Beach Energy's (BEPTF) CEO Matt Kay on Q2 2016 Results - Earnings Call Transcript

| About: Beach Energy (BEPTF)

Beach Energy (OTCPK:BEPTF) Q2 2016 Earnings Conference Call July 27, 2016 9:00 PM ET


Derek Piper - IR

Matt Kay - CEO

Mike Dodd - Group Executive Exploration and Development


Mark Samter - Credit Suisse

Nik Burns - UBS

James Bryan - Citi

Andrew Hodge - Macquarie

Derek Piper

Good morning all and welcome to the call. I'm here with Matt Kay, our Chief Executive Officer, Mike Dodd, Group Executive Exploration and Development, and other members of the executive and senior management. Matt's going to talk to the key events from the quarter and also touch on some of the full year results and guidance, and then Mike will talk to the results and go into a bit more detail. We'll also then open the lines to Q&A. So Matt, I'll hand over to you.

Matt Kay

Thanks Derek, and welcome everyone for the call. It’s a great pleasure to be with you today from our first quarterly report with Beach Energy. We have a pleasing set of results to talk to and they cap off a strong performance by Beach this financial year. And we have even more exciting future ahead of growth for the Company. Our quarter results reflect the number of positive factors, including benefits from the Drillsearch merger, excellent operating performance in the continued drive to achieve its expenditure across the business and they welcome strengthening of oil price.

I'll briefly touch on a number of these points now. Firstly we integrated Drillsearch and confirmed an expected $40 million of pre-tax synergies for FY '17. Integration was completed ahead of schedule and in a seamless manner. The key driver of the merger course was moving from 40% to 100% ownership of the PEL one oil permit. This has delivered a material uplift in net oil production, and underpins our record quarterly production. We produced 3.7 million barrels of oil equivalents, up 13% from the prior year quarter. Record production was reported by continued operational excellence in the field. We undertook a number of production optimization projects which help to accelerate production and mitigate natural field decline. Mike will talk to some of those in more detail later.

While drilling activity was still at a reduced level, it was a strong quarter with the drill bit. We participated in 10 wells with a success rate of 90%. That provides us with a lot of confidence as we prepared for our FY '17 operated drilling program which begins this week. Sales revenue increased 39% to $167 million, thanks both to higher volumes and rebounds in oil process. Combined with our diligence focus on expenditure, Beach has generated $45 million of net cash during the quarter. This demonstrates for robust nature of our business and our strong financial position. We ended the quarter with cash reserves of $199 million and access to a further $350 million of debt facilities. So I am sure you can say while this is a pleasing quarter for us on so many counts and it places us in a very strong financial position for our future growth story. The quarter also obviously brought an end of our FY '16 financial year, one which again was challenging for most of those players in the oil and gas industry.

Despite those conditions Beach delivered against the strategy on multiple funds, and we strengthened our positions to growth. I'll touch on a few of those that comes briefly. As I mentioned we delivered in organic growth through the acquisition and integration of Drillseach, which enhances the scale of our business and provide wide range of benefits. We continue to actively review more inorganic growth opportunities in line with our strategy and we have multiple opportunities under review right now.

We completed our organization review with key recommendations implemented. We started the year with a lean workforce but measures to right size our organization mean that we now have less staff in place than we did before to the Drillsearch merger, and that’s a significant achievement. We continue to drive value from our We continue to drive value from our, with a focus on operational efficiencies, cost reductions and a broad range of development projects. I’m very pleased to say that our already high safety standards improved even further, with a reduction of 76% in a reportable incident drive. We set the bar high on safety as a company, but we continuing driving to perform and improve.

We’ve enhanced our capital allocation process in the previous quarter. This provides a strict framework for all discretion expenditure, ensuring attractive pretends on capital at targeted and mix. There was serious approach reflected in our FY17 capital expenditure guidance. We similarly enhance our M&A or merger and acquisitions assessment process for screening due diligence, technical and financial assessment to ensure that we’re truly regress in our assessment of both the risks and rewards as our growth opportunities.

Expenditure has been significantly optimized across the business. We high graded discretionary capital allocation and reduce operating and corporate cost. We’re working very closely with Santos, operator of the South Australian Cooper Basin and South West Queensland joint ventures, together in an ongoing drive with favor efficiency and cost reductions. Overall this is an early stages, we are pleased for the progress made and look forward with regarding market guidance in due course. Lastly we further strengthen our financial position. Our actions saw cash reserves increase by $29 million over the past year. Demonstrating our ability to live within our means in this challenging terms. We’ve also increased their access to liquidity within increase debt facility approved $350 million of which remains undrawn. So I can confidently say that Beach is very well placed to with fairly growth, thanks to the efforts of our team and the results from the past year. We’re fortunate to have the opportunity to focus on growth at this time in the cycle. And we have multiple organic and then organic opportunities well as to review right now.

Looking forward, today we announced our guidance to FY17, capital expenditure and production, Mike will tell some of this in more detail, but I would like to stress a few points. Firstly with regard to capital expenditure, we are embarking on an active and focused programs to deliver superior retains on capital and we have to regard n place to provide those opportunities, We are estimating the expenditure between $180 million and $200 million for FY17. We’ve reached more than half is discretionary in nature, and all of it meets our strict capital allocation requirements. In particular, our at discretion expenditure comprises firstly a greater allocation to Western Flank exploration, without the six days exploration wells to be drilled along with a broad range of development activities.

Secondly the significantly reduced allocation to the SACB and South West Queensland joint ventures, representing a steady profit and reduction on these ventures from FY'16 and a 65% reduction from FY'15. Furthermore, total FY'17 capital expenditure for these ventures represent a much smaller fraction of Beach's total CapEx compared to previously. Circa, 42% for FY'17 compared to 66% in FY'16. This again demonstrates our focus on allocating discretionary spends to the highest returning areas. For production we're guiding towards 9.7 million to 10.3 million barrels of oil equivalent. The full benefits of the Drillsearch merger will be same, as will incremental production from various development activities including facility expansions. We are of course expecting continued natural fuel decline, particularly with our Western Flank Oil permits.

I would highlight that our FY'17 forecast does not take account of any exploration success during the course of the year. And I would note that our first exploration well in the Western Flank will be drilled this quarter and if successful we'd be online later this financial year. So, in closing I'm extremely pleased with the strong balance sheet and operating competency that Beach has demonstrated in the previous year. Our performance in operations, safety and the Drillsearch merger demonstrates both our financial capacity and our ability to drive further organic and inorganic growth. In short Beach is a company very well placed for this point of the cycle and we have many exciting opportunities ahead for us for the benefit of our shareholders.

Thank you and I'll now hand over to Mike to talk some of the operations in more detail.

Mike Dodd

Thanks, Matt. And there've been some really exciting things on, on the operations front over the last quarter. And I'll now give you a little bit of detail on those. It's worth pointing out that the Q4 actually saw the end of an excellent year of HSE performance for Beach operations. Q4 saw great milestones for the company as we reached a million hours without an LTI, stretching back from September 2014 up to June '16. Our focus on contractor safety has paid dividends. We're LTI free for contractors on Beach operations since September 2014 right up to today. And FY'16 is seeing a reduction in our total reportable injury frequency rate from 15.6 to 3.8. These statistics are great testament to Beach staff and our contractors and their dedication to Beach's value of safety taking precedence in everything that we do.

Moving onto some of the highlights from the production world for the quarter, I'm pleased to be able to confirm as Matt said that we had a record quarter of 2.7 million barrels of oil equivalent of production, a 30% increase from the prior quarter. That's a fantastic result and is due to field development activities which I'll expand on in a second and the merger with Drillsearch. Looking firstly at oil, in the ex PEL 91 area, net production was up 55% on the prior quarter to just over a million barrel. A large part of that increase was due to a full quarter of a 100% equity following the Drillsearch merger, so a tangible benefit of the Drillsearch merger there. Bauer and Pennington fields have continued to be strongly producing. We've barreled around 10,000 barrels of oil a day and Penningnton is still over 1,000 barrels of oil a day.

Projects in this area this quarter, we're bringing the Hanson-2 well online and commission a variable speed beam pump at Chiton-3. These two projects have added around 200 barrels of oil per day production between them. Since the end of the quarter Bauer 23 and Hanson 3 have been connected and work on the Bauer facility expansion has continued. We still have well stoke in the area with Bauer 24 Bauer 25 still to be connected, and the FY '17 drilling program will begin in this area with the Hanson field.

In the ex PEL 92 area the effects of natural field decline with partially offset by development activities, this included proactively detecting likely failure on ESP and getting there and repairing that quickly as well as flow line reconfigurations. Net production for the quarter was 188,000 barrels in the PEL 92 area down 12% on the previous quarter. In the Senex operated areas the ex PEL 184 / 111 areas the Growler and Martlet fields continued as very strong ,producers partially offsetting the decline as other fields resulting in a quarter's net production of 115,000 barrels.

Moving now onto gas, Western Flank Gas in our ex PEL [106] area was impacted by repairs to the Middleton separator which is now back online and the number of shut-ins were requested by the Moomba operator. As a result net gas production was down in this area 61% that 29,000 barrels of oil equivalent and net gas liquids were down 59% at 12,000 barrels. The downtime was however used productively and we got two new wells connected at Ralgnal and Udacha, and since the end of the quarter productions increased to $18.5 million scfs per day and 400 barrels of condensate per day, or 3,700 barrels of oil equivalent and that compares to 1,700 barrels of oil equivalent per day in Q3.

The Middleton compression project is continuing and expected to be online in Q3 FY '17. In the Santos operated areas of the Cooper basin productions were sustain all but flat at 988,000 barrels of oil equivalent assisted by new wells from the Moomba under-balanced drilling campaign that we completed earlier in the year so four wells in the Moomba are brought it online. The impacts of these wells will be assessed after long term testing and its hope this under-balanced drilling technique will be successful in developing depleted fields.

Oil productions from the Santos operated areas was also flat to 194,000 barrels net to Beach. Now we will run through few highlights development activities executed in the last quarter, starting with the Santos operated JVs the quarter saw the first three wells of a five well Tirrawarra Gooranie field program, completed with the fourth well completed subsequent to the period end. These wells have exceeded pre-drill estimates for Patchawarra Gas and Tirrawarra Oil. However the final well in this successful program has had to be deferred due to flooding in the area so that rig has now moved into the Big Lake area.

We expect these Tirrawarra wells to be online late this year and add approximately 1.3 million a day after black out and 30 to 50 barrels of oil per day in liquids. Potentially these rates could actually be improved by de-bottlenecking projects. A three well campaign Coolah complex over in Queensland designed to appraise field limits has targeted Toolachee Sands as the primary target. The first two wells Dunadoo-1 and Coolah-3. Was successful and in line with a pre-drill expectations. These two wells will like to be online in mid next year and provide a 3million to 4 million standard cubic feet per day in total. Coolah-4 was also cased but we’re quite for their evaluation due to post development poor sand development.

Durham Downs North-5 and 6 are strong wells that could do 5 million to 10 million a day, each as well as and after blackouts should still increment 3 to 6 million a day each into the system as they could be online like this in. I’m moving out of the Cooper Basin joint venture areas, in PEL 5.3 the final wells of the recent campaign Lyra-1 intersected 10 meters of net cash and has been cased and suspended for further testing. PEL 5.3 is one of the Beach obtained through the merger with Drillsearch, and is complementary to our Western Flank project in PEL 1.6.

Two other wells did really a brilliant, South-2 are also awaiting tested and we'd expect that to happen during FY17 and three other wells from that campaign are gas producers. In terms of exploration in the operated areas, this quarter we concentrated on finalizing the FY17 drilling program, the program will begin in the first week of August and after three development wells we move on to Western Flank oil exploration targets, also on the explorations side is the 9 months suspension extension, was granted on T/14P which will allow extra time for mapping up the Flanagan 3D to inform the go forward decision on that permit. Overall in Q4 Beach participated in 10 wells, none of which was successful and not it sense success right. We’ll now turn to FY'17 guidance and the exciting program associated with that, which focus on extracting maximum and record returns from Beach strong portfolio opportunities and then this is an important foundation to Beach great strategy.

So firstly production guidance, Beach is very pleased to be able to announce FY'17 production guidance in excess of FY16 volumes and guidance as method is 9.7 to 10.3 million of barrels of oil equivalent. Beach has taken positive action over FY16 to sustain us from production numbers and the all side the production profile is new oil fields of the Western Flank is understood and predictable, early flush high oil production gives way eventually to high water cut production, this water cut moves from a low percentage to a high percentage quickly but then flattens out and the wells continue to produce large volumes of oil with associated larger volumes of water for a long time. As I say we continue to take the steps to offset this predictable decline in its key producing asset PEL 91. These steps include the merger with Drillsearch to move the payment from a 40% equity to a 100% equity. Expanding the bio facility to handle a 120,000 barrels of fluid a day from 75,000 barrel per day, which increases the produce low volumes and high water cut and optimizing well utilization and time.

As a result Beach expects oil production in the range of 5.1 to 5.4 million barrels for FY17 and sustaining the 5.2 million barrels from FY16. In terms of gas and gas liquids our forecast of 4.6 to 4.9 million barrels of oil equivalent slightly up from the FY'16 volume of 4.5 million barrels. Cooper Basin joint venture production is slightly down driven by low levels of development activity and natural fuel decline, but sales will increase on top of the produced volumes as storage is utilized to meet contractual demand. Operated gas is up to a compression project in PEL 106 which will come online in Q3 FY'17 and the connection of successful wells as previously mentioned at Udacha and Ralgnal from the FY'16 capital program. The benefits of these projects is already evident with production in early July increased as previously mentioned from 2,700 barrels of oil equivalent to 3,700 barrels of oil equivalent.

I should stress that our model -- our production model has FY'17 exploration successes coming online in FY'18. But our dedicated teams will do all in their power to bring production full in the event of exploration success during the FY'17 year. In terms of capital guidance, Beach is offering guidance of a 180 million to 200 million for the year. 100 million to 115 million of that would be classified as discretionary, and 80 million to 75 million as fixed. This compares to 184 million for FY'16. The split between development and exploration is 129 in development and 63 in exploration.

Beach has a healthy balance sheet and the capital program for FY'17, aims to sustain this. In short capital has been invested where it can quickly create a healthy return, consequently discretionary capital is focused on our core business areas of the Western Flank Oil, Western Flank Gas and the Cooper Basin joint venture. We're extremely well placed to deliver value in this area with our seven technical leads having an average of 30 years’ experience and a deep knowledge of the Cooper and Eromanga Basins.

A little more detail now on that capital spend in the Western Flank Oil permits, 40% of our discretionary CapEx is directed into this area. These assets have long been Beach's highest margin producers and providers of the revenue stream for reinvestment. Here we have a mix of development and exploration activity with up to 16 wells in total including up to 12 exploration wells. Exploration drilling will target not only the Namur but also Birkhead targets and Patchawarra. Birkhead targets have been located using seismic attribute techniques and if successful have follow-up applications.

The first three operated exploration wells on the schedule have an average chance of success with 24%. Of particular interest is the Kangaroo-1 prospect in the northern part of the PEL 91 area, targeting Birkhead channel sands delineated on an inversion volume. The prospect has a mean unretrospected resource of around 3.5 making barrels of oil, with a chance of success of 18%. If successful further similar targets with similar seismic signatures exists in close proximity. So, we have a follow-up there.

High quality 3D seismic has been the key to success on the Western Flank and a further 300 square kilometers is planned to be acquired during FY'17 and a further 1,700 square kilometers to be inverted. Development activities include facilities expansion which will be aimed at offsetting fuel decline and sustaining production levels as high as possible. Western Flank Gas has been allocated 25% of the discretionary capital. There will be more exploration drilling in this area planned to follow up on recent program successes. The Middleton compression project will increase well deliverability and the seismic previously mentioned will also address this area as well as the Western Flank Oil. In sense of the Cooper Basin and JV program, 35% of our discretionary capital allocated here. AndBeach will be focused on cost effective development in this part of the business to supply the existing contracts. Which will be regressing investing L&E in those drilling campaigns that made our capital allocation requirements and the first campaign in FY '17 is a Big Lake a series of Big Lake pad drills for development has just commenced. The Santos operated part of the business is now lower proportion of the Beach total capital spend. There is definitely an increase level of collaboration with your operator and the cost saving initiatives that Santos have been driving into the business of very good to see. We expect to see ongoing efficiencies in both the capital and operating expenditure over the year.

And with those details on the programs, I'll now hand back to Derek.

Derek Piper

Thanks for that Mike and Matt. I will now open the line, so Kevin if you can perhaps introduce the first to ask a question please.

Question-and-Answer Session


[Operator Instructions] we do have our first question in queue from Mr. Mark Samter from Credit Suisse. Please ask your question Mark.

Mark Samter

Morning guys, a couple of questions. Starting actually with a couple on the SACB JV. I suspect everyone's pretty glad to see some rationality and more rational spend from the operator there. I guess the problem and the challenge for us in modeling volumes going forward is as you say for a while you can tell from storage and sales volumes can increase whilst production drops, and I think you said you're drilling 19 wells in FY17. I'm pretty sure off the top of my head Santos has said before that you need to drill 35 wells a year to sustain production at their 2015 levels. One question is, are you able to tell us how much storage has already been drawn down to know how long that trend can continue? What's your level of confidence at drilling 90 wells a year, how long can you sustain your contracted volumes? I guess the level of confidence we have that fiscal rationality will sustain for a while longer or will contractual operations for other JV partners start to weigh on the capital call from the asset?

Matt Kay

Thanks, Mark, it's Matt here. I might just answer the question on fiscal rationality and let Mark touch on some of the drilling issues. As we have mentioned we are progressing very good discussions with Santos right now. So I am probably three month in here now and I had a large number of discussions both Kevin Gallagher and with Vince Santostefano. And we are working on a plan around the basin. Now we just feel that it’s only a few months in that it’s a little bit early to be giving explicit guidance and but there's great alignment between the two companies on what we are trying to achieve and where we are heading and we are seeing early wins are already around that. So I'm very confident around the rational decision making and that cash flow and value and is going to be front and center in all decision making and is really opening good dialogue happening. So I am very comfortable around that. But I might let Mike touch on the details as the number of wells.

Mike Dodd

Hi mark I guess firstly addressing your question on storage, storage is still in pretty good shape reckon between 60 and 65 PJs still remaining in storage. We have started drawing down on that the amount that gets drawn down on a daily basis peaks and troughs quite a lot. Last week it was about 122 TJs. So still plenty of capacity in that storage. In terms of your question on the level of development drilling required, you mentioned that 35 wells and year number to sustain 2015 levels to 2015 levels, I guess question is the do that with the AGL contract dropping off and contractual demand changing a little bit there. I will point out that Santos are definitely looking into that things and reviewing with their price and development more to more be and we haven’t seen the outcome of that yet, so I expect to see some review, some more numbers of wells to get to place. As we say Mark, a fair bit of rational thinking going into what's that we needed and the best way to get value out of the basin.

Mark Samter

Yes, it probably comes onto the next question, Matt, well I guess unsurprisingly there's the word acquisition comes up a lot in the release, and looking at acquisitions I can't see any reference to divestments. Is your head thinking, is there still, you're in the seat now, had a chance to look through the assets, do you think there's scope for some asset rationalization as well or is the focus much more on things coming in and going out?

Mike Dodd

No the focus is certainly on both, Mark, so we are undertaking a clean house process and we have abroad range of acreage and infrastructure across the basin. A lot of that is highly valuable and create a lot of cash flow for us and that retains for us, so of it not very much and most areas were we see opportunity to create cash ins and were we can get value out of infrastructure and acreage that we don’t see a line of site to clear value, then yes we're in discussions and process right now around, either framing down or exceeding some of those acreage in our portfolio. So you'll see us active in that space as well.

Mark Samter

Maybe one last question if I can sneak it in. I know you're not going to give us any granularity in details on what you're looking at, but if you look at the SACB JV and fiscal rationality is prevailing, which is great, but fiscal rationality says less volumes being produced. The [LPNG] train starts at some stage, you've got that natural decline on a lot of these assets, there's pretty much sod all on contracted 2P reserve on the East Coast of Australia at the moment. In the list of opportunities that you've got, do you see opportunities for acquisitions in uncontracted East Coast gas reserves? How prevalent is, without obviously giving any details, do you think there's realistic acquisition opportunities that target that market that the SACB JV has affectively exacerbating the need for more of that gas to come to market rationally?

Mike Dodd

Yes obviously Mark, you're hitting the nail on the head that I won't be able to go into granularity around this. But to give you a steer, we do believe in the East Coast gas market, theory on the supply demand squeezes that is happening there, we do see this an opportunity, so there is a number of organic and in organic opportunities that we’re looking at to play that thematic and that includes both within the Cooper Basin and outside of the Cooper Basin, so we expect to fully active in that site.


Thank you. And the next question comes from Nik Burns of UBS. Please ask your question.

Nik Burns

Hi Matt and team. Just another question on FY17 CapEx guidance and specifically on the Cooper Basin JV CapEx. Just interested in your comment in there about Beach's ability to selectively participate in most drilling campaigns. Is this a relatively new thing for you? Is it something that you've flexed in the past? Do you expect to use that selective participation option to trigger that this year and that's sort of what's going to keep you within your CapEx guidance range? And does it say anything about the contract you have with Origin? Like if you don't choose to participate in certain gas wells, because they don't meet your internal criteria. Does that mean you've got flexibility in your gas contract with Origin to potentially not deliver the full volumes?

Matt Kay

We do have more flexibility in recent times that we had in the past. So, that is the clear signal to the market today. However that's being said we're working very closely as I said with Santos and part of that discussion is to be in a place where the two companies are aligned them with programs going forward and our schedules going forward. So, our preference obviously is not to have to use that flexibility, and I'm sure that's the same for the entire venture. But if we do need to use it, we will. But of course contractual commitments are key and we'll be focused on meeting our contractual commitments throughout.

Nik Burns

Just a question on your exploration drilling program in Western Flank Oil. Just wondering, you've talked about up to 12 prospects, have you identified those prospects? I'm just wondering in the context of do you believe that on a risk loaded basis that the risk -- volumes that you hope to find through the year would be sufficient to replace production volumes from the Western Flank Oil in FY'17?

Mike Dodd

We've identified to a large part, the prospects that we intend to drill in that Western Flank program speaking from the operated point of view, there are some non-operated wells to drill as well and we haven't seen the prospects for those yet. And I guess what you're alluding to, with the fantastic production we've been having over recent years and the sustained numbers that we're predicting for FY'17 is going to be a challenge to replace all that production from the exploration campaign that we've got targeted for this year. So, the expectation is that we would replace part of production from this exploration program but not to entirety.


Thank you. The next question comes from Mr. James Bryan from Citi. Please ask your question James.

James Bryan

Just a fairly high level question first off. They've obviously flagged M&A very clearly to the market today, but just outside of that with the Drillsearch integration largely done now, and Matt I guess you've been in the chair for a few months now, where do you see management's focus really being over the next financial year? Do you see much low hanging fruit within the business now that you've been in here for a couple of months, Matt, and that you think you can chase near term? I guess you've already alluded to collaboration with Cooper as one example.

Matt Kay

In relation to the Drillsearch merger it is done. So, that's behind us and we're really pleased that has been a seamless process for us and we've got more than -- and the synergies that we thought we would have when we initially undertook that transaction, so that’s really pleasing for us. In relation to management’s focus obviously one is getting as much value as we possibly can out of the Cooper Basin going forward and optimizing our portfolio there. Hopefully you're seeing the signal of that in our guidance for FY '17 and our focus on the Western Flank, particularly the 100% oil focus, which is very high returning as you can appreciate, and very low operating costs in the Western Flank. So that’s a key focus, get as much value out of that portfolio as we can. Another key focus is to rationalize the portfolio where it needs to be as I mentioned earlier and let go sell down or sell out of those parts of the portfolio where we don’t see a line of sight to the same sort of returns. Another key platform is clearly our relationships with Santos and the joint venture around the Cooper Basin and South West Queensland. As I said key area there is working together on the Basin development plan field development plans and getting more efficiency through that business. As I said we are very pleased with our progress on that so far, albeit early days. Then as you've said inorganic growth is the key focus for us and we are active. We're being extremely disciplined about it. We have got the resourcing in place. We're getting support from the right external resources as well and I think we are well placed in terms of time of the cycle. And it's not a lot of - a queue of buyers out there at the moment but there are number of parties who are still somewhat distressed as you know, and we're in active discussions with those parties.

James Bryan

Great, that's interesting. Second question, so at the first half result the dividends had been suspended pending an oil price recovery. Now as we look at the outlook for FY17 discretionary expenditure it would seem that given how robust that is, would it be reasonable to suggest that you're comfortable enough with the current environment to reinstate the dividend near term?

Matt Kay

We haven’t had the discussion on recently on dividend policy and obviously that is a matter for the Board as well, so I wouldn’t be too explicit in my response here. But what I would say is -- and its clearly still ongoing uncertainty in terms of what the outlook is for oil and then I think we need to be a little bit careful as to how we would play our capital management. Add to that the fact that we're clearly active in the M&A market that’s another consideration we have to give to that thinking because we are clearly building a little bit war chest right now. So all of those factors would have to go into our thinking but that’s subject to discussion with our Board at the right time.

James Bryan

Understood. Thanks guys.


And our next question comes from Mr. Andrew Hodge from Macquarie. Please ask your question Andrew.

Andrew Hodge

Thanks guys. I've got two questions, both just kind of related to capital for FY17. If I look back through the drilling report that you guys have put back in March, I guess you guys touched on Santos a few times. You talked about further testing particular at PEL 570 in FY17. I'm just curious about the look forward in terms of how much carry remains with some of the Santos farm-in. The second question is really also about another deferred capital program that you guys had had earlier on. It was about the Bauer facility upgrade, so you guys were going to go from 75,000 to 133,000, and I just wanted to check to see how that was going as well and what the plan was for that?

Matt Kay

Thanks Andrew and touching on touching on Bauer firstly, that project moving a long and you said it gone from 75,000 to 127,000 barrels of fluid a day and we would expect that to be all that from running in Q3 of this financial year so that would be really maintain some production levels in Bauer as the water cut increases. In terms of the wells inside, you’re asking about Santos farm-in block 513/623 area where we just finished -- there is a demand of carry left on that block. We'd say in the order of 20 million left in the carry in that agreement so, and clearly very soon, work to be done, done on the ground there. The results today, sign good, not so a process of evaluating those results right now and seeing what the best way forward is, because I explain it. And Andrew we do have a well-planned in this year.

Andrew Hodge

Yes, but you guys had no wells drilled in 632/513?

Matt Kay

We're discussing the forward plan with the operator right now.


[Operator Instructions]

Derek Piper

I think we might end the call there, thanks, Kevin. So thanks again to everyone who joined. The call, as we will be available for any follow up questions. Thank you and have a good day.

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