Good day, and welcome to the Genesis Energy Investor Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Mark England, Chief Executive Officer. Please go ahead, sir.
Good morning, everyone. This is Mark Ingen, the 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 Coupe. You'll have seen that we've announced a strategic review in relation to the asset. And for those of you that are less familiar with it, Coupe 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 Hauwerda, and it's the 3rd largest producing asset in New Zealand consisting of 3 producing wells. It produces natural gas, LPG and some condensate, which is currently exported. And it's had a strong production history with 3 significant reserve upgrades over 10 years, and we increasingly believe it has strong exploration potential. So Beach Energy, an ASX listed oil and gas company, is the operator and a highly inexperienced competent one at that. So Coupe 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. And 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 Huntley plant and also our customers. So 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, Mark, and 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. And this project is due for completion in mid-twenty 21 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 Coupe asset. Now 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. And lastly, whether there are potential lower risk, higher value or strategically aligned alternative opportunities for the use of these funds if the 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.
And 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. So with that, I'll open up for any questions and Mark and I will share the questions between us.
Thank you.
You.
Thank you. We'll take our first question. Please go ahead, caller. Your line is now open.
Good morning, Mark and Chris. Andrew, Harvey Green here. Just 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 the strategic review?
No, we weren't, not as part of the review, Andrew.
Okay. And 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 and make the asset a little bit more attractive to a potential buyer?
Yes. Look, that's all part of the review. And 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 we if the review did end up in a sale. So all of those things are in the mix.
Yes. Okay. And including for 46% repricing the gas for the next 5 years or so under the remaining term of the current take or pay?
Yes.
Yes. Okay. Yes, that's all from me.
We'll now take our next question. Please go ahead, caller. Your line is now open.
Good morning, Tim. It's Grant Sullivan from Gartan. Yes, 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 PJs.
What is it looking like for the next 3 to 4 years? And then 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? And then now I know it's not 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 to 18 months to potentially make you an offer for the Coupe stake? Or is this just something that you're starting up with no outside interest as a starting point?
Thanks.
Thanks, Grant. Yes, three questions. In terms of take or pay, I mean, we've disclosed how our gas contracts roll off in previous presentations. So our gas contracts both relate to the 46 percent that we own. So clearly, we can control the way we set that up and that will be part of the review and the balance of the 54% is contracted with our joint venture partners.
So we've obviously got no ability to change that missed that we're willing to change it on the other side, but all that is part of the discussion. In terms of losing, to use your words, 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.
And in terms of alternative offers, have we been approached? Look, people come and see us from time to time. So we've never engaged in a conversation more than taking a telephone call, but I guess that's a natural part of owning assets. So but that hasn't prompted us to start the review.
So could I just clarify?
Thank you for that. But to clarify
your answer, the first question, some of that coupe take or pay had already started rolling off and there had been some indication that Genasys had resigned that. Can I assume that you haven't resigned as the take or pay has rolled off against coupe according to your previously indicated volumes?
Yes. 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 is currently set.
Perfect. Thank you. Thanks, Chris.
All right. We'll now take our next question. Please go ahead, caller. Your line is now open.
Good morning, Chris and Mark. It's Steve 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 Coupe stake generated in terms of free cash flow at a group level for fiscal year 2020. I think for EBITDA, it was kind of 31% of EBITDA ex the outage.
So I just wondered if there's any reason to use a different number to say 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? And then just thirdly, can you just remind us what preemptive rights the JV partners have and the nature of those?
Yes, Steve. The free cash you can deduce that from the EBITDA from last year. And I guess we haven't disclosed capital specific to Coupe from the last year, but you can make an estimate of that. So I can't 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.
And 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 will be part of the review, one of the things we need to think about. And your third question sorry, I just I didn't drop down your 3rd question. Sorry, Steve, do you mind just repeating that 3rd question? Preemptive, sorry.
Thank you. Thanks. Yes, what are the yes, look, they're 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 Enzog share. So I wouldn't see them as a hurdle.
As you, Chris, I might just slip in one more. The corporate costs last year, dollars 37,000,000 any of those corporate costs associated with the Coupe assets that you can sort of split off for us?
Yes. I can't isolate them, but clearly we have a number of people focused on at a group level on looking after coupe, whether it be from gas, whether it be from accounting, or the various things that it takes to run an asset, but I can't give you a specific number on that.
Okay. I might just have one more go. I mean 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 sort of, I don't know, what your marginal cost of debt is for debt repayment purposes, but let's say 3 or lower, how can that not entail a review on your dividend policy?
Yes. I'll just bring you back to what we're actually looking at here, Steve. I mean, I think we're faced with 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. So there's 2 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. And we're also thinking about what a buyer might be interested in valuing that asset.
So essentially what we're trying to do is finding the best way to unlock value from that asset. So I'll just leave it at that. This is a review and we're considering 2 potential paths. We're comfortable that we can the review doesn't have 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.
We'll now take our next question. Please go ahead, caller. Your line is now open.
Hi, Mark and Chris. It's Cam here from Craig's. 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 Coupe for a
potential acquirer?
Yes. Sorry, Kim. There's confusion outside. So how does it the question is how does it tie into FutureGen and contracting? Look, FutureGen, as we've widely published, is about displacing baseload thermal over time.
That's a long dated program. We've given you some numbers for the 10 year targets of what we're shooting for in terms of contracting or building new renewables. And we're going to require gas for quite some time to come, whether it be for baseload or whether it be for backup. So these two things work in parallel. Gas is at potentially a declining fuel in New Zealand.
It's potentially more valuable fuel over time. So these things will work in concert. We need to clearly think about all of those things together when we think about how we set contracts up for the future.
Okay. Thanks, Chris. And 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 Steve Hudson understood it. But we pay over the odds for gas now to our own Coupe P and L. So the Coupe P and 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 Coupe 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 Coupe joint venture P and L for gas over the last few years. And that's where the value difference is.
So 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 Coupe P and L into the wholesale P and L within Genesis if we do this. That was behind your question.
Great.
Thanks, Garth. That's clear. And also proceeds, I mean, Genesis has been highly geared over the last couple of years. So 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?
Yes. I mean, you're 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 do 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 FutureGen strategy, which you alluded to. At the moment, we have been contracting volume.
One option could be that we invest to deliver that strategy. But look, early days and we've made no decisions on any of that. And we don't have right now, I'm not sitting here with an alternative investment to say here's a better way to use the funds. But that's all part of the 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 for me.
All right.
We'll now take our next question. Please go ahead, Collin. Your line is now open.
Hello, Tim. Can you hear
me? We can.
Excellent. I couldn't hear myself. Really just thinking over the bones of all the previous questions. Just one clarification. Can you tell me for the 54% you're currently contracting from your fringe JV partners, how what rights do you have currently under those GSAs for currently undeveloped gas?
Yes. We have all rights to all gas produced from Coupe for the entirety of the asset life.
Right. And the obviously, there's not gas price agreed for those. Does that give you some sort of right sort of first offer or sort of is there a way to summarize this rights first offer? Okay, great.
Yes, it's correct.
And the second question really is just following on also about the use of proceeds. I mean, when you say other alternatives, how wide is the field? Are we looking at, say, retail opportunities? Are we thinking primarily in the generation space?
You're fishing for an answer we don't have. We're not contemplating this process with target in mind. So my answer is going to be very general, which is it could be almost anything within the sphere of our current operations. So Chris has mentioned our FutureGen 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. But if you look ahead over the next 5 or 10 years in New Zealand, this is going to be quite a big transition, and we want to be in a position where we can create value in that transition.
Very good. Yes, that's great. Thank you. And the last question for me is, again, just sort of related to FutureGen. Is there any way a potential sale of your stake here can tie in with your desire to secure greater gas flexibility?
Possibly. So that's something we'll look at through the process.
Okay. So there's sort of no one of the ideas potentially you sell to someone who's willing to take base like gas, but sell you back flexibility. I guess that might have been somewhere in full process, but it's obviously just one of many options, I'm giving you answer.
1 of many options and we can do that contractually anyway, not necessarily through a sale process. So there's other ways you could achieve that, which we've mentioned in the past. So 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 Coupe 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 announcements around the ban of offshore exploration. Have there been any recent transactions or anything like that you can point to?
So in terms of our own valuation that any government announcements has zero impact. I'm not sure if you're I'm not sure about other transactions. Yes, 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. But 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. So I would expect that to be seen if 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. And 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.
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, the FutureGen strategy and the desire for more renewable or less carbon intensive generation sources of projects?
Yes. Hi, Amit. I mean, I think Mark gave quite an articulate answer a moment ago.
New Zealand is going to
go on a big transition, which could create all sorts of opportunities. The FutureGen strategy is one of ours and that could be one of the options. So we're keeping our options open and there may be many different strategically aligned opportunities, FutureGen of which is 1.
All right. Thank you.
All right.
We'll now take our next question. Please go ahead, caller. Your line is now open.
Hi, Deena. It's Riwashi Kuohiti from the National Business Review. I have three questions. The first is in terms of and this is early days, but in terms of potential buyers, do you know of any who might be interested at this stage?
Yes. I mean, I think there's a question earlier around have we had calls to purchase this asset. So you had a response to that. Occasionally, we did get calls. We haven't tested the market.
We've only announced the review overnight. We were in 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. So 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 your stake?
Yes. We haven't tested that fully. Typically joint venture partners are interested because they know the asset well, but that will 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 6 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 I mean, a big part of the review is understanding what the next phase of development would look like. So it's very dependent on 1, if a drilling program that occurred, does a drilling program need to occur to unlock wells, to unlock resources? 2, if it does, are we just looking at production in the existing field? And 3, parties interested in taking some risk and looking at some near field exploration? So 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. So too early to tell you what that look might look like.
Sure. And my final question, is Genasys concerned about the optics of drilling?
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 sort of very important asset to New Zealand. So that hasn't been a factor in our thinking.
Okay, great. And thanks for your time.
Thank you.
All right. There appears
to be no further questions. 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. And so the review is all about understanding the different options for us.
And that's why we can't answer all your questions this morning because we're still going to work them through. So this is not a fait accompli. It's not a definite sales process, but 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. So I look forward to seeing you all wherever you are at our Stakeholder Day on 9th December, whether you can make it physically or virtually. And 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.