Beach Energy Limited (BEPTF) Q2 2024 Earnings Call Transcript

Beach Energy Limited (OTCPK:BEPTF) Q2 2024 Results Conference Call February 11, 2024 6:00 PM ET

Company Participants

Derek Piper – Head of Investor Relations

Brett Woods – MD and CEO

Anne-Marie Barbaro – Chief Financial Officer

Conference Call Participants

Tom Allen – UBS

James Redfern – Bank of America

Adam Martin – E&P

Dale Koenders – Barrenjoey

Saul Kavonic – MST Marquee

James Byrne – Citi

Gordon Ramsay – RBC Capital Markets

Nik Burns – Jarden Australia

Sarah Kerr – Morgan Stanley

Henry Meyer – Goldman Sachs

Scott Ashton – SHA Energy Consulting

Derek Piper

Thank you. Good morning, all, and welcome to the Beach Energy results webcast for the half year period ending 31 December 2023. My name is Derek Piper, Head of Investor Relations. And here with me is Brett Woods, our Managing Director and CEO; and Anne-Marie Barbaro, our Chief Financial Officer. We released a presentation this morning, which summarized our results and we’ll talk through that today. Brett will provide a highlight and — or an overview of the highlights and Anne-Marie will touch on these financials.

We’ll then open the lines for Q&A and we would ask if you could keep your questions to one or two each so that will be appreciated. We will try to move through those fairly promptly. So on that note, I’ll hand to Brett for an overview of the results.

Brett Woods

Thanks, Derek. Hello and welcome to Beach Energy’s FY ’24 half year results webcast. My name is Brett Woods, and I am the Managing Director and Chief Executive Officer of Beach. Joining me today is Anne-Marie, our Chief Financial Officer, to take us through the financials. Let me please start by saying it is a privilege to have been appointed to the role and I’ve certainly started at an exciting time for Beach. We’re on the cusp of completing a suite of projects that delivers material volumes of new gas supply to domestic and global markets.

This near-term growth outlook, our sound financial position and the prospects for transformational growth, are what attracted me to Beach. Past few months while I’ve been transitioning, I’ve thought long about my key areas of focus. So in short, my key priorities are firstly, delivery of Waitsia Enterprise, Thylacine West production as per the schedule and capital guidance, reducing our operating cost of the existing business. I am concluding a comprehensive review of the organization and its cost base, specifically with a target to deliver disciplined, high-performance organization.

Critically, we need an integrity and safety-focused organization who chases every molecule at the lowest possible cost. Margin growth is also a key mindset that I wish to unlock within Beach, effectively enabling Beach to be in the strongest position to take advantage of its unique financial and technical capability.

This can unlock further organic opportunities and those large opportunities when the right ones are available. I want to maintain our strong balance sheet position. And finally, I want to deliver disciplined capital allocation with the focus of increasing our shareholder returns. Just a quick thank you to Bruce Clement for stepping up in the interim period, while I’ve been on garden leave. Bruce has overseen much progress across the business and has greatly assisted me with my transition. For today’s webcast, I will provide an overview of the results and recent activities and an outlook for the remainder of this financial year.

Anne-Marie will update on the financial results and we will finish with webcast with the Q&A. Slide 2 sets out the compliance statements, which I’ll leave it you to read at your leisure. Beach is getting closer to completing this period of capital growth expenditure with the new production well Kupe in New Zealand, good progress at Enterprise and Waitsia. Our asset portfolio also provides several organic growth opportunities beyond the current drilling campaigns and performance enhancement initiatives. We are undertaking development studies on the Artisan and La Bella in the Otway Basin. As we undertake these activities, we do so with a strict focus on sustainability and executing projects that are value accretive in order to support the energy transition.

We have clear emissions intensity reduction targets and are progressing several projects, including the nationally significant Moomba CCS project. Beyond Beach’s existing asset portfolio and opportunity set, our scale, position in the market and our financial strength, all position us well to pursue inorganic growth aligned with our core competencies. We have commenced a comprehensive strategy review to align our organization and the market on our objectives and approach to growing our capital returns to shareholders and disciplined growth and I remain committed to our capital management framework of returning 40% to 50% of pre-growth free cash flow dividend payments. We look forward to communicating outcomes in the coming months.

Turning to Slide 4, which details our health, safety and environmental outcomes, which are very mixed. Our personal safety performance reflects a disappointing result for an organization that I know is much better than these numbers show. We have kicked off a major safety intervention, particularly on our — with our regard to our contractors in attempt to reverse this trend.

However, on the positive, we have had excellent outcomes with our environmental performance with the material reduction in hydrocarbon spills with a capacity of only 0.6 barrels being linked and no significant Tier 1 or Tier 2 spills. Plant process safety performance was also strong with no incidents recorded. Again, with regards to personal safety, we are taking steps to investigate the cause of this and I’ll be leading our Stand Together For Safety campaign across all our operations to turn this performance around. There is a strong safety culture at Beach, so we must improve in this area.

Slide 5 sets out emissions reduction progress. A key element of our decarbonization plans is the nationally significant Moomba CCS project. Construction progress continued over the past 6 months as the joint venture target’s first CO2 injection in mid-calendar year 2024. Once operational, Moomba CCS will abate roughly 1/3 of Beach’s equity emissions. In our operator business, we progressed several early-stage projects. Beach has previously reported on the potential for CCS in the Otway Basin. Having completed the assess phase of this project, this project does not currently meet our investment [goals] and I am committed into maintaining discipline in our capital deployment.

As such, we’ll be putting this on hold for the time being. Electrification of our assets in the Otway Basin continues as does the flare reduction project at Beharra Springs. Now turning to Slide 6, Anne-Marie will talk through our financials in some detail shortly. So, to summarize our results for the first half were impacted by lower production and a capital-intensive period as our major projects progressed. Production was down 11% to 8.8 million barrels of oil equivalent, primarily due to lower customer nominations in the Otway Basin. Despite lower production, sales revenue was up 16%, thanks to our first Waitsia LNG cargo and a one-off Waitsia condensate cargo.

We recognized revenue of $162 million for these cargoes. Underlying EBITDA was in line with prior corresponding period and our financial position remains robust. Accordingly, the Board declared a fully franked interim dividend of $0.02 per share. In January, Beach announced a $721 million noncash impairment of our Cooper Basin producing assets and exploration carrying those across the Western Flank, SA Otway Basin and Bonaparte Basin. Anne-Marie will break this down in more detail shortly.

As you can see on Slide 7, it was another period of key project milestones, both in the field and on the commercial front. I will touch on some of these in more detail a bit later.

So for the time being, it’s worth calling out just a few. Firstly, the team in New Zealand have drilled, completed and connected the Kupe South 9 development well. The incident-free campaign was drilled in less than 90 days on schedule and on budget. The well is now cleaning up by producing at lower rates than expected.

We’re assessing the course of this, including whether something may be restricting its flow.In the Otway Basin, the Enterprise development is in good shape as we continue to target first gas in Q4 financial year 2024.

During the first half, our agreement with local native titleholders was concluded and we also completed tying of the pipeline to the Otway gas plant. We now await final regulatory approvals to complete well site construction activities and commence the flowing of gas. In the Perth Basin, our operator drilling campaign delivered gas discoveries at Trigg Northwest and Tarantula Deep and the development well at Beharra Springs Deep 2. We will soon be spudding the Redback Deep 1 gas exploration well, testing the Kingia reservoir immediately east of the Kingia gas reservoir in the Beharra Springs Deep field.

Still on drilling and in the Western Flank, we have completed the oil exploration and appraisal campaign for financial year 2024. While the success rates were well short of historical averages, I intend to place a hold on exploration drilling in the Western Flank so that we can refresh the drilling inventory.

We will, however, remain focused on development and appraisal drilling. I remain confident that there is further exploration potential in the Western Flank to pursue in line with our approach to disciplined capital deployment. On the commercial front, key agreements were struck during the half, which have materially enhanced the value of our assets. We were particularly pleased to conclude negotiations with Origin for the Otway Basin price review and a new agreement for the sale of Enterprise gas. Our Otway Basin agreements now provide greater certainty for increasing production and higher prices in calendar year 2024 and beyond. These agreements were fantastic outcomes for Beach.

So, let me just touch on them in a little bit more detail now. So, looking at Slide 8 and the pleasing commercial outcomes we have recently achieved. Production from Otway over the past year has been significantly constrained. Beach has said many times the legacy Origin Otway contracts and repricing are complex. The GSAs gave Origin significant flexibility. As we moved into calendar 2024, this flexibility has been reduced and take-or-pay levels are more than 50% higher than calendar year 2023.

When considering this greater than 50% increase, it’s important to note that nominations in calendar year 2023 did exceed minimum take-or-pay levels. We now have greater confidence in guiding towards higher volumes and revenues in calendar 2024, mainly from the higher take-or-pay I mentioned, signing the Enterprise gas sale agreement, which includes the minimum take-or-pay volume and the ability to sell surplus Enterprise volumes on a day-head basis and the new volumes expected online this year, including Enterprise in Q4 financial year 2024 and the Thylacine West development wells in the second half of this calendar year. We have already seen offtakes start to increase in 2024.

Our Otway Basin acreage and infrastructure available assets, which we expect will become more evident as 2024 progresses. Turning to Slide 9 and an update on the Waitsia Stage 2 project, the first Waitsia LNG cargo and the one-off Waitsia condensate cargo were clear highlights from the half. Our strategy to mitigate past challenges by storing surplus gas from the Xyris plant allowed us to fill an early LNG cargo and benefit from strong market prices. The image on this slide shows loading of the cargo, the first in Beach’s history, a very important milestone for us.

On my first Friday with Beach, just last week, I attended an executive meeting with Mitsui Webuild Clough and the lead project and operations staff of the Waitsia project. Within that meeting Clough and Webuild reconfirmed their commitment to the RFSU and gas export dates. Through what I observed as an acceleration of some of their critical path items such as engineering sign-offs and compressor commissioning activity, I can support that the project time lines are still in line with Beach’s market guidance of Waitsia being online in mid-calendar year 2024. Mitsui and Beach are very aligned to seeing that both dates and capital hold firm as we’ll quickly move into closing out the construction and progress commissioning activities.

In terms of risks of these dates, with elements like engineering closeouts and commissioning, Clough took us through a range of mitigations and again, this gave me confidence to maintain our timing and capital guidance. In the Perth Basin, we’ve also been keeping busy with our operator drilling campaign. The program has so far delivered successful appraisal of the Beharra Springs Deep field and gas discoveries at Tarantula Deep and Trigg Northwest.

Beharra Springs Deep 2 confirmed gas within the Kingia Sandstone in the southern part of the Beharra Springs Deep Field. The primary purpose of the well was to maintain flatter production at the Beharra Springs gas plant, the delivery of gas into the domestic market.

The Tarantula Deep discovery came in, in line with expectations and can be developed together with the Beharra Springs Deep Field. The discovery is also encouraging to further near-field exploration opportunities. At Trigg Northwest, we plan to flow test that discovery in Q4 financial year 2024, with the aim of providing information on productivity and connectivity of the reservoir. Results will form after the next steps for further appraisal exploration and ultimately, development of this part of our acreage.

Turning to Slide 10 and a quick reminder that Beach sells its products into key energy markets, which have very strong fundamentals. This diverse market exposure is a key element of our value proposition. Beach supplies gas to the East Coast, West Coast and New Zealand markets and oil liquids and LNG to global markets. Each market continues to display its attractive fundamentals with tightening supply demand outlooks as summarized on the slide.

On the East Coast, our recent major investment in the offshore Otway Basin and Enterprise will yield a much needed uplift in gas supply volumes for the market and at a time when increasing tightness in gas supply is forecast. Similarly, on the West Coast, Beach currently has 2 gas plants delivering into the domestic market at Xyris and Beharra Springs.

And on completion of the Waitsia Gas plant, Beach will also be delivering into the global LNG market. Before I hand over to Anne-Marie, a quick look at our priorities for the second half of FY ’24. In Perth, as we progress construction of the Waitsia Gas plant, we’ll also be taking the production testing of Gynatrix and Trigg Northwest to understand productivity of these discoveries and support development plans. In the Otway Basin, we are focused on a key number of priorities.

Firstly, completing the Enterprise development as we target first gas before the end of this financial year. Secondly, we’re progressing the manufacturing and installation of the replacement flowlines to the final 2 wells of the offshore Otway program, Thylacine West 1 and 2, which we are targeting to be online in H1 FY ’25.

And finally, we continue to progress early-stage planning for developing the Artisan and La Bella discoveries. Finally, as I mentioned earlier, we’re currently undertaking a detailed strategy review focused on building a disciplined low-cost organization. We look forward to sharing the outcomes of the review in the coming months. On that note, I will hand over to Anne-Marie for an update on our first half financial performance.

Anne-Marie Barbaro

Thank you, Brett. Good morning all. Thank you again for joining us today. I’ll begin with Slide 13, which shows our headline financial metrics. As Brett mentioned, our first half results were influenced by lower production, largely due to customer nominations and planned gas plant downtime.

Despite lower production, the Waitsia LNG and condensate cargoes contributed 4% increase in sales volumes to 11 million barrels of oil equivalent and a 16% increase in revenue to $941 million. The Waitsia cargo saw our product mix shift more towards liquids, which accounted for 67% of first half sales revenue with gas accounting for 33%. For reference, in the prior corresponding period, the split was 59% liquids and 41% gas.

Underlying EBITDA of $488 million was in line with the prior corresponding period. Higher revenue for the half was offset by higher cost of sales with an increase in third-party purchases and inventory movements, largely driven by the Waitsia LNG and condensate cargoes and higher operating costs in the Cooper Basin joint venture. Underlying NPAT was down 10% to $173 million due to higher DD&A from the change in production mix and higher Cooper Basin JV costs as well as adverse FX movements.

Statutory NPAT was impacted by the impairment charge we announced during January.

The charge of $721 million before tax or $505 million after tax related to the following carrying values. In the Cooper Basin, we recognized a $468 million impairment charge on our producing assets, largely driven by a forecast increase in Cooper Basin JV operating and capital costs. For our exploration assets, a $178 million impairment charge was recognized to impair the carrying value for Western Flank exploration and a $68 million impairment charge recognized for the SA Otway exploration carrying value.

A $7 million impairment charge was also recognized in relation to our Bonaparte exploration carrying values. It’s important to note that the impairment charges are noncash and do not impact our underlying earnings, which I’ll now touch on. Slide 14 shows drivers of the 10% decline in underlying NPAT from the first half of FY ’23 to the first half of FY ’24.

We’ve already touched on a number of these, but to summarize, revenue was higher due to the Waitsia cargoes, although this was partially offset by lower production due to lower customer nominations in Otway. Cash costs were higher due to higher third-party purchases associated with the Waitsia cargoes and higher Cooper Basin JV operating costs. Inventory movements were higher again due to the Waitsia cargoes as well as timing of other liquids liftings. We saw higher DD&A from a change in production mix and higher Cooper Basin JV costs and adverse FX movements were experienced.

Turning to Slide 15, which outlines movement in cash, which resulted in closing cash reserves of $226 million. During the period, net operating cash flow of $350 million was generated and debt drawdowns of $315 million remains.

These inflows funded a capital-intensive period with cash spend of $603 million for the half. In FY ’24, capital spend is skewed towards the first half, largely due to drilling across the Western Flank and Kupe, which we conducted in the first half and elevated major project activities as we work towards our first gas targets at Enterprise and Waitsia.

On Slide 16, you’ll see that our balance sheet remains strong with $446 million of available liquidity and net gearing of 12% at the end of the period. Our financial position allows us to maintain flexibility as we balance investments in growth with increasing dividends to shareholders. In recognition of this, the Board has declared a $0.02 interim dividend. As we move towards a period of strength in free cash flow in FY ’25, once our major growth projects in the Otway and Perth basins come onstream, we have the capacity to pay higher dividends to shareholders in line with our capital management framework while retaining optionality for growth.On that note, I’ll now hand back to Brett.

Brett Woods

Thank you, Anne-Marie. We’ll now have a quick look at the remainder of financial year 2024 and activity across our portfolio. Slide 18 sets out our FY ’24 full year guidance, which reflects performance from the first half and expectations for the second. The guidance is presented in our recent quarterly report. Full production, the top end of the range was reduced with full year guidance now 18 million to 20 million barrels of oil equivalent, which is largely the result of Otway customer nominations in the first half of FY ’24.

For capital expenditure, the bottom end was increased with full year guidance now $0.9 billion to $1 billion as we deliver our key growth projects. A breakdown of production and capital expenditures by type and basin can be seen set out on the slide. Before we move to Q&A, a quick reminder of why we see a compelling outlook and value proposition for Beach, which sets us apart from our peers. First, as we complete major projects this calendar year, you will see the long-awaited step change in production and cash flow, which sets us up nicely for material growth in FY ’25 and beyond.

Second, Beach has exposure to key markets with strong fundamentals, which will continue for decades to come as the energy transition plays out. Third, our financial position is strong and we are committed to disciplined OpEx and capital deployment.

Fourth, the imminent step change in cash flows provide flexibility to balance sheet to increase dividends for shareholders and in line with our capital management framework whilst retaining optionality for growth. Fifth, our existing portfolio of quality assets has several meaningful opportunities for organic growth. And lastly, we have emissions reduction projects underway, which support our decarbonization and sustainability objectives being well advanced against our 2030 commitment.

So in closing, Beach is poised for a big year ahead for the rest of 2024, with new gas supply coming to market at Kupe, Enterprise, Waitsia and Thylacine West.I’ll now ask the lines to be opened for question-and-answer.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Tom Allen at UBS.

Tom Allen

Congratulations, Brett, on your appointment and first set of results. Just regarding the strategy review focused on cost and capital discipline. As a new CEO, can you expand on your specific ideas for this review and where the cost out initiatives might come from? You mentioned in the presentation, there’s a hold on exploration drilling in the Western Flank, but where else might savings come from?

Brett Woods

Yes. I think from my perspective, Beach needs to position itself as a low-cost operator and I did a comment that we aren’t that at the moment. We have an organization that was built up on the basis of a large project delivery and execution. And we need to get ourselves leaner in those spaces as those project ends. But critically, we need to get into looking how we do things.

It’s the structural improvements that we need to build into the organization. We need to look at our — simplifying our systems and our processes to make sure that we can deliver things in a more nimble and timely manner. We’re kind of getting that position where I’d say we’re doing a little bit too much business with ourselves. So, my focus will be on making sure the organization is fit and rightsized for what we need to do moving ahead, that our operator cost base is under control, that we work with our joint venture partners to be constructive in working with them on their cost base, that we can look at growing our margins and delivering more value to shareholders.

Tom Allen

That’s fantastic to hear. Just a second question, if I may. With the big step change in free cash flow expected now inside of 12 months, what are your early thoughts around the potential uses of cash in regard to how the team is thinking about returning cash to shareholders compared to investing in new growth?

Brett Woods

I’m absolutely remaining committed to our 40% to 50% of pre-growth free cash flow dividend policy as the Board announced over the previous years. I think that’s important. It’s a great value proposition for shareholders in Beach. One of the other great opportunities we have is we are uniquely positioned with a very strong balance sheet. And sitting in that kind of between small cap and major organizations that we’re well positioned to take advantage of any assets that may come free.

My mission though isn’t to kind of jump into something blindly. We’ll only have to take a disciplined approach to execution and look for those assets to add the most value to our organization as they come available.

Operator

Your next question comes from James Redfern at Bank of America.

James Redfern

Brett, congratulations on the role as well, and thank you for your comments regarding your priorities for the company, which is very, very useful. 2 questions, please. First one is just on the Otway, just a housekeeping question just in terms of the take-or-pay volumes for calendar ’24 with Origin Energy from Otway, just wanted if you could please confirm what that number might be, please?

Brett Woods

Unfortunately, I can’t give you that number. So, what I’ve tried to do is derisk the volumes a little bit through the statement. The take-or-pay levels have increased by effectively twice, 2 times, 50%. And the real exposure that Beach has had in the Otway is having such a vast range between its take-or-pay levels and what the plant can deliver. So, a significant increase in that take-or-pay reduces our — or makes it much more clearer when we put production guidance out that we’ll be able to hit those targets.

And then the additional benefit here is we’ve been able to achieve an excellent arrangement on the Enterprise gas. It has, again, a solid foundation of take-or-pay and does give us exposure to the market with some ability to trade some spot as well. So with the growing take-or-pay out of the existing GSAs plus the additional take-or-pay out of Enterprise, it gives us a much more solid foundation of the proportion of gas in the Otway that we can deliver readily to the market and then still giving us excellent exposure to value through spot.

James Redfern

Second question is just linked to Moomba CCS project. First injection is due mid-calendar ’24, how quickly will it ramp up to nameplate capacity of 1.7 million tonnes? And just checking, did you say that would offset 1/3 of Beach’s equity-based emissions at full capacity?

Brett Woods

James, yes, that’s right. The Moomba CCS project gets us a long way to our 2030 targets and it reduces our equity emissions by 30%, which is a fantastic single project to deliver that. And as you mentioned, we are on track and its operator and Santos, obviously, is on track to deliver that project in the middle of the year. I haven’t got specifics on the ramp-up time line. I’m sure that will come to hand as we get closer to execution.

Operator

Your next question comes from Adam Martin at E&P.

Adam Martin

Just back on Waitsia, Brett, well done on your new role, but you talked just about compressed commissioning activities. Can you just give us a bit more color on what you were talking about there, please?

Brett Woods

Well, as we go into — or as any project goes into the late stages of construction and commissioning, we have 4 banks of compressors. Over the last few years, there has been some supply chain challenges, which the operators or the contractor is working very hard on.

So I think for me, if I was to think if there was any time line to be focused on, I feel quite confident about our midyear gas export time line. And then it’s just — we’ll start with 1 compressor run and then we’ll cycle to 2 compressors and 3 compressors and 4 compressors as we ongoing execute the ramp-up and commissioning of the project. That time line is really depending on just how everything comes together at that time.

So, we’re not speculating on that at the moment plus and we build at working closely with Beach and the operator and Mitsui to make sure that, that is the shortest possible time frame to do it safely and sustainably.

Adam Martin

And just a second question back on the strategy of your cost out. I mean, you were obviously at Santos in that ’16 and ’19 period when that company brought — they got very good at drilling wells, basically lowered CapEx considerably and also lowered OpEx. Is there any sort of learnings from that process in the way that you’re tackling this strategy review?

Brett Woods

Absolutely. Yes, I had a fortunate position of sitting over the top of the Cooper Basin during ’15, ’16 and ’17 and work very closely with Kevin, which was a very effective cost out and efficiency program. And one of the key learnings we got from that, that it’s not just about removing contractors and bringing them on next time you drill a well. It’s really trying to focus on how structurally you do things different. So, I often use this language, which is structural cost out.

So, things that we can put in place that when we continue to execute, they don’t come back, operating more efficiency through our compressors, simplifying our operations, more remote operations where applicable. These types of things can really affect positively our costs. And then similarly, we’ve — I’ve got a very, very good relationship with Kevin and Santos, and we’re going to work very closely to make sure that we achieve our cost objectives over the next few years.

Operator

Your next question comes from Dale Koenders from Barrenjoey.

Dale Koenders

Congratulations on the role. Just hoping you could expand again on the strategic review underway. You’ve called out the Bass Basin cost and operational reset. What is this, Brett? And also when you think about operational efficiencies, what other assets are you challenging that operational efficiency review?

Is this potentially Waitsia debottlenecking or what’s involved?

Brett Woods

Well, Waitsia debottleneck is already part of the plan. We’re working with the operator on what that’s going to look like. But for me, if I can break it into 2 sections, my primary focus at the moment is what I can control. What I can control is our cost. So, we’ll be looking through our Otway operated position, our Cooper Basin operated position primarily and obviously, our New Zealand operated position and then working closely with our second tier, which is influencing Mitsui, influencing the [SA Beach] joint venture.

We also have our own operations in WA, which we’re also actually really good on costs. I think there’s parts of our organization that are very cost focused, but I want to kind of bring Beach back to its original pioneering spirit. It’s spirit of being able to do things efficiently and quickly and leanly and then be ready to grow and pounce when it’s right. And other way to put it, Dale, is I want to earn the right to invest. And I want our organization to be fit and ready to invest.

And at the moment, I think we’re a bit far from that. So, my mission is to focus the organization, get it lean, get it fit and really kind of emphasize that cost is a priority for us.

Dale Koenders

On that thought process, the sustaining CapEx base for Beach has been quite high historically, potentially anything in that $300 million to $500 million per annum. Is that something also a focus?

Brett Woods

Well, that’s at the heart of it, really, Dale. It’s — the sustaining — just so everyone is clear, our exploration drilling in the Cooper Basin sits in sustaining. So, the numbers you see at the moment for the FY ’24 includes the second — or the second half of last year’s calendar or I’m getting confused with all the financial years and calendar years. But — in the second half of last year, they executed the Waitsia program with all the exploration drilling. So, we’re not going to see that in the next part of this year.

So — and the Kupe drilling also came in the second half of last year and we won’t see that kind of expenditure in the second half — in the first half of this year. So, my mission is to get that sustaining capital under control and at a level that supports making sure that we grow our margin across our business, doing it safely and sustainably.

Operator

Your next question comes from Saul Kavonic from MST Marquee.

Saul Kavonic

Brett, a couple of questions, if I may. And perhaps just a broad one. I think you’re the first CEO of Beach with a very strong technical background, essentially since Beach is the company it is today after the Lattice acquisition. I’m keen to get your sense on looking at subsurface and technicals in particular, what surprised you to the downside and the upside since you’ve got your feet under the desk over the last few weeks?

Brett Woods

I think on the upside, probably the quality of the people. I walked into an organization only in the last 2 weeks and I’ve wandered around and I’ve met nearly everyone here in Adelaide and I met most of the people in Perth. And there’s a lot of capability in this organization. And I think that is exciting for me because to drive the outcomes that we to deliver, it starts with having a high performing, highly capable organization.

And then when we look at opportunities, I remember, and you would remember this well Saul, middle of last decade when we kind of broke apart the Cooper Basin and went after it again, we spent a bit of time getting our inventory right and then we had a fantastic era of drilling across the Cooper Basin. I believe in the Cooper Basin, nearly every time anyone puts a hole in the ground, we end up finding some form of hydrocarbon.

But what we’ve had is we’ve seen our success rates dwindle a little bit over the last 12 months. And I think that’s a function of a lack of inventory. So, the reason I press pause and exploration drilling in the Cooper Basin is to give a very capable subsurface team time to catch up with the drill bit and put their best foot forward and what is the next phase of exploration drilling across the Western Flank because those barrels deliver a lot of value for our organization. So, they’re very important barrels. So, we need to get that right.

And then if you look at the — I’m quite amazed with the scale and this access across the Perth Basin. For me, there is great exploration opportunities there for us. And I’ve got a great relationship with folk at Mitsui. So, we’re going to work even more closely than we have in the past to deliver value for our assets and value from the Perth Basin.

Saul Kavonic

Are you confident that Waitsia is going to not slip towards the last quarter and is actually going to be able to deliver a full nameplate capacity of the new plant being built?

Brett Woods

Yes, a couple of bits on that. So, from my meeting so far with — which has been one and a kind of a detailed review with the project team, they have all the elements lined up to be able to deliver as per the guidance, which we’ll get exporting gas in the middle of the year. And I think — so I pushed back on that and said, well, what could go wrong? What are the elements? And then Clough and Webuild took me through a range of mitigations that they’re putting in place, if anything can slip.

So in terms of confidence, I do have confidence in our RFSU and our gas export dates. I think for me, the risk that I’d like to highlight is probably just the ramp-up time. Is it going to be 1 month or 2 months or 3 months? I think because and one of my challenges there is the North West Shelf has announced that they’re having a shutdown in August. So, I’d love to get all the compressors all ramped up and at full rates before that shutdown. But it may be that we only get 1 or 2 of them ramped up and executing.

So for me, that’s kind of one of the probably more important risks in the second half of this calendar year is what’s the ramp-up going to look like? And then when the North West Shelf comes back online, how quickly can we get to full rates. In terms of the gas, we’ve got enough gas to deliver at full rates. We’ve got enough gas to fulfill our contracts. So, I’m quite confident in where we’re heading with Waitsia.

Saul Kavonic

I’m going to sneak a quick one here as well, last one. Is this goes for any more LNG cargoes to be exported before official start-up of the plant?

Brett Woods

I think one of the great things that we have and certainly from one of my observations is we’ve got some real strength in marketing and trading. And because we’ve got 2 domestic gas trains in WA, we are positioning ourselves to take advantage of whatever opportunities come up. I’m not going to say whether we can or we can’t. But as you know, me, Saul, I’ll look at every opportunity to generate some value for the organization. So, we’ll certainly be looking at things like that and driving as hard as we can.

Operator

Your next question comes from James Byrne at Citi.

James Byrne

Congratulations on the appointment, Brett. Look, I love what you said earlier about earning the right to invest. But as I look at the portfolio, there’s not a great deal of 2C. Listening to your answer to Tom earlier, it does sound like M&A is an important part of growth, but you do feel like you’ve got the right to invest indeed. I’d contend though that you need quite a bit of acquisition to get to the kind of scale, I think that an oil company needs to make it through the energy transition without destroying equity value.

I don’t think you’re close to having that scale today. Feel free to push back on that. But I’d actually think that a better approach is to take your skill set, really lean out the organization, spend a very limited amount of capital on the highest margin growth and excluding provisions, give the rest back to shareholders. Do you think that there’s a — there’s not merits to putting Beach into harvest mode, given where the business is at today?

Brett Woods

Well, the in part of our strategic review is to look at all options, and one of them is to — obviously, to think about opportunities such as that. I would argue that there is great opportunities coming out. And though you’ve seen recently that the Woodside transaction with Santos hasn’t gone ahead. I expect that there’s so many — there’s a lot of other clever thinking going on next door to figure out how else to liberate value. So, I’m not in a rush to do anything else.

I’m going to be very prudent. We’ve got a very strong return capital to shareholders’ philosophy within the organization. And we’re going to align these things up and see what delivers the best value and do things that are accretive, not erosive of value. So, nothing is not on the table. I certainly look at every opportunity to deliver value.

And what I do have is a Board and I believe our major shareholder that is very aligned to the vision that we’re putting in place and that’s a positive for me. I wouldn’t have joined an organized such as Beach, if I didn’t think there was real value in the share price, real value in the assets that it currently holds and a fantastic opportunity to try and grow value. That’s what I’m all about.

James Byrne

How would you describe the M&A market here in Australia from a competition perspective because — on the one hand, it’s much more difficult for juniors to be able to finance acquisitions related to things like abandonment provisioning. And at the other end of the spectrum, there may be less capital from offshore. But that’s not to say that there’s no competition in M&A and I’d just love to hear your perspective.

Brett Woods

Yes. I think that reflects to the unique position that Beach has. We sit between the minors and the majors. We have a strong balance sheet. What we are seeing is if you compare the cost of doing M&A transaction in Australia, it appears to be lower cost than, say, doing it in other parts of the world.

So, I think there’s an opportunity there for us to take some of that value and run with it. So, I don’t — I think you’ve seen in today’s press there are rumors that other players coming into the market, which is even more exciting for me to get competitive on what opportunities there are available.

James Byrne

And that’s all for me from a question perspective. But can I just applaud you for your early decisiveness on capital allocation around Western Flank exploration and pausing on Waitsia. Yes, I mean, I think they’re both demonstrating the discipline that we’re all hoping for.

Operator

Your next question comes from Gordon Ramsay at RBC Capital Markets.

Gordon Ramsay

Brett, congratulations on your new role. Just very quickly on [Kupe NZ 9]. You’ve indicated that, well, it looks like it’s initially disappointing. Does that have got to do with reservoir quality? Have you kind of been able to narrow that down in terms of what the issues might be?

Brett Woods

Yes, no problem, Gordon, and good to speak to you again. Kupe NZ 9 came in effectively just slightly under prognosis in terms of its static subsurface properties. And we had initial rates. So, we’re really quite high and quite promising. But then we’ve seen what appears to be a bit of a restriction.

So, we’re not sure if it’s mechanical. We’re not sure if it’s a bit of dirt coming up out of the ground. It’s unclear. So, we’re going to do some step rate testing across there to see if we can get that flow moving. We think — no, I think there’s a good chance that we’re able to get this thing moving in the right direction.

But what I want to do through my time here at Beach is just be very open and transparent and upfront with you. And at the moment, it is erring on the disappointing side, but we’re going to do everything we can to get that fixed.

Gordon Ramsay

And just another one for me. What is a modest gas price increase mean in terms of the Lattice contract arbitration?

Brett Woods

It means it’s up, but it’s not significantly up. To be fair, the original GSAs were struck at a pretty good price at the time. And we’re pleased given the lack of comparable contracts that have been executed across the market over the last few years to get where we got to. But the critical part for me, the critical part for our organization is significant growth in minimum take-or-pay. That gives us so much more surety about our base volumes and it helps us to manage our costs as well.

In the Otway, if we can’t get our volumes away, we get a relatively higher cost base. So for me, there’s multiple avenues to managing costs and getting more out of the ground is certainly one of those good things. But I’m also a value player and getting access to that spot market, that tightening East Coast is really important. Doing a little very, very hard on how to maximize our value from our Otway assets, whether it be for ongoing GSAs or even more positioning against the spot market.

Gordon Ramsay

Just related to that, can you comment on how much of Enterprise has been contracted in terms of what you expect the output to be from — to your contract, but what do you expect the output to be from that field roughly, just on a percentage basis?

Brett Woods

Unfortunately, I can’t — because a lot of that is commercial in confidence, Gordon.

Operator

Your next question comes from Nik Burns at Jarden Australia.

Nik Burns

And let me join the others and congratulating you to the new role, Brett. Apologies, I have another question on M&A. And just about your comments around first wanting to earn the right to invest. How long do you feel it could take to earn that right. And you mentioned there could be some opportunities with your friends at Santos next door.

I’m just wondering if that means that M&A may not be on the radar for some time say this year, if you can just maybe just add some more color on that.

Brett Woods

But to start with, like, I’m hoping that my intention will be at the full year to give a much clearer and firmer view on our strategy and our strategic direction. And I expect it will be able to demonstrate some of the significant moves I’ve done on costs during that time. So, I’m hoping that through action that you’ll be able to see that I’ll be earning the right. And I think we’ll always be opportunistic. We’ve got a great balance sheet.

Certainly, it’s not my focus over the next 3 months to 4 months to go and bite something off. But we’ll always be looking if something becomes — something that is really exciting. But good M&A requires you to deliver the synergy value from that transaction. So, I want to have an organization that can actually unlock that synergy value as well as see grow that accretive value part of the story. And I don’t know if I have that today. And we’re going to work closely as a leadership team to make sure that we have that and that we’re positioned for that.

So, I think the message I want to give you, Nick, is I just want an organization that is disciplined and focused. And I think that will come with time, hopefully, not too long. But that’s just absolutely my mission over the next 6 months.

Nik Burns

And maybe just touching this might be a part of your last answer, but you’ve called out margin growth as a key focus for you. Just wondering what you mean by that exactly? I’m assuming it’s more than just lower costs. Can you talk about is it pursuing higher-margin growth opportunities organically or inorganically? And maybe give some examples of how you think you can achieve that?

Brett Woods

Yes. I think — so obviously, margin growth includes costs. So that’s one element. The other part of it is potentially getting more exposed to the spot market in terms of our commercial positioning. I’m just weighing that up at the moment with the team on how we can — we’ve seen in every market we’re operating in, you’re seeing tightening.

So, I see a very exciting future in the East Coast gas market, very exciting future in the West Coast gas market as well as internationally. So, then I’ll be chasing assets that have the ability to execute at low cost. Those things that we have advantage on.We have excellent onshore operating skills. I must say our onshore operating team are trending towards low cost. We need to get that in all our offshore activities as well, which I think are trending towards low cost.

So, there’s real good shoots in this organization of capability. I can’t understate the quality of the people that I’ve come across so far at Beach. And what I want to do is get them focused. And if we get that focus, we get those elements and costs, we get those more molecules to market in those higher growth markets, as well as looking at some simplification of our asset base and maybe chasing some over time, some higher-margin assets, that will help our story and that will help drive that kind of leverage position that I’m trying to achieve.

Operator

Your next question comes from Sarah Kerr at Morgan Stanley.

Sarah Kerr

Congratulations on your first results. I have 2 questions, if I may. I was wondering if you could provide some color on any consultation speech you’ve had with the WA government, just on the possible relaxing of the domestic gas export ban? And what could a possible lifting of the ban mean for Beach?

Brett Woods

Yes, I can’t really comment on any discussions with the West Australian government. We’re in a great position that we have an ability to execute gas from the Waitsia Field to the LNG markets. But I just want to reflect everyone that we have 2 other gas facilities there, both serving the domestic gas market. I think if — maybe I’ll be a bit over ranging here, but WA has got a lot of wonderful assets and some of those assets are getting underutilized like the North West Shelf. To deliver more gas to the domestic market, some of those smaller projects do need some exposure to export markets.

So the irony here is giving more access to export will enable more domestic product. But I think we need to do that in a balanced way. And certainly, as an organization and certainly me, I’m absolutely committed to servicing the domestic market as well as getting exposure to the export market. I think that makes practical sense.

Sarah Kerr

And could I direct the question to Anne-Marie. How are you thinking about the debt capacity running at 12% versus the 15% target Beach has? And how can headroom increase once Beach has earned the right to invest?

Anne-Marie Barbaro

So initially, when we put out our target gearing of 15%, we did talk about that being quite a modest gearing target to allow us the ability to stretch our legs further in the event that we did want to pursue any incremental growth. We’re currently at 12% at the end of the half, but obviously, that’s sort of as we are getting to the point and of delivering our major projects, so we do expect that to sort of come off quite quickly once those new projects are onstream. But we sort of talk about that 15% being at a target there, but allowing us internally to stretch ourselves further if the right opportunity presents.

Operator

Your next question comes from Henry Meyer at Goldman Sachs.

Henry Meyer

Brett, congratulations on the appointment. 2 questions if I can, just quickly. First one on this could be early days, but your focus on exploration in the future strategy, you pulled back some exploration in the Western Flank already. Interested if you could share some color on the flexibility you might have in exploration offshore Victoria. What’s firm and committed potential time line for Offshore Gas Victoria drilling?

And a lot of talk on inorganic growth as well as some opportunities popped up. Could you defer some of that activity? Or is it more or less locked in ’25?

Brett Woods

I’ll start with the Otway. We’re currently doing a bit of a refresh, a part of the strategic review is to really have a deep look at what we’re going to drill in the Otway Basin. Things like Artisan and La Bella discoveries. They’re all close to tiebacks. So, we’re just going to go and test the market for costs at the moment and then run the economics to make sure that those projects conform to our new model of disciplined capital deployment.

And that’s really important to me. And then similarly, we do have a great partner in OGV, and we’re looking at drilling a well with them in the later this year, this calendar year. But — well, actually, sorry, I think it might be next year, next calendar year. But our challenge here is what are we going to do and what we’re not. And I’m not going to do anything that is not value accretive.

So, we’re having a good refresh at that. And that — and I’ll give a much more colorful view on the Otway exploration development lens at the full year.

Henry Meyer

And a final quick one, if I can. You mentioned you’ve got the other existing domestic gas plants in WA. Spot prices there and re-contracted prices are shooting up or have been shooting out fairly significantly, too. In the past, you just provided a bit of an indicative breakdown on contracted gas position on the East Coast. Can you talk to any notable change in your contracted gas position in WA going forward?

Brett Woods

At this point in time, I can’t — sorry, Henry. It’s — unfortunately, most of that is very commercially in confidence. What we have been doing though is we’ve been able to execute some great swaps to facilitate the LNG cargo and we will continue to look at every opportunity we can to deliver value through the market.

Operator

Your next question comes from Scott Ashton at SHA Energy Consulting.

Scott Ashton

Brett, congratulations. Just 2 questions. With a fresh set of eyes coming into the business, where do you see the lower-hanging fruit in the sort of cost optimization for drilling vis-a-vis, say, Perth Basin versus Cooper? And then secondly, it’s more of a technical question because it goes to optimizing the molecules, those deeper discoveries around Beharra Springs, that’s high-pressure gas. How do you sort of think about optimizing the topside facilities, which are sort of not designed to handle that high-pressure gas.

Does that mean that the Beharra Springs facilities need some sort of optimization?

Brett Woods

Yes. So, I’ll start with the cost question. Before I joined Beach, I heard much about effectively the cost profile that Beach we’re executing program and the cost profile. Others were executing the program. As part of my strategic review, I’ve been working with some of our partners to kind of really get a clear view on where we’re competitive on cost and where we’re not.

So, I’m going to break that down in a lot of detail and work with the team to get that right. And some of that is associated with corporate overhead. So, I’ve got to make sure that all parts of the business are rightsized to make sure we were aligned to the cost objectives that I want to drive. In terms of the variable pressure across the Perth Basin, that comes with its own opportunities for us as well. Any modifications and dropping pressure down would be not hyper complex. So, I’m not particularly worried about it.

But we’ll continue to explore and chase opportunities in the Perth Basin because it’s such certainly a critical market for us in the West and we do have a fantastic position and an excellent partner with Mitsui are aligned with us on investing across that basin.

Operator

Thank you. That does conclude our question-and-answer session and our conference for today. Thank you all for participating. You may now disconnect your lines. Thank you.