Genesis Energy Limited (GNE) Earnings Call Transcript & Summary

Good day, and welcome to the Genesis Energy Investor Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Marc England, Chief Executive Officer. Please go ahead, sir.

Good morning, everyone. [Foreign Language] This is Marc England, the CEO; and I've got Chris Jewell, our CFO, next to me. We want to offer you the opportunity to ask questions about the announcement this morning that we put to the market about Kupe. You'll have seen that we've announced a strategic review in relation to the asset. And for those of you that are less familiar with it, Kupe is an oil and gas asset that consists of a large production exploration permit off the coast of South Taranaki. It's got an onshore production station nearby Tauhara , and it's the third-largest producing asset in New Zealand, consisting of 3 producing wells. It produces natural gas, LPG and some condensate, which is currently exported. And it's had a strong production history with 3 significant reserve upgrades over 10 years, and we increasingly believe it has strong exploration potential. So Beach Energy, an ASX-listed oil and gas company is the operator and a highly and experienced competent one at that. So Kupe is a core fuel supply in the New Zealand energy market with over 15 years of remaining production. It's a major, reliable supplier of gas and LPG for Genesis customers. And Genesis has a 46% owner of the asset in this joint venture, has been involved in the joint venture since the project was developed in 2010 to produce gas for our Huntly plant and also our customers. So with that, I'm going to hand over to Chris to talk a bit more about the review we're undertaking and to take most of your questions. Chris?

Thank you, Marc, and good morning, everybody. The joint venture is partway through an onshore compression project, which sees equipment that will allow the plant to again operate at design output. And this project is due for completion in mid-2021 and is going very well. The joint venture has also recently started to consider the second phase of development, which may consist of further drilling for both production and potentially exploration wells. Given the field has existing permits and is not impacted by the ban on new permits and there have been challenges with a couple of other large New Zealand gas fields, the joint venture has been assessing the opportunities and economics of exploration of some of the near-field prospects. No decisions have yet been made, and the joint venture is in the early stages of these assessments which will consider the number of wells, the cost, the timing, the reserves and ultimately, the economics of this program. An offshore well drilling program, firstly, targeting proven reserves; and secondly, possibly exploring for and targeting prospective reserves is a different proposition for Genesis, which would require capital and would come with a different risk profile than what Genesis has chosen to take on since the IPO in 2014. Given the likely capital decisions, our Board has asked for management to undertake a strategic review of the Kupe asset. Now this review will consider the structure and tenure of our gas and LPG contracts with our 46% interest, this is our own use gas and LPG; the timing, the costs and the economics of unlocking the existing undeveloped reserves; and the risks and opportunities associated with this program and ongoing ownership of the Kupe asset; the potential for a sale of Kupe and the value that could be received through a sale process. The optimal balance sheet structure for Genesis in the event of a sale; and lastly, whether there are potential lower risk, higher value for strategically aligned alternative opportunities for the use of these funds if the sale did occur. Regardless of the outcome of this review, our long-term contractual rights to oil gas produced will not be affected, although we anticipate resetting pricing for our current share to be more akin to current, long-term average prices. And deciding a path forward post the review, the Genesis Board will be making a decision in the best interest of all shareholders. We do recognize that dividends are important to our shareholders. Our earnings have grown significantly this year as per our guidance. And all else being equal, we anticipate further growth in coming years. Regardless of the outcome of the review, this review on its own would not impact our ability to maintain dividends at the current level. This review is anticipated to take until the middle of 2021, and we will continue to update the market at the conclusion of this review. So with that, I'll open up for any questions. And Marc and I will share the questions between us.

[Operator Instructions] We'll take our first question.

Marc and Chris, Andrew Harvey-Green here. Just, I guess, a key question everyone is going to be focusing on, I suspect, is just around debt dividend sustainability. And you've just, I guess, given some indication there. Will you be revisiting the dividend policy as part of the strategic review?

No. We will not, as part of the review, Andrew.

Okay. And the other question I just had was, I guess, around looking at take-or-pay, I guess -- and sort of I guess beyond 2025 and whether you would consider I guess, contracting for that guess now if you do go down that sale path to, I guess, try and make the asset a little bit more attractive to a potential buyer?

Yes. That's all part of the review. And I say the word review, the long-term tenure of the contracts, the nature of the team, the structure, the pricing, all of those things are things we're thinking about whether we hold the asset or whether we -- if the review did end up in a sale. So all of those things are in the mix.

Yes. Okay. And including 46% repricing the gas for the next 5 years or so under the remaining term of the current cycle pay?

Yes.

[Operator Instructions] We'll now take our next question.

It's Grant Swanepoel from Jarden. Yes, just following on from Andrew's questions. Can you just give some sort of color on what your commitment to take-or-pay is over the next few years? It was 20-odd PJs. What is it looking like for the next 3 to 4 years? And then you guys have historically mentioned that your LPG business has a nice competitive advantage being backward integrated. How do you feel about losing that competitive positioning? And then I know it's not -- I'm not asking if you've got any deal on the table right now. But have you had people approaching you over the last 12 to 18 months to potentially make you an offer for the Kupe stake? Or is this just something that you're starting up with no outside interest as a starting point?

Grant, yes, three questions. In terms of take-or-pay, I mean, we've disclosed how our gas contracts roll off in previous presentations. So our gas contracts both relate to the 46% that we own. So clearly, we can control the way we set that up. And that will be part of the review, and the balance of the 54% is contracted with our joint venture partners. So we've obviously got no ability to change that, unless they were willing to change it on the other side. But all of that is part of the discussion. In terms of losing, to use your words, the LPG competitive position, we don't see that. We're obviously maintaining the rights toward the LPG. The way we set those contracts up will be part of the review, and we don't see any change in that outcome. Essentially, if it did,result in a sale, we still would be essentially vertically integrated. And in terms of alternative offers, have we been approached? Look, we -- people come and see us from time to time, so we've never engaged in a conversation more than taking a telephone call, but I guess that's a natural part of owning assets. So -- but that hasn't prompted us to start the review.

Good. Can I just clarify -- but to clarify your answer to the first question, some of that Kupe take-or-pay had already started rolling off, and there had been some indication that Genesis had resigned that. Can I assume that you haven't resigned as the take-or-pay as well [indiscernible] Kupe according to your previously indicated volumes?

Yes. I think the best way to answer that, Grant, is we'll update at the next time with a chart that gives you a feeling for where our take-or-pay currently sit.

We'll now take our next question.

Chris and Marc, it's Steve Hudson, Macquarie. Just three from me. I just wondered if you can give us kind of a broad steer on what your share of free cash flow was at a group level -- sorry, what the Kupe stake generated in terms of free cash flow at a group level for fiscal year '20? I think for EBITDAF was kind of 31% of EBITDAF, ex the outage. So I just wondered if there's any reason to use a different number to take 30%. Secondly, would there be any tax payable if you sold above book value, which I'm assuming that you're hoping to do, if you go down that road? And then just thirdly, can you just remind us what preemptive rights the JV partners have and the nature of those?

Yes. Steve, the free cash, you can deduce that from EBITDAF from last year. And I guess,we haven't disclosed capital specific to Kupe from the last year, but you can make an estimate of that. So I can't -- apologies, I can't give you a number for free cash. What I would say is free cash and EBITDAF is influenced by our own internal gas transfer prices. And as part of that review, we need to think about what the right number is today and on a go-forward basis. In terms of tax payable, I'm sorry, I can't tell you today about tax. That will be part of the review. It will be one of the things we need to think about. And your third question, sorry, I just -- I didn't hear question. Sorry, Steve, could you mind just repeating that third question? Preemptive, sorry. Thank you. Thanks. Yes. What are the -- yes. Look, with all joint ventures, they're preemptive and very much depends on whether you're selling assets or you're selling participating interests. We're well aware of those. We've navigated those arrangements previously when we purchased the NZU share, so I wouldn't see them as a hurdle.

Great. I might just slip in one more. The corporate costs last year, $37 million, any of those corporate costs associated with the Kupe assets that you can sort of split off for us?

Yes. I can't isolate them. But clearly, we have a number of people focused on -- at a group level on looking after Kupe, whether it be from gas, whether it be from accounting, all the various things that it takes to run an asset, but I can't give you a specific number on that.

I might just have one more go. I mean it sounds like you're going to be trying to sell an asset potentially on a free cash flow yield of 7% and repaying debt at sort of -- I don't know what your marginal cost of debt is for debt repayment purposes, but let's say 3% or lower. How can that how can that not entail a review on your dividend policy?

Yes. I mean I'll just bring you back to what we're actually looking at here, Steve. I mean I think we're faced with -- we're doing a review, and we're faced with some decisions that we may or may not have to make around participating in further exploration and drilling. So there's 2 processes we're really looking at where the joint venture is running a process to understand what the next program of work is in relation to unlocking value from that asset, and we're also thinking about what a buyer might be interested in, in terms of valuing that asset. So essentially, what we're trying to do is finding the best way to unlock value from that asset. So I'll just leave it at that. This is a review, and we're considering 2 potential paths. We're comfortable that we can -- the review doesn't have -- irrespective of the outcome of the review, it doesn't impact our ability to pay dividends at the current level.

[Operator Instructions] We'll now take our next question.

It's [ Ken ] here from [ Craigs ]. I'm just wondering if you could give me some color around the gas contracting going forward, how that ties into both the Future-gen strategy and also how that also ties back to the value of Kupe for a potential acquirer?

Yes. Sorry, Ken, just confusion outside. So how does -- the question is how does it tie in to Future-gen and contracting. Look Future-gen, as we've widely published is about displacing baseload thermal over time. That's a long-dated program. We've given you some numbers, sort of 10-year targets of what we're shooting for in terms of contracting or building new renewables. And we're going to require gas for quite some time to come, whether it be for baseload or whether it be for backup. So these 2 things work in parallel. Gas is potentially a declining fuel in New Zealand. It's potentially more valuable fuel over time, so these things will work in concert. We need to clearly think about all of those things together when we think about how we set contracts up for the future.

Great. And also proceeds...

I'm just going to build on one thing Chris said because I think you're asking it with a bit of knowledge there, and I'm not sure Steve Hudson understood it. But we pay over the odds for gas now to our own Kupe P&L. So the Kupe P&L that Genesis has reported for the last 2 years has been based on the same gas prices that have been escalated for the last 10 to 13 years in other contracts we have externally on other parts of the Kupe field. As we go through this review, we'll be considering what the right long-term market prices for Genesis to pay for gas, but we believe it will be lower than we've been paying our own Kupe joint venture P&L for gas over the last few years, and that's where the value difference is. So we don't know yet. We've got to work through all this. But the chances are, we'll be repatriating some of the existing Kupe P&L into the wholesale P&L within Genesis if we do this, what was behind your question.

Right. It's clear. And also proceeds, I mean, Genesis has been highly good over the last couple of years, so I'd imagine some of that's going to go to balance sheet. Can you give any color around other opportunities and so forth that you might be looking at? I know it's early days but anything there?

Yes. I mean your -- part of the review is looking at the best structure for the balance sheet and what gearing levels we're happy with that, one, give us some firepower to do other things or return funds to shareholders, if we do -- if we choose to do that. In terms of the alternative use of funds, we haven't made any decisions on that. We've clearly got a strategy we've laid out around our Future-gen strategy, which you alluded to. At the moment, we have been contracting volume. One option could be that we invest to deliver that strategy. But look, early days, and we have made no decisions on any of that. And we don't have -- right now, I'm not sitting here with an alternative investment to say here's a better way to use the fund. But that's all part of the -- we've got to put all of that in the next when we think about the best way forward.

All right. We'll now take our next question.

Can you hear me?

We can.