Good day, and welcome to the Genesis Energy Investor Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Marc England , Chief Executive Officer. Please go ahead, sir.
Good morning, everyone. [non-English] . This is Marc England , CEO, and I've got Chris Jewell , our CFO, next to me. We want to offer you the opportunity to ask questions about the announcement this morning that we put to the market about Kupe. You'll have seen that we've announced a strategic review in relation to the asset. For those of you that are less familiar with it, Kupe is an oil and gas asset that consists of a large production exploration permit off the coast of South Taranaki. It's got an onshore production station nearby to Hāwera, and it's the third largest producing asset in New Zealand, consisting of three producing wells. It produces natural gas, LPG, and some condensate, which is currently exported. It's had a strong production history with three significant reserve upgrades over 10 years, and we increasingly believe it has strong exploration potential.
Beach Energy, an ASX-listed oil and gas company, is the operator, and a highly experienced, competent one at that. Kupe is a core fuel supplier in the New Zealand energy market, with over 15 years of remaining production. It's a major reliable supplier of gas and LPG for Genesis customers. Genesis is a 46% owner of the asset in this joint venture, has been involved in the joint venture since the project was developed in 2010 to produce gas for our Huntly plant and also our customers. With that, I'm going to hand over to Chris to talk a bit more about the review we're undertaking and to take most of your questions. Chris?
Thank you, Marc, good morning, everybody. The joint venture is partway through an onshore compression project, which sees equipment that will allow the plant to again operate at design output. This project is due for completion in mid-2021 and is going very well. The joint venture has also recently started to consider the second phase of development, which may consist of further drilling for both production and potentially exploration wells. Given the field has existing permits and is not impacted by the ban on new permits, and there have been challenges with a couple of the other large New Zealand gas fields, the joint venture has been assessing the opportunities and economics of exploration of some of the near field prospects.
No decisions have yet been made, and the joint venture is in the early stages of these assessments, which will consider the number of wells, the cost, the timing, the reserves, and ultimately the economics of this program. An offshore well drilling program, firstly targeting proven reserves, and secondly, possibly exploring for and targeting prospective reserves, is a different proposition for Genesis, which would require capital and would come with a different risk profile than what Genesis has chosen to take on since the IPO in 2014. Given the likely capital decisions, our board has asked for management to undertake a strategic review of the Kupe asset. This review will consider the structure and tenure of our gas and LPG contracts with our 46% interest. This is our own use gas and LPG.
The timing, costs, and the economics of unlocking the existing undeveloped reserves and the risks and opportunities associated with this program and ongoing ownership of the Kupe asset. The potential for a sale of Kupe and the value that could be received through a sale process. The optimal balance sheet structure for Genesis in the event of a sale. Lastly, whether there are potential lower risk, higher value, or strategically aligned alternative opportunities for the use of these funds if a sale did occur. Regardless of the outcome of this review, our long-term contractual rights to all gas produced will not be affected. Although we anticipate resetting pricing for our current share to be more akin to current long-term average prices. In deciding a path forward post the review, the Genesis board will be making a decision in the best interest of all shareholders.
We do recognize that dividends are important to our shareholders. Our earnings have grown significantly this year as per our guidance, and all else being equal, we anticipate further growth in coming years. Regardless of the outcome of the review, this review on its own would not impact our ability to maintain dividends at the current level. This review is anticipated to take until the middle of 2021, and we will continue to update the market at the conclusion of this review. With that, I'll open up for any questions, and Marc and I will share the questions between us.
Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on the phone will indicate when your line is open, and please state your name before posing your question. Again, that is star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. I'll take our first question. Please go ahead, caller. Your line is now open.
Morning, Marc and Chris. Andrew Harvey-Green here. I guess the key question everyone's going to be focusing on, I suspect, is just around that dividend sustainability, and you've just, I guess, given some indication there. Will you be revisiting the dividend policy as part of this strategic review?
No, not as part of the review, Andrew.
Okay. The other question I just had was, I guess, around looking at take-or-pay gas and sort of gas beyond 2025 and whether you would consider, I guess, contracting for that gas now, if you do go down that sale path to, I guess, try to make the asset a little bit more attractive to a potential buyer?
Yeah, look, that's all part of the review. I say the word "review," the long-term tenure of the contracts, the nature of the term, the structure of that, the pricing, all of those things are things we're thinking about, whether we hold the asset or whether if the review did end up in a sale. All of those things are in the mix.
Yeah. Okay. Including for a 46% repricing the gas for the next five years or so under the remaining term of the current take-or-pay?
Yes.
Yeah. Okay. Yeah, that's all from me then.
All right. Once again, that is star one on your telephone keypad if you'd like to ask a question. We'll now take our next question. Please go ahead.
Good morning to you. It's Grant Swanepoel from Jarden. Just following on from Andrew's questions. Can you just give some sort of color on what your commitment to take-or-pay is over the next few years? It was 20-odd PJ. What is it looking like for the next three to four years? You guys have historically mentioned that your LPG business has a nice competitive advantage being backward integrated. How do you feel about losing that competitive positioning? I know I'm not asking if you've got any deal on the table right now, but have you had people approaching you over the last 12-18 months to potentially make you an offer for the Kupe stake, or is this just something that you're starting up with no outside interest as a starting point? Thanks.
Thanks, Grant. Yeah, three questions. In terms of take-or-pay, I mean, we've disclosed how our gas contracts roll off in previous presentations. Our gas contracts both relate to the 46% that we own. Clearly we can control the way we set that up, and that'll be part of the review. The balance of the 54% is contracted with our joint venture partners. We've obviously got no ability to change that unless they were willing to change that on the other side. All of that is part of the discussion. In terms of losing, to use your words, the LPG competitive position, we don't see that. We're obviously maintaining the rights to all the LPG. The way we set those contracts up will be part of the review, and we don't see any change in that outcome.
Essentially, if it did result in a sale, we still would be essentially vertically integrated. In terms of alternative offers, have we been approached? Look, people come and see us from time to time, we've never engaged in a conversation more than taking a telephone call. I guess that's a natural part of owning assets. That hasn't prompted us to start the review.
Sorry, Chris, can I just clarify? Thank you for that. To clarify your answer to the first question, some of that Kupe take-or-pay had already started rolling off, and there had been some indication that Genesis had re-signed that. Can I assume that you haven't re-signed as the take-or-pay that you rolled off against Kupe according to your previously indicated volumes?
Yeah, I think the best way to answer that, Grant, is we'll update at the next time with a chart that gives you a feeling for where our take-or-pay currently sits.
Perfect. Thank you. Thanks, Chris.
All right, we'll now take our next question.
Good morning, Chris and Marc. It's Stephen Hudson calling. Just three from me. I just wondered if you can give us sort of a broad steer on what your share of free cash flow was at a group level. Sorry, what the Kupe stake generated in terms of free cash flow at a group level for FY 2020. I think read at Jarden it was 31% for the EBITDA, ex the outage. I just wondered if there's any reason to use a different number to take 30%? Secondly, would there be any tax payable, if you sold above book value, which I'm assuming that you're hoping to do if you go down that road? Then just thirdly, can you just remind us what preemptive rights the JV partners have and the nature of those?
Yeah, Stephen, the free cash, you can deduce that from EBITDA from last year. I guess we haven't disclosed capital specific to Kupe from the last year, but you can make an estimate of that. Apologies, I can't give you a number for free cash. What I would say is free cash and EBITDA is influenced by our own internal gas transfer prices. As part of that review, we need to think about what the right number is today and on a go-forward basis. In terms of tax payable, I'm sorry, I can't tell you today about tax. That'll be part of the review, be one of the things we need to think about. Your third question-Sorry, I just didn't jot down your third question. Sorry, Stephen, do you mind just repeating that third question?
Preemptive. Sorry. Thank you.
Thanks.
Yeah.
Yeah. Look, with all joint ventures, they're preemptive, and it very much depends on whether you're selling assets or you're selling participating interests. We're well aware of those. We've navigated those arrangements previously when we purchased the NZOG share. I wouldn't see them as a hurdle.
That's great. Actually, Chris, I might just slip in one more. The corporate costs last year, NZD 37 million. Were any of those corporate costs associated with the Kupe assets that you can sort of split off for us?
Yeah, I can't isolate them, but clearly we have a number of people focused at a group level on looking after Kupe, whether it be from gas, whether it be from accounting, all the various things that it takes to run an asset. I can't give you a specific number on that.
Okay. I might just have one more go. It sounds like you're going to be trying to sell an asset potentially on a free cash flow yield of 7% and repaying debt at, I don't know what your marginal cost of debt is for debt repayment purposes, but let's say three or lower. How can that not entail a review on your dividend policy?
Yeah, I'll just bring you back to what we're actually looking at here, Stephen. I think we're doing a review, and we're faced with some decisions that we may or may not have to make around participating in further exploration and drilling. There's two processes we're really looking at, where the joint venture is running a process to understand what the next program of work is in relation to unlocking value from that asset. We're also thinking about what a buyer might be interested in in terms of valuing that asset. Essentially, what we're trying to do is finding the best way to unlock value from that asset. I'll just leave it at that. This is a review, and we're considering two potential paths. We're comfortable that irrespective of the outcome of the review, it doesn't impact our ability to pay dividends at the current level.
Okay. Thank you.
Okay. Thank you.
If you find that your question has been answered, you may remove yourself from the queue by pressing star and then two on your telephone keypad. We'll now take our next question. Please go ahead, caller, your line is now open.
Hi, Marc and Chris. It's Cam here from Craigs. Hey, just wondering if you could give me some color around the gas contracting going forward, how that ties into both your Future-gen strategy and also how that also ties back to the value of Kupe for a potential acquirer.
Yeah, sorry Cam, just confusion their side. The question is how does it tie into Future-gen and contracting? Look, Future-gen, as we've widely published, is about displacing base load thermal over time. That's an elongated program. We've given you some numbers, sort of 10-year targets of what we're shooting for in terms of contracting or building new renewables. We're going to require gas for quite some time to come, whether it be for base load or whether it be for backup. These two things work in parallel. Gas is potentially a declining fuel in New Zealand. It's potentially a more valuable fuel over time. These things will work in concert, and we need to clearly think about all of those things together when we think about how we set contracts up for the future.
Great. Okay. Thanks, Chris.
Cam-
Also proceeds.
I was just going to build on one thing Chris said because I think you're asking it with a bit of knowledge there, and I'm not sure Stephen understood it, but we pay over the odds for gas now to our own Kupe P&L. The Kupe P&L that Genesis has reported for the last few years has been based on the same gas prices that have been escalated for the last 10 to 13 years in other contracts we have externally on other parts of the Kupe field. As we go through this review, we'll be considering what the right long-term market price is for Genesis to pay for gas, but we believe it will be lower than we've been paying our own Kupe joint venture P&L for gas over the last two years. That's where the value difference is. We don't know yet.
We've got to work through all this, but the chances are we'll be repatriating some of the existing Kupe P&L into the wholesale P&L within Genesis if we do this. That was behind your question.
Great. Thanks, guys. That's clear. Also proceeds. Genesis has been highly geared over the last couple of years, I'd imagine some of that's going to go to balance sheet. Can you give any color around other opportunities and so forth that you might be looking at? I know it's early days, but anything there?
Part of the review is looking at the best structure for the balance sheet and what gearing levels we're happy with. That one, give us some firepower to do other things or return funds to shareholders, if we were to choose to do that. In terms of the alternative use of funds, we haven't made any decisions on that. We've clearly got a strategy we've laid out around our Future-gen strategy, which you alluded to. At the moment, we have been contracting volume. One option could be that we invest to deliver that strategy. Look, early days, and we've made no decisions on any of that. Right now I'm not sitting here with an alternative investment to say, "Here's a better way to use the funds." We've got to put all of that in the mix when we think about the best way forward.
All right. Thanks, guys. That's all from me.
All right, we'll now take our next question. Please go ahead, caller. Your line is now open.
Hello, team. Can you hear me?
We can.
Excellent. I couldn't hear myself. Really just picking over the bones of all the previous questions. Just one clarification. Can you tell me for the 54% that you're currently contracting from your joint venture partners, what rights do you have currently under those GSAs for currently undeveloped gas?
We have all rights to all gas produced from Kupe for the entirety of the asset life.
Right. Obviously, there's not gas price agreed for those. Does that give you some sort of rights for first offer or is there a way-?
Correct
To summarize those rights? Rights first offer. Okay, great.
Yes. Yeah, that's correct.
Very clear. Thank you. The second question really is just following on also about use of proceeds. When you say other alternatives, how wide is the field? Are we looking at, say, retail opportunities, or are you thinking primarily in the generation space?
You're fishing for an answer we don't have. We're not contemplating this process with a target in mind. My answer is going to be very general, which is it could be almost anything within the sphere of our current operations. Chris has mentioned our Future-gen strategy. We could put capital into that. We could look at putting capital into retail. There's all sorts of options. We'll bring you on that journey as we go through things. If you look ahead over the next five or 10 years in New Zealand, this is going to be quite a big transition. We want to be in a position where we can create value in that transition.
Very good. Yeah, no, that's great. Thank you. The last question from me is, again, just related to Future-gen. Is there any way a potential sale of your stake here can tie in with your desire to secure greater gas flexibility?
Possibly. That's something we'll look at through the process.
Okay. One of the ideas, potentially you sell to someone who's willing to take base load gas but sell you back flexibility. I guess that might have been somewhere in thought process, but it's obviously just one of many options, given your answer.
One of many options, and we can do that contractually anyway, not necessarily through.
Right
A sale process. There's other ways you could achieve that, which you know we've mentioned in the past. We will consider all flexibility options, as you can tell. We will need more flexible fuels as we go through the 2020s.
Very clear. Thank you very much.
Thank you.
All right, we'll now take our next question. Please go ahead, caller, your line is now open.
Good morning, team. It's Jeremy Kincaid from UBS here. I just have one question around potential valuation of Kupe, and obviously we can come to our own views on this, but I was just wondering if there's been any structural changes in valuations since the government's announcement around the ban of offshore exploration. Have there been any recent transactions?
No
Anything like that you can point to?
In terms of our own valuation, any government announcements has zero impact. I'm not sure about other transactions. Sorry, I don't quite understand the question.
I think one response to that, Jeremy, is the government's ban on further offshore exploration should make existing permitted areas more valuable. Obviously, that depends on how much of it is uncontracted. For the uncontracted exploration potential of Kupe, it should be more valuable than it was before that ban, and we are in a situation in New Zealand with declining production. I would expect that to be seen, by the right potential buyer if we go down that route, as something that's more valuable than it was in the past. New Zealand still needs the gas, but supplies are being constrained.
Right. Have there been any past transactions recently, I suppose, relative to pre-government announcement levels or anything like that?
Not that would be relevant here, I don't think, no.
Okay, great. Thank you.
Great. Once again, that is star one if you'd like to ask a question. We'll now take our next question. Please go ahead, caller, your line is now open.
Good morning. Eamon Rood from Energy News here. I wanted to ask, the reference to potentially more strategically aligned investments that the review will cover, is that a reference to, again, with the Future-gen strategy and the desire for more renewable or less carbon-intensive generation sources or projects?
Hi, Eamon. I think Marc gave quite an articulate answer a moment ago. New Zealand's going to go on a big transition, which could create all sorts of opportunities. The Future-gen strategy is one of ours, and that could be one of the options. We're keeping our options open, and there may be many different strategically aligned opportunities, Future-gen of which is one.
Right. Thank you.
All right. We'll now take our next question. Please go ahead. Caller, your line is now open.
Hi there, it's Reweti Kohere from the National Business Review. I have three questions. The first is, and this is early days, but in terms of potential buyers, do you know of any who might be interested at this stage?
Yeah. I think there was a question earlier around have we had calls to purchase this asset. You heard the response to that. Occasionally, we do get calls. We haven't tested the market. We've only announced the review overnight. We're in the early days of the process. However, it's a very attractive asset. It's had a history of reserve upgrades. It's predominantly gas, which is a fantastic transition fuel. It's one of New Zealand's bigger fields with a company that has a very good credit rating. We would expect there to be good interest for this asset, but we haven't tested it.
Just as a follow-up, has any of your joint venture partners expressed an interest in buying a stake?
Yeah, we haven't tested that fully. Typically, joint venture partners are interested because they know the asset well, but that'll be part of our review. We haven't treated joint venture partners any differently to anybody else through this process, so we will flush that out over the next six months.
Okay, great. Just in terms of the drilling program, do you have any idea how much that would cost Genesis?
No, we haven't. A big part of the review is understanding what the next phase of development would look like. It's very dependent on, one, if a drilling program did occur. Does a drilling program need to occur to unlock wells, to unlock resources? Two, if it does, are we just looking at production in the existing field? Three, are parties interested in taking some risk and looking at some near-field exploration? That's a key part of this review and a key part of what the joint venture is working on and thinking about, and we need to weigh that up against alternative options. Too early to tell you what that might look like.
Sure. My final question, is Genesis concerned about the optics of drilling?
No, look, I think this is a permitted field. Gas is a very important fuel. Clearly, there's an element of the community that may not like the prospect of drilling, but it's been a very important asset to New Zealand, so that hasn't been a factor in our thinking.
Okay, great. Thank you for your time.
Thank you.
All right. There appears to be no further questions, so I'll turn it back to you, Mr. England.
All right. Well, thank you all for listening and taking the time to ask questions. As we've stated here, we think this is a great asset in the center of New Zealand's energy sector. Genesis has been a good owner and a happy owner of this for the last few years, and we're at a key moment where we need to make a choice. The review is all about understanding the different options for us. That's why we can't answer all your questions this morning, because we're still going to work them through. This is not a fait accompli, it's not a definite sales process. We're committed to making sure it's in the interest of all shareholders at the end of it, and we've made some commitments through the call about what that might mean.
I look forward to seeing you all wherever you are at our stakeholder day on the 9th of December, whether you can make it physically or virtually. We'll be talking more about the exciting opportunities ahead for Genesis, but also how this transition in New Zealand is going to look and some of the exciting choices for the country as a whole too. With that, I'll end the call. Thank you very much.
All right. This concludes today's call. Thank you for your participation. You may now disconnect.