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Edited Transcript of CTP.AX earnings conference call or presentation 11-Mar-22 10:59am GMT

Half Year 2022 Central Petroleum Ltd Earnings Presentation Kardinya, Western Australia Sep 9, 2022 (Thomson StreetEvents) -- Edited Transcript of Central Petroleum Ltd earnings conference call or presentation Friday, March 11, 2022 at 10:59:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Leon Devaney Central Petroleum Limited - Managing Director & CEO * Damian Galvin Central Petroleum Limited - CFO ================================================================================ Presentation -------------------------------------------------------------------------------- Leon Devaney, Central Petroleum Limited - Managing Director & CEO [1] -------------------------------------------------------------------------------- Welcome to today's presentation of Central's first-half results for the 2022 fiscal year. It was a very active half year. We had solid operations and delivered some key projects. We also progressed a couple of transactions that will fund a significant period of exploration and appraisal for Central. I'm joined today by our CFO, Damian Galvin, who will talk about our financial results. I'll cover our recent highlights and provide an update on some of our key activities. Let's start with recent highlights. The most significant was the completion of a 50% sale of our producing assets to New Zealand Oil & Gas and Cue Energy. The acquisition of our operating assets in 2014 and 2015 really transformed Central both in terms of operational capability as well as financial stability. We have now booked a $37 million profit on just half of those acquired assets. The profit is nearly half of the sale price, making it a very successful investment that is now funding our share of over $100 million in joint venture development and exploration, including the upcoming exploration wells at Palm Valley and Dingo. Another highlight was the recent announcement of a farm-out to Peak Helium. We've been working hard over the past couple of years to accelerate exploration at term at Dukas. Our farm-out to Peak not only results in the Dukas well getting drilled, but two additional sub-salt exploration wells that will be fully funded for Central. Other highlights include the completion of two step-out pilot wells at Range, a four-year gas sale into a very strong term gas market, and solid operations across safety, environment, and production. We'll cover most of these in more detail throughout the presentation. So at this point, I'll hand over to Damian to talk through our financial results. -------------------------------------------------------------------------------- Damian Galvin, Central Petroleum Limited - CFO [2] -------------------------------------------------------------------------------- Thanks, Leon. So let's go through the details for the half year in a little more detail. Now, it's difficult to compare the headline numbers with prior periods, having sold down half of our producing assets after the first quarter. So in general, you'd expect our operating results to be down by about 25% just simply due to the reduced interest. So with that in mind, let's have a look at the operating results in a little more detail. So over the six months, we sold 3.8 petajoule equivalents of gas and oil, down 25.5%. So it's fairly consistent with previous periods after you adjust for the asset sale. So if we look at this on a field-by-field basis -- and I will talk in 100% field volumes just to keep it consistent. At Mereenie, we averaged 31.6 terajoules per day, which was up 5% on the preceding June half year and reflecting the contribution from the development program. If you recall, we recompleted four wells midyear, and we brought two new production wells online. So by December, we were averaging 35 terajoules a day. And we'll go back with a coil tubing unit in the next month to further optimize production from some of those wells. So overall, the results -- the program, we're probably slightly below our expectation. And as a result, we did take a slight downward hit on our gas reserves at Mereenie, down by half a petajoule at December 31. At Palm Valley, the production averaged 6.8 terajoules per day. It was down about 16% from the preceding six months due to a couple of shutdowns for compressor maintenance. There are some outages on the Northern Gas Pipeline. And natural field decline was obviously kicking with our Palm Valley 13 now coming off its plateau. And it's still declining at a much lesser rate than expected. And it's -- I guess overperformance resulted in us being able to take an extra 1.7 petajoules of 2P gas reserves on board at December 31. At the end of December, Palm Valley was averaging around 7 terajoules per day. Dingo averaged 3.4 terajoules a day. That's down 13% on the June half year. But Dingo's sales do tend to be demand driven. It sells exclusively to the Owen Springs Power Station, which does tend to be seasonal. We've certainly seen higher demand in recent months, in the second half of summer. And in any case, the short -- any shortfall there might be under the contract quantity of 4.4 terajoules per day, subject to take-or-pay conditions. We get paid in January every year for any shortfall. So Dingo remains a very consistent performer. And as a result of that, we're able to actually book an increase in 2P gas reserves of 2.3 petajoules at December 31. So look, revenues are down about 18.7% from the December 21 half year at $23.5 million. And that's obviously stronger than the lower underlying volumes might suggest. And that's reflecting the higher oil prices and stronger gas markets that we've seen recently. We booked a headline profit of $30.5 million for the sixth month. That includes $36.6 million from the profit on the sale of our half of our interest in Mereenie, Palm Valley, and Dingo. On the other hand, it had also included $10 million of exploration costs. So it's not a very good indicator of underlying performance. And we tend to use and we prefer to use the underlying EBITDAX number, which, at $10 million for the six months, was down about 22.5% on previous periods. So again, a stronger result than you might expect after adjusting for the asset sale. Cash balances -- they were holding fairly strong at $23.6 million at the end of December. And net debt was significantly lower at $12.4 million compared to the $31.3 million at June. And that was obviously as a result of us paying down a large portion of the loan using proceeds from the asset sale in October. So I'll come back to debt in a bit more detail in a minute. The half-yearly sales chart illustrates, I guess, how steady -- how relatively steady the underlying production has been from those Amadeus fields. And they're still providing a very steady cash flow, easily servicing our debt and contributing to cover our corporate costs. Sales prices -- you'll see they have been stronger as a result of the strong gas market and higher oil prices. And our operating costs have also edged higher. And that is a little bit -- is due a little bit to portfolio shifting, if you like. We have a new gas sales contract that started in -- at the start of 2021. That requires transport, so we get to pass through those transport costs. But on the other hand, it appears obviously in our costs as well. So probably, a better way to look at our underlying performance is to consider our gross margin. So that is, take the operating cost per unit away from the sales price. So on that basis, our gross margin for the half year has improved to $3.18 gigajoule equivalent, up from $3.02 for the full FY '21 year and $2.49 per gigajoule equivalent for the preceding December half year -- so increasing margins. And the good news is that our sales contracts are CPI-linked. And that's going to provide some protection against inflation that seems to be creeping back. As I mentioned earlier, we expensed $10 million of exploration costs as we ramped up activity to drill Palm Valley and Dingo Deep wells. They're due to start drilling at the end of this month. And so we'll consider -- continue to see significant exploration expenses booked in the second half as the drilling progresses. But it won't be at a cash cost to Central, because those costs are being carried under the asset sale arrangements. So at December 31, we still had a further $26.9 million available under those carry arrangements that we can draw on. And it's currently sitting in our balance sheet at current assets. It's at December 31. Come back to the loan facility quickly, we made obviously a big impact on the loan facility this period, paying down $32 million. Most of that was utilizing proceeds from the asset sale to partially retire this debt. So at December 31, we had a balance of $34.8 million outstanding. The facility is due for renewal in September. We're currently discussing with Macquarie to extend it. We've done that successfully a couple of times in the last couple of years. And we're also considering alternative financing options. So we're aiming to have that debt extended or refinanced by midyear, if not sooner. So in summary, it has been a pretty steady half year once you strip out some of those lumpy items. Look, I think the real focus now for us is on this pipeline of drilling activity that we've got ahead of us over the next 18 months. And with a bit of success, it promises to deliver some really significant value to the company. So I'll pass it over to Leo now to provide some more detail on the activity that's ahead of us. -------------------------------------------------------------------------------- Leon Devaney, Central Petroleum Limited - Managing Director & CEO [3] -------------------------------------------------------------------------------- Thanks, Damian. Sub-salt exploration is now a big part of Central's near-term growth story. As we announced last month, Central is farming out some of our interest in three permits in the Southern Amadeus to Peak Helium. Peak is also farming into some of Santos's interest in those permits, and they already hold an interest in EP 134, which is just to the south of the farming area. Not surprisingly, Peak Helium is focused on exploring for and commercializing high-value helium, which is priced in the order of 45 times more than natural gas by volume. The farm-out results in a major sub-salt exploration program consisting of three wells, scheduled for drilling in 2023 -- one well at Dukas, one well at Mount Kitty, and one well at either Magee or Mahler, which you can see circled on the map in this slide. Under our farm-out with Peak, Central will be free-carried for the well at Mount Kitty and the well at either Magee or Mahler. I'll take a moment to clarify why we farmed out some of the Dukas permit without getting a free carry for that well. The answer is that the farm-out was considered as a package. Since we gave up only 6% of the Mount Kitty permit, 10% of the Dukas permit became part of the total farm-out package that we traded for the two-well free carry. This is a great transaction for Central. It gets us drilling at Dukas, which I know is welcome news for shareholders, plus it adds two additional sub-salt wells, all of which are targeting large volumes of natural gas and helium which, if successful, would be company changing. So what is sub-salt exploration? Since the farm-out was announced, there has been an increased interest in understanding sub-salt exploration. So we prepared this slide to provide a very simplistic illustration. In order to trap commercial quantities of gases underground, where they are produced, we need a layer above the gas to act as a trap or a seal. Salt is unique in this way. When it is in thick layers underground, it can be one of the best seals or traps for natural gas, but also much lighter gases such as helium that typically escape over time through rocks into the atmosphere. The Amadeus Basin is fortunate to have vast layers of salt throughout the basin. It is also fortunate to have hydrocarbons, which we know are present, plus helium, and hydrogen, which we have already observed in high concentrations at Mount Kitty and Magee through previous drilling. It's this unique combination of salt traps near hydrocarbons and helium that makes sub-salt exploration in the Amadeus Basin so exciting for us. This slide shows our helium play map. The green shading indicates where in the Amadeus Basin, we think, the combination of salt and helium create the best opportunities for commercial success. Not surprisingly, you can see in the map that there is a large southern focus area that includes all three wells to be drilled under the Peak farm-out. There is also a northwestern focus area, which includes our Zevon prospect where we are currently waiting on clearances from the Northern Territory government to conduct a seismic program. Stepping back, you can see Central's exploration portfolio is well positioned for sub-salt exploration success over the next couple of years. Moving on to other key activity updates, we completed drilling two step-out pilot wells at Range. The coal thickness showed good improvement within two kilometers of the initial pilot location, which is what we're looking for. As you can see in the slide, the coal thickness recorded at essentially six separate areas suggests that the initial pilot location may simply be in a location that is not indicative of the broader permit under development. This was a positive outcome, but I need to emphasize that coal thickness is just an indicator. Our upcoming production testing will be critical to assessing these wells and how we can progress towards the final investment decision. In terms of schedules, there have been several severe rain events in Queensland. These have delayed the connection of the step-out wells to the pilot facilities by a couple of weeks. At this point, we expect production testing for the step-out wells to commence next month. Moving on to our Palm Valley and Dingo exploration programs. The rig is currently in the process of mobilizing to Palm Valley, which is the first well in the program. The schedule has also been impacted by severe weather events in northern part of Western Australia. The updated schedule has spudding at Palm Valley in about three or four weeks. This is a really exciting exploration program for the joint venture with the Palm Valley Deep and the Dingo Deep exploration targets, having the potential to more than double our reserves in existing fields that allow for brownfield economics and much quicker access to markets and commercialization. Finally, let me quickly comment on markets. As I mentioned earlier, we recently signed a four-year gas contract. Through that sale process, we not only observe strong prices but also interest from a broad range of customers. Domestic gas market fundamentals continue to indicate a tightening of supply and upward pressure on prices moving forward. This all provides really good support for our strategy to increase gas reserves through new exploration and appraisal. Obviously, high oil prices are getting a lot of coverage at the moment, with current global events driving this volatility. Oil sales from Mereenie are clearly benefiting from these pricing dynamics. But our oil prone permits in the western portion of the Amadeus Basin are also looking very attractive for exploration and farm-out activity. This includes our Mamlambo prospect, which we estimate to have a mean prospective resource of 18 million barrels of oil. Obviously, we don't know where the oil market goes from here. But prices have rebounded extremely well since their post-COVID lows and support future oil exploration throughout our portfolio. To summarize today's presentation, we had a solid half year of operations. And through several key transactions, we are now moving into an exciting period of high exploration and appraisal activity. Thank you for your time today, and I look forward to reporting our progress and results as we move ahead.