PETSEC ENERGY LTD
Production Update
PSA - Quarterly Results - Mr Terry Fern, Chairman
Wed, 23 Jul 2008 11:00AM
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Mr Terry Fern
Wed, 23 Jul 2008
11:00AM Australia/NSW
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PETSEC ENERGY LTD (PSA)
ASX code: PSA
Website: http://www.petsec.com.au/
Industry: Energy
Principal Activities:
Oil & gas exploration, development and production; Investment in mineral exploration, development and production; General investment.
Address:
1 Alfred Street, Goldfields House, Level 13
SYDNEY
NSW
Phone: (02) 9247 4605
Fax: (02) 9251 2410
Executives & Directors
Mr Terry N Fern , Chairman, Director, CEO
Mr David A Mortimer , Non Exec. Director
Dr Peter E Power , Non Exec. Director
Mr Craig Jones , Company Secretary
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Announcements from the preceding six months are shown below.
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PETSEC ENERGY LTD (PSA) Events
Australia/NSW
PETSEC ENERGY LTD (PSA)
| Pipeline Maintenance to cause Temporary Shut In of CA 31/32 | Wed, 19 Nov 2008 |
| Third Quarter Report period ended 30 September 2008 | Thu, 23 Oct 2008 |
| Third Quarter Release correction | Thu, 23 Oct 2008 |
| September Quarterly Results Teleconference | Tue, 21 Oct 2008 |
| Appendix 3X | Tue, 21 Oct 2008 |
| Miles Timber No 1 Well Test 1.7 MMCFD and 170 BOPD per day | Fri, 17 Oct 2008 |
| Appointment of Non Executive Director | Tue, 14 Oct 2008 |
| Petsec production increases to 27 million cubic feet of gas | Tue, 14 Oct 2008 |
| Petsec awarded two new leases North Padre 929 and 934 Gulf o | Tue, 23 Sep 2008 |
| Post Hurricanes Production Update | Thu, 18 Sep 2008 |
Please note: This company appears on this website as a result of its listing on the Australian Securities Exchange. Boardroom Radio does not claim any association with any company listed on this site.
PRESENTATION BY TERRY FERN, CHAIRMAN OF PETSEC ENERGY LIMITED (PSA)
“Production Update - Quarterly Results”
http://www.brr.com.au/event/47582
WEDNESDAY, JULY 23, 2008, 11:00 AM.
PSA Good morning, ladies and gentlemen. Thank you for joining this teleconference to discuss Petsec Energy’s June 2008 quarterly results. I have senior management with me. I will begin with a brief review of the quarter and
10 then I will open the call to questions.
Production of 3.4 Bcfe was 22% lower than the previous quarter. As flagged in the last quarter conference call, production would be low but the result is somewhat lower than we expected and that was mainly due to the shut-in of
15 the Main Pass 270 field the majority of the quarter. This is a result of third party pipeline blockage and it resulted in production of 0.375 Bcfe less from this field in the previous quarter. There is also lower than expected production from the Mobile Bay fields and this was caused by increased water production from a number of wells, and as a consequence, the field produced
20 0.269 Bcfe less than the previous quarter.
The well production was lower than the previous quarter, was 103% higher than the corresponding quarter, the full year of 2007, and that reflected the contribution of the Mobile Bay gas fields which commenced production in
25 November 2007 and the contribution of the gas fields which we acquired, again, in November 2007.
Our 2008 production guidance of 15 Bcfe can still be met provided Main Pass 270 and Vermilion 258 wells return to production in August. In Vermilion 258,
30 three of the wells need to be recompleted and we hope they will be recompleted in August and then they will come online.
The Company has its reserves audit each half year to coincide with the Company’s annual and half year results. The independently estimated 2P
35 reserves, that is proven and probable reserves, on the 30th of June 2008 are 34.5 Bcfe. That reflects the 7.8 Bcfe of production in the half year, Bcfe addition in the Laurent well in the 4.8 Bcfe, downward revision, that is predominantly in Mobile Bay and South Sunrise fields where there has been premature water encroachment in those wells which of course reserves to be
40 reassessed.
Petsec Energy’s internally estimated reserves are a little bit higher at 35.9 Bcfe.
45 The average gas sales price we received in the quarter was the same as that of the previous quarter at US$8.77/Mcfe. This did not reflect the high spot gas prices reported late in the quarter. Because of the lower production, some 77% of production ended up being hedged and that was at an average price of $7.79.
Nymex gas spot price is currently trading around US$10.70/Mcfe and the two-year strip is approximately $10.50 in each year.
5 Net revenue through the June quarter was US$30 million that was down 22% from the March quarter and that was directly in line with the reduction in production.
EBITDAX for the June quarter was a little lower than the 22% fall in
10 production that was US$22.1 million, 31% down. This represents the cash operating margin of US$6.45/Mcfe, down 12% on the previous quarter of US$7.33. That reflects lower production which in turn (inaudible) (0:03:56).
Our US$16.575 million that was the cash flow generated from operations in
15 the quarter was applied to debt reduction. The Company’s net debt position, that is total debt less cash, has further reduced from $54 million down to $41.1 million on June 30. Our net debt of US$41.1 million comprises of outstanding debt of US$67.9 million less cash of US$26.8 million.
20 Debts facilities put in place last year included a $30 million short-term component and that was fully repaid on the 8th of April. The remaining debt facility comprised US$29.9 million facilities. That is repayable in 2011 and the US$63 million revolving credit facility which expires in 2010.
25 Expenditures in the quarter on exploration and development amounted to US$12.45 million. That covers acquisition of three Gulf of Mexico leases with drilling of Laurent, Triple Play and Crown oil wells and the development of Laurent well, Main Pass 18/19, our storage platform, and ODP from FEED work on 6-12 and 12-8 West oil fields in China.
30
We expensed US$2 million for unsuccessful drilling cost at Triple Play well and a small amount for the China drilling in the first quarter.
Looking at our operations in a little more detail, we were awarded three
35 leases by the MMS in the Gulf of Mexico. These were the high bids we made at the March 2008 Central Gulf of Mexico Lease Sale.
We also drilled or are drilling three wells: Onshore Louisiana this quarter. The Triple Play well, which was initially drilled and temporarily plugged in
40 September 2007 due to deteriorating hole conditions, was reentered and deepened a further 151 metres or 500 feet and reached measured depth was 4145 metres or 13,680 feet, to our American friends, to test the target the Hollywood #2 sand. It had mapped potential in the range of 20 to 25 Bcfe. The well was plugged and abandoned after logs indicated early thin
45 laminated gas sand which were not commercial to develop. The drilling cost there was US$1.7 million and has been expensed net to Petsec.
The Laurent well, that was formerly known as the Virginia Geason well on its Dickel Prospect and Moonshine Project, was drilled late in the first quarter and tested on the 13/64-inch choke, 3 million cubic feet of gas a day and 70 barrels of condensate. The well was developed in the second quarter with production commencing in the 1st of July at the initial rate of 5 million a day and 125 barrels of condensate a day. However, shortly after commencing
5 production, the well began making significant amount of water and current analysis indicates that the water production is the result of a mechanical breakdown in the wellbore and remedial plans are currently being developed.
The Miles Timber #1 well is testing the Crown Royal Prospect. Moonshine
10 Project, that is close to the Skywagon well we drilled in 2007. We are drilling ahead this morning at 3917 meters, that is 12,926 feet, to a proposed depth of 4024 metres or 13,280 feet. That is testing targets with the potential net of 5 to 7 Bcfe to Petsec. We should reach target depth within a week and have good outcome.
15
In terms of development in the USA, the Laurent well was placed in production, as I said previously, and the 3000 barrel oil storage platform was completed in June and it is adjacent to the Main Pass 19 platform. This is to allow higher rates of oil and gas production in the Main Pass 18/19 fields. We
20 also completed recompletions of three wells, the G1, G3 and G7 at Main Pass 19 and that was done in late June.
In China, work continued during the quarter in conjunction with the China National Offshore Oil Company on the front-end engineering and design
25 studies and the overall development plan for the 6-12, 6-12 South and12-8 West fields. These three fields contain recoverable oil in the range of $29 to $37 million barrels, and as you are aware, Petsec Energy has a 25% working interest in those three fields.
30 The joint venture expects to make a final investment decision and commence development which will be seen later this year.
September quarter. At the moment, not a great deal on the horizon. The Crown Royal well results will be known, and should there be success there, it
35 could well initiate another well in a prospect close by. In China, work will continue on the ODP and FEED for the fields in 6-12 and 12-8 West.
Thank you. I think that concludes my remarks, so I will open the floor to questions. Thank you.
40
Operator Thank you. For those of you on the phone, if you would like to ask a question, please press * followed by 1 on your telephone keypad. I will repeat. That is * followed 1 if you would like to ask your question.
45 The first question is from Irena (inaudible) (0:09:59). Please go ahead.
Q Yes, good morning. Every one, my question is on reserves downgrade or reduction at the Mobile Bay. That sounds quite significant. I understand, it was about 18 Bcfe improved reserve for the Mobile Bay leases. Could you just tell a little bit more about your outlook for those wells in terms of production decline rates, etc?
PSA Ross, would you like to answer that delightful question from Irena? Irena, I
5 noticed that in the last two conference calls you have been the first question.
Q I have more.
PSA Well done.
10
PSA Terry, yes, I will answer that. Our outlook out there is really for the production to be fairly steady. The wells are producing at lower rates than we had originally anticipated because of the water that is coming to a couple of wells. So looking at the field as a whole, the Mobile Bay 100 series of wells, it will
15 maintain a fairly steady rate of production, albeit at a lower rate.
Q Okay. There is a thing around this time, you must be close to achieving the paybacks. So is your net revenue interest going to come down on those leases any time soon?
20
PSA The payback is calculated on a lease-by-lease basis. One of the leases has paid out but the other ones are still working towards that payout status. So, in one of them, we have reached the back endpoint but not in the others.
25 Q Thank you.
Operator Thank you. The next question is from John Young of Wilson HTM. Please go ahead.
30 Q Thank you. Hi, Terry.
PSA Hi, John.
Q I just have a question for you regarding the China project. I noticed that in the
35 development concept that is put forward here at the moment, it appears to correspond with what Roc had previously talked about as phase 1 and phase 2, and I have seen in some other presentations there is a possibility of a third phase which is the 12-8 East. I just wondered if you could please give some guns as to whether you expect that third phase to go ahead, and if it were to
40 go ahead, what would be the likely time and place?
PSA The expectation is that 12-8 East will go ahead and that it will follow the development of 6-12/6-12 South and 12-8 West. Granted a production license of the 12-8 West and 12-8 East, we will be required to bring 12-8 East into
45 production within two years of the production license which we expect to get some time in the second half.
What Roc is doing on the feasibility of 12-8 East contemplates that we will stop development I think within a year or so of starting the development of 6-12, but maybe a little later than that and it may not start developing until we have brought 12-8 West into production, but it will be close to that time.
It is important because there is a large volume of oil there. At our last talk,
5 there were about 180 to 190 million barrels of oil in place. And as you know, it has rather high (inaudible) (0:13:50) 70% of oil that is quite sticky at room temperature, but what we would expect is we can recover 10% to 15%, maybe more, of that oil. It becomes a significant oil volume for the joint venture, but the cost will be higher because a lot more water will have to be
10 handled so we will need a bigger facility to manage both.
Is that sufficient for you?
Q Just still on that final remark, please, sorry, with respect to the water handling.
15 I understand the facility that is being put in will have something like 25,000 barrels a day of, I do not know if that is total fluid capability or oil capability, but the initial production rates are like 10,000 to 15,000 barrels a day. Does that mean the facilities that are being installed at the start will have sufficient capability for this later development or they will need some debottlenecking or
20 expansion?
PSA I think that later it will need some sort of expansion, but it is still a little bit early to discuss it.
25 Q Okay. Thanks very much for that.
Operator Thank you. I will remind everybody again, if you would like to ask a question, please press * followed by 1 on your telephone keypad.
30 The next question is from Peter (inaudible) (0:15:21) Bank. Please go ahead.
Q Hi, guys. I would just like to get back to Irena's question. She asked about the cut back in reserves. You have reduced like by 4 Bcfe, mostly out of Mobile Bay. My understanding was that your share of the Mobile Bay reserves on 2P
35 basis is only about 6.4 Bcfe, is that correct? So you have gone from 6.4 down to about 1.6 or less? Or would it have been 6.4 (inaudible) (0:15:50)?
PSA It is a bit higher than that. Ross, do you have it on hand?
40 PSA Yes, Terry, I do. Peter, the write-down of reserves, the 4.8 is in both Mobile Bay and also at South Sunrise. So not all of that 4.8 is attributable to Mobile Bay. So our Mobile Bay 2P reserve, as per our numbers, is on the 4 Bcfe at the 30th of June. Where we have taken the heat also, as I said, is at South Sunrise because we have seen water coming at both the wells out there.
45
Q Okay. Which part of your operations is South Sunrise? What area?
PSA I beg your pardon. South Sunrise is Onshore Louisiana.
Q Okay.
Operator Thank you. The next question is from Glenn Crichton of Baillieu Stockbroking. Please go ahead.
5
Q Good morning, Terry and Ross.
PSA Good morning, Glenn. How are you?
10 Q Not too bad. I am just wondering if you can make some comment about the Board’s thoughts on closing the gap between the current share price and fair value.
PSA ... all the array of potential items, then we have discussed it at some time. We
15 are working on a number of those problems, but it is somewhat difficult in an environment as we have. We have people selling for liquidity purposes because they are a little bit scared of what is happening in the word. Value will be established if we make any discovery. Some may take out bits of the Company or there is some other monetization.
20
Q Yes. Is there anything else you can add in terms of progress for the commitment with China or is it still that China is holding up the process?
PSA The process in China is always methodical and relatively slow compared to
25 our experience in the US. But there is a great deal of activity going on and we are getting very close to the point where an ODP can be launched and improved, and respectively, it does not get launched unless it is approved. The feasibility studies, the ODP and FEED are effectively being done in conjunction with CNOOC. Most of their research facilities (inaudible) (0:18:52)
30 drilling, the exploring facilities that will need the development will come from CNOOC. CNOOC is going to be, I expect, our joint venture partner. It is logical that we are doing the development work hand in hand with them, and we are getting very close.
35 Q I am just, I suppose like many others, frustrated that the initial expectation was that the process would be completed around midyear. It was the Company’s sort of expectation out. Sort of deteriorated to being later in the year which is pretty vague and it sort of means everybody is on (inaudible) (0:19:33), saying, “Well, is it next month or is it in four months time?" But by
40 the sound of it, you think it will be sooner rather than later.
PSA Well, you know me, Glenn. I am always an optimist.
Q You know me, I am always a pessimist.
45
PSA No joke.
Roc is the operator. They are in day-to-day. We get informed on a weekly basis as to what is going on and there is an enormous amount of activity, and plus, we do not have control over the Chinese. They have their own agenda. They have a whole series of other fields that they are developing and we are just one of the big ends lost into their program. But everything that I hear and see would suggest that before the end of the year we should have an
5 approval and the economics and such. We have always been happy to proceed for the last 18 months.
Q Just one final thing. The average reserve price in the first two quarters was a little disappointing compared with the strip and spot prices. I am also a bit
10 surprised that about high percentage of sales were into hedges. Assuming that third quarter production is up, can you give us any idea of what your reserve price is going to be?
PSA The hedges are in the quarterly report, and you can see in the September
15 quarter, we do not have that many slots. It is predominantly put. Because production was lower in the second quarter, a lot of hedging was increased. It is a bit disappointing, yes. One would like to draw much more advantage, but we do not have control over the Chevron pipeline and it has been a bad luck with Mobile Bay and South Sunrise. In the third quarter, our hedging swap is
20 quite small.
Q So a little net basis. But with respect as to where it is, it is not unreasonable to expect a lift in the average reserve price then?
25 PSA One would hope. If it remains around about 10 level, we could expect to get over 9.
Q Yes. That is what I was sort of thinking.
30 PSA So there is a prospect of getting a bit more production and a prospect of getting gladly higher price. I believe the third quarter is (inaudible) (0:22:27).
Q Have you got any sort of indicative timing on (inaudible) (0:22:37)?
35 PSA (Inaudible) (0:22:39) is dependent on us getting a rig. We thought we had a rig a week or two ago, and that slipped through our fingers. Ross is working pretty hard to try and track another one down. All the geological work is done, and it is now a function of securing a rig. Now, we cannot drill in the hurricane season. If a rig appeared, the earliest that we could drill this thing is at the
40 end of the year. December–January.
Q Okay.
PSA But it is unlikely to be that early, I would suggest. I think that at best it will be
45 late in the first quarter, going into the second quarter.
Q 2009?
PSA 2009.
Q Yes, okay. Good. Thanks.
Q … detailed questions on the financial data, what is the other expense and sort
5 of 779 larger than usual? What is the reason for lease operating expenses going higher? Finally, how many barrels of oil did you produce?
PSA Irena, it is Fiona Robertson. The other expense is essentially a recycling of those foreign exchange translation loss from the foreign exchange translation
10 reserve into the P&L as a consequence of each company’s loan and interest settlement that occurred during the quarter. In terms of the equity of the Company, it is no alteration. It is just a realization for P&L purposes.
Q Okay.
15
PSA Lease operating expenses are basically up, and Ross may dare to comment on this, but they are basically up in unit terms as a consequence of the low production. Ross, I wonder if you want to comment in terms of the absolute increase there?
20
PSA The absolute increase, I think, is really in line with our expectations. I am looking at our budgets and our (inaudible) (0:25:09) forecast in front of me.
PSA They always have a change, but because of the fixed nature of a lot of these
25 LOEs on a production basis, they increase because our production was lower than we anticipated.
Q Okay. And so given that you have a couple of more leases now, will it go up sort of on an absolute basis with the second half of this year?
30
PSA No, it is not going to change that much for the rest of the year. Are they, Ross?
PSA No, they are not.
35
Q And the barrels of oil production?
PSA 23,000 barrels for the half year, Irena.
40 Q I am sorry, I did not hear that.
PSA 23,000 barrels of oil for the half year.
Q Okay. Thank you.
45
PSA I do not have the quarterly figure here in front of me, but if you need it, we can get it.