Brookside Energy Limited (BRK) Earnings Call Transcript & Summary

Hello, and welcome to Market Open Direct Connect, a webinar series for companies to tell their story, why it's compelling, and why it's an opportunity to invest. I'm your host, Stuart Walters, and we're joined here today by David Prentice, Managing Director of Brookside Energy, ASX code BRK. David will run through the company's Q4 2024 results and also participate in the Q&A. A recording of this webinar will be available on the Market Open and Brookside's communication channels within the next 24 hours. So I'd like to introduce our guest. David, welcome to Direct Connect, and over to you.

Thanks, Stuart and also, I'd like to point out that we've got G. Lambert on the webinar as well. Thanks, Gin, for joining us. And thank you to everybody who has joined us today for the Q4 '24 results presentation. I'll quickly get you to have a look at the disclaimer and the reserves cautionary statement. Obviously, it's important to stay up to date with that, and then move straight into the highlights. Obviously a cracking quarter, we were expecting a good quarter as a result of the production increase coming from the FMDP wells. Nonetheless, it was a very strong quarter, with record cash receipts and record operating cash flow, which obviously saw a big surge quarter-on-quarter and left us in a very strong cash position at the end of the year despite almost $19 million of FMD-related CapEx outflows during the quarter. That left us with $11.3 million at the end of December, which is a fantastic result. The successful execution of the FMDP ahead of schedule and budget is something we are very proud of. This was an ambitious initiative for a company of our size to drill and complete 4 wells off the FMDP pads at the same time, and to bring that all together with lower drilling days than anticipated and significant cost savings across the board, without any serious incidents, was a fantastic result and a credit to our operations team. A lot of planning goes into these operations, and it's really that planning and risk management that we do ahead of operations, along with the prudent supervision of the operations while they're underway, that means we're able to deliver these kinds of results. So we're immensely proud of that achievement. The fact that we were able to fund all of that activity from cash reserves and cash flow is a credit to the business. Obviously, record quarterly production, so just a little bit under 2,500 BOE per day, which was the target guidance that we had indicated for the year-end, which is fantastic. A strong liquid content and a good increase quarter-on-quarter. That importantly, excludes any production from the Gapstow wells that are just coming online now. So we'll see a nice bump from those in coming quarters. The SWISH wells continue to perform very strongly, with record production of almost 400,000 BOE gross from those operated wells during the quarter. We've reached another milestone for those wells of 2.5 million barrels of oil equivalent cumed over their life so far, again, excluding the Gapstow well. The wells continue to perform very, very well, and that's really underpinning the financial success that we're having as a result of this activity out in SWISH. I touched a little bit on the Gapstow full-field development. I had the opportunity to visit those operations when I was in the U.S. late last year, and obviously, Continental has done a marvelous job there. They were very pleased with the initial numbers that we're starting to see coming from that, and we expect to have some news out on that during this coming quarter, but production and cash flow receipts will obviously be recognized in subsequent quarters. We were able to increase our interest in the FMDP well during the quarter, which was again a credit to our land and leasing team. It's all of that hard work that goes on behind the scenes, working through all of the title and leasing information, and to be able to take advantage of that opportunity to increase our interest which again, a credit to the team. Lastly, touching on the U.S. listing and the capital consolidation, I'll talk a little bit more about both of those as we get into the presentation, but capital consolidation is complete, and we are heading down the path of the preparatory work for the U.S. listing. That remains on schedule as we move through the last quarter and into the first quarter of this year. Late in December, we announced our 2025 tactical plan, which will see us drill 3 new SWISH Play wells in 2025, all 10,000-foot horizontals, with the first of those wells to spud shortly. Again, we had some news out on that last week, and we will have more next week as we bring the rig on and get ready to start drilling. So, it's great to be drilling again and moving forward. Just on the numbers, comparing quarter-on-quarter performance, as you'd expect, we see a big bump there in group net production from the third quarter to the fourth quarter and gross operator production. A similar story with quarterly sales, $21-odd million. You can just see the reconciliation there of opening cash versus closing cash, with the biggest impact coming from CapEx. The last pieces of CapEx coming from the FMDP represent the major outflow. But as I say, this left us in a very strong cash position at the end of the year. Looking at the 12-month performance and working our way from net production there, again, you can see a huge jump as a result of the impact of the FMDP wells from Q3 to Q4. Similarly, both operating income and quarterly sales show big jumps. You can see in both of those charts, in the top right and the bottom left, a sort of sawtooth pattern, where you see income and sales drift lower with the natural decline of the wells and then get a big bump when you bring the next set of wells online. And then just in the bottom right, you can see there the reconciliation of closing cash and opening cash. And you can see obviously, CapEx is the biggest contributor there in terms of cash movements on the right-hand side. Just looking at the performance of the SWISH AOI, I've said their reserve definition well, it's really a combination of those and the FMDP wells. You can see the first 12 months of production for the first 4 wells, then the FMDP wells combined and normalized to 10,000 feet. We've normalized all those wells to a 10,000-foot lateral. You can see the FMDP tracking along nicely, slightly above where the Flames well was at a similar time in its life, so pretty much in line with expectations. And then on gross cumulative production on the right-hand side, which takes us out to, I guess, current time. So you can see there the dual well has obviously been on production for almost 43, 44 months now. And you can see the impact of the FMDP well, so 4 wells combined there and already produced almost 350,000 barrels of oil equivalent. So a great result from those 4 wells. In terms of production and cash flow, just under 400,000 barrels of oil equivalent for the quarter, net volumes 226,000, gross operated production 4,300. As I say, we got to that 2,500 BOE per day net for the year-end production target. Net cash receipts were $14.7 million, after the deduction of working interest and royalties from sales volumes of just under 300,000 BOE at a realized price of just under USD 33 per BOE, leaving us with cash of $11.4 million at the end of the period. Operating expenses for the quarter were just under $9 million, made up of production expenses $1.3 million, payments to working interest partners, and royalties, the big number there at $6.4 million. Importantly, production expenses continue to stay low and remain in line with our forecast, really driving the economics. Obviously, well performance but also low OpEx is what's driving the fantastic financial outcomes we're getting. And CapEx for the quarter, net of payments coming from working interest partners of $16 million. And then on to corporate. So the U.S. listing, we've been working away in the background there on doing the aligning work. So we're going to go back and look at '22, '23, and then look at '24 and get the financial statements for those periods translated to IFRS standards. So that work is ongoing. We've engaged our auditor in the U.S. to do that work. It's kind of laborious and takes a long time, but it's underway, and that's really completing that work. '22 and '23 is substantially underway and almost complete. '24 is obviously just getting underway because that's got to align with the Australian audit process, which is currently underway. So that will be for the year-ended 31 December '24. Once we get all 3 of those years translated across to IFRS, then that will be the point at which we can start to really pull the trigger on the disclosure documents and take the next steps for lodging documents with the SEC and moving into, I guess, the workaround promoting the company into the U.S. markets and getting ready for the U.S. listing. We've got the annual review of the oil and gas reserves also underway. So all of that work will dovetail into the listing process. And then finally, on the share consolidation, we completed that during the quarter, and the shares resumed trading post-consolidation on the 25th of October. The company has got just under 96 million fully paid shares on the shares now and 546,000 share rights at the end of December -- sorry, at the end of 31 December 2024. So Stuart, that's the kind of a wrap-up for the presentation. So if you want to move across to the questions now.

Yes. Thanks, Dave. You did have a few questions come in through your hub. Did you want to run through those before we get on to the others?

Yes, sure. So look, we've had a bunch of questions around the, I guess, the share buybacks and the capital allocation. Before I get on to that, I guess, let's talk about the strategic focus for 2025. So we've taken a pretty measured approach to 2025. We've been keeping an eye on the oil price. Obviously, oil is tracking below that $75 number that we use for our internal modeling. And so we're keeping an eye on the oil price and really trying to make sure that we are taking a measured approach to the development of our precious inventory because obviously, we've got limited inventory. If we move forward and develop these wells up in full field development and deliver that production into lower oil prices, then we don't get to sell those barrels again. They're gone. And so really trying to maximize the value of the reserves in the ground is an important consideration for us moving into 2025 and really what's been driving that '25 strategic focus. So as I say, we've got drilling underway now or about to get underway now on the Bruins well. The pad is complete and that well will spud shortly. And then 2 more wells are planned for the second half. Those wells will be drilled on a new DSU that we're currently in the process of finalizing. There'll be more news out on that when we get a bit further down the track. So then in terms of the capital allocation framework, I wanted to spend a little bit of time talking about this, and I've prepared a slide for this because we've had a lot of feedback from shareholders around buybacks and the imperative around share buybacks and timing of share buybacks. So I want to make it clear that we haven't changed our position in regard to buybacks. If prices stay above our forecast levels, so that $75 and $250 for an extended period, and we generate surplus cash flow, then we will certainly consider another buyback. But our fundamental goal here is to balance growth with shareholder returns. So we've got 2 levers there if you like, production growth and reserves growth. So production growth coming from the reserves that we've already identified in the SWISH AOI and then reserve growth coming from additional acreage that we might be able to pick up or new AOI that we might be able to establish inside the company. So that's sort of organic or inorganic growth, and then balancing that with shareholder returns, whether that be buybacks, dividends, or capital returns. The growth imperative from the Board's perspective, we're of the view that we need to get bigger to attract larger pools of capital investing in the company, and scaling up is critical to that, and bigger capital pools equal valuation gap closing. So in other words, we attract bigger pools of capital, we get more eyeballs looking at the story and the valuation gap closes and obviously, a stronger share price. Now that's something that's obviously at the front of mind for the Board, for me, for the whole team in terms of we want the share price higher. And our view is that getting bigger and attracting those larger pools of capital, making us more relevant as a business in terms of our scale will attract those larger pools of capital and close that valuation gap. So that's a very strong imperative from the Board's perspective. Now in terms of how we do that, what are the growth pathways? So we've got production growth versus inventory and reserves. Clearly, the market hasn't rewarded us yet for the production growth that we've achieved over the last few years, and particularly very frustratingly, when we bought the FMDP wells online, again, we didn't get the reward for that production growth. And so the decision to focus on inventory and reserve growth really is seen by the Board as now the best alternative for achieving that growth. So in other words, developing -- moving straight into full field development in an uncertain period for commodity prices versus continuing drilling in a measured way, but really focusing on building out that inventory and reserve growth is seen by the Board to be the best alternative. So how do we fund that? So clearly, we've got cash and cash available -- cash flow and cash available to help us to do that. We can't issue new equity, for example, if we were to find something that we wanted a large acquisition that we wanted to do to increase our scale very quickly because the stock remains undervalued, and issuing equity is not an option. So our only real source and our best source is cash flow and some conservative use of our debt facility. Now assuming prices stay around current levels, our 2025 capital is fully committed with a reasonable buffer, so for operations and the allocation for inventory growth. So in other words, the drilling that we've got planned and the initiatives that we're looking to implement in 2025 around inventory growth really speaks to all of the surplus capital that we have coming through the business, assuming prices stay where they are or drift lower with a reasonable buffer for unexpected events. And in terms of those unexpected events, what are the threats to our forecast? Well, we've got to still have a relatively small well count, and we really need to build out our inventory, if you like, of low decline production. So that's the wells that are mature and don't see the decline that you would see in the first 12 months on new wells. The idea there is that having that larger base of low decline production minimizes that sawtooth effect that you see in our projections when you're drilling out of cash flow. In other words, when you're moving forward with your production growth story and you're waiting for cash to build before you roll out your next drilling program, you get that sawtooth effect, and that makes -- it causes volatility in terms of the valuation. We're obviously also exposed to commodity prices. So market fluctuations and movements in the oil and gas prices obviously impact our revenue. And probably in the last one, which we put a lot of effort into managing over the last 2 or 3 years is operational risk. So cost overruns, delays, and execution challenges. These are very real challenges. And if you look at the scale of the activities that we're undertaking, USD 40 million in CapEx for the gross CapEx for the FMDP, for example, a 10% cost overrun or some kind of execution challenge or delay. If that had occurred during the execution of that project, then we could have a USD 4 million or USD 5 million impact to our budget very, very, very easily. And so when people look at our cash position and assume that we've got this big surplus of cash, I need to keep in mind that we're obviously managing that cash position with an eye on making sure that we've got a comfort level around these threats to our forecast. And then finally, other considerations, I think we need to maintain, obviously, a stable capital structure in the first quarter and the second quarter of this year as we move toward the U.S. listing. Obviously, we're starting to get ready to prepare disclosure documents and finalize the financial statements, having a buyback in place that would mean that the capital structure would be uncertain -- would not be practical. So I hope that helps people to understand a little bit about the capital allocation framework, how the Board looks at the various alternatives we've got for growth, and how that impacts our decisions around balancing growth with shareholder returns.

Dave, thanks for running through the capital allocation and covering off those questions that came through. There are a few others that have come in. Can you elaborate on the key drivers behind the 667% quarter-on-quarter increase in operating cash flow? And do you expect this momentum to continue into 2025?

Yes. So look, that big jump in revenue and operating cash flow was all driven by the big jump in production from the FMDP. And yes, we expect the positive momentum to continue into the first quarter, and then we'll get another little bump when the Bruins well comes online. So yes, we do expect to see that momentum. I mean, maintaining 600% or 700% quarter-on-quarter growth is not achievable just because we're not drilling that many wells that quickly to be able to maintain that kind of trajectory, but the positive momentum is certainly there for 2025.

You successfully completed the FMDP ahead of schedule and under budget. What are the main factors that contributed to this efficiency? And how do you plan to apply these learnings to future projects?

Well, look, we haven't really done anything different there right all the way back to when we planned and planned for and drilled our first well, the dual well, we were always capital-constrained, and taking on these big drilling projects means that the amount of, I guess, planning and risk management that goes in before we put the drill bit in the ground is enormous. So planning, I guess, working out the various scenarios, what could go wrong, how do we mitigate those risks and then really -- so getting all that planning right at the front end, and then most importantly, having the right people and the right equipment on the location and the right supervision is really what drives that success, and we've been enormously successful with the first 8 wells that we've drilled in terms of managing that risk, and we're certainly looking to continue that momentum.

With the Gapstow full field development coming online, how do you expect its production to impact revenue and cash flow in the next few quarters?

Look, it will be a modest impact. Our share in those wells is modest. So I think we guided that there'll be like 250 barrels of oil equivalent per day bump when those wells come online. We don't have enough data yet to see whether we've been conservative in that forecast or not. I suspect we probably have, but we'll see. But yes, look, we're obviously looking forward to bringing that production and cash flow to account.

And the company is advancing preparations for a U.S. listing. What are the expected benefits of this move? And what is the current timeline for completion?

So look, it all goes to this idea of attracting larger pools of capital. So clearly, we're struggling here in Australia to get larger pools of capital, bigger investors to look at our story and take an interest in what we're doing. That's not just a Brookside thing. It's across the board for small-cap oil and gas companies. And so the feedback that we've had from the investment banks we've talked to in the U.S. is that there are larger pools of capital in the U.S. that are interested in small-cap oil and gas stories. And so that's the rationale behind that is if we've got a security that trades on an exchange that they recognize in a time zone that's convenient for them, we'll be able to promote more effectively to those groups, which obviously represent those larger pools of capital. And that will be the catalyst for closing the valuation gap. That's been enormously frustrating for the Board, for me, and most importantly, for all of our shareholders. It's been enormously frustrating.

And the company's 2025 strategy includes drilling 3 new SWISH Play wells. Can you provide insights into the expected production potential and how these wells fit into the company's long-term growth plan?

Yes. So probably reluctant to give predictions on sort of individual flow rates for individual wells. But we'd expect that these 3 wells will perform sort of in line with the offsetting wells drilled in a similar formation. So I guess we're not looking for any surprises here. And in terms of the Bruins well, it's a HBP well. So it's the last well that we need to drill to hold our existing acreage by production. And then as I said, the 2 new wells are being drilled in a new DSU, which we're still working through the land and leasing aspects of that. So there will be some exciting news to come over the next few months around where that is, how big it is, and what's going to be the impact on scale for us in terms of increasing inventory and building out our position.

And Brookside increased its working interest in FMDP wells to approximately 70%. How does this decision impact overall profitability and risk exposure for the company?

I think it's neutral on both those fronts. I mean it's -- obviously, it's more about what's the impact to cash flow. Obviously, if we end up with a higher working interest, then we get a bigger share of the cash flow. And so we're absolutely delighted that, as I said, through the diligent work of the land team there, we were able to take advantage of some leasing opportunities and spacing and pooling opportunities really during the last final pieces of that puzzle and increase our interest. So it was a great result.

There's a couple more that have come through, so we'll run through those. Can you speak to the difference in production volumes and sales volumes for the December quarter? And how will it impact in Q1 2025? Will we expect to see net sales volume be greater than net production volumes and the possibility of a record sales number?

Look, I'm reluctant to give guidance on what's going to happen in the first quarter of this year. But look, I think what we can say is that the FMDP wells are performing in line with our forecast. And so, therefore, we'd expect that positive momentum to continue on into the first quarter.

And lastly, someone's come in and said, I take it that roughly 70% of this production will be in the first 3 years with greater than 53% liquids for the first 3 years. Just trying to assess the expected payback period for this well off of Brookside's production estimates in the first 3 years.

So I'm not sure whether that question is directed towards the FMDP wells or the Bruins wells. But I think we've guided 24 months, I think, in terms of the FMDP wells. And I don't know what the number is off the top of my head for the Bruins.

Thank you, David. That's all that's come through today. Some great questions have come in and I appreciate you taking the time to run through our Q4 results and also take part in this Q&A. For more information about Brookside Energy, you can head to the company website, brookside-energy.com.au or you can follow the company's social media channels and investor center. David, thank you for participating today. Keep up the great work and look forward to chatting again soon.

Thanks, everybody, for joining us.