Aug 26, 2015 (Thomson StreetEvents) -- Edited Transcript of Drillsearch Energy Ltd earnings conference call or presentation Wednesday, August 26, 2015 at 1:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Dudley White Drillsearch Energy Limited - General Manager Corporate Communications * Jim McKerlie Drillsearch Energy Limited - Chairman * Walter Simpson Drillsearch Energy Limited - Acting CEO * Ian Bucknell Drillsearch Energy Limited - CFO ================================================================================ Conference Call Participants ================================================================================ * Kirit Hira Macquarie Research - Analyst * Nik Burns UBS - Analyst * Timothy Masters Canaccord - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Dudley White, Drillsearch Energy Limited - General Manager Corporate Communications [1] -------------------------------------------------------------------------------- Good morning everybody, welcome to the Drillsearch FY2015 results conference call. I draw your attention to the presentation that's been lodged with the ASX just over an hour ago, and just a reminder that there will be a recording of this call up on our temporary website later on today. (Operator instructions) I'll just quickly run through the early part of the presentation for you before handing over to our chairman Jim McKerlie. Slides two and three have some important notices on forward-looking statements, our reserve statements, and our non-IFRS accounting financial information. Then if you move on to slide four, you'll see the agenda for the call. First up, we'll have Jim McKerlie giving some opening remarks from the Chairman, we'll then move on to Walter Simpson providing an overview of operating highlights for 2015, Ian Bucknell will then provide an overview of the results for the year before handing back to Walter for an overview of the outlook and strategy update, and after that, there'll be a chance for questions. So without further ado, I'll hand over to the Chairman. -------------------------------------------------------------------------------- Jim McKerlie, Drillsearch Energy Limited - Chairman [2] -------------------------------------------------------------------------------- Thank you, Dudley, good morning everyone. My name's Jim McKerlie and I'm the Chair of Drillsearch. There's two slides that I wish to talk to this morning, the first of which is some thoughts and reflections on the past year, and we'd like to set some context for what we've achieved, and in the second slide, I'll move onto a forward view of where we're going and the position the company's in and what steps we've taken to build our future. So starting with some reflections on last year, which is slide six, I think the very first comment I want to make is that the Board and management took a very real response to the market conditions. We genuinely attacked costs, we acted very quickly, very decisively, and we did what had to be done in a one-cut process so that the ambiguity and uncertainty around that didn't hang around. So as a result of that quick action and decisive action, we've managed to deliver a very strong underlying profit in the market conditions, it's in the order of AUD60 million as you've seen, and it's a measure that we as a board and management believe we can manage, too. We can't manage impairment costs and other costs, but we can manage to generating that underlying profit and we're very pleased that it is virtually unchanged from last year. What that has allowed us to develop is a very strong balance sheet: roughly AUD176 million in either cash balances or available credit. We have the view that cash is king, and cash is really important to have, particularly in this down market. We see that it gives us flexibility and optionality in terms of specific operating opportunities and other strategic opportunities that might come up in the market in the coming months and years. So how do we manage to deliver that result, what's happened that's allowed us to perform at that level? I think it's absolutely a reflection of the exploration success in the past. One of the things that Drillsearch has built a reputation for is delivering exploration success -- I think we're running at something like 74% for the last year. It means we got our investment decisions right, and that's how we built this company up to where it is today. We have taken a very prudential approach to making those investment decisions, and that exploration has delivered the production that we've got. So this year, we have maintained production at pretty well the same level, and I think it's important to note because of the success that we've had with exploration, it is our target to increase production by 50% or more and we can see where that will come from. And within our Cooper Basin portfolio, there is an upside opportunity to do significantly better than that, and that is the target that management have got to work to. I think in a comment on risk management, we spend a lot of time as a board talking about risk. Risk is -- it comes in many forms, as we all know. We went early on hedging, which has proved to be very beneficial and Ian Bucknell will talk about that in detail. I think the investment decisions we've made have been prudent, and it really reflects the quality of our opportunity pipeline, the quality of the assets that we've got coming through, and of course safety from the Board down is first and foremost in our mind and we've had some very good results, safety records. So from my perspective, and the Board's perspective, looking back on last year, we are very pleased with the result under the difficult circumstances, and I think what's most pleasing is in fact how we see the opportunities going forward as we think ahead, and we continue to build on our future, and I've just moved onto slide seven. One of the things that, as we've grown up as a company is, we've developed a very comprehensive capital management strategy, and there's been vigorous debate around this, but we find ourselves in a position where the CB, which I get asked about a lot, we are in a strong position to deal with that, we won't be held with our feet to the coals, and Ian will talk through on that. I get asked quite a lot about dividends, and dividends are something that are very definitely in our minds. If we continue to grow our production and our revenues and we have sustainable earnings we would very much like to get into a position where we are paying dividends in the future. That is not for this year, but that is something that is very much part of our capital management strategy. I think another unique thing that Drillsearch has done, and it's been a core part of what we have been doing for several years, is a commitment to research, and that's not an esoteric concept, but we've been a Cooper Basin player and for some considerable time now we have dedicated some people in our technical team to do geological studies across the Cooper Basin. Everybody knows we have been reasonably active in our acquisition strategy. Those acquisitions is based on a strategy that's based on the geology, and we don't randomly go and look at balance sheet and find an opportunity, we are driven by the rocks and the quality of the rocks and that builds into our pipeline. Another very important aspect of what we've done that we're starting to see pay dividends is a commitment to innovation and technical leadership. Now I know a lot of people talk about innovation, but we as a board have had innovation as a formal part of our Board agenda for several years, and we have encouraged management from the most senior levels across and deeply through the organisation to come up with ways to find smart ways of doing things, and that has been reflected in a lot of major innovative steps. I think our 3D seismic in 940 was a very good example of where we were leading in terms of how we went about doing things. We as a board and management see Drillsearch as a smart E&P operator and a company, and that is very important. And that's not just in terms of science projects: we actually take that work that we do and we take the suggestions from that and put that back to our JV partners, and it has changed a number of decisions that have led to significantly better commercial outcomes for Drillsearch. We view the fact that, as a 60% holder in major assets, that warrants our investment in some technical resources to keep that operator really honest, and if we can find ways of improving the outcomes, then we will do that. That really goes to the next point, which is our business model, there's been some commentary about our strategy, our business model and strategy is very clear: we find quality assets; we apply a disciplined management approach to those to assess them; we pick and find the best operator or partner to work with, and we keep that operator working as honestly, if I can use that term, but as productively and in cooperation with us to provide the best commercial result and outcomes. That's our business model. In the previous commentaries we've said we're broadening our look out across the Cooper Basin and beyond the Cooper Basin and what that was intended to inform the market was, yes, absolutely, we see significant growth prospects for production in the Cooper. Our five year plan is completely subsumed by what's available in the Cooper, but as we roll through that plan there may be opportunities to add assets that are not Cooper Basin based at the back end of it, and to provide and apply our business model to those assets. So that is just saying to shareholders, we will put your money and the company's investment in the place that's going to provide the best return using the skills that we have available for us to use, and that's how we make money for shareholders and create value. Now my very final point is on the Board and senior management. You know that we are looking for an MD at the minute. The philosophy at Drillsearch about management and leadership is much more akin to a football team rather than a presidential election. We have never taken the view that we find an MD and that person dictates the strategy and completely takes responsibility for delivering. We have grown as a company because we have had a very talented and active board working cooperatively with a very talented and deeply-skilled management team. The absence of a managing director does not change our game plan and does not change our ability to go forward and the search for an MD is really a search for a somebody who is going to fit into that team and bring additional skills for that team. We are 100% confident that the acting CEO will fill that role that we've got, and there's no immediate hurry for us to go and find an MD, although we are advanced in that search process. So I think that's a bit of colour and background from me. I'm going to be available at the end to take any questions, but I'm now going to pass over to Walter to run though his presentation as CEO. -------------------------------------------------------------------------------- Walter Simpson, Drillsearch Energy Limited - Acting CEO [3] -------------------------------------------------------------------------------- Thank you very much Jim, so welcome everybody to our FY15 results call. Look, starting on slide nine, as we all know, it's been a difficult year, and market volatility continues to have a major impact on the sector. However, despite the difficult climate, we're pleased to be able to show you today that Drillsearch delivered strong performance in FY15 and we expect to continue that through FY16. Decisive measures to reduce costs, streamline the business, and set those clear priorities to allocate capital to production, cash flow and reserves replacement means we delivered a record work program, production line with guidance, increased oil reserves, and maintained strong liquidity. But perhaps what made us most proud is we're able to do all that with a greatly improved safety performance: no lost time injuries and just three recordable instances for the year, resulting in a 30% improvement in our key safety performance indicator of total recordable incident frequency. Looking at that record work program, sound technical expertise was the foundation on which the work program was built, and combining this with our decisive action to respond to the challenging market meant we were able to continue to invest wisely in development, appraisal, and exploration. This wise investment resulted in us maintaining our impressive drilling success rate, adding 12 new discoveries to the portfolio, and delivering additional production capacity. As shown on slide 11, production was solid, about 3 million barrels of oil equivalent, slightly down on FY14. Oil production remained the major contributor, meaning we continue to be Australia's third largest onshore oil producer, and, with Beach, we celebrated the 10 millionth barrel of production from the Western Flank fields in June. As the additional oil production capacity started to come online in the fourth quarter, production increased by over 1000 barrels a day gross, and we've seen that strong production continue in FY16. As I move to our reserves position, once again, we've increased our oil reserves, which now sit at 9.8 million barrels. This was driven by the Western Flank where reserve additions from the new drilling and the updated models as a result of the continued strong reservoir performance increased reserves by more than production. However, the low oil price did result in a slight revision to oil reserves in the eastern flank. In Western Wet Gas, the successful drilling campaign in the JV with Santos added reserves of close to 4 million barrels of oil equivalent, and in the Beach JV, analysis of the Middleton and Brownlow production performance added developed reserves, but this was offset by a revision, mainly to undeveloped reserves, following an analysis of well results. So now let me pass you over to Ian who's going to cover the financial position. -------------------------------------------------------------------------------- Ian Bucknell, Drillsearch Energy Limited - CFO [4] -------------------------------------------------------------------------------- Thanks Walter, and welcome to all in the call. As Jim and Walter have already touched on, just what a difficult year it has been for the sector, and it's into this context that we present these full year financial results. On slide 14, we show a number of financial highlights for the year. Revenue was down as a result of lower realised pricing and a fall in production. We moved quickly and place hedging that has provided significant revenue protection in financial year 2015, and beyond. Additionally, the company acted decisively, making hard but necessary decisions to reduce our operating costs, with headcount reductions of over a third of our workforce, the shutting in of the Flax facilities, revisions to our business activities in line with the capital priorities that Walter spoke to, and resolving to sell our interest in Tintaburra, which is classed as an asset held for sale as at June 30. The full benefit of the AUD10 million to AUD15 million worth of annualised savings from these actions, it's expected to be realised in financial year 2016 and beyond, with the Drillsearch of today a far leaner and focused organisation. Perhaps the most satisfying aspects of the results from our perspective is the underlying net profit after tax being flat year on year and continuing strong liquidity and cash flow despite the challenging oil price environment. The table on slide 15 highlights our financial performance for the year. At this summary level, you can see the impact of lower realised pricing and production on some of the key financial metrics. EBITDAX is down 34%. Reported net profit after tax is a loss of AUD8 million, which includes non-cash items of AUD58 million in exploration write-offs which are impacted by successful efforts and AUD52 million in impairments. These were then partially offset by changes in the fair value of oil hedge positions and the convertible bond. Operating cash flow of AUD84 million fell 63% but still provided significant funds for reinvestment in the business. At the same time, our cash balance, as Jim mentioned, is AUD132 million, with an additional AUD40 million in liquidity available via an undrawn debt facility. We've achieved all of this in a year in which we reinvested AUD142 million in capital expenditure. Turning the page to slide 16, you can see a waterfall which details the movement in revenue from financial year 2014 to financial year 2015. You can see there the primary drivers for the decrease: the lowering of production, which had a AUD36 million; the fall in the average realised oil price, a further AUD112 million impact, offset by a AUD12 million positive impact of a weaker Aussie/US dollar exchange rate. By far the most material of these drivers was oil price. The table on the bottom right of the slide adjusts revenue for the realised benefits of hedging which provided additional income of AUD21 million, resulting in adjusted revenue of AUD271 million. But looking beyond revenue to profitability, slide 17 shows our realised margins on oil and gas barrels for the period. It should be noted that the oil barrel analysis is a blended barrel between our profitable Western Flank and the less profitable Eastern Margin barrels. Oil cash operating margins have decreased by 61% but still delivered AUD56 a barrel in margin before the benefit of hedging. The averaged realised oil price for the year was AUD90 a barrel, 29% lower than the AUD126 a barrel realised last year. Oil hedges provided on top of that an additional AUD8 a barrel of price support in the period. Cash costs, operating costs and royalties in the oil business of AUD35 a barrel have slightly reduced year on year, with savings realised in royalties due to the lower oil price environment. The increase in non-cash DD&A costs reflect the revised development cost over the full life of 2P reserves. This change was discussed in detail at the half year with now a full year impact shown. The averaged realised wet gas basket price for the year was AUD35 a barrel of oil equivalent, a 17% decline on financial year 2014 prices, reflecting the lower realised liquids pricing. In gas, DD&A, operating costs and royalties per barrel remained relatively flat year on year. So overall, you can see that our margins in both the oil -- in both oil and gas remains strong although impacted by lower liquids pricing. Turning to slide 18, you can see there a waterfall reconciling net profit after tax -- a loss of AUD8 million. Working from revenue on the left you can see the relative impact of operating and corporate expenditures, fair value adjustments, impairments and write-offs, amortisation and depreciation and tax benefit in calculating net profit after tax. EBITDAX highlights that Drillsearch continues to be a profitable business even in this volatile oil market. The movement from EBITDAX to net loss after tax has been largely impacted this period by three key non-cash areas: asset impairments and write-offs, DD&A and tax. We -- as you know, we took an impairment of AUD44 million relating to the Tintaburra oil asset at the half year. A further impairment of AUD8 million has been booked in relation to Flax at the full year after the asset was placed in care and maintenance. Flax remains a long-term growth asset for the Company however. With the adoption of successful efforts we took a AUD58 million write-off to E&E assets in the period and DD&A was expensed at AUD58 million and partly offset then by a tax benefit of AUD12 million to arrive at our net loss after tax position. Slide 19 shows the movement from net loss to underlying net profit after tax and it really highlights the underlying profitability that has been maintained at AUD58 million year on year. In calculating underlying net profit after tax, the non-cash items of impairment and write-offs, the fair value adjustments on derivatives and the convertible notes are backed out together with their tax effect. So as stated earlier, this result is one of the more satisfying aspects of the full year results. Slide 20 illustrates the strong cash generation from our business and our robust cash position. Closing cash as of June 30 2015 was AUD132 million. Following the current year movement in the graph you can see the impact of the strong cash generated from operations of AUD117 million. This has helped to fund AUD74 million worth of reinvestment in our E&E assets, AUD48 million in our oil and gas assets -- which have primarily been focused on the profitable Western Flank oil assets -- and then a further AUD23 million invested in seismic, G&A and G&G activities. In addition to the cash balance, we have AUD40 million in facilities available which remain fully undrawn, providing total liquidity of AUD172 million. The facility has amortised during the period from AUD50 million to AUD40 million and, as noted in the June 2015 quarterly we have begun discussions with commercial banks to refinance our existing debt facility and the AUD125 million convertible bond. We expect to be able to announce the successful completion of these discussions in the coming months. With that, I will hand you back to Walter who will provide some detail on the financial year 2016 outlook and strategy. Thanks, Walter. -------------------------------------------------------------------------------- Walter Simpson, Drillsearch Energy Limited - Acting CEO [5] -------------------------------------------------------------------------------- Thanks very much Ian. On the back of those results, let me take a look at our outlook for FY16 and beyond. Slide 22 shows our guidance for production for FY16 which is 2.8 million to 3.2 million barrels of oil equivalent. As Ian has mentioned, the Tintaburra asset is an asset held for sale. But our production guidance will not change with the potential disposal of that asset. Key drivers for production volumes in FY16 and beyond are the investments made last year in the additional production capacity in the Western Flank, allowing oil production to stay strong and the growth in the wet gas production as a result of us bringing our exploration successes on-stream. If I move to the next slide you see how that investment in the development of oil production and the catalyst of commercialising our wet gas exploration success progressively strengthens our production base. The decisive action we've taken, the discipline we've shown in managing our business and the success of our investments in FY15, combined with the profitability of our assets, enables us to continue to make investments in development, appraisal and exploration. On slide 24 our CapEx guidance for FY16 is AUD80 million to AUD110 million. This encompasses activity across all our business units, with circa 55% being spent on development and appraisal and 45% spent on exploration. In addition, we continue to derive free carry benefit. In the Western Wet Gas JV with Santos, we'll be carried in development, appraisal and exploration activity this year. In the Inland-Cook, Beach will carry an exploration well and in the Northern Cooper Santos will carry an unconventional exploration well. This next slide highlights the work program across the oil, wet gas and unconventional business units, translating our commitment to investing in growth into development, appraisal and exploration activities. So what are the key catalysts for us? Maintaining strong oil production from bringing the additional Western Flank capacity online, commercialising our wet gas exploration success in all three of our Western Wet Gas JVs and delivering our exploration program. Maroochydore-1 in PEL 924 which tests the large (inaudible) anticline structure in the Inland-Cook, the PEL 182 wells which test the exploration of the Western Flank Oil Fairway, the Jute and Willow wells in PEL 101 which test the wet gas potential of the Northern Cooper and the Washington-1 well in PEL 570 which is underway and is a play opener for the gas potential of the Permian Coals of the Northern Patchawarra. Our commitment to investing in growth is important. Looking at slide 26, you can see that we see substantial potential within our existing portfolio. Even in a capital constrained environment, one way we limit our investment to at or below our net operating cash flow, we expect to grow production by 50% over five years. The more immature the prospects, the more work there is to do to be able to bring that prospect into production. However, we have a robust hopper and the work program to mature those opportunities is underway with wells this year testing prospectivity across the portfolio. In addition, should the market improve or upside exploration outcomes be achieved, then we see the potential for increased growth. Our Cooper business is sustainable and repeatable and provides a considerable growth platform. So what have we done that's enabled this success? Being new to Drillsearch, I've been able to take an outsider's look at the strengths and how we've applied them; if you will, what is the Drillsearch way? So let's move to the next slide. Our success in the Cooper has been driven by a thorough technical understanding of the Basin and the commercial acumen to leverage the right partners. These skills have allowed us to build a portfolio of attractive acreage and our growth has been delivered through sound technical work, identifying acreage with potential, acquiring and exploring that acreage efficiently and monetising discoveries quickly. Leveraging the right partners has been a successful element of growth, allowing efficient exploration and quick monetisation. We have a large and attractive acreage position and our financial strength to our rapid response to the changing market, cost reduction, capital reallocation and revenue protection, means that we remain able to explore the potential of that acreage while maintaining investment in our producing assets. The Cooper is a very successful business for Drillsearch and we expect the potential we see in our acreage to allow us to continue to grow our Cooper business. Put simply, the Cooper business is a superb platform upon which Drillsearch can build. So what are the key takeaways from today? We see the market remaining challenging but the decisive action we've taken means we've been able to maintain our underlying profitability, retain a strong balance sheet and begin refinancing activities. This means we're able to continue to invest in production growth, diversify our production base and maintain a balanced exposure to the full value chain from exploration -- from evaluation through exploration, appraisal and development, all the way to production. Our proven and repeatable approach means we have a high-quality portfolio of assets and, even in this challenging market, the quality of our portfolio means we expect to grow production by 50% over five years. So thank you very much and we'll now open the lines for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentleman, we will now being the question and answer session. (Operator instructions) Kirit Hira, Macquarie. -------------------------------------------------------------------------------- Kirit Hira, Macquarie Research - Analyst [2] -------------------------------------------------------------------------------- Morning guys. Just a couple of questions from me. Firstly, with regards to the five year outlook for production, just keen to understand what that includes; whether it includes obviously the wet gas discoveries you've had with Santos this year in terms of that development but also any replacement with regards to Western Flank oil; whether there's an implicit assumption in terms of your thinking there. I just want to really understand what's in and what's out in terms of what makes up that 50% growth target. -------------------------------------------------------------------------------- Walter Simpson, Drillsearch Energy Limited - Acting CEO [3] -------------------------------------------------------------------------------- So look, we -- obviously we've got the Western Flank oil production is continuing, Kirit, and we see that carrying on into the future. We see the Western Wet gas that we're commercialising over the course of this year, we see that contributing to it. But we also have this very extensive and high-quality portfolio of assets within the Cooper. What we've looked at is our risk-based exploration program and the results we expect that to deliver. So our growth in production relies on the existing base in oil and wet gas that we have, the growth that we see from the discoveries already made and the quality of the portfolio of exploration assets that we have. -------------------------------------------------------------------------------- Kirit Hira, Macquarie Research - Analyst [4] -------------------------------------------------------------------------------- Okay. Then just a question regarding the CapEx budget: AUD80 million to AUD110 million. I just note that there's only about AUD40 million-odd of committed CapEx in terms of the financials. I'm just wondering, how compressible is that budget assuming that oil prices were to remain, let's say at low AUD40s for the remaining of the financial year? Would you look to actually compress that budget further and is that actually physically possible just given the low commitments in the balance sheet? -------------------------------------------------------------------------------- Walter Simpson, Drillsearch Energy Limited - Acting CEO [5] -------------------------------------------------------------------------------- So look, we've been very clear on our strategy around our capital management, that we will always manage our capital expense to be within our net operating budget. We keep that under constant review, looking at the revenues we're bringing in from the oil price and from the revenue we achieve from our gas and our wet gas. So we keep that under review at all times. Look, we have a stated intention that we'll manage our capital budgets to live within our means. So we will stay within our net operating cash flow. -------------------------------------------------------------------------------- Kirit Hira, Macquarie Research - Analyst [6] -------------------------------------------------------------------------------- Okay. Just the last question, perhaps maybe for Jim. Regarding long-term performance rights, I notice there's been a fair transition in terms of what you've assessed there in terms of share price growth, just absolute basis being the weight -- the heavy weighting in 2012. Now it's more so focused on relative TSR, which is probably the appropriate measure, but also a fairly sizeable 25% weighting towards reserves growth. I'm just wondering how the Board thinks about long-term performance, whether it's underpinned by growth or more so focused on relative TSR? -------------------------------------------------------------------------------- Jim McKerlie, Drillsearch Energy Limited - Chairman [7] -------------------------------------------------------------------------------- It's one of those things -- it's a bit like strategy consulting, isn't it? You can prophesise all these things but you're often not around when they think -- when they come home to roost. Long-term incentives are a bit like that. So how do you provide an incentive in this environment that's going to get the behaviours that are required to deliver shareholders' returns in the longer term? Philosophically we -- because we are absolutely committed to growing our production, we need to grow our reserves to be able to do that. So reserves growth is the fundamental driver. That gives the business sustainability. There's just no way around that. Then we are competing for capital. People will want to invest in this sector and whether we outperform our peers is a function of how well management manage the levers, pull the levers, make the decisions. So that is a very, very important factor that we look into. We've -- those things roll over and we look at them at length every year. We are not into the business of changing them for the sake of changing them, but what was in 2012 is not appropriate for now. So they've sort of washed through and out of the system. Going forward, we're very much about growth in reserves and ensuring that the Company's relative performance is strong compared to its peers. -------------------------------------------------------------------------------- Kirit Hira, Macquarie Research - Analyst [8] -------------------------------------------------------------------------------- Okay. I get -- -------------------------------------------------------------------------------- Jim McKerlie, Drillsearch Energy Limited - Chairman [9] -------------------------------------------------------------------------------- Does that answer your question? -------------------------------------------------------------------------------- Kirit Hira, Macquarie Research - Analyst [10] -------------------------------------------------------------------------------- It does. But looking at Drillsearch, it's never been a challenge of reserves growth. Actually, you've done fairly well in that regard given the medium-term replaced -- the reserves replacement that you've delivered. It's more so actually transitioning that reserve to actually production and profitability that's been probably -- maybe, rightly or wrongly -- the challenge, just given the backdrop of a weaker oil price. But let's just focus on production which strips out the oil price which is out of your control. That's always been the, I guess, the conversion that maybe has been perhaps a bit more challenging in terms of converting that attractive reserves growth to actual production growth -- outside maybe Bauer. So I'm just wondering if reserves growth is actually the appropriate measure; rather should it be production or profitability? -------------------------------------------------------------------------------- Jim McKerlie, Drillsearch Energy Limited - Chairman [11] -------------------------------------------------------------------------------- Yes. Look, it's something that the Board looks at and is under constant debate. Walter's jumping up and down and wants to make a comment. -------------------------------------------------------------------------------- Walter Simpson, Drillsearch Energy Limited - Acting CEO [12] -------------------------------------------------------------------------------- (Inaudible) So the way we look at it from a how are we driving performance perspective, we looked at from the point what are the things that we really think are going to be a differentiator for us as an internal management driver and what is it that the market's going to judge us off? So well we looked and said look, if we're going to grow production -- which we want to do -- the market is going to measure us on that in our -- in the relative shareholder value. So in the relative TSR, what our production rates are will come into that. What we wanted to make sure was that that was sustainable and we could keep that growth going and so that's what brings in the reserve number into that long-term because we want to be able to have the reserve base that can continue to support that growing production. That was the rationale behind it really. -------------------------------------------------------------------------------- Kirit Hira, Macquarie Research - Analyst [13] -------------------------------------------------------------------------------- Okay. Actually that makes a lot of sense, yes. -------------------------------------------------------------------------------- Jim McKerlie, Drillsearch Energy Limited - Chairman [14] -------------------------------------------------------------------------------- Yes. It doesn't always turn out to be a great result for management. This year it'll be zero in terms of reserve growth. So it does have the required impact I think. -------------------------------------------------------------------------------- Kirit Hira, Macquarie Research - Analyst [15] -------------------------------------------------------------------------------- Okay, great. Thanks for that guys. -------------------------------------------------------------------------------- Walter Simpson, Drillsearch Energy Limited - Acting CEO [16] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- Nik Burns, UBS. -------------------------------------------------------------------------------- Nik Burns, UBS - Analyst [18] -------------------------------------------------------------------------------- Thanks guys. Just a question on your production guidance -- slide 23 -- particular -- just on the wet gas side of things. I notice it looks like your production guidance is contingent on a series of well connections in the Santos JV area. Just with the issues that Santos has at the moment, how firm is that plan, given they're carrying you on a fair chunk of your forward capital there? So I'm just wondering if there's any risk around some of those wells being pushed back maybe into FY17? -------------------------------------------------------------------------------- Walter Simpson, Drillsearch Energy Limited - Acting CEO [19] -------------------------------------------------------------------------------- So look, obviously Santos would have to comment themselves on their own internal difficulties. But in terms of the engagement we have had with them, and obviously we've been heavily engaged because of the importance of this to us, they are fully committed and are providing all of the updates and the plans in -- that would show that they're committed to delivering these on time for us. So right now, obviously we're keeping we're keeping an eye on it, but absolutely the engagement we've had with Santos completely would be consistent with them delivering on these timeframes. -------------------------------------------------------------------------------- Nik Burns, UBS - Analyst [20] -------------------------------------------------------------------------------- Right, okay. Just on your reserves position, just quickly on the Santos JV, are you able to provide any split between gas and gas liquids on the 7.9 million BOE 2P reserves there? -------------------------------------------------------------------------------- Walter Simpson, Drillsearch Energy Limited - Acting CEO [21] -------------------------------------------------------------------------------- No. We don't break that down in our reserve breakouts I'm afraid. -------------------------------------------------------------------------------- Nik Burns, UBS - Analyst [22] -------------------------------------------------------------------------------- Okay, fair enough. Look, I'll just ask as well on the Beach JV wet gas. Look, 12 months we have this debate around -- I think Beach was carrying 2 million BOE. You had 14.1 million BOE. You were confident that your numbers were correct. We've now seen a 43% reserve reduction there, the 2P level. Beach is now at 2.2 million BOE. You're at 8.1 million BOE. So there's still quite a bit of a gap there. What can you tell us that gives us confidence that you believe that that 8.1 million BOE is there and it will be produced? -------------------------------------------------------------------------------- Walter Simpson, Drillsearch Energy Limited - Acting CEO [23] -------------------------------------------------------------------------------- So look, the fact there's a difference between us and Beach, we all do our own technical work and they have different views. As we work together and we compare notes we tend to be more aligned. So what is it that's driving ours? We have an independent review of our reserves done and our gas reserves have been independently reviewed by D&M. They are comfortable with the numbers we've put forward. We had a number of wells that we drilled in the Beach JV this year. The results of those wells made us review the technical work and review the position we had on reserves. That meant that we did take a revision to the mainly undeveloped reserves in the Beach JV. But equally so in Brownlow-Middleton, some technical work around material balance and geological models and the production history matching from our model to the thing -- to the well production we were seeing, we actually increased our developed reserves there significantly, which is a really good step forward and showing the strength of production coming from these gas fields. Now, as yet Beach haven't made an adjustment to their reserves in that field. So it's something that we will talk to them about as a JV and see where we can move that stuff forward. So in light of why do we have a different view? We've had a heavy focus on wet gas. We've had a heavy focus on monetising it. As you know, it was us that drove the Brownlow-Middleton development and getting it forward and we have tremendous confidence in our reserves. -------------------------------------------------------------------------------- Nik Burns, UBS - Analyst [24] -------------------------------------------------------------------------------- That's great. Thank you. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- Tim Masters, Canaccord. -------------------------------------------------------------------------------- Timothy Masters, Canaccord - Analyst [26] -------------------------------------------------------------------------------- Yes, hi guys. A good result. I just had a few questions, starting on the wet gas business. I had the Santos carry being fully utilised towards the end of this year but it looks like most of that program and most of that spend is going to be in the second half of FY16. Can we assume that you'll get through the majority of that program and, if not, how much are you expecting to contribute, and would that be mainly in Q3 or Q4? -------------------------------------------------------------------------------- Walter Simpson, Drillsearch Energy Limited - Acting CEO [27] -------------------------------------------------------------------------------- So we are expecting that the majority of this program will be conducted through the free carry with Santos. Yes, you're correct in that. -------------------------------------------------------------------------------- Timothy Masters, Canaccord - Analyst [28] -------------------------------------------------------------------------------- Okay, fantastic. Could we just maybe move on the Beach JV as well? That compression which was going to get improved, it felt like that was going to increase your production there at least by 5 million standard cubic feet a day. If that's coming through just from Udacha and Coolawang, is there any additional production that will come through from [Ranau]? And if -- is that one expected to be tied in in FY17? -------------------------------------------------------------------------------- Walter Simpson, Drillsearch Energy Limited - Acting CEO [29] -------------------------------------------------------------------------------- So look, we are planning to bring on Udacha and Coolawang and we're looking to have the compression installed by the end of the year so that it can increase the production from those fields and, yes, that gives us the opportunity then to tie in further fields. We're going through the technical work at the moment to agree what the configuration and sizing of the compressors needs to be. That's advanced work with Beach at the moment and we're on a point of moving that forward to actually go to the ordering and construction phase for that project. It should move things so that we're ready for the end of the year for it being up and running. -------------------------------------------------------------------------------- Ian Bucknell, Drillsearch Energy Limited - CFO [30] -------------------------------------------------------------------------------- Yes. But there's no benefit in our production guidance assumed from the compression in FY16. -------------------------------------------------------------------------------- Timothy Masters, Canaccord - Analyst [31] -------------------------------------------------------------------------------- Okay. That's good to know. Then is that compression -- is that contingent on the two exploration wells there or will they be run alongside -- -------------------------------------------------------------------------------- Walter Simpson, Drillsearch Energy Limited - Acting CEO [32] -------------------------------------------------------------------------------- No. The compression is going ahead on the basis that it'll provide value for FY17 and beyond. -------------------------------------------------------------------------------- Timothy Masters, Canaccord - Analyst [33] -------------------------------------------------------------------------------- Okay. Okay, great. Thanks guys. -------------------------------------------------------------------------------- Walter Simpson, Drillsearch Energy Limited - Acting CEO [34] -------------------------------------------------------------------------------- No problem, thank you. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- (Operator instructions) -------------------------------------------------------------------------------- Dudley White, Drillsearch Energy Limited - General Manager Corporate Communications [36] -------------------------------------------------------------------------------- Okay everybody. Well, if there are no other questions then thank you very much for listening in to the call today. As I said, there will be a recording up on the website later on. Thank you very much. -------------------------------------------------------------------------------- Walter Simpson, Drillsearch Energy Limited - Acting CEO [37] -------------------------------------------------------------------------------- Thanks everybody. Thank you. -------------------------------------------------------------------------------- Jim McKerlie, Drillsearch Energy Limited - Chairman [38] -------------------------------------------------------------------------------- Cheers. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- Ladies and gentlemen, that does conclude our conference for today. We thank you for participating. You may all now disconnect.
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