Cooper Energy Ltd (COE) Q3 2022 Earnings Call Transcript

Cooper Energy Ltd (NYSE : COE) Q3 2022 earnings call dated Apr. 19, 2022

Corporate Participants:

David P. Maxwell — Managing Director

Michael Jacobsen — General Manager Projects & Operations

Analysts:

Nik Burns — Jarden — Analyst

Gordon Ramsay — RBC Capital Markets — Analyst

James Bullen — CGF — Analyst

Nick Palethorpe — Origin Capital — Analyst

Stuart Howe — Bell Potter Securities — Analyst

Presentation:

Operator

Thank you for standing by. And welcome to the Cooper Energy Limited Third Quarter FY ’22 Quarterly Report Conference Call. [Operator Instructions] There will be a presentation followed by a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to Mr. David Maxwell, Managing Director. Please, go ahead.

David P. Maxwell — Managing Director

Thank you very much. Yes and as per the introduction, this is David Maxwell, the Managing Director of Cooper Energy, and I’m joined this morning by some members of our leadership team as well. I’m just going to make a few introductory comments and then hand over to Q&A. I think that’s really the real value is.

As reflected in the announcement, we released our third quarter results this morning for the 2021-’22 financial year. A short summary of these results. It was a further set of strong results, evidenced by the record and year-to-date increases in production, sales volume and revenue of 24% to 71%. We had steady improvements in the processing rate at the Orbost Gas Processing Plant, which is operated by APA together with the first full quarter of processing of our Otway Gas through our own — our owned and operated Athena Gas Plant.

The improved Orbost Sole production together with the commencement of the re-sculpted AGL — together with the commencement, sorry of the re-sculpted AGL take or pay contract, has created a significant reduction in the quantity of gas, backup gas supply and this reduction is being from some 1.3 petajoules or 1,300 terajoules in the previous quarter to 252 terajoules in the third quarter. And that’s created the opportunity for some 846 terajoules of gas to be sold into the high-priced spot market. This is perhaps best illustrated in the graph, which appears on Page 3 of the quarterly where the gray area illustrates the backup gas supplied into our Sole gas sales agreement and the green area illustrates the spot sales. And a quick look at that graph and you can see the contrast before and since January 1.

Gas supply into Eastern Australia continues to be tight and prices are increasingly influenced by international LNG prices. The current spot Victoria and Sydney gas prices are circa 2 times what they were this time last year. The outlook is for higher spot gas prices as we come into winter when gas demand peaks. The Orbost Gas Plant was shut down from March 25 for the Phase 2B Works and has returned to service on April 11. This included a few days delay due to flooding, flooding of the access roads, not flooding of the plant.

After the shutdown, APA took it steady and went to 45 terajoules a day and 47.5 terajoules a day and is now producing at 50 terajoules a day. And it’s important to note that this is before the commencement of the polishing unit, which was installed by APA and before the — and separately, the Solids Removal Package, which is now in place and we expect will be commissioned later this year.

In the offshore Otway, the well configuration and rates are still being optimized and during the quarter, we announced a significant upgrade to the low risk offshore Otway prospectivity. And earlier this month, we advised we’ve been awarded a new prospective Gippsland Basin permit, that’s VIC/P80, which includes the Wobbegong opportunity. You can expect to hear more about our exploration plans as a part of the next drilling campaign, which is being built around OP3, the OP3, the Development Project, which is focused in particular on developing the Annie field we discovered in September 2019.

We have maintained our guidance for production, sales volume and underlying EBITDAX and capital spend. And as mentioned in the quarterly, our current year-end forecast is at the upper end for production, sales volume and revenue of the ranges that we provided for guidance and we are going to review that again in the next month. Yesterday, we and APA signed and announced an extension to the transition agreement that we have in place and this an extension out to the end of June. We and APA are working closely on the long-term arrangements for Orbost and the processing of our Sole Gas and this extension provides the time to finalize these terms.

In the Cooper Basin, together with Beach, we’re drilling two exploration wells in the area formerly known as PEL 92. The first well, Bangalee-1 commenced yesterday and this will be followed by the Hummocky exploration well. And finally, it’s worth noting we are engaged with our banks regarding a new finance facility to replace the existing facility established to support the Sole development. The purpose of the new facility will be to support and enable the next growth phase for the company.

So on that note, I’m happy to open the lines and take any questions and I’ll also use the support of a few on the leadership team where appropriate for answers.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from Nik Burns from Jarden Australia. Please, go ahead.

Nik Burns — Jarden — Analyst

Hi, thank you. Hi, David and team. Just a question on the extension to the transition agreement with APA. I imagine you and the team have been working hard with APA on, together achieve a mutually agreeable outcome for Orbost for a number of months. Are you able to comment at all on what the key issues are that meant you are unable to get an outcome by the end of April and why you’re confident you can achieve an outcome by the end of June? Just wondering if the delay relates in anyway to your permanent CFO not commencing until next month? Cheers.

David P. Maxwell — Managing Director

Thanks, Nik. Look, the delay is really just things are taking a bit of time. The environment that we find ourselves in over the last two years is different to the environment that was contemplated when these agreements were initially put in place and it’s important that there be the appropriate commercial balance in the rejig long-term arrangements.

What I can say is that we and APA are working very closely together. And it is about increasing the rates, increasing stability and the long-term arrangements, which work for both parties. And it would probably be inappropriate for me to say anymore than that at this stage other than that I’m confident that within the next month or so, we’ll have the opportunity to sign it off and we’ll at that point be obviously fully embracing of describing the new arrangements in place for processing of our Sole gas through Orbost.

Sorry, I can’t be more specific, Nik.

Nik Burns — Jarden — Analyst

Got it. No, I appreciate that. I thought I’d try anyway. Thanks, David. Look, I might just turn to Phase 2B Works. I was interested in your comment around APA installing a gas polishing unit, but that you didn’t endorse that work. Can you just talk a bit more about this? Why didn’t you endorse it? Did you pay for it? What impact does APA expect this unit to have on plant operations? Cheers.

David P. Maxwell — Managing Director

Yeah. Look, it was a proposal by APA and we couldn’t see the economic merits of proposal that it’s APA’s own and operate the plant. They wanted to install it. And so they continued and did just that and funded it 100% as opposed to the Solids Recovery Unit, which we could see the value in most definitely and we supported that and funded effectively 50% of that. The polishing unit is just outside of the Sulphur Recovery Unit and it literally just takes off the last few PPM if the H2 starts to stray up towards pipeline spec.

And in terms of the technical information around what’s involved in the polishing unit, I’m going to pass across to Mike Jacobsen who can describe it and also add anything to the answer that I’ve provided.

Michael Jacobsen — General Manager Projects & Operations

Yeah. Thanks, David, and good morning, Nik. Thanks for the question. I think when we look the original investment for the polishing unit, we just didn’t see the return on the investment. It was a substantial amount of capital. And what this does it takes out the highs when — so what it does is, it basically absorbs the H2S that is in the gas and it can only deal with low levels of H2S and we just couldn’t see over a longer period of time or long period of time that it would have a material impact on the amount of gas that the plant would export. So, when we balanced the costs versus the extra gas that it would produce, we just couldn’t justify the investment. APA wouldn’t view and they from an operations point of view, they felt it was a unit that gave more operational flexibility, more operational stability and they saw it different to us. So, that’s how we’ve got to where we are.

Nik Burns — Jarden — Analyst

So, does that mean if they are correct, you should see more upside — uptime from the plant going forward?

Michael Jacobsen — General Manager Projects & Operations

Yes, I think certainly, certainly stability. And we may — what it also may do it gives, it may give a longer period between the cleans. As we get closer to the cleans, we see the H2S rates start to go up. So, there is an argument to say that it can stretch that period out slightly longer, but yeah, time will tell.

Nik Burns — Jarden — Analyst

Got it. I’ve got another question, but I might jump back on the queue. Thanks. Cheers.

Michael Jacobsen — General Manager Projects & Operations

Thanks, Nik.

Operator

Thank you. [Operator Instructions] Your next question comes from Gordon Ramsay from RBC Capital Markets. Please, go ahead.

Gordon Ramsay — RBC Capital Markets — Analyst

Well, thank you very much and good result. David, nice to see the plant continuing to improve in terms of Orbost Gas Plant. I just got a question about the gas price and the ranges that you’re seeing in Victoria, where you’ve said spot ranged from AUD6 to AUD12.76 and I’m assuming the higher prices, the more recent price and the average of AUD9.47. What can you do to take advantage of this and capture some of those high spot pricing in your revenue stream going forward, assuming it could be a little bit higher potentially in the winter period?

David P. Maxwell — Managing Director

Yeah, thanks. Thanks, Gordon. What we can do quite simply is get the rates for, in particular Orbost up as high as possible. And as Mike touched on, it’s the daily rate and extending the frequency between cleans and stability is important. You will have heard us say that the Solids Recovery Plant has been installed but we haven’t yet commissioned it. And what we — and I’ll give you a little bit of the thinking behind that. What we — as we come into winter and you look at that graph that we have on Page 3 of the quarterly, we’re expecting that the gas prices will be high. And what we are wanting to do is to make us to have available as much gas as we possibly can to put into that market and it really comes down and in this case to Orbost and getting as much gas to Orbost as possible.

And the reason we are holding back on actually commissioning the Solids Recovery Kit is, it might take a week or two for the system to stabilize post-commissioning and that’s a week or two that could be very valuable in terms of both spot sales opportunities but also gas into our term contracts to our customers who really need it during winter. So, I think it is as simple as getting the processing rates up as high as possible at Orbost and then separately, over at Athena, continuing to optimize the cycling between the four wells that we’ve got.

At any point in time, we’ve generally got two wells online and two wells shut in and then we use — because these wells are nearing the end of, end of their life, sorry, the well — the field is nearing the end of their life, we’re using flash production and synchronizing between wells and the number of wells on to maximize the throughput. So, those are the two things really; Orbost processing rate and synchronizing, optimizing the offshore cycling in the Otway.

Gordon Ramsay — RBC Capital Markets — Analyst

Thanks, David. You kind of answered my second question about the delay with the second part of the, what I call the SPR for the Phase 2B Works. I appreciate that. Thank you.

David P. Maxwell — Managing Director

I don’t know, but Mike wants to add anything to that. There was quite a lot of thought that went into the timing of commissioning of the Solids Recovery Kit.

Michael Jacobsen — General Manager Projects & Operations

Yeah, no, I think, I think you’ve covered it David. Just, it’s really about I think we don’t want to, I mean the rates are good at the moment. And we do expect when we do the commissioning there’ll be periods of time where there is some instability. And we didn’t really want to do that as David mentioned, as we lead into winter with the gas prices where they are. So, I think I think you’ve covered it, David.

Operator

Thank you. Your next question comes from James Bullen from CGF. Please, go ahead.

James Bullen — CGF — Analyst

Good morning, David and team. You’re very confident that you’re going to finalize your revised financing facility in the June Q. I was just hoping you could share a bit more color as to why you’re so confident that’s all coming together well, particularly given you’ve had to extend out the transition agreement?

David P. Maxwell — Managing Director

Yeah. Look, the confidence comes from the nature of the conversations and the level of support that we’re receiving from our relationship banks. And we are in discussions with them and those discussions are what gives us the confidence and it is around the terms and that’s progressing well. I don’t think I can say too much, too much more than that on direct response to the question. What I can say though is that it was always our intention and our relationship banks always understood that was our intention that once we had Sole up and running and commissioned albeit at the moment it’s not quite at the 68 [Phonetic], our intention was always to refinance the existing facility.

And so it is something that was always intended from both our perspective and also the bank’s perspective. I mean obviously we held it off for a while because Orbost was a little bit later than we had desired and planned. But now that it is stable, those conversations have been going on for the last month or so and making good progress and it’s off the back of that, that we’ve got, we’ve got the confidence.

James Bullen — CGF — Analyst

That’s great. And just I guess a small question. So, the polishing units, so that was to APA’s account and Cooper hasn’t contributed to any of the CapEx associated with the polishing unit. Is that correct?

David P. Maxwell — Managing Director

That is correct. Yes, yes. We contributed to the Solids Recovery Package, but not to the polishing unit. And polishing unit was funded — being funded 100% by APA.

James Bullen — CGF — Analyst

That’s great. Thanks very much.

Operator

Thank you. Your next question comes from Nick Palethorpe from Origin Capital. Please, go ahead.

Nick Palethorpe — Origin Capital — Analyst

Hi, David. Rig availability, [Indecipherable] at the moment given the global events that are occurring?

David P. Maxwell — Managing Director

Good question, Nick. It’s, we are engaged at the moment with exactly — with the rig operators on exactly that question. There’s the odd window a few months here and there, but the extended periods, three, six months is ’23-’24, probably more likely ’24 than ’23 at the moment. And then in our case, we are very keen to make sure that we’re drilling or we are operating offshore not in the rough weather period, which is typically winter. So, summer and then either side of summer is ideal for us. So, at the moment, it’s 2024. There have been a number of opportunities and they are being explored at the moment, but I think the more likely scenario is that it will be sometime, if there’s a rig of opportunity for an odd well in ’23, where it will kind of works, we’ll certainly take it, but the more likely scenario is ’24.

Nick Palethorpe — Origin Capital — Analyst

Thank you.

Operator

Thank you. Your next question comes from Stuart Howe from Bell Potter Securities. Please, go ahead.

Stuart Howe — Bell Potter Securities — Analyst

Hi, David. Just back on the Solids Removal Package and commissioning those, I actually missed when you said that would be commissioning but just confirming that with current rates being quite good, you want to maintain that consistency of supply over the winter months. But then you also made the comment around the polishing enabling a longer period between cleans. So, I guess what I’m coming to is, once the SRP is commissioned, I’ve got the understanding that the cleans won’t then be required because that basically reduces the filings [Phonetic]. Could you perhaps just provide a bit of clarity around, around those topics?

David P. Maxwell — Managing Director

Yeah, I’ll say a few things and then certainly, I’ve got Mike to add to it. The purpose of Solids Recovery Kit is to remove the heavier particles, which has been causing the filing. And so if you can remove the heavier particles, remove the filing, then you didn’t have the need for cleaning. So, you don’t have the need for cleaning on a regular basis that is, you may do — ideally you’d clean once a year. What we’re very focused on is — and it comes back to the earlier question, is getting as much throughput as we can through the plant through winter. And so the Solids Recovery Package is sitting there, it’s installed, but not yet commissioned.

And the decision of when to commission it, our hope, our desire, our preference would be after this winter. And that — in that scenario we’re running at steady rates, predictable rates, 50 plus and putting gas into the spot market. And then we interrupt processing in a down period say sometime in spring of this calendar year. So, that’s the, that’s the thinking behind it. And Mike, if you’d like to add anything, so that you maybe also just talk on the polishing unit and how it supplements the SRP.

Michael Jacobsen — General Manager Projects & Operations

Sure. Yeah. Morning, Stuart. Yeah, I mean I think in terms of the polish when I said it extend — may extend the cleans out, talking probably one or two days. It’s main purpose is to take out those when we get a trip on H2S or when there is other sort of issues that go on and we see a spike in the H2s. The polisher is that sort of catch, that fallback in those types of circumstances. So, it’s not really designed to stop the filing or to extend the cleaning. It is, it is purely to, to add to the backstop and when we see some spikes in H2S.

What has happened previously in those cases, the plant has to shutdown, which takes time to get it back. So, that’s what its purpose is. The SRP, the Solids Removal Package, we expect that by taking the solids out, then as David mentioned, we don’t expect to do any cleans during the course of out with our normal maintenance program. So, whether it’s once a year, probably that’s, that’s what we expect it to be. So, these sort of differences. Yeah, but you’re right about we want to do that commissioning and so time when we see the gas market is not as tight as it currently is.

Stuart Howe — Bell Potter Securities — Analyst

Yeah, okay, thanks guys. And just secondly, obviously good to see the step up in production of Otway following the cut over to Athena. With those cycling between the wells now, what sort of production profile should we expect going forward from third quarter from the Otway business?

Michael Jacobsen — General Manager Projects & Operations

It’s got to be up and down a bit and it depends which wells are on but you’d expect it to be in the — and this has not yet been optimized. So, there might be a little bit more upside on this. But you’d expected it to be in the range some days down around 25, 26 terajoules a day and then when you’ve got your two best producers on an early in the cycle, up in the low-30s, 32, 33, so in that, in that range. And this work ongoing to optimize — to optimize that.

Stuart Howe — Bell Potter Securities — Analyst

Great, thanks a lot. I’ll hand –.

Operator

Thank you. There are no further questions at this time. I’ll now hand back to Mr. Maxwell for closing remarks.

David P. Maxwell — Managing Director

Thanks very much. Look, just a couple of final comments. As I said right at the outset, we are now starting to see the solid results come through as on the back of increased production and increased revenue. Revenue also being compelled by increased pricing. And coming into winter, I think we’re in for a fascinating winter, 2022. When you look at LNG prices where they’re at, no sign of them coming back in the next 12, 18 months. Tight supply in South-East Australia. Gas demand holding and in some cases, increasing. Supply, very tight from the other producers into the domestic market. Therefore, our focus is very much on getting as much production as we can through both Orbost and Athena.

And I think we’ve set ourselves up well. We might look back in a year or two’s time and not think that the deferment was quite because it was because the delay has occurred at the time, it pushed us into a time when prices and margins are quite a bit higher than they were 18 to — 18 months, two years ago. I think the next quarter, the fourth quarter is going to be very interesting for Cooper and I expect it just a further and we’re already seeing it in the April results further builds on the growth in the third quarter, which will lead to a good year end results and set us up well for 2022-’23. So on that note, thank you for your attendance.

And if you have any questions, don’t hesitate to give Eddy Glavas or myself a call. Thanks a lot.

Operator

That does conclude our conference for today. Thank you for participating. You may now disconnect.