Central Petroleum Limited (CTP) Earnings Call Transcript & Summary

Welcome to our May 16 webinar. I need to apologize, we had some technical difficulties in our first round of the presentation. Apparently did not get distributed or broadcast and we didn't have recording. So we are doing this for the second time and hopefully it's a better version. Second time's a charm. My name is Leon Devaney. I'm the CEO and Managing Director at Central Petroleum. I'm joined with Damian Galvin, our CFO. Today, we're presenting our quarterly results for the quarter ending March, and we're also providing an activity update on some of the important things that we've got on the fly and we're going to be doing over the next month. I understand there's a Q&A at the end, so please feel free to save up and ask any questions. I think there were some around the first one. We'll include those. If there's any others, I don't think you'll be able to have an opportunity to ask them because this, I think, no longer is live.

But feel free to send through an e-mail to [email protected], and we will respond individually to.

Yes. Okay. Let me start with the first page highlights. So we've had a very busy quarter and a lot's happened. We'll go through more of these in detail during the presentation, but we did have a solid March quarter performance that Damian will talk to. Real big development was our ability to get our debt refinanced and extended for 3 years. That's a great outcome. We have exploration drilling currently underway, and I'll talk to that, it's at Palm Valley. So very exciting activity happening there. Strong markets, I'll talk to that in a little bit, but both term and spot markets are very strong at the moment. Our sub-salt exploration program is progressing well and we do have range testing underway. So I'll cover all those through the presentation. But let's first hand it over to Damian to talk a little bit about the March quarter performance.

Thanks, Leon. Certainly, our Amadeus basin fields enjoyed a very steady quarter on the production front in the March quarter. Sales volumes were up around 4% in December which that quarter had been impacted by maintenance shutdowns. If we sort of split it up, I feel that Mereenie in 100% JV terms were producing at 33 terajoules per day on average, which is up from 32 terajoules per day the previous quarter. Palm Valley is also slightly high at 6.4 terajoules per day compared to 6.3 terajoules in the December quarter. And the Dingo field, in particular, experienced very high demand driven by the summer electricity demand in the Alice Springs region. It averaged 4.3 terajoules per day this quarter, which is 49% higher than the previous quarter and very close to the maximum contract quantity. Of course, demand does tend to be seasonal out there, so we would expect that to drop back a bit in the coming quarters. Revenues were up 11% to $8.5 million, and that was on the back of the 4% higher volumes. Obviously, more significantly higher pricing that we're starting to see flow through. We averaged $6.69 a gigajoule equivalent across our portfolio in the quarter. Gas prices, in particular, rose 4%. And really, oil prices were the main drivers of the portfolio price. I think they benefited obviously from the strong international markets of 37% on the previous quarter. So interestingly, oil revenues now comprise about 16.5% of our total sales revenues compared to about 10% a year ago. And that's, I guess, a symptom of the strong market dynamics that we're seeing now continuing into this current quarter. Leon is going to talk about those in a bit more detail shortly. Cash balances remained healthy end of March at just under $19 million, were down from December. The operating fields are sort of holding their own, which is good, but we do have some extra expenditure, $1.4 million of sustaining CapEx, $1.7 million of exploration costs and $2.5 million of debt service, which will decrease in quarters going forward. We did book small reserves upgrade at 31 December. The 1P reserves were up 12% or 7.1 petajoules, that was reflecting the new production wells that came online in Mereenie late through last year. And the 2P reserves were up 5%, effectively replacing production for the 6 months. And the 2P increase was a result of the continuing outperformance of the Palm Valley 13 well, which was drilled in the middle of 2019, and the Dingo field, which is certainly experiencing lower decline rates and losses than have previously been forecast. From a financing perspective, look, we're very happy to extend our debt facility by a further 3 years. So that now expires in September 2025. Given the ESG pressures that banks are under, debt funding for oil and gas projects is certainly becoming more difficult. So this gives us a level of financial security for another 3.5 years from now and on substantially the same terms that we've enjoyed previously, with lower repayments, which reflects the lower loan balance that followed the partial asset sale in October last year. We've also got the ability to apply to draw down a further $5 million in that facilities, subject to the bank's approval, and that certainly gives us flexibility to fund future development activity if we so wish to take advantage of the strong market conditions. So certainly comforting to have that facility locked in until 2025. That means we can now focus on the exploration and appraisal programs which are underway. So with that, I'll hand back to Leon for some updates on those important projects that are currently in progress.

Great. Thanks, Damian. Let's turn our attention to the current drilling program, and there's plenty to cover on that front. First, let me start by saying how exciting it is to finally get back to exploration drilling. Our last exploration well was in 2019 at Dukas. And even then, we didn't get a result. Since 2019, we've had market downturns and COVID to deal with. So to now be drilling the first of 5 exploration targets to be drilled over the next 18 months is just great. The Palm Valley 12 is currently at a depth of about 1,700 meters. We are getting pretty close to the halfway point for total depth. But the exploration part of the well is just ahead. If you look at the picture, you'll see we're just approaching the Pacoota 1, which is one of the appraisal targets planned for PV 12. And then on the back of that, you'll see, and we'll talk about this in a little bit, a formation called Pacoota 3. And then we've got our journey down to Palm Valley Deep exploration target. So that's all exciting. Everything really below the Pacoota 3 is new. We haven't drilled that before. So it's going to be some interesting technical information as we do move through those depths. We advised last week that the drilling program is experiencing cost pressures. At the end of April, this totaled about $3 million. Many of the increases reflect the same inflationary pressures that we see throughout the economy more generally. Things like diesel prices, for example. Others were more one-off increases like those resulting from delays in getting the rig to Palm Valley at the start of the drilling program. We do have contingency within the budget that we can use. And we also have headroom under our free carry with NZOG which does address our funding. Having said that though, half of the well cost is ultimately our investment. We want to get as much out of our free carry as we can. So we are very motivated to find ways to mitigate these costs as we move forward. We also announced last week that the joint venture might want to expand the PV12 well program to include an appraisal of the Pacoota 3 interval or P3. The P3 is a separate interval that sits just below the P1, which is the interval we currently produce from -- at Palm Valley. Appraising the P3 would require a separate lateral that is similar to the one that we have planned for the P1 interval. We are about to drill through the P3 in the next week or so as we drill on our way to the deep exploration target. This gives us a great opportunity to get additional technical insight about the P3's potential to flow gas at commercial rates. There's a few reasons the joint venture is interested in considering appraising the P3. The P3 could hold a significant volume of gas. It's obviously much shallower than the deep targets making it easier to drill. We have existing facilities at Palm Valley that are already connected to the market. And new production can be brought online relatively quickly and sold into the gas market which, I'll talk to later, is very strong. I want to make very clear at this point that the joint venture hasn't made any decisions about pursuing the P3 appraisal at this time. We still don't know exactly what we'll find when we drill through the P3 plus, and this is very important, drilling the P3 lateral is a big investment, which we need to consider in the context of our funding capacity and also the drilling cost pressures that we've already seen in the program. The plan for the P3 is to log the interval in the next couple of weeks as we drill through vertically. We can then work with our joint venture partners to decide if and when appraisal of the P3 interval might make sense. We currently expect to reach PV12's total depth around mid-June. This is about a week longer than the initial schedule, but we'll get the P3 logging in and try to claw back some of that time through improved drilling rates going forward. So in summary, the next month is going to be really exciting. We'll be going through the P1 interval very soon. We'll then have an opportunity to log the P3 and make some decisions on that appraisal. We'll then reach our deep exploration target and make a decision if we pull back to chase the appraisal at the Pecoota formation, that depends on the success of the Palm Valley deep target. And obviously, we'll keep the market informed as all this plays out. So stay tuned, but a very exciting month ahead on the PV12 drilling program. Okay. Turning our attention to markets. As I mentioned, they are very strong. We're actively marketing firm gas supply from 2023 and have seen a lot of interest in the term market and pricing is at levels that we haven't seen in quite some time. Our term contracts are also linked to CPI. So obviously, that provides some mitigation against cost pressures we're seeing elsewhere in the business. We did announce recently that we've been able to arrange gas transportation on a flexible basis that allows us to sell gas into the East Coast spot markets. This does 2 things. One, it improves the opportunity to sell all of our nonfirm production on a day. And generally, we keep about 15% of our production nonfirm, which at the moment is in the order of 2 TJs a day on average. Plus. The spot markets have been very tight recently. And as you can see from the chart on the right, they've exceeded $30 per gigajoule. That's orders of magnitude higher than our portfolio contracted price. So very high-price spot markets that we're able to sell into. Obviously, one of the benefits is those strong spot markets and also the term market do help offset our other cost pressures within the business and provide a potential for additional growth activities going forward which is great. The PV12 drilling program that we're undertaking now, an objective of that is to target and ultimately produce gas, both firm and nonfirm sales, from both the Pecoota formations or the deep exploration target. So that could have a near-term impact on our ability to sell more gas. As we move on to the next slide, our sub-salt exploration, which talked about this quite a bit in the past following our farm-out to Peak. The joint venture is moving forward very well with planning and approvals. The program for 3 sub-salt wells in 2023 is on schedule, and we're very comfortable with what the joint venture is doing to make that happen. We are expecting to drill Mahler in preference to Magee for a variety of reasons. When that's actually decided at a joint venture level, we'll explain why, but it looks like a much more attractive target for us. The farm-out to Peak is progressing well, and we don't see any real issues in getting that farm-out completed on time. So everything on track for sub-salt exploration. Obviously, some really exciting drilling activity to happen next year to round out the exploration program we have on foot for this year. Moving on to Range. Not a whole lot to report. We're just in the middle of our water drawdown process. So we've been drawing down the water at the 2 step-out wells gradually. We're in the order of about 50% drawdown. So we have some ways to go -- to get it fully drawn. We're not going to have clear visibility of how these are performing until we get that water drawn down. We are bringing on Range 6, which is one of the wells in the original spot -- the original pilot wells. And that allows us, obviously, to get a benchmark with the 2 step-out wells over a period of time. The production test is going to be extended through the balance of this year. Obviously, our original hopes were that the results would lead to a very quick decision on FID. That hasn't been the case. The original pilot wells really weren't indicative of what our expectations are for the balance of the field. So we are going through a process with these step-out pilot wells to get additional information. We are optimistic on the commerciality of this permit, and we are pushing forward and really up to get to a FID at some point not too far away. So it's a focus for us. But at this point, we're just going through the testing phase for the step-out wells. Finally, we've got our map on near-term activity. As you can see there, we've got a number of upcoming activities that are quite substantial and exciting for the company. We've got our 3 sub-salt wells that are being drilled in 2023. We've got our Palm Valley 12 well currently being drilled. And as we talked about, there's a number of opportunities in that well for success. And we've got the Range CSG, pilot testing continuing through this year. In addition to that, we've got a couple of others that we have on the radar that we've been working to progress. There has been some interest in both of those from third parties on farm-outs which is great. Mamlambo, obviously, an oil target that we'd love to get drilled this year or as soon as possible. We think that's a real exciting game changer for the company. And we are in some discussions about farming that out to get that drilled. And similarly, with Zevon, we are talking to parties about farming that out in order to fund a seismic program and, ultimately, an appraisal exploration sub-salt well at that permit. So a lot of activity. We've got a full spread of work going on over the next 18 months. That's represented in the following slide where you look at the time line. And as you can see, we've got PV12 followed by Dingo-5. We do have Mereenie development wells. And really the driver there, obviously, that's subject to joint venture approval, but a real interest in getting additional production out of Mereenie in the development wells and potentially recompletions are obvious candidates that we're going to prioritize. We've got Range, the extended testing that we're talking about over the course of this year. And our 3 sub-salt wells happening in 2023 at Dukas, Mount Kitty and likely at Mahler. So those are obviously big exploration programs for us and something we're really looking forward in the next year's set of activity. Mamlambo and Zevon, as I've talked about, those are subject to farm-out discussions, but things are moving well. We've got third-party appetite and interest. So we are in active discussions. And hopefully, we can get those projects progressed sometime this year or starting to progress sometime this year. That essentially wraps up the presentation. I think we wanted to answer some of the questions that we saw at the first round we did this presentation but didn't actually get a broadcast. I think some questions came through. So we might as well address those while we have the opportunity.

Sure. Question about dividends. When do we expect the dividend?

Look, dividends are something that we certainly are focused on growing into and having the capacity to pay dividends. The strategy for that is essentially that our operating assets are not going to generate sufficient free cash flow to cover our other corporate and growth activities. What we are doing is using that to support those activities. But our investments over the next 18 months are designed to get a step change in this company in terms of both reserves and production and revenue. And if we can find success through those investments, and as I've said we've got a full lineup of exploration and appraisal over the next 18 months, success there will put this company in a very different position as a substantial supplier of gas and potentially oil into the markets. And at that point, it's our hope and something that we are striving to is to be in a financial position where we can start paying dividends to investors who, obviously many of them, have been invested in the company for quite some time. So our focus is on delivering this exploration and appraisal program over the next 18 months to make that possible.

Thanks, Leon. There was one other question just around this map in particular, just was note 3 at the bottom of their name where it talks about the residual interest subject to completion by Peak of its farming obligations. So all I'm saying is that for Dukas, Mount Kitty and Magee, those -- the percentage interest that you can see in the blue squares is our ownership interest after completion or after Peak have completed their farming obligations. That is in terms of their expenditure, et cetera. Obviously, if for some reason that doesn't go through, we'll revert back to our old percentages.

Okay. Well, I think that wraps up today's webinar. Hopefully, this works technically and we can get it out as a recording for everyone to listen to. We appreciate your patience and do apologize for the technical difficulties we had in the original live presentation. The takeaway that I hope many of you see on the conclusion of this presentation is that we are now in a very exciting phase for the company. We've transitioned from really fundamental things like capital management, financial management, managing through challenges in operations from COVID and whatnot and then put ourselves in a position where we are now actively drilling substantial and significant exploration targets with the clear intent to, over the next 18 months, have a step change in this company and really bring resources into reserves, into production and become a major supplier of gas and potentially oil into the markets. On that note, thank you for your attention, and we'll keep the market updated as things progress.

Thank you.