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Edited Transcript of BPT.AX earnings conference call or presentation 27-Apr-17 10:59am GMT

Q3 2017 Beach Energy Ltd Earnings Call

Glenside Apr 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Beach Energy Ltd earnings conference call or presentation Thursday, April 27, 2017 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Derek Piper

* Jeffrey L. Schrull

Beach Energy Limited - Group Executive of Exploration & Appraisal

* Matthew V. Kay

Beach Energy Limited - CEO, MD & Director

* Michael Dodd

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Conference Call Participants

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* James Byrne

Citigroup Inc, Research Division - Research Analyst

* James Nevin

RBC Capital Markets, LLC, Research Division - Senior Associate

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to quarterly report for the period ended 31st of March 2017. (Operator Instructions) Please be advised that this conference is being recorded today, Thursday, 27th of April 2017.

I would like to hand the conference over to your speaker today, Mr. Derek Piper. Thank you. Please go ahead.

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Derek Piper, [2]

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Thank you, Karina, and good morning all. Thanks for joining our results call on what's no doubt going to be a busy day for us in the industry.

With me here is Matt Kay, our Chief Executive Officer; Mike Dodd, Chief Operating Officer; and Jeff Schrull, Group Executive, Exploration and Development; and other members of our executive management team. Matt, Mike and Jeff are going to talk to our results for the last quarter and then we'll open the lines for Q&A.

Matt, I'll hand over to you for an overview of the results.

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Matthew V. Kay, Beach Energy Limited - CEO, MD & Director [3]

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Thanks, Derek, and welcome, everyone, to the call. We once again have a solid quarterly to present to you today with pleasing results across all of our operations. Strong production, gas discoveries, new completion of our facility expansions and strength in liquidity are some of the highlights. Pleasingly, these results and our year-to-date performance allow us to confidently talk to increased exploration and development activity for FY '18.

Starting with production. Our results held up strongly thanks to good performance from recent wells brought online and field development activity. Decline of only 5% to 2.5 million barrels of oil equivalent reinforced our full year guidance, which we have maintained at 10.3 million to 10.7 million barrels of oil equivalent. We are on track and we continue to perform well in the field.

Also on guidance, we reduced full year capital expenditure guidance to $160 million to $170 million, down from $170 million to $185 million. Around half of this reduction was due to further efficiencies in the field in both operated and nonoperated assets. The other half was updated from timing revisions as we look forward to the next few months of field planning. That means, in short, that approximately $7 million of spend from this year will spill into next year.

Exploration success was again a clear highlight for the quarter, particularly the completion of our operated gas exploration program which delivered 3 discoveries from 4 wells. These discoveries will add new 2P reserves, support Middleton production at maximum capacity beyond FY '18 and importantly, have strengthened our intent to increase capital allocation for an expanded FY '18 exploration program.

Given the success we have had and planned increase in activity, we are already assessing a further expansion of our Middleton facilities from 25 million scf a day of raw gas to between 40 million and 50 million scf a day. As we think about a more aggressive campaign in FY '18, it's also important to highlight that our year-to-date drilling success rate for exploration, appraisal and development is currently sitting at 85% year-to-date. That's from the 40 wells that we've drilled this year. Jeff will provide some more detail on our plans in a moment.

Still on exploration, it was pleasing to be awarded $6 million of grant from the South Australian government to help fund the conventional gas exploration well in the Otway Basin. This marks the return for the company to exploration in the Otway and is an exciting opportunity. We've already identified a 34 Bcf prospect and we have multiple follow-up opportunities that provide potential for meaningful new volumes to supply to the market. It's also worth noting that Beach will participate in a further $16 million of government grants for our nonoperated joint ventures. In short, the total net benefit to Beach is just over $10 million of grants.

Turning briefly to our financial results. Despite a 6% reduction in oil price, we again strengthened our liquidity by generating net operating cash flow of $75 million for the quarter. And we increased our cash reserves by $27 million. That was after dividend payments of $13 million. Our available liquidity is now in excess of $675 million.

Contributing to these results was the recently negotiated gas contract with Adelaide Brighton which commenced on 1 January. This new contract and the expiry of legacy Cooper Basin joint venture contracts increased our average realized sales gas and ethane price by 6% to $6.28 per gigajoule.

The commercial arrangements of our operated and nonoperated gas ventures are now well-established. They provide an attractive mix of tenors and pricing structures and ability to contract surplus volumes to new customers or sell into the spot market.

So that's just a quick snapshot of the quarter highlights, and I'll hand over to Mike to discuss the operations in more detail.

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Michael Dodd, [4]

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Thank you, Matt. As Matt communicated, the operational side of the business is healthy and continues to deliver. The key aspects of Beach's operational business in the last quarter are that we've had a very strong quarter of production, the connection of successful wells and performance of artificial lift projects are paying dividends. We've made very good progress on our 2 major facilities projects.

Project guidance, which was lifted at the midyear, is maintained. Capital guidance has been lowered. And the OpEx savings, which we've talked about previously, are being sustained. So I'll briefly expand on some of the detail behind these achievements now.

Firstly, on production. The quarterly production of 2.5 million barrels was 5% down on the previous quarter but 4% up on the previous corresponding quarter. This healthy volume demonstrates the effectiveness of the projects that we've carried out over the year in largely offsetting natural field decline, especially in the gas and gas liquids business but also in the oil business.

Moving to some more detail on gas. Firstly, our operated gas business centers on the ex PEL 106 area where success with the drill bit and facilities projects are combining to grow this business, which gives us the prospect of increasing amounts of currently uncontracted gas being available for new contracts or spot sales. Obviously, this is a very attractive position to be in, and I'm sure Jeff will be happy to give you the details of the very successful drilling campaign in a moment.

Firstly, I'll talk about some of the significant development projects in that 106 area. The connection and initial production from the Middleton East-1 well, one of the successful exploration wells from last year's campaign, has contributed to the daily average rate of just over 2,000 barrels of oil equivalent per day for a total of 185,000 barrels of oil equivalent for the quarter. Production for the quarter was impacted throughout March with the Moomba operator restricting volumes due to work at Moomba and shut-ins associated with the mechanical work associated with the compression project.

Installation of the 2 compressors at Middleton has been completed and the equipment has been commissioned. The restrictions previously mentioned have impacted on being able to hand over to full volume production mode to date. It is expected that this will occur over the next week or so, and we expect to see daily volumes increase to approximately 25 million a day.

With the recent exploration successes in the area, we expect to maintain those rates through FY '18 and currently considering the case to increase the capacity of the Middleton facility to 40 million or more to accommodate exploration reserve additions.

Although total operated gas production for the quarter is down on the previous quarter, it's worth remembering that, that production was deferred and not lost and is available to enhance production in Q4. The Cooper Basin joint venture's gas production was a good news story for the quarter with the boost from the connection of exploration well successes in Queensland, in particular the Durham Downs 5 and 6 wells which added about 12 million a day of production.

Moving quickly on to oil and moving further west. The ex PEL 91 area continues to dominate oil production. Production in the area was bolstered by the connection of Kangaroo-1 and the performance of wells connected in the previous quarter, contributing to a daily average production of 9,800 barrels of oil per day with water.

The Bauer facility expansion is almost complete with oil expected into the facility this week. The increase in handling capacity from 75,000 to 120,000 barrels of fluid a day will allow Bauer-24 and Bauer-25 to be brought online and give headroom for new discoveries in the area. You should see a moderate uptick due to the new wells being brought online and debottlenecking of some of the existing flowlines.

The first full quarter of production from Callawonga-12 and continued good performance at the Q2 artificial lift projects have kept daily average production flat in the ex PEL 92 area.

Lastly, a word on CapEx and OpEx. As Matt mentioned, capital guidance has been reduced to $160 million to $170 million. But in addition, should point out that the OpEx savings described at the half year have proved sustainable. And as such, we are looking at a full year OpEx some 15% down on what we contemplated at the start of the financial year.

I now hand over to Jeff to talk through our exploration efforts and successes.

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Jeffrey L. Schrull, Beach Energy Limited - Group Executive of Exploration & Appraisal [5]

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Thanks, Mike. While our exploration and development CapEx resources and human resources are continuing to be focused on our 4 key play fairways, 2 gas and 2 oil, I'd like to give a brief summary of what happened in Q3 for these play fairways, what Q4 looks like and what we're thinking about doing in FY '18.

I'll start with the gas play fairways. The Southwest Patchawarra play fairway is one of our proven producing provinces. We got Middleton gas compression kicking in, et cetera, that's where our gas hub is. The ops team and my E&D team are focusing on getting me as much oil and gas as we can or condensate and gas as we can out of those fields, maximizing EUR per well, looking at oil net pay and maximizing the production.

As Matt and Mike both mentioned, we just finished a 4-well program. We have a 75% commercial success rate, 3 out of the 4 wells worked: Canunda, Mokami and Crockery. We've added almost 2.5 million barrels of 2P reserves for Beach. So we're quite enthusiastic about that. And the good news is, my E&D team has handed 3 new producers over to the ops team to hook up and get producing.

One of the wells tested 8.6 million a day and 800 barrels of condensate a day, the Mokami well. And I'll mention more about that in a minute.

Going into the program, our success rate was assumed to be about 25%. So the increase to 75% for commercial success rate has given us a lot of confidence that our exploration mapping techniques are lowering the risk of these prospects. And we now have 8 to 10 lead/very strong, drillable prospects that we're working on to be hopefully in the FY '18 exploration budget.

In addition to that, we just started seeding on our surveying with the Spondylus 3D survey over PEL 107, which is the southern end of the Southwest Patch trend. And that will lead to even more drilling in this critical play fairway in the FY '19.

The Permian Edge play fairway is a more frontier play fairway for gas. The Mokami well is right on the edge of the 2, but it's probably more akin to the Permian Edge play fairway. And it has derisked that play fairway significantly.

It has a direct impact on one of the lead -- we had this portfolio called the Lowry prospect. And we look forward to drilling that in FY '18. So stay tuned to hear more about the Lowry prospect.

We've got 4 to 6 other drillable candidates that we're working up in the Permian Edge play fairway, including 2 very strong leads in the PEL 630 block, 630 East block that we recently farmed into with Bridgeport. So a lot of good news coming from most of our gas play fairways.

And the Namur, moving on to oil. Beach's bread-and-butter, the Namur-McKinlay play fairway. As part of our initiative to find more oil from our existing fields, we've identified several infill drilling programs, and that's had a slight impact on our Q4 drilling queue.

So we're currently drilling the 2 wells in PEL 630, the farm-in wells Butterfish and Harvey's Return. After Harvey's Return, we're going to go to the Callawonga Field where we've identified a 5-well infill program along with our JV partner, Cooper. And those wells are going to add between 750 to 1,000 barrels a day with an EUR combined of close to 0.5 million barrels. Now it's really good to see the immediate returns and the increase in production as part of our technical efforts.

Following that program, we're moving to the Bauer Field, and we're going to drill Beach's first horizontal well. We're going to drill a horizontal well in the McKinlay reservoir. And we hope to add incremental production from that well of 2,000 to 3,000 barrels a day and an EUR of 750,000 barrels. The good news with that is that if it works, there's at least 4 or 5 follow-up locations in Bauer and the play extends to the north of our CKS, a bunch of fields in Pennington. So there's a lot of forward-looking production adds associated with that.

Moving to exploration. We have a 5-well program in FY '17 to test the northern end of the Namur play fairway. Three are in PEL 182, which are operated by Senex, and 2 are the farm-in wells in 630. Two of those wells had been drilled and unfortunately P&A-ed. Those are the Sparta, Hoplite wells, but they gave us an encouraging trend in the Birkhead. We're now drilling the 2 wells in 630, as I said earlier, Butterfish and Harvey's Return. And the third well in 182 will be drilled in May by Senex, that's the Immortals well. Following those 5 wells, we'll have a better understanding of what the value of the northern extent of the Namur play fairway is and we can factor that into our program.

We're also embarking on a different approach to depth conversion, which is one of the technical things you have to solve on this play fairway by having geologically modeled -- and the velocity models over the area to help get better depth images. And we're hoping to find some additional prospects and have a better understanding of our field as a result of this work.

The second oil play fairway is the Birkhead play fairway. We have the proven field at Growler, Spitfire, et cetera, that are operated by Senex. They drilled the Kangaroo discovery well earlier this financial year and is being produced, as Mike mentioned. Encouraging results so far. We look forward to incorporating the production from Kangaroo and the regional mapping and to figuring out where to appraise this very promising trend. The 2 wells that we have planned are Bantam and Wackett. And the plan with both of those wells is to drill straight holes with sidetrack locations that can hopefully serve as pilots for horizontal wells.

We think one of the keys to unlocking this Birkhead play is the application of geosteering techniques in horizontal drilling so that we can increase the deliverability per well on a daily production level and also the EUR per well. So we're hoping -- pending FY '18 budget approval, we're going to plan on doing a couple of horizontal pilots for the Birkhead play sometime in FY '18.

A couple of highlights from our Delhi exploration acreage. The Ranger well, this was drilled by Santos, was drilled and completed, cased and suspended. It will come online in FY '18. And significantly, the snowman (sic) [Snowball] 3D volume has ended. It's a big 1,200 square kilometer survey. We've already got 12 very good leads and prospects that we're working on. We look forward to that delivering some impact to exploration drilling for FY '18 and '19.

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Matthew V. Kay, Beach Energy Limited - CEO, MD & Director [6]

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Thanks a lot, Jeff. Well, with that, Karina, I'll ask you to open the lines for Q&A, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of James Byrne.

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James Byrne, Citigroup Inc, Research Division - Research Analyst [2]

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Congratulations on some of the small gas discoveries. Just wanted to ask quickly about the proposed expansion at Middleton. What would you need to see there for that work program in FY '18 to be able to justify doing that work? I mean, do we need to see 5 more successes like the ones you've just seen? How should we, the market, gauge success?

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Matthew V. Kay, Beach Energy Limited - CEO, MD & Director [3]

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I think, James, one thing I'd say, I'll let Jeff comment a little bit more about the drilling in a second, but we're right on the cusp at the moment given we can see with the existing discoveries that we're going to keep Middleton at its new capacity for the next couple of years at least. So it won't take much in terms of a couple of more discoveries for us to think about triggering that next decision. So we're right on the cusp already. Jeff, I don't know if you want to add to that.

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Jeffrey L. Schrull, Beach Energy Limited - Group Executive of Exploration & Appraisal [4]

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Yes. I guess one of the key success factors is how many commercially successful wells we drill. How many producers do we leave behind. We just drilled 4 wells. We've got 3 producers we handed over to ops. And obviously, if we drill 10 more and we keep that same kind of strike rate, we would hand 6 or 7 more producers over to ops. We'll see how the dice roll for us. But if we get that level of success, I would hope that we could expand it. But some of the wells in the Permian Edge play fairway would go through a different set of infrastructure. So all the wells that we're considering drilling for FY '18 aren't necessarily going to go through Middleton. The 630 East is up to the north and it would go out through some of the Santos-operated infrastructure.

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James Byrne, Citigroup Inc, Research Division - Research Analyst [5]

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Okay. And then look, obviously, a lot going on in the gas market environment. How do you guys see yourselves positioned? And then you're also a big part of that solution. I mean, obviously, you've got some good news at Middleton and you talked about the grasp that you have for exploration in the Otway. Like what else do you have in the portfolio that you think can be of benefit in this tight gas market for you?

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Matthew V. Kay, Beach Energy Limited - CEO, MD & Director [6]

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Look, James, this is obviously a thematic that we've believed in for a number of years. You see having visited Canberra a few times in the last couple of months, we're well across the positioning that's happening. And I think what you're seeing is, the opportunity in terms of providing gas to the market for us is clearly focused on the states that we believe and we have good opportunity to invest in, which right now is South Australia and Queensland. However, we think it's important to see further reform both federally and from the states to open up opportunities for us to invest in opportunities in other states on the East Coast. So clearly, we, along with others in industry, are lobbying for that because we have a strong balance sheet, we'd love to be reinvesting further. But at the moment, our core focus is on the states which onshore, I would say, are open for business which at the moment is Queensland and SA.

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James Byrne, Citigroup Inc, Research Division - Research Analyst [7]

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Sure. Look, obviously, your JV partner in the Cooper Basin had just released to the market that they'll be producing as much on gas as they export through LNG. Do you think that has direct impact on that joint venture in the Cooper Basin? Could you see another rig going in there? Would you be supportive of that because I notice that you're not participating in all of the wells drilled in that JV at the moment with the current amount of rigs?

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Matthew V. Kay, Beach Energy Limited - CEO, MD & Director [8]

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Yes. Look, I think just a couple of things to highlight there, James. Just firstly, for clarity, because sometimes there is confusion in the market around this is, clearly, we are not party to the LNG projects nor do we supply any gas directly to the LNG projects or to the Horizon contract. There is some confusion occasionally in the market on that. I'll just make that point clear.

Look, we've got very good alignment with Santos and the leadership of Santos. We deal with them very regularly at multiple levels. And at the moment, other than a couple of wells which we've elected to opt out on, on the basis of commerciality of those individuals wells, we've got very good alignment on the program going forward. So we're certainly not seeing any fracturing in terms of the strategic outlook for the Cooper Basin.

And in terms of another rig, now that's a case-by-case situation. It depends on what the venture would want to drill. And if there are commercial prospects then, of course, we'd be supportive of that. One thing I would highlight is, the Cooper Basin today is looking very different from what it looked like a year ago. And it's certainly looking very different from what it looked like 3 years ago. Once you got 30-odd percent of rate down on drilling of wells and 30-odd percent increase in efficiency of drilling of wells and you're reducing your operating cost, then that basin looks very different than probably what it did 3 to 5 years ago.

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Jeffrey L. Schrull, Beach Energy Limited - Group Executive of Exploration & Appraisal [9]

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This is Jeff. One of the things that we're focusing on is the exploration prospectivity in the JV that we're in with Santos. I mentioned the snowman (sic) [Snowball] survey earlier. That's a big survey in Southwest Queensland and it's actually mostly gas prospectivity. So we'll be encouraging Santos to get the best prospects moved to the front of the queue.

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James Byrne, Citigroup Inc, Research Division - Research Analyst [10]

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Okay. Yes. I guess in some regards, it could be taken as a little bit of a negative first in the gas market when you walked away from Nappamerri Trough. I mean you're long-dated and you need to see line of sight to shareholder value. But one of the risks we see, the announcement that corporate guidance, spending capital on unconventional resources in the near term to supply the next decade. And I mean, do you see better unconventional resources in your portfolio outside of the Nappamerri Trough and hence, you're happy to walk away?

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Matthew V. Kay, Beach Energy Limited - CEO, MD & Director [11]

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No. Look, I don't think it's purely around unconventionals. I think that what we said is, we've done a full assessment of unconventionals in the Cooper. There's been a lot of money spent, not only by us historically, but by industry to try and prove that concept up. And we haven't really moved it substantially forward nor has the industry. So what we've said is, we don't want to be reinvesting in science experiments. We want to see line of sight to commercialization. Now that doesn't rule us out from other Australian unconventional opportunities or other Australian CSG opportunities. It's all about shareholder value. If we see line of sight to commercialization then we'll have a very good look at it. We've got the balance sheet to do that.

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Operator [12]

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Your next question comes from the line of James Nevin.

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James Nevin, RBC Capital Markets, LLC, Research Division - Senior Associate [13]

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Just one quick question. I was hoping, are you able to give an update on gas inventory levels in the Cooper? I think in prior quarters, the sale of gas was running a bit higher than production. If you could just provide an update on that, please?

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Matthew V. Kay, Beach Energy Limited - CEO, MD & Director [14]

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Yes. So at moment, there's around 45 PJs in storage at Moomba, if that was the question, James.

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James Nevin, RBC Capital Markets, LLC, Research Division - Senior Associate [15]

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Yes, exactly. And then as far as just, is that planned to be sold then as well? What are the plans then for that?

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Matthew V. Kay, Beach Energy Limited - CEO, MD & Director [16]

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Look, obviously, it's a venture decision around use of that storage, but there's no yet specific plans to highlight to the market today. Obviously, the key for us is usually continuing to drill out the Cooper and get more gas into the market rather than any specific gas storage.

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Operator [17]

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(Operator Instructions)

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Derek Piper, [18]

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And I think we might end the call there. So once again, thanks to everyone for joining the call. And as always, please give us a call if you have any follow-up question. Thanks, everyone, and have a good day.

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Matthew V. Kay, Beach Energy Limited - CEO, MD & Director [19]

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Thanks, everyone.

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Operator [20]

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Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.