Central Petroleum Limited (CTP.AX) Q4 FY2025 Earnings Call Transcript & Summary

Good morning. Welcome to our presentation on Central Petroleum's June quarter results and other business activities. I'm Leon Devaney, CEO and Managing Director of Central Petroleum, and I'm joined today by Damian Galvin, our CFO. Throughout today's presentation, you're welcome to submit questions online, which we will address at the end. Please ensure you read the legal disclaimer that applies to this presentation. We are pleased to announce that we have achieved outstanding financial results for the June quarter, marking one of the most successful years in our company's history. This success follows several years of strategic debt reduction, cost management and capital preservation. Recently, we have successfully delivered 2 new production wells at Mereenie and commenced deliveries under new long-term gas contracts. As I've emphasized over the past year, Central Petroleum is at a turning point, and our second half results are beginning to reflect this. Today's presentation will provide a clear picture of this exciting new situation. I'd like to now hand it over to Damian.

Thanks, Leon. As you've highlighted, we've had a very strong 6 months. We've been flagging the expected impact from the new gas contract since they were signed last year, and the results are now starting to really speak for themselves. The quarterly revenue chart at the bottom left of the slide, it shows the step change quite clearly. And our $12 million fourth quarter revenues were up 43% on the same quarter last year. They were 28% higher than the December quarter and almost 6% higher than the March quarter. And most of that increase has come from the increased gas prices attributable to those new contracts, which started on the 1st of January this year. And that's illustrated by the average price chart on the top right of the slide that you can see it's got a very similar shape to the revenue chart. So that's showing that most -- a large part of that revenue increase has come from higher prices. Now look, we'd expect the average prices to move more in line with CPI for the next couple of quarters at least, and that's going to translate into a very healthy ongoing inflow of cash. Our June quarter operating cash flows were $6.3 million before CapEx. And so that's a record for Central at our current ownership interest. So the next big step in cash flows will be from May next year when the previously overlifted gas has all been returned. So we're currently returning that at about 2 terajoules a day. So we'd expect cash flows to jump by about $7 million, $7.3 million per annum from May next year if we stick to the current pricing. And so if you put that into context, that's about 50% of the net operating cash flow that we reported in the full year financial year FY '25. The strong revenues have also been supported by higher volumes. The second half sales volumes were higher than the first half. Firstly, due to those 2 new Mereenie wells, which came online in the March quarter, and they increased the Mereenie production capacity by about 9 terajoules per day. And that was an excellent result. We have those wells online ahead of schedule, within budget, and they've been performing very strongly. And secondly, the volumes are higher than last year due to those new contracts that we put in place. They provide more protection against the impact of closures to the NGP, the Northern Gas Pipeline, which prevent us from delivering gas to our East Coast customers. And you recall that those pipeline closures last year hit our sales volumes and revenues. And to mitigate that risk, we secured new contracts within the Northern Territory. There's still a couple of maintenance-driven outages in the June quarter. You can see that on the chart. We've also had to cap gas production due to some temporary constraints on our oil offtake. Now you might ask how does an oil constraint affect gas production? Well, it's because many of our Mereenie wells produce both oil and gas. So when you turn down a couple of wells to reduce the oil production, it obviously impacts the gas production as well. So as a result, our gas production was turned down by about 5% for a couple of months until late July. The good news is that we have found a solution that's going to restore the gas volumes. And although oil revenues may be slightly lower for the foreseeable future, that shouldn't have a big impact on our revenues as oil comprises less than 7% of our total revenues. And the downturn we're talking about is about 37 barrels of oil per day, our share. So our priority clearly is to maximize gas production. Going forward, we've got most of our firm production contracted now until the end of 2027. That provides a clear line of sight to reliable cash flows at improved margins regardless of whether the NGP is open or not. The conditional Arafura contract that was to kick in from 2028 has lapsed after they failed to satisfy conditions by the end of March. So we've got that gas from 2028 back on the market. The chart at the bottom of this slide illustrates the leap in the operating cash flow this quarter. I've taken out the exploration costs because that can be a bit lumpy at times. But even with the exploration costs, our operating cash flows in the June quarter are up 70% on the March quarter. As I mentioned earlier, after that overlifted gas is repaid in May next year, there could be another, say, $2 million of additional cash flow each quarter. So there's still cash flow upside just from our existing production capacity. The improved financial performance in the last 6 months has translated into a much stronger balance sheet. And strengthening our balance sheet has been an objective we've been working on since 2019 when our net debt stood at about $65 million. So it's great to see that at the end of June, we're actually in a net cash position of about $4 million, and that's the best position that we've been in since we acquired those production assets. And that's after including a $2 million lease liability for a new 5-year office lease that we've just put in place. So we've got a combination of the highest operating cash flows and the strongest net cash position. It's what a great position to be in and it reflects the successes that we've had over the last year. The higher revenues and cash flows, they stem directly from that successful gas contracting process that we ran in the middle of last year. And those resulting long-term gas contracts have given us much more stable volumes and at that new pricing point. The new wells at Mereenie was successful in boosting our volumes. Our debt facility was restructured and extended that eliminates that refinancing risk and it smooths out our debt service over the next 5 years. So all of this has put us in a position to offer our first shareholder returns, and that's the share buyback program, which will start next month. So overall, a successful year. It sets us up very well for the future. And on that note, I'll hand you back to Leon.

Thanks, Damian. Let's take a look at the NT gas market. The dynamics for the Northern Territory gas market remain in a state of flux. Our production from the Amadeus Basin shown in green on this chart has been consistently steady at approximately 40 TJs a day. The supply from Blacktip, along with periodic contributions from LNG producers has effectively balanced the NT gas supply equation, intermittently facilitating the export of gas through the Northern Gas Pipeline or the NGP. Of note, the operational status of the NGP has been on and off again throughout the year. This has been challenging for the market, particularly for NGP customers that are no longer able to rely on this pipeline for firm gas supply. Fortunately, we have now structured our gas portfolio to mitigate the impact of the NGP on our revenues, which is one of the reasons we have been able to post strong revenues over the last 2 quarters. Currently, the NT market appears to generally be balanced with only marginal support required from LNG producers from time to time. However, should there be a significant decline in Blacktip's production over the coming year, there may need to be an increase in sustained reliance on LNG producers to meet the NT's gas demand or alternatively, there may need to be a requirement to import gas from the East Coast by reversing the NGP flow. Consequently, we are witnessing substantial interest from customers for firm gas supply over the next 12 months. Looking ahead, the NT's market's long-term supply outlook continues to be uncertain. In addition to concerns regarding Blacktip's long-term production and the ongoing availability of LNG production, 2 pilot projects in the Beetaloo Basin are hoping to significantly contribute to the NT's gas supply mix starting next year. Both of these pilot projects, however, remain subject to further drilling and flow test results, which are expected over the coming quarters. These market dynamics are understandably generating apprehension among all NT gas market participants with respect to long-term gas contracting. Central is actively engaged with the market for both short- and long-term gas supply, including the potential supplies from new wells at Mereenie and Palm Valley. Moving on, we were very pleased to announce last week the initiation of a share buyback program for up to 10% of the company's shares commencing on the 15th of September. This marks a significant milestone as it is the first time the company has undertaken shareholder returns. Our robust financial position with a cash balance of $27 million. This is approximately 2/3 of our market capitalization, along with strong revenue generation from long-term gas contracts has enabled us to achieve a June quarter operating cash flow of $6.3 million and a consistent improvement in net cash, reaching a recent balance of $3.9 million. Despite our positive financial trajectory, our share price does not appear to reflect these gains. In this environment, we believe that a share buyback represents an excellent allocation of capital. The potential benefits include higher future earnings and dividends per share, increased liquidity and more tax-efficient gains for most shareholders. In alignment with the share buyback program, the Board has also decided to cash settle a portion of the bonus and long-term incentive shares divested on 30 June. This decision reduces the number of shares the company needs to issue at this time. While we anticipate being active in the share buyback program at recent share price levels once it begins next month, we are mindful of the regulatory constraints. The company cannot purchase shares while in possession of undisclosed price-sensitive information, such as farminee transactions or material financial results. Additionally, purchases under the share buyback will be subject to factors such as prevailing share price, liquidity and future capital allocation decisions. Okay. Turning to growth. While we remain entirely focused on our financial fundamentals, we are also mindful of the need to drive growth and increase shareholder value. I've already mentioned our opportunities to increase production through investments in new wells or any final investment decision would be supported by securing long-term gas contracts at acceptable margins. I would like to take this opportunity to emphasize the significant efforts underway in other areas for growth. The exploration and appraisal of our sub-salt permits, which have been installed for several years, holds substantial potential for large volumes of helium, hydrogen and hydrocarbons. We are actively engaged in discussions to restart sub-salt exploration with a particular focus on drilling an appraisal well at Mount Kitty, a discovery known for its world-class levels of helium and hydrogen. Additionally, we are in active discussions regarding conventional exploration in the western flank of the Amadeus Basin, specifically targeting our Mamlambo prospect and EP 115, which is on trend with the Mereenie and Palm Valley fields. Beyond exploration, we are open to new opportunities that offer lower risk, high-impact growth. Ideally, these opportunities will allow us to leverage our strengths to increase and diversify our reserve base. Importantly, we have worked diligently to reposition the company into a new financial trajectory. Therefore, any growth transaction must be compelling while minimizing our cost exposure. I'll conclude today's presentation with an overview of the capital allocation options currently available to the company. The share buyback program represents a significant milestone, but it only accounts for a relatively modest portion of our available capital. As previously discussed, we have identified lower risk, high-impact opportunities for investment in new production and exploration and are also pursuing other avenues for potential growth. We will, however, be very deliberate in allocating capital to these areas. We have the option to prepay some or all of our outstanding debt, which currently amounts to approximately $23 million and is scheduled for full repayment by 2029. However, once repaid, the debt cannot be redrawn. So it is crucial to ensure our capital requirements are thoroughly assessed before proceeding with any early prepayment plan. Despite this, repaying debt has been a priority for the company over the past several years and the allocation of capital towards early debt prepayment is always under consideration by the management team and Board. This presentation has also highlighted the higher financial robustness of the company, driven by long-term gas contracts and reduced costs. Our strong balance sheet and positive operating cash flows now allow us to consider the initiation of a sustainable dividend policy, which could serve as a catalyst for share price appreciation. We are undertaking a thorough evaluation of all capital allocation options. And while each represents its own merits and considerations, the breadth of these choices reflects the company's substantial progress over the past 5 years and provides us with multiple avenues to enhance shareholder value in the near term. With that, I'll hand it over to Damian to start the Q&A section of the presentation.

Thanks, Leon. That's -- we've got a few questions lining up, so I'm not sure we'll get into them. So first, there's a few here around the sub-salt and the helium. So any progress on helium development? What steps are being taken to recover control of Dukas and other related prospects? Salt caps, what's happening?

Yes. So sub-salt certainly is a focus that we have been working hard in the background, been stalled for a number of years. That's been very frustrating for everyone involved. We have been talking to parties. You would have seen efforts to get farmouts across the line. Those haven't worked in the past. We've had some challenges there. Santos is the operator. We don't control the joint venture. Those have been a bit of a hurdle for us to bring in new partners. But there has been a renewed interest. And I think the engagement that we're currently involved in, I think, is -- I'm very optimistic that we'll be able to change those dynamics. We're targeting trying to get something done this year, if possible. And ideally, we can get those sub-salt permits started again. And obviously, the focus is on Mount Kitty being a discovery. It's the lower risk drilling opportunity in those permits, and that's where we're seeing the most interest. So it's a focus for us. We're making good progress. There's still work to be done, but we do want to get that restarted. Our focus again is to continue to get some exposure, get drilling done, but minimize our costs in terms of that exploration program.

Okay. Just on farmouts, there was a comment here. I'll read it out anyway. Can I ask that in future farmout efforts, please ensure amounts owed are fully received, proper due diligence, please?

Yes. That's a great concept and great idea. We certainly do try to get the best counterparties to farm-ins that we can. Sometimes there's not a deep lineup of parties to bring in, and we try and do as much due diligence, and we obviously try and move forward with parties that we think are credible and can fund it. The Peak transaction obviously fell through. That's not a common sort of thing. Typically, they'll -- parties will get started into the joint venture when they've sunk money into it, it's very hard for them to back out, and we find that's not a common thing. So we are balancing it. I mean Central Petroleum itself is not a credit rated credit counterparty. So we have some understanding of what we're looking for when we do talk to parties. But it will be a focus, and it has been, but we'll continue to focus on that to make sure that who we contract with is able to provide the funds and continue with their obligations under the farmout agreement. So I appreciate the sentiment there, and it's something that we do focus on.

Okay. We've got a few market type questions here. I guess, first one, what is take-or-pay? Is it some sort of a contract?

Yes. So take-or-pay are provisions within a gas supply agreement. And essentially, what it does is it sets a minimum volume that the customer has to take. If they don't take that minimum volume, they have to pay for it. The gas they paid for but didn't take gets accumulated. It's called makeup gas. Obviously, one of the key things that we look for to ensure our revenue streams is that the take-or-pay provisions are as high as possible. We've got high take-or-pay provisions in our current contracting portfolio. So that does underwrite and give us a lot of confidence in the forward revenues. So it's an important part of the GSA and something we spend a lot of time and focus on to ensure our cash flows and financial position aren't subject to a lot of volatility with respect to the customers' demand requirements.

Okay. So just carrying on with market-type questions. So I'll try and bring -- I'll grab a few of them together. So what's your view on the bear case that Beetaloo Gas will result in a significant lowering of gas price in 2 to 3 years' time? Is there anything that can be done to mitigate this outcome from a Central perspective? Or are we pretty much hostage? And also throw in, can you give us a bit more on your comment about the apprehension of customers about the long-term NT market and the Beetaloo?

Yes. So a lot to unpack there. The long-term gas contracting environment in the NT, as I said, is very uncertain. That's driven by uncertainty around Blacktip and obviously, potential volumes coming from pilot projects in the Beetaloo. We've got a real advantage at Central. We're an incumbent. We're an existing operation, reliable supply. Importantly, we have reserves and certified reserves to back long-term contracts that's critical for customers that have capital projects and need long-term supply. We will be leveraging those advantages. We believe we're the lowest cost producer in the NT. Even with the Beetaloo coming on board, we believe we have a cost advantage there. So I think we're in a really good position to compete should the Beetaloo and other parties come and produce gas into the NT market. We think we're in a very good position to compete and to be successful. The one thing I would highlight in terms of the bear market, whilst it certainly is a more of a surplus market than the alternative, which we've talked about, where the NT is actually physically short, it does take us back to where we have been historically. And that's been an environment we've been successful in. We are able to compete and contract our gas on a long-term basis and generate good profits from customers on the East Coast, whether that's Mt Isa or further down the line. And I think the East Coast as well has very solid market dynamics, and we're confident that we'll be able to get our gas out the door and sold, and we'll be able to make money at it regardless of how these things play out. So we don't see it as a bear market per se. We just think that the market dynamics will require us to be adept and be strategic in how and when we contract. And that's a lot of what we're doing right now. We're focusing on maximizing the value of the reserves in the ground that we do have.

Okay. And I guess an extension of that, there's a question or 2 here, Leon, around new wells at Mereenie and Palm Valley. So will those potential new wells sort of be locked in with new or extension of gas offtakes?

Yes. So similarly, we do have some existing uncontracted volumes, particularly from 2028 and beyond. So that's one of the areas that we're in early discussions with. It is early to contract that gas out at this point. We've got a number of years before that comes to market. We're well contracted as the chart that Damian showed through 2027. So that really provides a good base of revenues for us over that period. Additional supply coming from new wells is another source of production that we are out marketing. Obviously, gas supply contracts for that volume would be very constructive in terms of calling FID and accelerating the point in time where we're able to actually drill and come online with them. It's something we're working hard at this point. We do have interested parties. Again, it is a highly uncertain market when you talk about long-term gas contracting, particularly for customers that don't know what the supply dynamic looks like. But as I said before, we've got some real advantages in terms of our cost base, in terms of our reserves and being able to offer a firm gas supply backed by certified reserves and a history of delivery. So those are important things for customers, and it's something we're looking to leverage off.

Okay. I guess the extension from that is, can you please elaborate on the allocation of capital new wells at Mereenie and Palm Valley versus the buyback? Can Central do both? And when would the FEED on new wells potentially be?

Okay. Okay. So certainly, the buyback that we've announced, as I've mentioned, is a relatively modest allocation of the capital that we currently have. I think it's about 15% of -- at most of the current cash balance. So it is an important step for us in terms of a maiden shareholder return, but that doesn't preclude us from much more significant decisions in terms of capital allocation. One of those, as you've identified, is investment in Palm Valley and Mereenie wells. It really depends on a couple of things, what those programs are, how many wells. I think the -- doing wells at Mereenie and Palm Valley at the same time is probably more than what we currently have in terms of cash in the bank. That's not to say we can't do all of that with a share buyback. We have opportunities if we needed to potentially to use other sources of capital, whether it's debt or prepayment as we've done in the past to help supplement the cash reserves that we do have. I'd also add that we've got very good positive cash flow that's accruing and building and increasing our ability. So we're pretty close. We certainly can do one of those fields and invest in the wells without really needing additional capital depending on other allocation options that we are looking at. But we do have a good test. And with the share buyback, it isn't that significant a part of the capital we have. So we do have some big decisions to make, and we can actually get a lot accomplished with the remaining funds that we do have.

Okay. The question here, can we please elaborate on the oil offtake arrangement constraint? Is this a cost of trucking, logistic issue or a surface facility constraint?

I can, what, pass that over to you.

I can handle that. Look, it's -- we're not a big producer of oil. So the arrangement we have at the moment is we supply our oil to -- we'll call it an aggregator who obviously brings in oil from other producers in Australia as well. So -- and then they blend it together and they export it. There's obviously a blending or an export specification that, that oil has to meet. And because we've got oil coming from different producers, that blending can sometimes get out of balance. So in this case, where we've got some of the other producers have dropped their production for various reasons. It means then that some of the other producers have to do the same just so that the blend doesn't get out of spec. What we expect to see though in the near future is that as those other producers bring their production back up again, it should go back into balance, and we can start to supply our normal -- all of our volumes back to our normal customer. But in the meantime, we've made arrangements for that extra gas to go to a different customer, albeit at a lower margin, but we expect that all to hopefully be resolved in the near future. And our main aim at the moment is to make sure that our gas production isn't constrained by that oil constraint that we've got. Okay. Next question. And this is around -- let's go to some of the corporate type questions. So dividends, when can we expect the dividend, Leon?

Yes. As I mentioned, that certainly is an option that's available to the company. It's really exciting to be in a position to not just consider a one-off dividend, but really a sustainable dividend program going forward. And as I've mentioned, the revenues that we've got contracted allow for us to move in that direction if we choose. It is part of the capital allocation decision process that we're going through at the moment. As the earlier question alluded to, we do have a finite quantum of capital that we can apply to these things. So it really depends on other options, whether we're going to invest in new wells whether we're going to be looking at reducing debt or potentially initiating a sustainable dividend program. So it is one of the options that we're seriously considering, and it's a great position for the company to be in to have that opportunity in front of us. A decision on that, it would be difficult for me to put a timing on it. It is wrapped up with the other options that we're looking at, and those are subject to market conditions and other factors that are outside our control. But we're actively looking at where we want to deploy and how we want to use essentially the war chest we have, the $27 million in cash and the ongoing cash flow that we're generating. So a good position to be in. It's something that we're very focused on. I think it will be a catalyst for share price appreciation. I think it will be concrete evidence for the market and shareholders to appreciate the financial position of the company and the ability of this company to generate profits and free cash flow. So we're certainly keen to get that initiated when the time is right, but we're still looking at it. So I can't say it's going to be right now or in the immediate future. It's just part of that capital allocation decision process we're going through over the next few months.

Okay. While we're on the sort of corporate type questions, there was one here suggesting please don't give away your share rights, et cetera, to nonexecutive directors, make them buy them for themselves. Well, I guess the response to that is that the plan that we have for nonexecutive directors at the moment involves them actually sacrificing some of their fees to buy those rights. So they are actually paying for them by way of a sacrifice of their fees at the moment. There was a question here, Leon, back on exploration. You mentioned farming interest in Zevon, 115, EP 115, that is. Is there interest in helium hydrogen? Or is this more focused on hydrocarbons?

Yes. So Zevon is certainly something that we are excited by. We think it's a really interesting prospect. The focus we've had on sub-salt at this point has been predominantly leaning towards Mount Kitty as a first step. Certainly, our other prospects like Dukas and Zevon will benefit from that and are part of that broader, I guess, strategy to explore and unlock sub-salt within the Amadeus Basin. The interest that we're getting and the discussions we're actively engaged in now for EP 115 have been more around the conventional opportunities that are in that permit, and we think they're quite exciting. It is on trend with Mereenie and Palm Valley. So really lookalike type of fields or what we'd be going after and what other parties are looking to go after potentially in that permit. So obviously, any exploration to the extent it's in and around Zevon will help provide some information on that as well. But in terms of moving Zevon forward, I think what we'll find is that the first step would be probably a Mount Kitty drill, and that would then lead the way and be a precursor to other activities, whether it's Zevon, Dukas in the sub-salt permit portfolio.

Okay. On the share buyback, there's a question here, is there any concern that it might reduce the liquidity of the stock?

I don't think that's going to be an outcome. I think we don't have a lot of liquidity at the moment. I think any time that you can introduce a new buyer that's prepared to come in and purchase shares, which is what the share buyback would ultimately do. I think that will only enhance and help liquidity. I think another way, obviously, to address the liquidity is to continue with the successes we've had over the past year, continue to deliver on what we've said we were going to do. And I think we've had a very good track record of delivering on what we say. If we continue that and we have a continued series of good news flow, and we communicate a very smart capital allocation strategy that is creates value for shareholders. I think all of that potentially could help improve that liquidity position in the stock.

Okay. There's a couple here, which are probably more statements than anything, but I'll read them out for the -- just to be transparent. First one, congrats on the strong balance sheet, and on taking the great opportunity to buy back the company while it's very cheap. At the same time, saying, please do not make acquisitions. Our exposure has already been heavily diluted. You've not earned the right to make acquisitions. First, buy back the company; second, prove you can farm out responsibly; third, explore, develop sensibly. There was another comment. The traditional investor pool grows shallower daily. Is there an understanding of tokenization in the new crypto world of finance, Central needs exposure to the global market. I think my observation on that would be we'll stick to our knitting and do what we need to do best, which is trying to make a good return for our shareholders out of oil and gas. So I think there's one more here. It's been a long slog for most shareholders and the buyback and improved cash position is a welcome relief. Where do you see the company in 12 months? Is there something shareholders can feel excited about?

Yes, I think so. And I think you've hit it really a critical point that I hope came out in the presentation today. I've been talking about turning the corner. This presentation today talks about the past 6 months, the second half of the fiscal year being very successful. We've delivered what we said we were going to do coming into that period. And the financial position we're in, I think, gives us a lot of opportunities, a lot of options to do some very good things, both with the war chest and with our strategy that I think will go and help in terms of shareholder value and share price appreciation, and we've talked about some of those today. I'm very hopeful and I'm confident that we will continue with the series of good news flow that we've been having over the past 6, 9 months. And I think as we continue to deliver on what we're saying, and I think as the market appreciates the impact of where this company is and in particular, the trajectory we're on in terms of our financial position and our ability to generate free cash flow and what that means in terms of future investments and/or debt reduction and/or dividends, I think that news flow as we continue to deliver it to the market will be very supportive of increased share pricing.

Okay. All right. Well, I think that wraps up the questions today, Leon. We had a good spread there.

Yes. And I appreciate everyone attending today, and we look forward to some more good news flow over the coming months, and we'll certainly be providing an update to the market in the not-too-distant future. And again, thank you for attending and watching.