Star Energy Group (LSE:STAR) — Full Year Results Presentation

0:01 Good morning and welcome to the iGas Energy PLC Full Year Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time via the Q and A tab situated in the right hand corner of your screen. Just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Steven Bowler, CEO. Good

0:31 morning to you, sir. Good morning, and good morning, everybody. Thank you very much for joining us. What I'll do is review of the company for those of you that don't know us too well, and then we'll we've just released our results this week on Wednesday. And, obviously, there's been a lot of discussion about energy from government as well, and we'll touch on that as we go through. So introducing the business. We are a UK onshore energy business with a long legacy of producing assets. The board has got a lot of experience. Recently added to that is Chris Hopkinson joined us in January. He's got deep technical background in oil and gas as well as renewables experience.

1:21 And Kate Coppinger, who's over twenty years experience at advising energy companies and also sits on the board of CEREC as a nonexecutive director. As you'll see, a number of key institutional shareholders, Carriage and being the largest at 28%. Hence, they have two board seats. We are funded by way of a an RVL, a reserve based lending facility from BMO, and we've got modest leverage of £12,200,000 In terms of the assets, as I said, they're all onshore U. K. Our focus is absolutely in England. Our conventional assets, we're the largest producer by number of fields.

2:08 And our production of about 2,000 barrels a day is broadly fifty-fifty in the East Midlands and down in the Weir Basin, which is Surrey Sussex. And Hampshire, our decline on that portfolio, natural decline is about 10%, 5% to 10% per annum. And we've got good value there and improving cash flows, particularly as the hedges roll off, which I'll come on to shortly. To remind those of you that knew us before, we do have share licenses across the East Midlands and in the Northwest with a significant carried work program from INEOS. And there's been a lot of developments in our large scale geothermal business.

2:56 Governments have recently been very supportive, and we can have a grant for 50% of our CapEx on on those projects and and mentioned specific mention of geothermal in the energy security strategy yesterday where government have said that they want to aggressively explore renewable opportunities, including geothermal, which we are wholeheartedly in support of. It is really the only solution for decarbonizing heat in an urban environment, and we think we'll get good momentum in that business going forwards. We're also looking at other energy diversification projects, and we've got people coming to us to discuss them given our operating knowledge experience across across The UK.

3:47 Examples of that are we're looking at a solar project with Iona Capital in one of our licenses in the in the South, and we're looking at some battery projects on existing sites as well in terms of we we recently announced the heads of terms with Cornish Lithium, where we'll support them in their ambitions down in Cornwall as well as hydrogen projects across the piece. So a very exciting time for us. Just moving on to an overview of the results. Improving cash flow and hedging position improves. We have good opportunities in our existing conventional assets as well as the shale opportunity and the geothermal opportunities where we're looking at about five or six projects at the moment.

4:39 So if I just cover off the financial piece first, To remind you, these are the results for the full year to December 2021. If you exclude the hedges, we had about £14,000,000 of operating cash flow. That was at an average realized price per barrel of $68.5. So that demonstrates our cash flow generation as we move forwards in a stronger oil price environment and with hedging rolling off. So at 2,000 barrels a day, we're about 720,000 barrels per annum. We've got 320,000 of those hedged at an average price of 73. And the rest, because that puts and maintain the upside, is all at spot prices. So, you know, a hundred hundred plus. At the moment, our operating costs are about $38 a barrel for this year. And importantly, we have ring fenced tax losses. That's the same tax loss environment, both offshore and onshore, of GBP $268,000,000.

5:48 So if I move on to the opportunities in oil and gas, we updated or D and M updated the competent persons reserves assessment at the end of the year. We have 10,500,000 barrels of 1P reserves and 16 close to 16,000,000 of 2P reserves. The economics, which are included in the CPR, and that's on our website. The base case is run at about $67 for the next two years and then inflated thereafter. We have a 1p MPV-ten of 139,000,000 and a 2p MPV-ten of $190,000,000 We are operationally geared into higher oil prices. And even with a modest increase in the high case of 10% on the forward curve, that improves 1P and 2P NPV tens by about $40,000,000 for every 10% increment.

6:48 We have opportunities for additional production, what we call our hopper projects, our near term incremental projects. So those are projects on existing sites where we are doing modest things to improve production. The our threshold for those is to pay back within twelve months at $70. So we are going to spend about £1,500,000 this year to generate 70 to a 100 barrels a day by the end of the year. We have an infill project opportunity up in the East Midlands, which could add another 100 barrels in 2023 with good MPVs and a larger opportunity, again, adjacent to one of our existing sites in the East Midlands, which could add 200 barrels

7:37 and in phase two, another 500 barrels. That is subject to planning. So that's likely to be slightly slower. Additionally, we've got gas to wire opportunities, which within this price environment, obviously, very appealing. They have IRRs in the sort of 30s to 40s percent and pay back in a couple of years, and we'd like to push those forwards later in the year so they start contributing in back end of twenty twenty three. In terms of shale, the government have recently announced that they would like a review to be undertaken by the British Geological Survey, the BGS, and that is to be completed by the end of June. And I think importantly for us, there are two points there.

8:23 One is that they are being requested to look at other areas outside of the Northwest where the shale may be ex explored with different geologies. And secondly, whether or not the traffic light system that was put in place is appropriate. It is at a much lower threshold than for other industries like construction and quarrying, and we would like to be on a par with those other industries. And, yeah, I think in terms of the energy security strategy, it talked a lot about electricity and how that can be improved in the long term. We are we are hugely supportive of that and obviously trying to grow our geothermal business, but there wasn't a lot of talk about energy.

9:11 And we import 50% of our gas at the moment, and we obviously go to the highest. We're a marginal cost on that, we can, with the right government support, deliver a material amount of natural gas from shales going forwards.

9:30 So why is it so important in in The UK? It provides 40% of primary energy demand and around 30% of final energy demand. Electricity is growing, but gas is a key contributor to the base load for electricity generation as well. Clearly, there's ambitions in terms of nuclear. But in every single scenario you look at from the climate change committee report, gas is needed into 2050 and beyond. So the real question for us is not do we need natural gas. We need it to heat our homes. We need it to power heavy industry. The question should be where do we get it from?

10:12 So where do we get it from? You can see here in in the the pie chart, we do we we get an increasing amount from LNG with all of the benefits going overseas. And that that is only increasing. Since 2010, as a country, we spent £64,000,000,000 importing LNG from the likes of Russia, Qatar, and The US. We're obviously heavily reliant on Europe as well for our gas. You can see a significant proportion coming from Norway. We are going to be competing with other European countries who are trying to stop their imports of Russian gas. So that that is going to be an increasingly competitive market. So the the solution as a as a country, because it's a choice for the country, is where do we get that gas from?

11:04 And domestic production of gas, whether that's offshore or onshore through shales, is four times better from an emissions perspective than importing gas, let alone ignoring all of the economic arguments. And with that, I'll hand over to to Ross to talk about our shale position and our geothermal business.

11:31 Good morning. So I've got there sort of our our shale position in the East Midlands. As well as this, we've got circa 500 square miles of shale acreage up in the Northwest as well. But it's really here in the East Midlands with our our acreage position at about 400 square miles where we see real material opportunities to rapidly bring on production.

12:01 You can see within the very center of of of what is known as the Gainsborough Trough, sort of two stars. The stars to further south is the Tinker Lane well. To the north is Springs Road, both of which were drilled back end of two thousand eighteen, 2019. Springs Road sits within an area where we've got existing three d seismic coverage. And that three d seismic data really demonstrates that that the the the geology is very, very different to that in the Northwest. Significantly less faults, and we think and many others also think significantly lower chances of of any material seismicity.

12:52 As I said, we we drilled that well in 2000 sorry, the Springs Road well in 2019. The results from that well really demonstrate that we've got a world class shale section there. It's very thick. It's got a very high organic content, and we think it's sort of in the dry gas phase. The estimated gas in place is about 630 BCF per square mile, and that's across the the upper and lower bowling shell sections.

13:29 Lot of work has been done looking at analogs. We feel that the closest analog is in the Marcellus, in the northern sort of area of the Marcellus, and that gives us very good sort of type curves, which have been analyzed or have been, I suppose, taken from over three and a half thousand wells that have been drilled in the in that area of the Marcellus. What that gives us is is, in effect, each well will produce about two 12.7 BCF of gas. And so when we look to develop this as a as as a sort of a pilot project and try and bring on material gas, we look to to to develop it using a well pad with 16 wells on it, and that's that's in two different let sort of geological levels.

14:27 So initial gas or or gas production from the pad is circa 200 BCF, and that can supply about 750,000 homes. Within the East Midlands, we have long standing operations, so we have very good landowner relations. We have good community relations. And within within that, that gives us a real platform to develop shale on a commercial scale. What we see in that that commercial development is is a five pad development within our existing three d seismic area, which sort of accommodate it it it takes up about 10% of our our acreage within the East Midlands.

15:15 But those five pads of 16 wells each could be brought on, you know, in a three to five year period with initial gas in about eighteen months, and that would supply about 3,000,000 homes.

15:29 So it is it is very material production in a fairly short time scale. And I think the thing that should be stressed there is that there is real running room within the East Midlands, within the Gainsborough Trough to step out from that pilot production area.

15:51 So, you know, why why should we why should we be considering shale? Well, you know, we've we've we've talked about the material production that that could that could come on. We've talked about the lower carbon intensity. There's all the other benefits to that as well. There is, you know, tax take. There are jobs, and these are highly skilled jobs. There are significant community benefits in there. And as well as that, you know, we've Steve has talked about, you know, our our broad based approach to the business, which is sort of looking at lower carbon energy across the piece.

16:33 Shale is a fundamental part of that that low carbon story. And the East Midlands and the Gainsborough trough in particular is very close to the the the net zero Humber project, which is one of the large industrial clusters. So, you know, as well as it being a lower carbon source, there is actually the potential to make it a zero carbon source through carbon capture and sequestration. And as we've talked about, material production gives us a lever to to at least lower price or at least not have to be the the, you know, the the playing in the world market bidding for the bidding for the last sort of LNG tanker, which is where we are at the moment in in gas supply.

17:21 So what is our ask? Well, we need the moratorium lifted. We're we're very, very heartened by by the language used in the in the the recent review that's

17:32 been announced. The the the the traffic light system, we feel, should be much more aligned to construction, quarrying industries, have got very established

17:46 ground vibration standards. We need streamlining all regulation, and I think that's across the piece for energy. That's not just shale gas. That's onshore wind, offshore wind, solar. We need to be delivering energy at scale fast. And I think lastly, the EU has has been making moves towards recognizing domestic gas gas as a sustainable energy source. That drives investment. And it is it is easily demonstrated that that alongside sorry, sorry, that when compared with LNG, that is a lower carbon energy source. So from our shale acreage, we feel there is huge potential. We feel that we're making there there are the right steps are being made to unlock that.

18:42 And when that is unlocked, we can bring on very material production very quickly. I'll turn now to another very large opportunity that we have, which is our our geothermal business. We acquired GT Energy back in 2020.

19:01 Really, the the reason for that, as we stated before, is there's a lot of of complementary skill sets in drilling, the subsurface analysis, and operations. A report was commissioned or the the geothermal industry commissioned a report in 2021, which demonstrated that with the the right government support, there really is no other technology that can deliver utility scale decarbonized heat. It demonstrated that the geology is right in many parts of The UK, and it demonstrated that there is a suitable heat requirement.

19:49 And, obviously, for geothermal, that's in higher density areas. The really good news that we've had recently is that the government has announced specific fund within the green heat fund,

20:07 which will support geothermal development. And that looks across the piece of geothermal at the geothermal development piece. It it's not just the construction. It covers geological analysis. It covers the negotiation of heat contracts. So it it's a very, very valuable tool to accelerate development in that area. The fund opens in opens in March. We it'll fund 50% of costs, so we would need to provide match funding. And we would also need to demonstrate or we would need to go to the to government with a heat off taker.

20:54 So, for example, with our Stoke And Trent project, we're in to we're we're working with SSC to finalize

21:04 the heat off take agreement, so the thermal purchase agreement, and that will form a fundamental part of an application to government for funding for that project. The the other area that has helped considerably on the geothermal side of things is obviously the gas price. Long term gas prices are very high. That makes geothermal on a stand alone basis much more economical. But as well as that, we see a lot of potential offtakers or or or heat users who have a much greater focus on just decarbonizing heat, and there is really no other solution to do that other than geothermal.

21:52 So we're working with six separate off takers across six separate sites, which which will which could bring on 60 to 70 megawatts of of installed geothermal capacity. And several of those will go forward into funding applications into the government, really giving giving giving us a a real step up and and sort of us being able to accelerate that that whole business unit very, very quickly. And with that, I'll hand back to Steve. Thank you, Ross. Thank you.

22:38 So before just to wrap up, before we take questions, we have a very significant value in our core conventional business alone and a large tax loss position. We have oil and gas opportunities on these ex existing ex assets. It's attractive IRRs and and payback periods as well as the exciting opportunities for geothermal to bring on particularly on the large scale geothermal. We have a grant now confirmed from government. We have long term gas prices supporting our pricing proposition to offtakers as well as an increasing desire to decarbonize heat, which is a big challenge for The UK.

23:26 Each of those projects could generate about £2,000,000 of revenues per annum for twenty years and beyond. As Ross explained, we've got a large position in shale that's got a big carry from INEOS. And I think, you know, the year ahead for us should be very material in a number of different areas as we really look to leverage not only the cash flows from the conventional business, our infrastructure position as well as our expertise and experience as a UK onshore operator. So a very exciting period. And with that, we're happy to take any questions. Steve and Ross, thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions using the Q and A tab situated in the top right hand corner of your screen. But just while the company take a few moments to review those questions submitted today, I'd like to remind you that recording of this presentation along with a copy of the slides and the published Q and A can be accessed via your investor dashboard.

24:25 We received a number of pre submitted questions from investors, and I want to start off the Q and A session with these. The first one reads as follows. With regards to geothermal, the recent results mentioned iGas is in discussion with six offtakes across six separate sites. Please can you clarify, is this six separate geothermal projects? Yes. It is. And, Ross, do you want to give a bit more context? Yes. Absolutely. So we obviously have our our Stoke On Trent project, which is very well advanced. We're also in discussions with off takers in Southampton, Bournemouth,

25:08 Manchester, Liverpool. So these are all separate projects with their with very separate off takers. And they're all I suppose just to add to that, they're all in Stoke is is our largest project, but all of the other the the potential projects are in that sort of order of magnitude of size. So, you know, these are not small scale sort of multiple ground source heat pump type projects. These are proper deep geothermal circa 10 megawatt capacity projects. Thank you very much. The next question asks, will the GFML purchase agreement be based on a take or pay approach to guarantee a minimum megawatt hour volume, or will it be based on something else?

26:05 The answer is yes. Yes. We're we're in negotiations with SSC at the moment for the state project and obviously in discussions with other off takers for the other projects. But, yes, that that would be the basis on which we would negotiate the contracts. Perfect. Thank you very much, Steven. And with regards to the hydrogen projects, assumption planning is approved. How long do you estimate it will take to reach FID? Assuming FID is to proceed, how long do you estimate it would take from FID to first production? And are you able to share the expected CapEx these projects would need? Yeah. Ross, that's for you. Yeah. Sure. So timelines. You know, once we once we have planning and permits in place, we'd expect that we could reach FID within a a a four to six month period.

26:56 There's more detailed engineering work to be done post planning, but but much of it is much of the package, I suppose, is a a relatively off the shelf package. Once we're at FID, it would it would be circa fifteen months to first production on that. Excuse me. And but but that what what we have seen, and I think this this is with a lot of a lot of similar sort of projects, is that times have delivery times have lengthened on things such as high hydrogen compression units and and things like that.

27:43 So at the moment, it's targeting about fifteen months post FID. CapEx on those projects, that is sort of currently being finalized. But combined CapEx for the the two projects is is circa sort of fourteen million pounds. Thank you very much. Bear sorry. Bearing in mind, I I should there's a caveat there, which I should have added, is that our Bletchengy hydrogen project looks to to develop that in stages in a phased approach rather than full hydrogen capacity from the get go. Thank you very much, Ross. Next question relates to results. In the recent results, the 2022 CapEx expenditure mentions eight megawatts of power. Is this an additional eight megawatts of generating capacity, or does the eight megawatts include existing capacity?

28:36 And is this related to Bletchingley or elsewhere? So in relation to that, six six megawatts does relate to Bletchingley. So we would expect to have that as a hydrogen project. But if if that doesn't come through planning, then there is an opportunity for us to monetize that gas through a gas to wire project at Bletchingly. So that's a material part of those eight megawatts. The others is where we would like to monetize flared gas, associated gas from one of our existing sites, so slightly different on that one. If I could just add to that, sorry, on on Bletchingly for the gas to wire project, we have planning consent in place for that already.

29:24 Perfect. Thank you very much. The final pre submitted question reads as follows. When do you expect the first solar PV project to be put forward for planning consultation? Ross? Yeah. So we're currently in discussions with the local distribution network operator around good connection options. That's ongoing. So we'd expect we'd have something into plan as in certainly in h two, but we'd hope that would be q three relatively early on. Perfect. Thank you very much. That's great. That concludes the presubmitted questions for today. As you can see, we received a number of questions throughout today's presentation. Yeah. And thank you to all the investors for submitting those. Stephen, could I just ask you to read out those questions and give responses where it's appropriate to do so? And then I'll pick up from you at the end. Yeah. Sure.

30:21 Okay. So the first question comes, I note the company has £268,000,000 of tax losses that are ring fenced. What does this mean? In short, your market cap is 50,000,000, but you have 268,000,000 loss available. If another company paid double the share price for you, they would be a £150,000,000 better off. So the the answer to that is they are all in the ring fence. We do obviously use them to offset our profits at the moment. And, yes, if the company was bought, people could use those losses in The UK, whether it's offshore or onshore. There are rules around the pace at which you can use those losses, but they are available.

31:10 So if I move to the to the next question, couple of similar questions, really. What has maybe read both of them out and and then answer them collectively. What impact has the situation in Ukraine had on your dialogue with government? Are they more receptive? And secondly, how much of a catalyst do you see the government's new energy strategy shaping and growing the opportunity going forward? Will this open up more opportunities? I think, you know, I think really the the situation in Ukraine has merely emphasized the challenges that we have as a country. We have had energy policy that's fluctuated significantly over the past twenty years. It's it's in 2000, we were a net exporter of oil and gas, which we were in a in a strong position there. So and and, you know, gas prices were high before Russia's sad invasion of Ukraine.

32:08 So it's not it's not it's only a dynamic that's been emphasized, really. And I think you you've seen from governments in their statement on energy security, a lot a lot of that is focused on the long term, and a lot of it is focused on electrification. And I think where, you know, generally, we're missing out in in the dialogue is about the wider energy requirements of the country because oil and gas do yeah. Electrification and electricity is only about 30 to 35% of our overall energy usage. So we need to be having a dialogue about where we get all of our energy from. And, you know, when you're thinking about emissions and and ambitions to net zero, then having domestic energy production helps that significantly when you yeah. Imports of energy. Moving energy around is generally a negative. It's inefficient.

33:06 So when you are importing energy through LNG, for example, it's four times the the carbon content than producing the gas onshore. So I think, know, from from that perspective, the the dialogue is is improving, but I think there needs to be greater steps to improve our indigenous production. But I think, you know, on the on the counter to that, yeah, there is good government support for for renewables. We are a beneficiary of that with our geothermal business, and and that enables us to push on more quickly now with those projects and make a meaningful contribution to decarbonizing heat in The UK. So I think, yeah, there's there's a lot going on. It's not simple. But what government really yeah. There's no short term fixes in what has been proposed, and we have an opportunity there to to deliver against that.

34:06 The next question, what's the plan for future capital allocation? Why do you think the share price doesn't reflect the value of the company? In terms of capital allocation, we do want to delever in this stronger oil price environment, but that's not to say we won't be investing back in the assets at all. A good example is in the hopper projects where they pay back within a year at $70. So we should be we will do as many of those as we can, and then the deleveraging needs to be balanced against the other opportunities, the longer term opportunities that have a bit more CapEx. We'd spoke about how we would fund the geothermal business. So that doesn't take much at all of our our cash or our equity to deliver that business. It's really the people that are sitting in the business that need to deliver those projects going forward.

35:03 So a balance across the portfolio, but good opportunities to realize good IRRs and MPVs. Thank you for that. I think you managed to address all those questions from investors and of course the company will review all questions submitted today and will publish those responses on the Investor Meet company platform. But just before redirecting investors provide you with their feedback, which I know is particularly important to you both, Steven, could I just ask you for a few closing comments? Yeah. Sure. I think, you know, it's a it's a very exciting time for us. It's the most exciting time that we've had for quite a few years, and it's it's down to the hard work of the people in in the business. We will, in the coming months, update on those conventional opportunities where will be news as we progress the geothermal projects, the stope projects and other projects, I hope, as well as as further news on Shell, I'm sure, from government. So a very exciting time for us.

36:08 Steve and Ross, thanks once again for updating investors today. Could I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations? This will only take a few moments to complete, and I'm sure be greatly valued by the company. On behalf of the management team of iGas Energy PLC, we'd like to thank you for attending today's presentation. That concludes today's session, and good morning to you all.