Star Energy Group (LSE:STAR) — Trading update

0:00 Good morning. Welcome to the STAR ENERGY GROUP PLC investor presentation. Throughout this recorded meeting, investors will be in listen only mode. Questions are encouraged and can be submitted anytime using q and a tab situated on the right hand corner of your screen. Just click q and a, type your question, and press send. Company may not be in a position to answer every question it receives during the meeting itself, and the company can review all questions submitted today and publish responses where appropriate to do so. Before we begin, we'd like to submit the following poll.

0:28 I would now like to hand you over to Ross Glover, Chief Executive Officer. Good morning. Good morning, everybody, and thank you very much for attending our trading updates this morning. I'm joined by Francis Ward, our Chief Financial Officer. Good morning, everyone. And we will take you through a slide deck that we have. So I think just to start, STAR ENERGY, as we or as you're aware, we're an energy business playing in the sort of energy transition space. We've got very strong cash flows from our producing oil and gas assets, very low

1:10 well, I said low risk low well, there's no exploration or appraisal risk within those assets, and they're very long life assets producing out into the twenty fifties. As well as that, we've got a very high growth potential in geothermal, and that's both in The UK where it's all about decarbonizing heat and in Croatia where it where that is a power generation play.

1:37 Just to be clear on our corporate strategy, we have limited growth opportunities within our oil and gas business. That business is going to be managed for value optimization with a real focus on increasing the profitability of that business. Material growth within our business will come from our geothermal business. And I'd say the last few months since I've been in post have very much been focused on optimizing of that that oil and gas business. That will continue, but you're gonna see that management energy is going to start to turn and become more focused on the opportunities that we have in the geothermal space and driving that business forward.

2:26 Of course, we and most people are aware, we have a fairly significant tax loss position. There is a more certain regulatory and tax environment in The UK at the moment. And over the next

2:42 few months, we will be seeking to try and extract some value from that tax loss position. What I would say is that I think we're all aware that The UK operating environment for oil and gas businesses is is not easy at the moment, but we are going to try and seek to extract some value from that tax loss position.

3:04 Frances? Okay. So just to talk about some of our key highlights from from 2024. I guess that year, our focus was really on strengthening our balance sheet. So we completed our refinancing with Commonwealth Credit. That's a EUR 25,000,000 facility. And it provides funds for geothermal growth, but also allows us to reinvest cash in the oil and gas business. We also sold some noncore land for GBP 6,300,000. That we exchanged contracts for that in October, and we expect to complete it in H1. And we've got some final pieces to do just to finalize that sale.

3:52 The other thing we've been focusing on is on our costs. So we did some G restructuring in 2024, which will mean we will have significant savings going forward into 2025. In terms of oil and gas, as Ross said, we're focused on value, not volume. So it's about making our business as profitable as possible. We reach our production guidance of 2,000 barrels a day, and we have very strong cash flows coming from that oil and gas business. OpEx is high. It was $41.2 per BOE for 2024. We are trying to drive that cost down, and Ross will talk a little bit about that as we go forward in the presentation.

4:39 So next slide. On geothermal in Croatia, I think the key thing to note there is that we increased our interest from 51% to 71%, which doesn't give us any material increase in commitments in the short to medium term, but it does provide us in or put us in a better position to farm down on those projects.

5:04 In The UK, it's all about heat provision. And I guess what we're doing there is is utilizing grant funding to progress those projects. So looking forward to 2025, we expect production to remain at about 2,000 barrels per day. We have reasonably high capital expenditure of GBP 11,000,000, more than half of that is into our paid project at Singleton. Where we're using some currently flared gas and and hoping to generate electricity. It's a very quick coming online project, so it comes online this year, and will have production of 74 BOE per day.

5:51 On geothermal, our expenditures is fairly largely discretionary. We do have some internal work that we're doing both in Croatia and The UK, but anything other than that in Croatia will be subject to farm down process. And in The UK, it will be all about achieving grant funding and using that funding to move those projects forward. I mentioned our restructuring of G and A. We expect to have about $1,500,000 of savings as we go into 2025.

6:31 Right. So I think just to focus on the businesses that we have in the group now. And firstly, our oil and gas business, many of you will be aware of what that is. But for those who don't, I'll just quickly give an overview. Matured late life producing fields across the East Midlands and the Southeast Of England, Those fields have typically been producing for thirty, forty years, and many of them are projected to continue producing art since the twenty fifties. We're principally an oil producer of our of our 2,000 barrels a day, about 90% of that is oil.

7:17 And in virtually all of the fields that we produce from, are at a 100%. So we're we're sole owners of those licenses. We several key fields in Singleton, Stockbridge, Welton. That's where, you know, a large proportion of our our production comes from. It's worth noting that we have retained some exploration acreage within the Gainsborough Trough area. If you look at the map on the top top right hand side, everything that's not green is effectively exploration acreage where we are partners with various different partners.

8:03 That acreage is retained at at low cost. It has a a fairly low level work program on it, and it's there as as effectively low cost option value.

8:20 In terms of, yeah, what what we're doing with the oil and gas business. Said it before, it's it's all about optimization optimizing what we have. There are very few organic growth opportunities, and so it's about profitability.

8:38 We will we have already made some fairly significant G and A savings. That is a process that is ongoing, but the savings will be lower as we move forward. It is now turning to OpEx and OpEx reduction. There is a program of works ongoing at the moment, which will see some incremental OpEx reduction. But on a medium term basis, getting a step change in reducing OpEx will be done through full field abandonment. And what that will mean is as we move through that process is it will probably mean reducing production levels, but increased profitability and a more simple and easy to manage business.

9:27 Just turning to our geothermal business now. I think, again, an overview for those who who aren't familiar with us. We are seeking to to develop geothermal projects, and they will be hydrothermal systems, fairly standard hot sedimentary aquifer plays or potentially low enthalpy ground arrays. We're not playing in the enhanced geothermal systems or the advanced closed loop systems. We are sticking with the types of techniques that are proven in France, Germany, The Netherlands, and actually even at Southampton, for example, which has had a geothermal well operating for many many years.

10:21 Yeah. And the question is why us? Well, we've got very, very extensive knowledge of The UK subsurface. We've been operating in The UK in the space for for thirty, forty years. We're very, very good at delivering and planning and permitting complex projects. And that is that is experienced obviously through our oil and gas business in The UK. But in Croatia, the teams that sits in Croatia is the team that develops the first geothermal power plant in Croatia.

11:01 How do we generate value from this? Well, as a geothermal developer, we are gonna deploy our our in house expertise to derisk those projects. We'll use all of our in house subsurface reservoir engineering, well engineering expertise in the exploration appraisal stages. As I said, we've got a lot of above ground permitting and planning expertise, which we'll deploy. And we know how to build facilities. We've been doing that for many, many years. So we will we will deploy all that expertise into derisking the early stage of these projects. And that's what that does is by reducing those those project risks, we'll enhance the attractiveness of those projects, and it'll give us monetizing opportunities at natural milestones through project progression.

11:59 And we'll seek to bring in differing types of investors at different stages of projects or different state just different risk profiles of projects. And what that does, it creates options

12:11 for us to be able to recycle capital and retain some interest in those projects through to operation. Just turning now specifically to the Croatian geothermal sector where our play is all around power generation. I suppose the takeaway here is that it is a well structured and regulated sector. There is a a formal licensing program. There is a method of nondiscriminatory grid access, and there is a framework for a market premium system or a feed in tariff system, which will underpin the economics of of the projects. Projects.

12:59 I think it's worth adding to this is that there is significant government support here as well. Over the last couple of days in Zagreb, there's been a

13:09 geothermal investment conference, and it is it it is high profile enough for the prime minister to open that conference and for the energy minister to be in attendance for the the day yesterday. So there is real government focus on accelerating that that that sector.

13:32 And I think what that's done is attracted other players. So it's not just us in in in Croatia. The little map on the top there sort of demonstrates that there's a lot of other activity in Croatia.

13:51 Within the next year, there will be probably between six and nine wells drilled. That encompasses five five wells that the Croatian Hydrocarbon Agency is drilling themselves to get more data so they can better market further licensing rounds. But there are there are companies such as the ENERGY GROUP, which is a very, very large Croatian business, has just completed drilling its first well for a 20 megawatt power plant. And at the back end of last year, SOYAG GROUP, which is a a leading Turkish developer in very well established Turkish geothermal market, they were granted all of their construction permits for an 80 megawatt power plant in the north of the country. So I think in Croatia, it's reassuring there are fellow travelers there.

14:41 There is considerable interest from both local and international players. And I think what that means is that the Pannonian Basin, which is where where the geothermal activity is, is becoming a key European geothermal hotspot.

15:01 Just looking at what we have within Croatia, we've got three licenses. They are in slightly differing stages. So our license is is going from exploration into production phase at the moment. We will need to submit an outline FTP in the next few months, and our CETCH and CELIAH licenses are in ex in their exploration phase. I think the key thing to note here, if you look at the timelines for each of those projects, all of those project phases and through those project phases will as we derisk projects, will allow partnering opportunities for us and and an opportunity to recycle capital as we derisk the projects through exploration, appraisal, and then into development.

15:54 I think just turning to The UK now. And The UK is all about heat heat provision. The UK has a a very, very significant heat demand, largely satisfied by gas. There is a general consensus that that there is, you know, a significant geothermal resource in in The UK. It's no different to the likes of Germany, France, and Holland. But it is, in our view, very much a heat play as opposed to a power generation play. And various government studies demonstrate that that there is significant heat resource below areas that require significant amounts of heat. So Manchester, Newcastle, areas such as that,

16:47 And companies such as ARUP project a significant deployment of geothermal heat generation. And I think, obviously, it's it's driven largely by decarbonization targets, and that is is specifically prevalent within the the the public sector. What I would say, however, is that a lot of heat users are now not looking at heat

17:18 as a sort of five or ten year investment frame. They're looking at heat on a twenty, twenty five, thirty year investment frame, and that is for two reasons. One is security of supply, but the second is predictability of pricings. They've all been stung by by wildly volatile gas price over the last few years, and they are looking for long term heat offtake arrangements at a predictable price. And that is where we're starting to see a lot of attention. In terms of what we specifically have, we have a number of NHS projects awarded to us. Just to highlight two of those, Salisbury project.

18:08 We've spent about a million pounds on that. That has all been funded through grant funding. And we're at a a at a point now where we have done our our pre apps for the planning and the permitting side of things, and and the next phase is into well planning, having done all the seismic interpretation that we need to do. It's into well planning and planning and permitting for that surface location. Manchester is in a is in a similar trajectory. It's probably about six months behind. But again, we are we are at a point where where we've done our our planning and permitting pre apps, and we are reprocessing our the seismic data that that we have already got in that area. And I think the key thing to note with The UK geothermal side of things, it is a less mature market.

19:05 There is not as clear a line of sight to value creation there, so we will be very, very cautious with how we spend our own money. If there is grant funding available to us, we will use that grant funding to be able to to to advance projects. But if if the grant funding is not there and we cannot see real line of sight to value creation, we will extend the project delivery timelines while still slowly advancing things. So I think that that's a a really key thing from, you know, message that we want you to take away is that, you know, we will continue to advance our our UK geothermal business, but it will be done in a very sort of capital efficient manner.

20:05 And then I think, finally, looking forward. So we, as I said, we are going to and we will continue to maximize the current the the oil and gas business' profitability. As I said, there is work ongoing there at the moment that will that is going towards that. Within in Croatia, we are we we will look to benefit from the government support and the wider investor interest in that in that sector. As I said before, there's a lot of interest in there at the moment. We need to capitalize on that. And in The UK, the government obviously has very significant renewable energy aspirations. We'll capitalize on that, but we will capitalize on that in a very capital efficient manner.

21:00 Okay. Thank you very much. Just hand back to the Investor Week team. Think while they're thinking about to consider the the questions that have come up in the in the sidebar. I think what we will do is k. I think let's get on to the questions.

21:58 Let's run through those. It it seems like there are a number of questions in the same sort of area, so we're just going to group some of those together so that we can give the answers. Okay. So I think first off, has talked about significant gas discovery in the Gainsborough trough. Do you have any acreage in this area? I think that well, the answer there is yes. We we absolutely do. In fact, Egden is our partner in a number of licenses in that area. As I said, we have retained some quite a lot of the the the original shell exploration acreage in that area. And in most instances, we're at sort of 55% within the licenses within those those shell exploration licenses down to about 43 odd percent. So we have fairly large positions in those.

22:59 The acreage also or the Gainsborough trough also obviously includes some of our producing assets where we're at a 100%. So, you know, the answer is yes. We have got a lot of acreage across the Gainsborough trough. In fact, probably a majority position across the Gainsborough trough. It's maintained at low cost. And I think we all know from the prospectivity from a prospectivity perspective based on the analysis of our Tinker Lane and Springs Road wells a few years ago, we believe that there is a nationally significant gas resource within the Gadsden Trough. I think let's move over.

23:49 So a couple of questions about the sale of land. Why are you able to sell the noncore land? When will you receive the cash? Why can't you complete earlier? Francis, do you want me to take that? Yeah. So the the site that we've sold was used as a originally as a processing center for our our oil sales and more recently for processing some third party sales. It wasn't particularly profitable for the third party sales, so we decommissioned the site and got it ready for sale and and as we mentioned earlier, exchanged on that in at the end of twenty twenty four. We have a couple of permit releases that need to be done. That process is very much underway, and we expect to complete within H1 twenty twenty five.

24:48 Just picking up another question regarding the oil and gas business. Are there any prospects for CCS as these wells reach their end of life stage? I think the the short answer there is that there is a prospect for CCS, but it is limited. The the reservoirs that we produce from do not have significant capacities. So while it is probably of interest in in limited areas for specific end users, there's certainly not the the the the type of schemes that we'd see in the North Sea available to us. I think it's also worth noting that whilst there is a carbon storage framework in place in law, there is no current regulation around onshore carbon storage. So that would have to be a hurdle that that needs to be overcome. And I think, you know, it is not something that we're actively looking at at the moment.

25:54 It is we we have got enough on our plates with with, you know, maximizing the profitability of oil and gas business and advancing our geothermal business. Just come across to a couple more. Think how much money will you spend on geothermal this year? Francis? So we expect to spend somewhere between 2 and 2,500,000 on geothermal this year, but but a lot of that spend is discretionary. So in The UK, it depends on getting some grant funding. We have internal work that we want to do. Our subsurface team are working on interpreting some of the seismic data we've had and and the planning and permitting piece.

26:44 In Croatia, again, we have a lot of internal work to do. We can accelerate some of the development there, but it's very much dependent on on achieving a farm down. So between two and two and a half million, but but discretionary. Some of that is very discretionary. Okay. I'm just scrolling forward. I think There's a question I can see there on tax about the the loss carry forwards and and whether they can be used for nonoil profits. I'm assuming you're referring to the geothermal future profits. And and the answer is yes. We can use those losses for our geothermal business.

27:32 Okay. Sorry. Give me a moment. Right. I think so question around OpEx. Excuse me. OpEx is high. What are you doing to reduce this? As I said earlier, there there are a number of sort of work streams ongoing right now, which will give us incremental OpEx reduction, and that will deliver in a one to two year time frame. And that really is all about how we operate as a as a business. It's about more remote monitoring and doing that at at at fairly low cost focusing on, I suppose, the wells and the facilities that really matter.

28:33 And that's how we get that sort of incremental CapEx OpEx down. In terms of you know, that that is good, but what I'm looking for is a step change in OpEx. And the way we get a step change in OpEx is not is not a it's not a one or a two year program. Let's say two to five year program, which sees us fully abandoning certain fields and handing back licenses to to to the NSTA. And that will start to give us step change in OpEx, which will, you know, over that time frame, take us down, you know, below $35 a barrel type mark.

29:20 That that and that's certainly the aim. And I think it is worth stating we are not ever going to be a $20 a barrel type of an operator. The nature of our assets just doesn't support that. We are geographically dispersed. We produce relatively small amounts of oil from a high number of wells, and that bakes in a certain level of OpEx. I think another question. You've got a good cash generative business with a low valuation. Why don't you do a share buyback or pay a dividend? Fantastic. Yeah. So we're not planning on paying a dividend or or doing a share back in the in the near term. I think, you know, we we believe in the geothermal growth.

30:15 We we so we want to invest in that business. But any investment will be very targeted. It will we'll work on making sure that we can see a clear line to value in anything that we do spend. And so, you know, we will as Ross mentioned earlier, we will derisk our projects in our geothermal business, and that will provide us with opportunities to farm down, sell apart, and and generate value, and and that should then support the share price. Yeah. And I think in a way related to that, and there's a number of because there is a a general theme with a number of questions around the valuation of the business.

31:02 You know, why is the value of the company so low? Do do do do we believe that the value the the company is undervalued? Do institutional investors believe the company is undervalued? And, you know, what are we what are we gonna do about it? So I think, you know, the simple answer is yes. We absolutely believe the company is undervalued, and and certainly the feedback that we've had from a wide range of investors, institutional, and retailers is absolutely the company is undervalued. I think it comes to sort of why it's undervalued. You know, it it there is a general oil and gas and a market under undervaluation thing going on.

31:58 We specifically have suffered from policy reversals surrounding shale shale gas that's created significant share overhangs as well as negative sentiment towards this of general UK oil and gas sector. I think what are we doing about it? We've got a very clear strategy. We're putting in place measures to communicate this much more widely and provide regular updates to the market. In the past few months, we've changed our our Nomad broker, to Zeus Capital. It's a broker that's much more in tune with us as a business, And and we now need to make ourselves much more visible to the market to inform shareholders and potential investors of what value is available within our shares.

32:51 So we've got, let's say, a business that produces strong cash flows. Our our our geothermal opportunities offer fantastic growth opportunities, and we can use our existing skill sets within those that sector and capitalize on the early mover advantage that we have. And, you know, therefore, those two things combined, we believe that the share price, you know, has an opportunity for for for significant increase as we execute our strategy. Let's see if there are any new questions here. Another question. Has the company had any interactions with GB Energy, and how might we play a part in that?

33:44 So, yes, we have had interactions with GB Energy. In fact, we've had interactions with a number of people at at as well. GB Energy has to date very much been focused on power generation and specifically wind and solar, but we have had a couple of good discussions with them. There is actually a wider geothermal so it's not just us talking to the likes of GB Energy and DESNAS about the the the opportunities around renewable heat and geothermal. There is a wider forum of of participants in that. And whilst that wider forum hasn't hasn't actively engaged with GB Energy yet, they they there is well, I think something's actually been scheduled for the next couple of weeks around that. So, you know, as I say, GB Energy has been very power generation focused.

34:48 That is changing slightly. That's changing at the moment. I think once they once they've sort of set up their stall as to what they're doing on the power generation side of things, they are now looking to to peak decarbonization. Questions. Right. A question about the energy profits levy. The conditions for energy profits levy regime are close in terms of oil price, but not so much in terms of the price of gas.

35:36 Have you heard about any possible changes to the policy? Shall I take that one? Yeah. Please. Yeah. We haven't heard of any changes to policy. It's extremely frustrating for a a company such as ours where the majority of our production comes from oil, but we're still governed by what happens in gas prices. There is a lot of lobbying going on to to see if we can do something about that, but but at the moment, I haven't heard of anything that's going to change it. Okay.

36:30 Think, Ross, you've covered off a lot of questions and answers well. So thank you very much indeed for for doing so. And, of course, any further questions that are submitted to the company, we'll able to review those, and we'll publish them all on the investor meet company platform. Just perhaps before redirecting investors to provide you with their feedback, and that's particularly important to you and the team. Ross, if I could just ask you for a few closing comments, if I may. Yes, absolutely. Thank you. Well, thank you very much for joining us all today. I think this is an important engagement. We look forward to providing further updates as we execute on our strategy. And I'll reiterate it again. It's a very clear strategy. It's about maximizing the profitability of our oil and gas business. It is capitalizing on the growth opportunities that we have within our geothermal businesses. That's both in Croatia where there's very strong government support and wider investor interest.

37:27 And in The UK where there's a huge opportunity for the decarbonization of heat and a real government ambition around decarbonization. So thank you very much for joining us, we look forward to providing you with much more regular updates. Thank you. Fantastic. Ross Francis, thank you very much indeed for updating investors today. Now please ask investors not to close the session. It should now automatically be redirected to provide your feedback in order the team can better understand your views and expectations. This will only take a few moments to complete, and it's greatly valued by the company. On behalf of the management team of STAR ENERGY GROUP PLC, we'd like to thank you for attending today's presentation. That concludes today's session, and good morning to you all.