Central Petroleum Limited (CTP) Earnings Call Transcript & Summary

Good morning. Welcome to our presentation today covering Central's financial results for the fiscal year ending 2024. I'm Leon Devaney, CEO and Managing Director of Central Petroleum. I'm joined today by Damian Galvin, our CFO. You can lodge questions online throughout the presentation today, which we'll look to cover at the end. As Damian will discuss shortly, our financial results were impacted by the Northern Gas Pipeline, which was largely unavailable for us to sell gas into the East Coast market during the year. Whilst this was an unexpected challenge that we were able to partially mitigate during the year, it also exposed the emerging risk of structural gas shortfalls in the northern territory caused by unexpected declines in other fields supplying the NT gas market. In addition to more macro themes about gas shortages on the East Coast, the NT market dynamics are creating a distinct advantage for our producing assets that will lead to higher realized gas prices net of transportation. I cover this and other updates later in the presentation. But before we get into that, I'd like to first highlight the great safety record we continue to maintain. Our total recordable injury frequency rate or TRIFR has been zero for around 2 years. Is a great testament to the quality of our operations team on-site and here in Brisbane. I'd like to congratulate the team for their efforts and safety and encourage them to continue this focus, particularly as we head into a drilling program at Mereenie and the holiday season. I'd like to now hand it over to Damian to discuss our financial results for fiscal year 2024. Damian?

Thanks, Leon. Look, the 2024 financial year, it's now behind us. And it's pleasing that we recorded a statutory net profit for the year of $12.4 million and is courtesy of the $13.8 million profit that we made on the sale of the Range gas project. Our results tend to swing about depending on how exploration spend. So we get a feel for the performance of the underlying production business, we strip out that range profit and also the impact of exploration, depreciation and interest. And so that's our underlying EBITDAX, which was $13.8 million for the year, down 13% from last year. And look, that's a disappointing result and driven largely by interruptions to the Northern Gas Pipeline that started to emerge about 2 years ago, became more frequent and extended from September last year. Ultimately, we saw its indefinite closure in February this year. So this obviously not only disrupted our contracted sales, but the market uncertainty has also led to a deferral of investment to increase field production, particularly in Mereenie. And as a result, we experienced both the lost sales revenue of what we estimated around $4 million in FY '24, but also has led to an extended decline in fuel production and as available spot sales. Fortunately, the impact on revenue was mitigated by our marketing efforts that we put in place those alternative supply arrangements into the NT market. The recent GSA that we've agreed with the NT government will also mitigate that NGP risk and allowed us to now invest in two wells at Mereenie to rest field decline and return that fuel production to around 30 -- or to above 30 terajoules a day from around March next year. The Dingo field has provided some good news, posting its highest annual sales volumes to on record, up 18% from last year due to increasing demand for power generation at the Owen Springs power station in Alice Springs. But looking ahead, we've taken some significant steps to protect ourselves from those pipeline outages going forward. And that should improve our cash flow. It should reduce our revenue risk and increase field production capacity. Look, firstly, we have the new contract with Power and Water Corp. in the NT to supply gas for the rest of this year, 2024. This redirects gas that would have flowed east through the NGP back into the NT mitigates the impact of that pipeline closure. There have been a couple of small blips in the September quarter, but it looks like the September volumes will be up about 7% from the June quarter. And I've got a chart coming up shortly to illustrate that. Secondly, we have the new firm contracts with the NT government commencing on January 2025, and they will add certainly to sales volumes regardless of the NGP status and we can expect higher portfolio prices and margins as existing contracts mature. And thirdly, we've got the two new Mereenie wells that are going to be drilled, commissioned by early next year. There's a couple of other numbers worth noting from the results. The gross margin per gigajoules equivalent, if you ignore depreciation, was slightly lower than last year at $3.65 per gigajoule equivalent, impacted by the lower average realized prices and the fixed costs, which we've spread over the lower production base. Now remember that number, $3.65 per gigajoule, we'll come back to that shortly. We've also managed to carve out $1.4 million of savings in net corporate and administration costs. So becoming significantly more cost efficient at a corporate level. In relation to the balance sheet, for the first time in a decade, we're in a slight positive net cash position rather than a net debt position. So that is -- we've got slightly more cash on hand than we do have debt outstanding. And so when you consider that the group had over $85 million of debt several years ago, and we're now down to $23 million, but you can see the discipline that we've had in applying free cash flow from our operations towards paying down that debt. And we're now starting to see improving cash flows as our debt service requirements decrease. The final presold gas was delivered in December last year. And so that will now boost cash flows by more than $6 million a year, and that's about $0.08 per share. The overlifted gas will also be fully delivered by May 2026 and that's equivalent to more than $5 million per year in additional cash flow, and that's just at today's prices. Now [indiscernible] had observed and might have noticed that we have the first time established and accumulated profits reserve on the balance sheet, and that's to enable future distributions to shareholders, in this case, from the profit that we made on the sale of the Range Gas project. And that doesn't mean we're about to pay a $9 million dividend to shareholders, but it does preserve the ability to distribute those profits to shareholders in the future. Before we leave FY '24 behind us, I'll come back to this chart, which some will remember from previous presentations because it illustrates very clearly the interruptions we experienced throughout FY '24. That's the shaded section. Now it's up to date to last week, and its value really is in its recent performance. You can see we've had a steady level of production since mid-August. And as I mentioned earlier, the September quarter is tracking about 7% higher than the June average. So, with any luck, we expect to see that level of demand and full field production continuing through the rest of 24% as the weather in the Northern Territory warms up. This is another chart some will be familiar with. It shows our forward contracted sales through to 2030. Now these are all largely new contracts. Firstly, the contract to supply the NT government for 6 years. It starts on the 1st of January next year. And secondly, the contractor supply Arafura's proposed rare earth project from 2028 subject to that project reaching FID. Now the importance of these new contracts is significant, transformational, in fact. And I know that's a word that can be used quite loosely. But let me explain. Firstly, it sees all of our forecasted firm gas production sold within the NT on a take-or-pay basis at a fixed CPI escalated price. And we do have existing contracts with customers in Queensland in 2025. But if the pipeline is closed as it currently is, then all of that gas will swing into the NT government contract on a firm basis. So we will be largely protected from any impact from the NGP closures going forward like we -- as we experienced last year. Secondly, as we roll off our existing gas supply contracts, the new gas contracts that we've negotiated will obviously be at higher prices. And in the past, our average portfolio price has provided a pretty strong free cash flow from operations, which has been used to pay down debt and organically fund exploration. But the market dynamics have now moved in our favor, and the -- and that's reflected in the new contract pricing. We'd expect to see our average portfolio price move from the $7 to $8 range, up towards $10 per gigajoule. And that's got a major impact on our forward free cash flows. So I'll come back now to that $3.65 per gigajoule margin from FY '24. And if you add, say, another $2 per gigajoule to our margin, free cash flow from operations would increase by more than 50%. So when you combine that with our decreasing debt service and liability costs, we can look forward to a much more positive outlook for the company and for shareholders. One of the immediate outcomes is that we have confidence now in the financial capacity to invest about $8 million from our existing cash balances for our share of those two new wells at Mereenie, which we anticipate to be online around March next year, and they'll generate even more free cash flows. So it's a pretty economically compelling investment. If those wells are successful, there we expect to have a payback period of under 2 years. So with improving outlook. So that is -- we've got more reliable offtake contracts, higher pricing, reduced debt service, increasing production. We've got all the ingredients there for shareholder returns. So on that note, I'll hand you back to Leon.

Thanks, Damian. Whilst the NT gas market clearly had a negative impact on financial results last year, we successfully managed the challenges and emerged with a major new GSA that locks in much higher cash flows with much lower risk. So it was a great outcome. Our gas marketing success reflects the fundamental changes we are now witnessing in the NT gas market, which has moved from a market and surplus, exporting nearly 15 petajoule per year to the East Coast to a market that is currently relying on very expensive gas from the NT's offshore LNG export fields. You can see in this chart in green, the production from our producing assets over the past 4 years has been consistent at around 40 TJs a day. That includes Mereenie and Palm Valley. Blacktip production, shown in blue, was initially strong at around 80 TJs per day with surplus NT production allowing for significant volumes of gas to be exported to the East Coast. NT gas prices reflected this local surplus and a good portion of our sales revenue went towards transporting the gas to the East Coast customers. You can see in this chart that about 2 years ago, production from the Blacktip field fell off a cliff. This was unexpected. It ultimately reduced the NT's gas supply to the point where the Northern Gas Pipeline couldn't operate. What you see now is that the Blacktip field production is currently so low, that not only is the NGP not exporting gas, but the NT is now forced to rely on much higher priced gas from offshore LNG fields. You can see the use of INPEX LNG shown in red and the more current line on Darwin LNG, shown in gold. They use these to balance the supply and demand equation within the NT gas market. With NT moving into its peak season, we expect this reliance on expensive LNG gas to continue through at least the end of the year. This would mean that our as available production has a home and our sales should be, we expect, strong for the rest of the year. The extent to which this new market dynamic continues over the long term, though, will be driven by a variety of events over the next few months. These include the production results from new wells being drilled later this year, including one development well in the Blacktip field and two appraisal wells in the Beetaloo Basin we'll obviously be keeping an eye on this, and I'll provide some more information as these wells are drilled and results are known. As Damian spoke about earlier, one of the benefits of our new GSA with the Northern Territory government is that it also underwrites two new wells at Mereenie. Not surprisingly with a firm offtake and an attractive ex-field price, these development wells are intended to increase field production to back above 30 TJs a day with compelling economics. We have plenty of cash to pay the $8 million for our share of the wells without the use of debt. This means our free cash flow from operations should get an immediate boost from early next year as field production from those wells come online. As you can see in this chart, the wells are designed to be located on the crest of the field but entering at a deviated angle in order to increase exposure to the target Pacoota 3 formation, which could give us some welcome production upside. The rig we contracted should be mobilizing to site in December. This would allow for drilling to commence in early January. Each well takes about 30 days to drill. So we hope to have both wells drilled, tied in and producing by the end of March. Looking beyond the current Mereenie drilling program, we have several other opportunities to increase production and take advantage of a strong NT gas market. The most immediate are new production wells at Palm Valley. These wells are expected to have flow rates higher than the Mereenie wells with initial production capacity for the last two wells at Palm Valley in the order of 8 to 10 TJs per day each. Not surprisingly, we expect these wells to be extremely compelling financially. And because Central has a 50% interest in the Palm Valley field, these wells could provide a major boost to our operating free cash flows. We are currently progressing and planning for two Palm Valley wells. Naturally, our immediate focus is on successfully delivering the Mereenie wells on time and on budget. However, subject to JV approval, the Palm Valley wells could be drilled and producing late next year. Other opportunities that we're looking at to crank up production and sales include the appraisal of the Mereenie Stairway formation. This is a large 2C resource that could significantly increase field production rates and field life whilst leveraging off existing infrastructure. We continue progressing farm-out discussions to farm out our Southern Amadeus sub-salt permits with a focus on drilling Mount Kitty first, followed by the Dukas prospect. These are discussions that are in advanced stages at the moment, and we remain optimistic that we can return to drilling these company-changing helium and natural gas prospects in the near term. Finally, we are continuing to progress a helium recovery project at Mereenie with a major global helium supplier. The Northern Gas Pipeline disruptions over the past couple of years have been a problem, as you can imagine. But with the recent GSA that we've signed with the Northern Territory government now in place, that essentially mitigates that risk. This is an important domestic helium project that should start to get more traction towards FID over the coming months, and I'll keep you updated on that as things develop. Finally, let's take a look at some of the key activities we have for fiscal year 2025. We had a great start to the year with the completion of the EOI, the signing of the NT government GSA and the commencement of a two well drilling program at Mereenie. We remain in farm-out discussions, as I've mentioned, to restart our sub-salt exploration on a promote basis. Those discussions will continue, and we're looking forward to closing that as soon as possible. We have already engaged in discussions in relation to debt restructuring and an extension. Our current debt facility matures in September of next year. So we're already on to that task. We're focused on getting to FID, as I mentioned, for Palm Valley, the Stairway appraisal wells at Mereenie, and the Mereenie helium recovery unit and liquefaction plant. And last but not least, we are very focused on continuing to manage our capital and our cash flow with the purpose of maximizing those and accelerating shareholder returns. We'll also be keeping a close eye on developments in the NT gas market. As I mentioned earlier, these are expected over the next few months, and I'll be commenting on those as they arise. In short, we're on track for what I expect to be a pivotal year for the company and shareholders. We've had a great start. And I think we are building on that momentum with the activities that we're currently undertaking. And I hope to have some good news in the near term in relation to those. At this point I'd like to spend a few minutes answering any questions.

Thanks, Leon. We do have a couple of questions coming through. So thanks to people doing that. You can do that on your screen if you like, type them in, and we'll address them as we can. Perhaps the first question today, Leon, is around the sub-salt drilling. When will the drilling of the salt caps begin?

Yes. So, as I mentioned during the presentation, we are actively looking for a farmout partner. We're in advanced discussions. In theory, we should have the approvals of long leads. We should be in a position to commence drilling in 6 to 9 months following completion of a farmout arrangement. When that happens, it's hard to say. We're obviously working very hard to get that closed. I am optimistic, though, that we have a good counterparty in mind, and we're making great progress. And hopefully, by the end of the year, we'll have some positive announcements on that front, which again would allow potentially for drilling in 2025, possibly early 2026, depending on the timing of that farmout arrangement.

Okay. Leon, another question. So you've mentioned previously the NGP. So the Northern Gas Pipeline has been engineered to reverse flow. Can you give any further details on that?

Yes, I understand the NGP is now capable of reverse flowing. I have not seen it being used to date. I think the NT market is relying on the offshore LNG gas supply to cover the balance. My understanding is that reverse flow will require regulatory approval, so to speak, with the AER or AEMO, essentially opining on the need or merits of that reverse flow should that come to occur. So obviously, it's really a last call in terms of supplying the gap for the NT. It will be expensive. Obviously, you're now talking about paying East Coast prices plus the transportation cost to get it into the Northern Territory. So quite the reverse of what we've seen where we've had to sell gas into the East Coast market and pay those transports. We'll see a transportation advantage come to the NT market for producers that are producing in the NT. So it's certainly there. It's certainly a backstop option for the NT. But to date, we haven't seen it and not sure how extensive the use will be going forward. But if it is used, the market obviously will be in a real shortfall scenario, and you would expect prices to react accordingly in the NT.

Okay. There is a question here, Leon. Given the known financial metrics, when can we expect to be cash flow positive? So I might start off on that one. I think a couple of observations around cash flow. Firstly, the operations on a day-to-day basis are cash flow positive. They generate quite a lot of cash. So for example, EBITDAX, which is a reasonably close measure of field performance to some extent, is it was over $13 million this year. And just at a cash flow level in the statutory accounts, you'll see there's about a $7 million positive cash flow, and that includes exploration costs and admin, G&A, corporate costs. So the fields themselves generate cash flow, and we've obviously been investing that back into the fields, and we've been investing it into exploration. And I guess what we'll see going forward this coming year, for example, is we do have two wells to drill. We've got about $8 million worth of our share of costs for those two wells. So that will come out of cash flow. There's also a little bit of tidying up and some rehab work to exit the Queensland exploration tenements in the Georgina Basin. So there'll be a couple of calls on cash this year. But generally speaking, especially with our declining debt service, the fields are -- have been cash flow positive. And the company itself is probably at times and looking forward, once those wells are drilled next year, we will be increasingly cash flow positive, one, because we've got the higher price contracts coming through. We've seen some of our debt service come off. We've got that presold gas, we're now earning cash for. And once the new wells kick in, there'll obviously be increased production. So going forward, and it's one of the reasons we're a lot more positive on our outlook at the moment is we are seeing that the cash flow forecasts are looking even more positive than certainly they've been in the past.

Sounds good. And I'd just add to that, we have, over the past 5 years, really been disciplined in applying free cash flows from our operations to paying down debt. And as Damian mentioned, and we've shown a chart to that effect, our outstanding liabilities and the costs associated with those are significantly lower now, and that will continue to decrease as we pay those liabilities off. But a lot of that cash flow generated from our operations have really been applied to reduce our gearing, our debt -- and I think that's going to bear fruition going forward over the next few years with higher free cash flow even after a debt service consideration.

Okay. Another question just come in here. Could you elaborate on what a Mereenie infill, infill well success would have on Central's reserves and future contracting strategy?

Yes, certainly. So the Mereenie field is obviously quite mature. We have 1P and 2P reserves across the field. It is conventional. So, in that sense, it's fairly straightforward in terms of what we need to do to recover that gas. A lot of what the infield wells are doing are actually converting PDP or proved developed producing. It's increasing that and reducing the PDUP or proved developed unproducing. So really, what we're trying to do is accelerate the production that we might have gotten from the existing well stock down the road in 10, 15 years. The infill wells are designed to largely help accelerate that. We will get some additional reserves as they do draw on areas that we might not have been able to produce from. So it's really a combination of the two. And we have run the economics, obviously, in terms of these particular wells and that acceleration benefit and largely because of the increasing gas prices we're seeing in the NT market. it's quite compelling to put those infill wells in. And we are looking at further infill well locations that can continue to increase production and provide a very positive NPV for that investment.

Okay. Question here about debt, Leon. When can we expect to be out of debt?

Well, we certainly have a refinancing coming up in September of next year. I think our forecast for outstanding debt at that point will be $17 million-ish. It -- the decision or strategy to repay down that debt or accelerate it, I think, is one that we are still considering. Debt capital is still cheaper than equity. So we tend to have it in the capital structure. We're at a very low gearing relative to where we have been in the past. So we are not pushing the envelope on financial risk. But having said that, with the increasing free cash flows, one strategy and one opportunity is to accelerate those repayments and look to become essentially debt-free. We'll have the GBA repaid in 2026 So that's one liability that would be falling away. And we certainly could be looking at trying to repay the existing Macquarie debt facility down potentially to zero. It's really having a discussion at the Board level and considering the merits of a capital structure with or without debt, what are the other alternative uses we have for capital and which gets the best essential bang for the buck for shareholders. That's the thought process going through now. It's part of a broader capital allocation strategy that we're working through, which I'll talk to. I think there's another question on that coming up about that. But certainly, that's an opportunity for us to either continue with the repayment profile we have, which is fairly, fairly aggressive as it is or increase that repayment profile and pay it off early. So I don't have an answer as to what -- where we're going with it, but it's certainly under consideration.

Okay. Thanks, Leon. Which I guess brings us to our usual favorite question. What -- can you update plans to pay dividends?

Yes. So obviously, as part of the strategic review, we highlighted one of the objectives was to maximize cash flow. I think we've made some great strides in doing that with the GSA that we've signed with the NT government. So that's quite positive toward that outcome. We are looking at a Board level as to our capital and our cash flows and forecasting those forward. There's a few things that impact that, that we're weighing into that decision. The new NT GSA, obviously, has had a major impact on what we can do and when we can do it. There are some other things that we are working through and need to -- or would like to see resolve themselves or become a bit more clear in terms of what the capital requirements are. Those are, for example, the sub-salt farmout discussions, where we go with that and how we want to participate in the sub-salt plays, both at Mount Kitty and Dukas and what kind of capital do we want to preserve for that. Spot sales is a big one. Our GSAs have been focused on firm. A lot of opportunity to sell spot sales at a greater volume than we've been assuming or potentially at a much higher price. Again, that really depends on how the NT market unfolds over the next few months. But certainly, there's a scenario where spot sales in the NT attract a premium for a period of time. That could flow through and give us quite a cash boost that would help again accelerate these dates that we might be looking at returning something to shareholders. Palm Valley wells, compelling investment. It's something that we're very keen to have happened in the right market conditions provided we can sell that gas and essentially underwrite it both with firm offtake and high gas prices. But the economics of those are actually better than the Mereenie ones. We have a 50% interest. It has a much bigger impact on our cash flows. So that's something we're very focused on being able to call FID and how we strategically manage capital around that investment will play into all of this. And again, like I said, debt repayment is another option. So there's a few things in terms of capital strategy that we're working through. What I can say is that we have done a lot to accelerate that, which is fantastic. And I think going forward, we are in a very good position to start to seriously consider what we can return to shareholders and the timing for that. But as I've said, all the work we've been doing over the past 6, 9 months have been very positive in bringing that potential date forward. So we'll be sharing more with the market and shareholders on that front over the next few months, but it is something we're working through quite seriously at this point in time.

Thanks, Leon. Another question just came in. On the face value, we certainly are a healthy business with significant promise, yet our share price is poor to say the least. Why?

It is. I think there's some macro themes that obviously have played into that over the past few years. Obviously, the poor results that we had at Palm Valley, that was a very significant investment we made in a risky Palm Valley deep exploration well that didn't work out. So we did have a bit of a hit on that. Our peer group generally has been under pressure. So not surprisingly, our share price has been languishing. I think there's some wait-and-see thinking in terms of how we come out with a farmout for sub-salt and what that looks like. I think the visibility on the market, whilst we've been talking about and communicating and trying to explain why there's been a step change in the market, that really won't start to come through and be visible in our financial results until next year when the GSA starts on 1 January. So, I think that will help our decisions around the capital structure and how we might consider or look at shareholder returns in the near term could play into it. So I think from our perspective, we are focused on the fundamentals. We're focused on building the value in the business. I think that what we've been able to do and where the business is and the strength in the business will start to flow through and be visible to shareholders certainly in the next sort of 6 months as we get into the next calendar year. And hopefully, we'll have some very positive upside that is currently missing in terms of exploration through our farmout with the sub-salt permits, potentially the HRU, those sorts of things. So I think we're in a period where we've done some very good foundation building for the business that will start to come through over the coming months. And we've got a lot of things, as I talked about, the key activities that we hope to have come into play over the next few months that could provide a catalyst for that share price increase. But ultimately, I think when shareholders understand the cash generation potential for this business going forward and recognize that to date, the operating cash flows have been very strong, but applied towards organic growth and importantly, debt repayment, that will all benefit us in terms of free cash flow returns to shareholders into the future. So, I think at this point, that's probably the best, best I can share, but it's certainly a priority in terms of topics for the Board and something we're very keen to explore. And when the time is right, start that process of returning something to shareholders.

Okay. Well, thanks. That's sort of the end of the questions today. So thanks, everyone, who sent questions through. Hopefully, we've covered those off. But in any case, if you've got any other questions, feel free to shoot them through to us here at Central, and we'll get back to you when we can.

Absolutely. Great. And I appreciate everyone's attention and support, and we look forward to a really strong finish to this calendar year. And certainly next year, I've got a lot of optimism that these things will start to be visible, and we're going to have a great year coming up. So thank you again for your attention, and we'll be talking soon over the next few months as these things come out, we provide updates on them. So, thank you.

Thanks very much. Goodbye.