please update on how Beach will preference need to allocate capital to growth to support your reserve base and your medium-term production profile versus returning cash to shareholders over the next 12 months from here?

So obviously, when we get to our full year results, we'll be looking very closely at our expenditure and making sure that we fit to our dividend and capital management policy. We've got capital to be spent through the Otway Basin campaign, which I'm really looking forward to seeing the outcomes of that. So I think we've got a very balanced view about how we may be positive -- partly conservative view about how we're going to manage our cash flows over the year. I'm really pleased in the position of the balance sheet. And I think we've got great optionality to do both, which is invest in maintaining our strong production position as well as giving progressive dividends and sustained dividends to shareholders.

And is the focus Brett still, as you commented before, that any allocation or meaningful allocation to growth wouldn't be until the end of fourth quarter fiscal '25 when the Waitsia Gas Plant is up and running? Or if the opportunity came about, could we see move earlier?

That's a really good question. I'm really pleased where the business is in terms of its operating discipline and what we've been able to do to our business. I think we talked previously about earning the right to grow, and it's not for me to judge, but I feel more confident that I've got an organization and leadership team that can facilitate growth. And as opportunities arise, we will certainly look hard at those things that make the most sense.

Okay. And then finally, it feels like the Hercules exploration well is an important one for Beach. Can you please clarify that if Hercules returns a sub-commercial outcome, what happens to Artisan gas? And how will you think about future drilling plans and investment in growth in the Otway?

Yes. So -- with that, in the event Hercules doesn't work, we would still look to bring Artisan online. There's some other operators executing program in the region, even [indiscernible] which has got some good synergies with our plant and potential to grow the value through our infrastructure. So we're looking at how we work with and alongside those parties to maximize value. So continuing to work that program.

Your next question comes from Adam Martin with E&P.

Brett, Anne-Marie. Just back on the dividend, it looks like something like 16%, 18%. You've paid of sort of pre-growth free cash flow. Just to confirm, in the second half, assuming Waitsia is up and running as expected, would you do the second half at somewhere between that 40% to 50% on a full year basis, so we're going to see a big top-up? Or just trying to understand that, please.

Yes. I think the dividend -- well, the capital management policy has always kind of been written about a full year outcomes. So I think we'll have a very hard look at what the impacts are from the rest of this year, which I don't think Waitsia would preclude a change to the dividend at full year. So I don't think we're hanging on that. We've delivered significant value through swaps. But I think both getting past some of the abandonment capital and having the exploration well drilled just gives me the confidence to deliver what I want to be as a sustained dividend. So our ambition is to get that -- to deliver that 40% to 50% of pre-growth FCF as dividend. That hasn't changed. We just got to get there and manage the balance sheet in a prudent fashion.

Okay. That makes sense. And then just in terms of these swap cargoes, clearly you need to return some of that gas that will come out of Waitsia production. I mean we're assuming some cargoes '26, some cargoes '27. But just give us a sense of how quickly you need to return those cargoes, please?

Yes. So we've given a little bit of color in the pack about of the swap LNG cargoes so far, 35% of that gas has come from our own production. So we don't need to swap that back. So of the swap cargoes effectively 65% come as time swaps. And if you think about our existing LNG license, effectively, the best way to describe it is fairly even distribution of cargoes each year. So we've got this expectation or when the plants at normal operating capacity, we should be getting between 8 and 10 LNG cargoes a year. So if you take effectively what the gas we've delivered, you can see a relatively modest impact over those years progressively on a fairly even basis.

Okay. And just final question. A material portion of the Cooper Basin is going to get recontracted, where you're at in those negotiations? I think it's sort of around July sort of repricing? Is that going to Origin or somewhere else? Is that going to be short-term, long-term deal? Just a bit more color there, please?

Yes, I'm really pleased to say that we've been able to achieve great progress on some short-term transactions. And you see that through our average realized gas prices that's heading in the right direction. We have done a couple of minor gas sales moving forward, really well priced, but I'm just being very cautious of going too hard too early. Origin is certainly interested. I think other parties are -- we've got a lot of parties that are interested in that gas. And we're just -- I'm just trying to play that as carefully as I can to maximize value for the organization and make sure that we deliver gas at the right time to achieve that. So yes, real positivity in terms of our marketing efforts at the moment.

Your next question comes from Dale Koenders with Darren Joey.

Brett, I was hoping you could expand on your comments for development concepts for La Bella and for Artisan. Are these backfill into the Otway plant and you say how long does that plateau production for? Or are you looking to develop through other plants? .

Artisan and La Bella can go through our plant. And I think that's our preference at the moment. If we have a big outcome at Hercules or we have an expected outcome at Hercules, we probably want to get that volume on first, and we may want -- may seek to put Artisan maybe across any other plant that has available [ outage ] in the region, really depending on where other operators go with their drilling. I think for me, and I've long talked about the challenges I have economically with La Bella. We've seen improvement in our cost base, improvement in the gas market. And also, we see some pretty low-risk exploration drilling outboard of us that I think will also significantly amplify the value there. So I'm not going to commit today to what the development concept is, but we've got quite a bit of optionality that's emerging through the offshore Otway. And as we get certainly at the back end of the Hercules well, we'll be able to give a much clearer view of what our program is and the succession of backfilling that -- those prospects.

Partner of the, I guess, frustration or concerns of the market has been the roll-off of production for Beach and part of that is the Otway project. If these fields are developed how long can you sustain the Otway gas plant at full capacity for?

Well, it really depends on the scale of things like Hercules and the other activity in the region. There is -- this campaign will be the consolidation rig campaign that ourselves, Amplitude and ConocoPhillips are executing wells, give us quite a bit of optionality for sustaining the Otway Gas Plant for many years. And I guess the question you're really asking is what proportionality of Beach's gas would that represent? And at the moment, I think when we see the back end of the Hercules well, we'll have a much better view on what that looks like.

Okay. And then just in terms of abandonment spend, you sort of called out some works to '25 and '26. Are there other abandonment work to be done in Otway or the Bass over the coming years?

No, not in the short term. This really represents our statutory and prudent, while we've got a rig in place, activity to make sure that we manage the wells we have. We're seeing through that sustained production at Bass that the Bass -- the oil field has quite a bit more life in it yet. So there's no pending near-term abandonments associated with the program outside of the 5 that we've outlined in the presentation today and previously.

Your next question comes from Henry Meyer with Goldman Sachs.

Thanks for the update. Just at Waitsia as we move towards production, could you step through the current development and production plan? How long do you think you could sustain [ plateau ] 250 TJ/day rates? And what level of production you might look to supply to the domestic market after 2028?

Yes. We don't really give all that detail. So we've got our reserve statement out there. And our ambition -- our target is to get the plant to full capacity and deliver through the LNG export window at our full rates. And then we've got additional program coming in with Arenaria, and we've got the potential to do an interconnect project from Beharra Springs to add additional volumes through the Waitsia plant and potentially into export as well, given the change to the export license conditions that ourselves and our joint venture partner are working through. So there's a lot of optionality there for us. And certainly through this decade and through next decade, we'll -- Waitsia will be delivering strong production through that facility. And as we get all our wells online and just to be clear we've completed Phase 2 development drilling program. So all the wells that we need to get the plant up and fully supplied are in hand. And probably to cut to the chase, what's the next question. All our pressure and cleanup tests are all performing extremely well. So we understand the pressure regime. We understand the [ compart ] mineralization. Beach previously took an adjustment on reserves. I don't see any risk there from the work that we've done so far. So -- I feel fairly confident that what we have is going to deliver what we've promised to market.

Great. Just to confirm, based on current 2P reserves and ignoring any potential exploration success, do you think based on what you know, you can keep the plant full until 2028?

Yes, yes. Absolutely.

Great. Okay. And if I can squeeze another one. Just on the cargo swaps being returned, are there any other costs or adjustments to think about there? Or is it purely just volume?

I can -- I'll ping that across to Anne-Marie.

Thanks, Henry. So just in relation to the swaps, the majority of them are fewer time swaps. So from a cash flow perspective, I guess, in the future, we'll be producing that gas and returning it. So the cost of producing that gas is what you'll need to think about, what that costs now and basically we won't be getting the revenues for that. There's a small discrete swap fee. One of our contracts does have a payment now for the gas. And then when we return that gas, there will be a payment in the future, but that's sort of a smaller component of the total swaps that we've made to date. So if you're modeling cash flows, it's really just thinking about in the future, like Brett talked about, sort of if you assume a roughly even distribution of returning that volume, it's just the cost of production.

Yes. We've worked closely with the parties -- the counterparties to make sure that we don't have some kind of peaky return volumes. We're trying to do that on a smoothed out basis across the forthcoming years.

Your next question comes from James Byrne with Citi.

I wanted to prosecute the case a bit more on Tom Allen's excellent question just around capital allocation and portfolio. And just forgive me here for a little bit of preamble, but I think it's important just to set the same. Gearing, if you actually adjust it for LNG swaps, which are now effectively debt in a way. Gearing is actually 16%. 2P reserves life, if we adjust the rates you're ramping up is about 7 years and heaven forbid, it doesn't perform, then 1P reserves life is 3.5 years. But without organic growth left, I think those sort of adjustments that I've done suggest that the reinvestment treadmill in Beach is actually quite steep. Now our estimate, if you push gearing all the way to 25%, you have about AUD 0.5 billion headroom today. And I'm not sure that, that necessarily moves the needle enough in the absence of script to do an acquisition that's going to solve the longevity of the business. My question here is the payout ratio suggests you're going to pay out half your cash flows. And I'm just not sure that that's prudent necessarily given how steep this reinvestment treadmill is going to become. Now indeed, the Board hasn't been confident enough today to pay at the payout ratio. It sounds like for FY '25, that's the case too. And Anne-Marie you mentioned that was because of abandonment in drilling activities in the second half, but I'd contend that they're actually a normal part of your day-to-day business. So why should we as a market expect the Board is going to be confident to pay those higher dividends in lieu of using that capital for the urgency in the portfolio to do some M&A?

Do you want to start with that one, Anne-Marie.

I guess, yes, I'd just say similar to sort of the things that Brett and I have both mentioned through the presentation today, the payout of the dividend is based on full year cash flow. So we wouldn't be looking to pay on just the first half alone because we do have more sitting in that basically, your free cash flow ex growth. We've got more expenditure coming in the second half. So we've taken that into account. And it's not -- I guess, what we would say there is we are being sort of carefully measured in the way that we are allocating dividends. When we get to August and our full year results, that will be revisited. And obviously, we have a policy out there that we are looking to deliver within as we continue through the cycle. And from a gearing perspective, we are at 10% through some outstanding work from our commercial team, and that's not -- it is all value accretive. It's not value neutral is what I'd say on that one. James, it's not just a swap and the cash now versus the cash later. All of these swaps are NPV positive. Because of the way the LNG contract is struck, we're bringing value forward into a period where we are yielding really strong pricing. And, I guess, I'll hand back to Brett in terms of balancing M&A and dividend yield going forward?

Yes. And as I've mentioned numerous times, we've got a great opportunity in cash flows, like as you're inferring if we get a downside outcome across our whole portfolio, that we would need to act. And I think that's -- if that was a possibility at that point in time, we would have stacked. But we've got all the -- all marks through what we're seeing at the moment through our production activity and certainly through what we've -- now we've completed development drilling across Waitsia, understanding that what's in the ground there, certainly much better than what we did several years ago. So the level of confidence in terms of the organization that we can deliver long-term sustainable value from those assets. And continue to seek to grow them. Notwithstanding that, I think we've previously talked about later this decade that we do have production decline across the portfolio. I'm not -- certainly not hiding from that, Tom. And we are definitely -- sorry, James, we are definitely looking at how we continue to strengthen those -- our portfolio through a range of opportunities. So we've got a very strong balance sheet. We can utilize our balance sheet if we need to. But we're looking at about making sure that we get the right mix between giving good, sustainable returns and growing the business. So I do think we have a balance sheet that can support that.

Yes, okay. I guess philosophically, though, I was talking to a downside case, right? I think 7 years reserves life on a 2P basis is still reasonably short. I'm sure you've got a good cash flow hunt. But philosophically, I was testing whether paying half the cash flows is really consistent with solving for the longevity of the business. I think my second question then, when I talk to institutional investors, a big sticking point that I have personally and many institutional investors have is, what are we buying if we're buying today, given that decline that we can see a couple of years out. My question really is, do you think that we should trust the management team and the Board today by being invested today, not necessarily knowing what the asset mix is going to look like in the future? Or can you sympathize with the view of people like myself that it's probably better to wait until we know what we're buying potentially after a deal?

I can't -- I'm not in any place to give you a personal financial advice, James. But what I see at the moment is a very strong leadership team that has access to a fantastic balance sheet that has enabled it to grow its business organically and also grow its business inorganically. So we've got, as you said, a great cash flow generative business, which we need to continue to manage and to nurture and to make sure that we get the right opportunities to come in to keep those cash flows coming. So I guess the investment thesis for yourself, being your financial adviser of the day would be that I hope that you do trust what I can deliver and that -- and if you need to wait, well, then you pay at a higher price, I guess, is typically what happens. But I'm looking to try and grow the business. I'm looking to deliver value from our assets. And I think we're on track to do that.

Your next question comes from Gordon Ramsay with RBC Capital Markets.

I'm going to ask a positive question. Nice to see you reduce your field operating costs by 20%. Can you kind of highlight where that's come from? And is it mainly in the Otway Basin?

It's actually across the whole business. When we did our head count reduction, we haven't kind of focused on a particular asset. We've taken that across both corporate speech as well as across our field locations. We've been working with our contractors, getting better deals and trying to deliver high values. We're looking at positioning our contractor base out of just solely being Tier 1 to picking some of those local suppliers to deliver a low cost and high value outcomes. So Gordon, when you're trying to deliver these types of changes, you have to look under every stone. And we've really been focused on that and that's been great. Clearly, we've had some help with lift in production. But in terms of the raw cost through the business, we're seeing great intent. And that's against the backdrop of higher electricity costs in New Zealand and some of the inflationary pressures. So I never want to stop our focus on reducing costs but I'm very pleased with the direction we've gone. And we set a target for 30% head count. We've reached 32%, that also speaks to a bit of the culture and the leadership team that they just want to keep on looking how to grow and how to mature and how to become more efficient across the space.

Just on the Waitsia project. You made a comment earlier, I think it was Slide 7 that Clough personnel are now taking direction from Mitsui. I mean, that kind of scared me. I would have thought that would have been the case all the way along because Mitsui is the operator. And then I guess, you put 20 professionals in there. Tell me I'm wrong, but are you kind of giving instructions to Mitsui who gives instructions to Clough type of thing. Is this still not perhaps the most ideal joint venture structure in terms of giving you a high level of confidence in the ability to deliver the commissioning of the project? Or have you seen a big improvement there?

I think the challenges we had, the contractors that was signed originally had Mitsui taking over commissioning control. And one of the things that Beach has inherited in its business is a high level of capability, particularly in commissioning. We're always bringing things online. So we have the expertise to help. So I've tried to deploy that and help. So when I say [ Mitsubishi ], so effectively, now we're going to commissioning, it's going in from project control to operational control in different parts of the plant. And the ops team is the Mitsui team. So it's just -- you have that kind of period between full project and ops where you've got commissioning, and we've certainly got a lot of help in that space. So we've got very senior people in the structure, giving great advice, giving great direction. I'd love to have more people in there. I just -- at the moment, I don't have an organization that is capable of probably giving too many more people just because of our other opportunities around the business. But I thought a great move. I was very disappointed not to have fuel gas into the plant. We're still waiting on a few valves and some pipe work to be delivered. But we worked with Mitsui to figure out how do we break that from being a critical path. And as you would have seen, when you visit that big [ amine ] train, we need to get that commission. That was a real important piece. So we brought in equipment to get that commissioned so that we break out the fuel gas in as that critical element of the critical path. So working together on those things has been quite good and having more influence in the joint venture has been fantastic. And I've got to give credit to Glenn and his team who are speaking to Mitsui every day, working with them, engaging with our staff, making sure that we get this project up.

Last question from me and someone who has worked with maps for a big part of their career. On comparing the map that you have for the Perth Basin in the December quarter report to the new one that you've put out today, and I'm looking at Redback Deep and it looks like it's got a lot smaller. I'm a little bit worried, is this just a schematic? Or is it an actual change in potential size of Redback Deep?

It's just a schematic to be honest. Gordon I haven't looked at that map in that much detail. Given we come from the similar background, I probably should have. But no, no, Redback Deep hasn't gotten any smaller.

Your next question comes from Nik Burns with Jarden Australia.

Brett and Anne-Marie. Just back on Waitsia. Look, Brett, I'm sure you know that the whole process has been a source of intense frustration for yourself and shareholders more generally. You talked about the delay and the introduction of fuel gas, but you've been able to mitigate some of that time line by bringing in other equipment to start some of the amine commissioning. Just as we sit here today, how confident are you that the time line to completion of first gas presented here is realistic and can be met with no change in CapEx?

Yes. So we engaged several external parties to do reviews to very much get some more confirmation of that question. And there was a ton of that review, which is the -- what's been set out is achievable. And I hate to use this language, but somewhat conservative. And so we've got to balance that comment from the external reviews of the conservative time line that was mentioned versus the actual delivery of activity in the field, and the challenges we've had with things like valves, particularly about getting Xyris gas in. So I feel like we're fairly balanced in terms of our risk understanding. I go and look at the plant, the plant is built, we've just got to replace these valves and get these valves from the suppliers in a timely fashion and get the process online. I hate to give a comparison, but you look at what Santos delivered with commissioning the Moomba CCS project, full rates within about 6 weeks, that's kind of world-class activity. And we need to operators to lift to be able to deliver that type of outcome. And I'm trying to get in there and support them to do that.

Got it. You've called out opportunities for further gas swaps ahead of Waitsia start-up. Just can you talk about -- are we talking maybe 1 or 2 more cargoes? And you do mention Mitsui involvement there as well. My recollection is they haven't been involved with swap cargoes to date. So are they looking now to partner up with you. So further swap cargoes, maybe 50-50 with them? Or how should we think about that?

I think Mitsui looks at them on a case-by-case basis. So we will continue to work with Mitsui on that. We have opportunities for additional swaps in the market. And yes, we're looking very closely. I don't want to give you a promise Nik, because you'll put it in your model. But I'm hoping to get another 1 at least out before the half year. And if I don't, I apologize in advance, but we certainly got the opportunity to do that.

Got it. One more for me. Just on the Otway upcoming campaign. I mean you called out you're not going to drill Mavis. I'm just -- my understanding that was a commitment well. I'm just wondering, have you been able to get out of that commitment? And what does that mean? And then just following on from that, I think you're pretty bullish around the nearshore exploration campaign. Obviously, would use an onshore rig rather than offshore, but is there anything you can say about plans to progress nearshore drilling in the next year or so?

Yes. So we'll bring some more plans to that later this year. Sorry, I'll start with the nearshore. The -- from the enterprise well slot, there's opportunities to do additional wells. And we have really high-quality opportunities nearshore that we can connect through. So -- no, we've started the engagement with joint ventures and regulators to move that forward. And I hope to give you an update of that in the not-too-distant future, probably either at the full years or maybe at our next strategic update. I'll give you some color at that point. But that -- they look really exciting to me. It's not too dissimilar in size to what we -- how we view enterprise today, which is still very highly value accretive and relatively low cost. So I love those nearshore activities because we can use -- like you said, use an onshore rig, we can deliver it at a much lower cost volume. We don't have that challenge of mobilizing large offshore vessels around. So things like that make a lot of sense to me. Nik, and -- I can't remember what the other part of your question was unfortunately.

Just on the Mavis commitment well.

Sorry, yes. So we obviously -- Mavis we're working with a regulator on that. I can't really comment too much on that at the moment.

Your next question comes from Saul Kavonic with MST Marquee.

Brett and Anne-Marie. Putting Waitsia aside, perhaps on balance, it looks like the business is outperforming across the other assets versus your expectation 6 to 9 months ago. Keen to get your take on, is that the case? And particularly, if we look at the outlook for FY '26 and FY '27, Waitsia side, are you becoming more optimistic on what our production looks like over those years versus expectations at the time of the strategic review earlier last year.

Yes. It's a really good question. So I'll just -- at the point of the strategic review, we also -- I had some concerns of some of the option and we made changes to some of our reserves through that period. So I had some concerns through there. And what we've seen is much better performance against what the expectation was. So I feel pretty confident in where we are in the Otway in terms of production and reserves. Certainly, we've seen even across the Western Flank, we've been able to defend production, and we've got a really solid campaign of wells coming up across the Western Flank in this development and appraisal period. And then Bill and his team will get the final look at what their exploration campaign looks like, which will follow on after the development plan -- development program in the Western Flank and that's looking pretty good. So I'm feeling pretty confident about where we are for certainly '25, '26 and '27, no doubt. We've got enough information to hand to be able to fill that way. So I'm not promising any reserve upgrades at this point in time or anything, but I feel very confident about what our modeling suggests.

Perhaps a question related to some of the early ones but being most specific. With the number of companies gearing this new Queensland gas opportunities, inorganic ones to meet the domestic shortfall forecast in LNG in the next decade. Do you see a role for Beach to play in Queensland onshore, CSG [indiscernible]?

I think I've always had a view that CSG would be a good part of our portfolio. I think it's got that longevity, it's got that consistent cash flows. And as long as you've got the right acreage position, you could take strong advantage of it. Now obviously, we're not there at the moment, but 1 of my direct reports, Glenn Watt, is kind of an expert in this field. He's run assets across Queensland for one of the major operators there. And he's got probably more experience than anyone else. So -- we've got some individuals in the organization that understand that pretty well. So if the right opportunity come up, I would certainly have a look at it.

Great. And just last one, I think following on from the previous question, just on Mavis isn't mentioned anymore. We've got Hercules in the next few months. It seems -- I'm just looking at Slide 17, nothing for the FY '26 activity is suggesting more exploration. Is Hercules basically for the next 18 months in terms of big offshore exploration prospects you're targeting? Or is there scope to put additional things in the FY '26 program?

Yes. So this -- Hercules is the only we're discussing at the moment, but there is scope to do 2 other things. And we're just working on those at the moment. And hopefully, we can give the market an update when closer to that time.

Your next question comes from Rob Koh with Morgan Stanley.

Congratulations on the amounts achieved so far. Just a few questions on the swaps -- gas swaps. You've kind of given us some color of where the gas has come from there, 35% from your own production, is that a good way to think about the sourcing of the swaps this half 35%, 65%? Or is it a bit more case by case?

No, I think that's fairly representative of how you should think about it moving forward.

Okay. Great. And then I guess, I'm just looking at the accounts. We are just trying to -- because there was a comment on one of the other questions about gearing, including swaps being significantly higher. Just wondering if Ms. Barbaro has any further feedback on whether that number was right or not. I don't think it is. But where in the accounts is the financing component of the swap obligations, please?

No, there is no financing obligations as such that would be incorporated into a gearing calculation. So I can't speak for James' calculation, but our gearing, as outlined in our pack is 10%. From a swap obligation perspective, I guess the only place that you would probably see through the financials is within the inventory on balance sheet. So the sort of that borrowing loan that you account for as effectively just at the cost to produce that gas in the future. So like I spoke to earlier in Henry's question, when you're thinking about modeling how these swaps get returned, from a cash flow perspective, we should be thinking about what it costs to produce that gas, and that's the cost effectively to return that gas in the future. With one of the contracts, we do have them paying us for that gas in the future as well, which also is a good little cash flow for us in that return period as well.

Yes, great. that's consistent with how I understood it. So that works for me. All right. And then you've called out in the second half a little bit of P&A activity, which is, I guess, going into your thinking on dividend, which makes a lot of sense. Can I just get some color on how you're managing those costs, how that market for restoration and rehab is going? And is it worthwhile for example, bringing forward activity if there's equipment available, labor available? Or is it better to just fulfill your statutory obligations and keep pushing out as much as you can.

I think for us, it's about looking at wells that we fear that may have some issues. So we're just taking advantage of a rig being in the region to fulfill an obligation to make sure that the barriers are proper in place. So we obviously investigate all our wells all the time to check that they have strong and intact barriers. So a couple of those wells are starting to have some challenges. So we wanted to get them done and hence, moving them through. The best solution for abandonment is to do it at one time so that you can mobilize once you have all the equipment and have the right people there. And that's obviously best done at the end of the project. So it's probably not normal to do this in this time line, but outside of wanting to make sure that we have integrity across those wells and across those barriers. So we felt like that was an absolute requirement and a regulator agreed with us that there is a requirement to do that. So we moved that forward. But otherwise, I would suggest that doing things once and at the end is a much more prudent use of capital and a much safer way to do it because you'll have all the right people and equipment in the right place. And moving forward with additional abandonments for others, there'll be more equipment and things. And I think the competitiveness of the market will progressively increase as well.

Your next question comes from Mark Wiseman with Macquarie.

Just a few, hopefully, quick questions. On Waitsia, you mentioned 8 to 10 LNG cargoes per year. Can I just check, does -- is that net of the time swap settlements over the next few years and the 10 would sort of be without? Or is there some variability year-on-year on production as well?

I think you've seen through me, Mark, yes, that's a fairly accurate.

Okay. And just on the Waitsia, the delay to introducing that fuel gas, I appreciate what you're saying around the amine testing. But could you just talk through what was the root cause of the issues with introducing fuel gas? Was it a spec issue or a pipe valve issue?

It's unfortunately, just valve issues. So part of the challenge is being a slow construction phase is some of the valves will sit in location for a long time without being served. And some of them are in locations that they couldn't be properly pressure tested. So when they were finally able to be fully pressure tested, some of them were passing beyond what the specifications would allow. So they have to be rectified and then replacements need to be put in place. If you can execute a project in a much more timely fashion, these are normal project activities that you should get done. But over the longevity of this execution period, some of these issues have popped up. So the majority of those valves are all fixed and in place. We've still got a few awaiting supply chain-related issues to get in place and we'll get that done not too distant future. But I've been very conscious about getting the project up. Obviously, we all have shareholders alike, and so the clear way to kind of accelerate some of that time is to break. As you know, Mark, bringing the gas into the plant was the key tool to be able to commission the rest of the plant. So rather than having everything stalled waiting for available to, we brought some equipment in so that we can continue the commissioning phase around bringing those [indiscernible] first gas in. And so that remains the focus of us, of course, but it enables us to get on with work and not have to wait for a supply chain issue.

Okay. Fantastic. And just finally for me, on the sustaining CapEx. Within that $700 million to $800 million guide, the sustaining was $420 million to $480 million, you've spent $195 million in the first half. Is there anything seasonal between the second half and the first half that we should think about? Or it looks like you've driven out quite a bit of cost there.

Yes. So probably the difference -- what we normally include in sustaining is Western Flank development drilling. And so we're bringing a rig in. So the -- while we're still guiding for the target is -- or our forecast, I should say, is because we have that rig coming in to do those 10 development well -- appraisal and development wells across the Western Flank. So obviously, you wouldn't have seen that in the first half activity, but that's the second half activity that there has been the CapEx spent on.

There are no further questions at this time, and that does conclude our conference for today. Thank you for participating. You may now disconnect.