Woodside Energy Group Ltd (WDS) Q2 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Woodside Petroleum Half-Year 2019 Results Briefing Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, the 15th of August 2019. I’d now like to hand the call over to your first speaker today, Mr. Peter Coleman. Thank you. Please go ahead.

Good morning, everybody, and thanks for joining us for our 2019 half-year results. As you would have seen this morning, we released our half-year report and the results briefing pack to the ASX. Joining us on the call is our Chief Financial Officer, Sherry Duhe; and our Chief Operations Officer, Meg O’Neill. And as we’ve done in previous years, we’ll make some introductory remarks before opening the call up to a question-and-answer session. You’ll see the standard disclaimer on Slide 2, and just a quick reminder that this presentation does include some forward-looking statements and that our reported numbers are all in U.S. dollars. In the first-half of the year, we laid the foundation for a continued strong performance in our operations, while progressing our growth plans. We completed the first major turnaround at Pluto LNG since the start of operations in 2012, and this was, of course, a planned turnaround as we’ve spoken about before. We told you it was going to happen and it did and, of course, it’s setting up this world-class facility for continued safe, reliable and efficient operations for many years to come. So let me take you through some of the key financial and business achievements. As you can see on Slide 3, our net profit was $419 million. Our interim dividend for the half was US$0.36 per share. And to support our growth strategy, we’ve reactivated the dividend reinvestment plan, allowing our eligible shareholders to reinvest the dividends directly into shares at a discount. Operating cash flow was almost $1.5 billion and we generated free cash flow of $869 million, more than doubled the free cash flow for the first-half of 2018. Our financial position is robust and we continue to build our balance sheet as we progress into a growth phase. We achieved production of 39 million barrels of oil equivalent despite the planned turnaround of Pluto and disruption from Tropical Cyclone Veronica. We met our commitments on both budget and schedule for Greater Enfield, which is now in the final stages of commissioning. On Slide 4, production fundamentals were strong across our portfolio in the first-half and we’re on track to deliver our targeted annual production next year of approximately 100 million barrels of oil equivalent. At Pluto LNG Karratha Gas Plant, we completed activities that will set up these facilities for the future. And as I’ve already mentioned, the first major planned turnaround that was completed at Pluto, we’ll discuss that in more detail in a moment. We’ve also started FEED activities for Pyxis, involving drilling and subsea construction and we saw the first LNG from the Pluto truck loading facility as we build an LNG fuels market in Pilbara. And another step forward on our Burrup Hub growth plans, we’ve installed the tie-ins of Pluto for the interconnected pipeline to the Karratha Gas Plant. At KGP, we delivered efficiently – efficiency and capacity improvements during the half. The excellent news is that the way the North West Shelf project has performed. Really, the production increased on the previous year despite increased cyclone activity in Q1 and we’ve started FEED activities on the Greater Western Flank Phase 2 project. Woodside had a good first-half and is expected to deliver over 30 million barrels of oil equivalent in 2020, and we’ve also completed significant work for our Australia oil business. Let me give you some more detail on as we turn to Slide #5. In Greater Enfield, production from the existing Vincent wells recommenced in early July and we’re expecting first-half from the Greater Enfield reservoirs this month. I can also tell you that the joint campaign is well ahead of schedule, with 11 of the 12 development wells complete. We were pleased with the comprehensive refit of the Ngujima-Yin FPSO in Singapore, and that this project has been delivered on budget and schedule, with production expectations of around 40,000 barrels per day of oil equivalent after ramp up. Of course, that’s a great achievement for the team and what’s been a very complex project. Let’s take a closer look at the execution of the major planned turnaround, Pluto LNG on Slide #6. The scheduled turnaround is always a case of short-term costs for long-term guidance. We know, we’ve outlined here some of those costs and the extent to which we were able to mitigate them. Production would have been approximately 7 million barrels higher without the turnaround. That’s a one-off impact and we used all the tools at our disposal to manage it. In recent years, we’ve had – we’ve matured our trading capability, giving us some flexibility to source third-party cargoes and to continue to meet obligations to customers. The facility has performed well since production restarted in June, achieving a new daily LNG production record in the 99.9% reliability in the month of July. This is important as Pluto generates the cash flow needed to support delivery of our growth strategy. On Slide 7, the growth – that growth strategy is timed well to meet the supply gap that we expect to emerge in the 2020s. The demand forecast continues to grow every year and we have a strong appetite for LNG from China, but also from South and Southeast Asia. Indeed, in the space of just two years, projected demand by 2030 is risen by 88 million tons per annum, equal to the total of Australia’s existing LNG capacity. At the same time for sometime, the pricing would come under pressure during this current period, but in the longer-term, the world clearly needs more LNG, and that’s why we’re pushing head with our growth projects. On Slide 8, you can see some of the progress that’s been made in the first-half of the year on those key opportunities. We’ve been hard at work to advance the relevant approvals and preliminary technical work to enable on our investment decisions. At the full-year results in February, you’ll recall that I said this is a year the deal for Woodside and our whole organization is working hard to deliver this. And, of course, with that overview now, I’ll hand over to Sherry, who’ll talk about our financials in more detail, and then I’ll come back and take you through some of the milestones for the remainder of the year. Over to you, Sherry?

Thanks, Peter, and good morning, everyone. Woodside financial results for the half demonstrate our strong fundamentals and performance as we prepare for and deliver growth. I’ll start on Slide 10, which highlights the benefit of our diversified revenue streams, with both North West Shelf and Wheatstone, delivering strong production in the first-half, despite some cyclone activity in Q1. As expected, Pluto production was down due to the planned turnaround and oil production was down due to the planned retrofit of the Ngujima-Yin FPSO for the Greater Enfield project. With both Pluto and Ngujima-Yin now back online, we’re very well-positioned for a good second-half. Our advice remains that 2019 production is expected to be at the lower-end of the 88 million to 94 million barrel range as previously communicated to the market. On to Slide 11, our first-half profit reflects the production impact due to the Pluto turnaround and the Greater Enfield project. There was also the cost of executing the Pluto turnaround, which we were able to partially offset through the optimization activities of our LNG trading fees. This, together with our reduction in exploration expenditure, has resulted in a solid profit for the first-half of 2019. On Slide 12, a reduction in our break-even cost has supported 123% increase in free cash flow, with our business remaining resilient to a range of oil price outcomes. Our strong cash flows will help fund the execution of our growth plans. Turning to Slide 13, the LNG realized price was higher than in the corresponding period. These higher realized contract prices were partially offset by an increased exposure to a soft spot market. We do expect that in the second-half of the year, around 20% of our LNG sales volumes will be exposed to spot pricing. Our spot exposure is largely driven by two factors: first, our strong LNG production is yielding extra cargoes, which we sell into the spot market; and secondly, our customers exercise some of their volume flexibility options this year and the affected cargoes are sold in spot. Our unit production cost on Slide 14 speaks to the robust base business North West Shelf saw a small increase in maintenance spend in the first-half and preparation for turnaround activity, which are planned in the second-half, but still remained very competitive at under $4 per barrel of oil equivalent. At Pluto, nearly all of the production cost increase was due to the planned turnaround and Wheatstone showed anticipated improved cost performance with production cost reduced to $4.40 per barrel, as the facility settled into steady state operations. Slide 15 shows that we continue to manage a strong gross margin of 38% across our portfolio. Our high-margin, low-cost operations will generate cash flow that underpin delivery of our growth projects. Moving to Slide 16, you will see that we are continuing to prudently strengthen our balance sheet and secure the funding required for delivery of our growth plans. We took advantage of favorable market conditions to raise $1.5 billion from a Rule 144A/Reg. S senior unsecured bond, which is the largest bond Woodside has executed in its history. We received very pleasing support from the International debt market in that issuance. Our competitive portfolio cost of debt, together with an increase in our portfolio average terms of maturity of 5.3 years, is setting us up extremely well for delivery of our growth plans. Our gearing increased as expected to 18%, which is primarily as a result of the new leasing standard and our strong credit ratings with Moody’s and S&P have both been reaffirmed. Slide 17 provides a timely reminder of the impact of the new leasing standard. This is an accounting change only with no net impact on cash. Lease payments have simply shifted from operating expenses to depreciation and interest expenses with our leases predominantly relating to LNG vessels and property. Finally, on Slide 18, we have revised our full-year investment expenditure guidance. Our anticipated exploration expenditure during the second-half of 2019 has decreased, as we phase our preparations for the next Myanmar drilling program. We’ve also faced some spend on our major projects into 2020. Our capital intensity in the second-half will be greater than in the first-half, as we ramp up activity on Scarborough, Pluto Train 2, Browse, the North West Shelf, and of course, SNE in Senegal. We expect the investment expenditure for 2019 to be in the range of $1.45 billion to $1.55 billion. On that note, I’ll now hand you back to Peter to provide a final summary and look ahead.

Thanks, Sherry. Look, to summarize on Slide 20, we’ve spoken about our strategy many times before. We really have world-class online production assets that are performing really well and generating the cash to underpin the delivery of our growth plans. So looking forward to a strong second-half with Pluto and Ngujima-Yin back online, and we’re on track to deliver 100 million barrels target by June 2020. Of course, our project delivery has been on schedule and on budget, which has been very pleasing, particularly in the last 12 months through the success of Greater Enfield and the Greater Western Flank project. And, of course, we have slated growth opportunities well suited to our capabilities, which we’re progressing. If we move to Slide 21, you can see the work ahead that sets us up for a year of decisions in 2020. We are working hard to exercise the gas tolling agreement to Scarborough and complete the FEED activities at both Scarborough and Pluto Train 2 by the end of this year. This sets us up for an FID in early 2020 and RFSU a few years later. For Browse, the joint venture is committed to finalizing the gas processing agreement with North West Shelf this year and Ngujima-Yin handful of pace is to resolve the joint venture is online on commencing FEED by the end of 2019. So we all want to get on this project. And, of course, in Senegal, this is the first catalog for rank as we’re positioning to take FID in the second-half of this year. And earlier this week, the joint venture submitted an updated exploitation and development plans at Senegalese regulator in Dhaka. We’re securing preapprovals and, of course, finalizing project funding solutions with the joint venture. So across the business, we really are prepared for the next steps. We’re ready technically and financially and the Pluto turnaround is thankfully behind us. We still have some hurdles to clear with the commercial agreements, and we’re working hard to do that. So I’m looking forward to updating you on that later in the year. So with those opening remarks, I’ll now open it up to your questions.

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of James Byrne from Citi. Please ask your question.

Good morning, Peter and Sherry. My first question is just around the Burrup Hub. Now the site ship a few months ago, Peter, you’d stated, you expect a slight double-digit IRRs for these projects at current LNG contract prices. But you also stated that you’re quite positive on the commodity. What I wanted to ask is, when you as a management team go to the Board to sanction these projects? Is there an assumption of a higher commodity price that you’re able to achieve over time through periodic price reviews, or you’re going to be able to sanction these projects based on their economic merits at current LNG project prices of mid-11% slope?

Thanks, James. Well, let me reiterate. I think some guidance we provided before around the way we sanctioned our projects. Of course, we have what we call a midpoint pricing forecasts, we call that out mid-PDA. That has our real escalation in price over time, and we use that as a basis for understanding some of the financial flex we have in the business. When we sanction projects, though, we use a different pricing deck and that’s a $65 flat real pricing deck. And the reason for that is, historically over time, we’ve seen oil prices fluctuate around that $65 level. So we think if we can sanction a project at $65 flat real, then it means that investors get to enjoy the upside in projects as prices rise. You don’t want to build into your investment returns and assumption of rising prices, because of investment in rising inventory, the uptick in commodity prices over time. So we want to make sure our projects are robust. With respect to slopes, at the moment, we’ve adjusted our slopes downwards. So over the last couple of years, our slopes that certainly in the medium-term, so over the next five to eight years, we’ve adjusted them down within our modeling simply to reflect where we think the market is today. Of course, we’re hopeful that will increase. But the low double-digit rate of return that I quoted you during the investor tour, reflects a $65 flat real price and lowering of our short to mid-term slope expectation. Sorry, now we don’t need to make any adjustments to all these projects today we believe are economically attractive to move forward with.

Got it. Okay, that’s really clear, Peter. Thanks. The second question is just around balance sheet ahead of CapEx. I’ve noted, you’ve turned on the day out pay, which presumably is just getting that balance sheet ready. But also, when you look to cap, your exploration guidance in the medium-term is $200 million to $250 million. And then also related to the balance sheet is just whether your prior statements around only having to raise equity if you don’t fund down. Is that still relevant, given turning on the day out pay and also the extent to which LNG prices have fallen, not only in the spot market, but also with respect to some of the risk around repricing of your existing contracts?

Right. Well, let me deal with the DRP first. We decided to turn on the DRP for a couple of reasons. Firstly, it is to start preparing the balance sheet. So we wanted to – we said we want to signal these things early before we getting ready. But it’s also a sign that the executive and the Board are confident that we’ll be moving forward with our growth projects in the timeframe that we’ve outlined for you. So we decided this was an appropriate time to turn on the DRP. It’s not underwritten and we’ve got some historical data that tells us what sort of uptake that we would expect at the discount rate that we’ve offered. We’ll only know that, of course, after we’ve gone through the offer period, but we’ve got some estimates based, as I said on historical movements that would leads to believe we’ll get some certain outcomes. And, of course, as you know, there are certainly Australian-based investors who find it advantageous to participate in DRP programs. With – so that’s basically getting the balance sheet ready. And you say that – you heard from Sherry that we’ve already done a lot around pricing our liquidity and we’ve been out to the bond market earlier this year and rise another $1.5 billion. So liquidity is in good shape, and this is just topping that off. With respect to exploration, I would say, the guidance is towards the low-end of that number. So we say $200 million to $250 million. Where we’re tracking today is around $200 million is a sustainable number for us. It’ll fluctuate slightly around that, but it’s more towards $200 million on that. And then, of course, on equity, the guidance still remains the same. It’s really the equity position that we hold in the projects is critical to what our funding requirements will be. And so if we decide to maintain our current equity positions that as we’ve said before that by around the time we get to Browse, FID will continue on oil prices and so forth with a point in which we would be looking to rise additional equity. But – so that’s still sometime out for us, but it’s really going to depend on oil prices and what happens between now and that point in time.

Okay, that’s great. Thanks. That’s all for me.

Your next question comes from the line of Joseph Wong from UBS. Please ask your question. Mr. Joseph Wong, your line is now open.

Hi, guys. Just a question I had on the Pluto, North West Shelf interconnect. Can you provide some commentary on the startup now in the first-half 2022? I guess the prior guidance for the last 12 months has been 2021, and that was meant to accelerate Pluto gas?

Yes, I can Joseph. The 2021 startup was always really a Q4 startup. So it’s just a couple of months into the beginning of 2022. So we want to provide some guidance that basically gave us enough running room there. And of course, we hope we can execute faster, but that’s a slip in the guidance. So it’s not a material change in all our expectations. That’s really been driven around the approvals process that we’ve had, but we’ve got approvals – environmental approval requirements with the state and federal governments and, of course, negotiations with the North West Shelf joint venture around the facilities that dominate to on their side of the fence to accommodate the interconnected. So there’s been really no change at all with respect to the timing, not – at least not a material change. Now, of course, we were going to use that for early gas coming across from Pluto. We haven’t modeled that, to be honest with you, Joseph, because there’s still some question as to how much oil there will be in the North West Shelf plants at that point in time. We’re not, to be honest, our models aren’t accurate enough at this point to be able to predict the actual decline dates at which North West Shelf will go into decline. Yes, but there is an expectation that we will be sometime in 2021, that will start to see some capacity free up in the plant. But there’s different – differing views between each of the partners as to how quickly that will free up. So I would say at this point, everything’s pretty much on track and the environmental approvals are going through as we expected. And so it’s good news.

Yes, and that’s great to hear. And the other question I had is, if I look back at the Investor Presentation last year, you had, I guess, guidance about 20% of your LNG sales portfolio uncontracted. Where do you see your position now? And where do you think is a comfortable position to be in, as you kind of see the LNG markets, I guess, quite weak the next few years?

Look, that’s a good question. And when it comes down to – Sherry mentioned some of the customers have exercised the downward flex. And so we were also going to look at the way that we put together on our annual delivery program and our ability to be able to source cargoes in the market itself, should we fall short on a delivery point of view. So it’s one of those balancing is – things that the markets become more liquid. We have more ability to be more aggressive in our forecasting with respect to our commitments. So we’d like to be – we’ve always said we’d like to be in that under 20% range – 15% – anywhere between 10% to 15% for spot in this particular market is where we’d rather be targeting. And kind of assumes that we’ll building our annual delivery plans around that to try to target that 10% to 15% level. And the reason for that, of course, if you’d asked me this question five years ago, we would have said, we’d have more spot, because spot prices go up to $20 per MMBtu. Today, you can see that there’s quite a difference between contracted and spot pricing in the market. And as we’ve spoken about previously, we’re seeing far more seasonality in the market these days and it’s being exacerbated this year as new projects have started to stream. So we’re hoping to see a firming of spot prices as we come into the Northern winters. But we’re also mindful that some of the storage is getting poor, particularly in Europe. And so it might take the shoulder of that might be a little longer – that might take a little longer to see spot prices increase as we get into December.

Cool. Thanks for that. That’s it for me.

Your next question comes from the line of Adam Martin from Morgan Stanley. Please ask your question.

Yes. Good morning, Peter, Sherry and Meg. Just first question. Just look, cost, it looks like it’s going to become more important, obviously, always important. But how you sort of thinking about potentially Scarborough across North West Shelf? Is that a realistic option? You sort of talk through that? That’s the first question?

I don’t know, just let me clarify. I think Scarborough instead of Browse or Scarborough and Browse?

Yes, probably just Scarborough instead of Browse, bring Scarborough cost North West Shelf?

Yes. We’re not really thinking about it. The – we thought about it, of course, it at length over the last three, four years as we’ve looked at optimizing which resources will go through North West Shelf first. It’s been clear every time we have looked at that both as we sign in as the joint ventures that Browse is the best project to underpin development – of future development at North West Shelf. And for a number of factors, but one of them simply the resource size once 14-plus this year and the other one is about seven to eight TCF. So we looked at that, and there’s also some gas compositional advantages for Browse over Scarborough in going through North West Shelf. So at the moment, the base case remains for Browse to go through there. The North West Shelf is committed to that and the North West Shelf is negotiating a gas processing agreement at the moment pretty much exclusively with the Browse partners. That’s where the resources are being spent on this, not – certainly not with the Scarborough joint venture. Scarborough joint venture is just solely looking at trying to at Pluto. So there are options, obviously, if for any reason, Browse did not get develop. And of course, you’d have to have a look again at Scarborough and the potential to go through North West Shelf, but that’s very, very low potential at this point in time. In fact, I can’t say circumstance in which Browse would not be going through North West Shelf list.

Okay, thank you. And second question, just you obviously outlined that you’re looking to sell some of Scarborough asset. Can you provide an update there how that process is going with the impact on with that, just a little update there please?

Yes. We’ve actually had to slowdown that process. We’ve had a number of unsolicited proposals for participation, both on an integrated basis, upstream and downstream equally, just Australian mine and then, of course, a couple of interested parties just in the downstream. But we had to slow that down. And the reason for that is, we still haven’t finalized the toll that will be paid to process the gas through Pluto Train 2. And until that’s finalized, you really can’t progress discussions in any meaningful way around what a price might be for those assets. So we’ve had people in a data room that same device data, but we’ve we just had to put it on hold until we finalize the negotiations with the HP around the toll.

And those when you try and tie at year-end around the toll?

We’d like to get it done sooner than year-end, but certainly no lighter than year-end would be a target look at. So in the lap of the commercial guys at the moment so to work that through. I think the key here is, we’re reaching a point where that North West Shelf and Browse and, of course, with Scarborough going through Pluto, we’re, of course, each shelf is taking their own position with respect to the particular turns. I know with us reaching a point where people are going to have to put self interest to the side and start to work collectively into the development of the resources. And once you start to do that just all moving forward. These projects, each one of them economically sound at the pricing decks that we have the tolls that are currently being offered and discussed. And, of course, we’re in a point in the market where costs are very, very competitive to full construction. And we’re going to kind of look past some of the individual wants and needs and collectively. And so we’re in a competitive world here. We’ve got other projects around the world in other countries that are wanting to move forward and get into that same market space that we’re targeting. And so we’re talking to our joint venture partners to make sure they see a big picture and don’t get too focused on small stuff.

Okay. Thank you. That’s all for me.

Your next question comes from the line of James Redfern from Merrill Lynch. Please ask your question.

Yes. Hi, Peter, good morning. Yes, three quick questions, please. So the first one in relation to FID to Scarborough, early 2020. Can you just please confirm that Woodside is seeking to contract 50% of the LNG volumes from Scarborough before FID. And then if we – and if we should have seen a slightly 11.5% for those volumes based on the pace of agreement signed with ANN back in April, which is a 10-year agreement, 1 million tons. And I’ve got two more things, please. Thank you.

Well, two things, James. We would like to obviously contract more than 50% if we can really depend on the market conditions. And I think our year was booming over time that it’s best list in this market to probably contract more rather than less, given some of the uncertainties and the overhang that’s starting to be created in the market with some projects with the FID without any sales. So we are basically saying that 50% was guidance from us as kind of a minimum that we want. Historically, of course, we’ve contracted in excess of that. So if we can contract in excess, if we will, but we certainly got line of sight to that 50% today that the 50% is not the issue. The question is just how quickly we want to sign up the rest. With respect to slope, I’m not sure we’ve given guidance on slope. So thanks for slipping that one in. The – I think we give a range, though, where we’re seeing slopes in the market at the moment. I think the key one on slopes is more around price reopenings. And we are seeing some contracts out there being agreed without price reopens. Woodside is not signing any of those contracts for sure that’s quite concerning to us, because as you know, that’s basically a sign you can predict the future in a perfect world. So we’re ensuring that we do have price reopens in all of our contracts as we go in through that. So, your point on slope was – slopes are reflecting market conditions is probably what I can tell you at this point. But we’re maintaining all of the other terms in our contracts, as I said, my prices to increase over time for us to take advantage of it.

Okay. Thanks, Peter. And then just another one was in relation to SNE in, just let me – still targeting about [indiscernible] this year. Just wondering if you could please provide some more color on the various issues there regarding advertisements far that we put in by power Canada project and then project financing? Thank you.

Yes. Look, I think, the main issue at the moment with SNE is the financing of the project. Everything else is going very, very well, to be quite frank. We’ve got the contract. We’ve got the tenants in, where you can see we’re playing betting contracts, subject to final advisory. We’ve got the all-star team in our view of the contracts to execute this project and execute it really well. So we’re really pleased with what we’re being out to do with our contracting and development plans. As I mentioned, we’ve just resubmitted the field development and evaluation plan or exploitation plan. So all of the things that you control is going very well. But the biggest issue for us at the moment is financing and, of course, this is not an issue. But just a reminder, Woodside that, of course, our partners looking for financing, as well as the national companies would be now assisting them in project financing, because we continue to get feedback from the project financiers that the arbitration between [indiscernible] causing some uncertainty in the market. To be honest with you, James, it’s not clear to me how far it’s going to resolve this at this point. The arbitration is being heard. But the ruling itself is unlikely to come down before the end of the year. If it doesn’t it be great life in the year. We have a phase 3 that expires in early December. So any ruling that comes down after the phase 3 expire is kind of useless ruling anyway. So I’m actually not quite sure if I flip it back into their headquarters to going to actually solve the problem that they’ve caused you for the joint venture.

Very good. Thank you. Just one lastly quick one. Just want to check 20% of the LNG sales in the second-half this year will be spot. How is looking for 2020, please?

No, it will be less than 20%, it will be in that range. But it’ll be between 15% to 20%, that’ll be less than 20% in the second-half of the year. In next year, of course, I said in the April timeframe that’s an annual delivery plan. And, of course, we will be, as I mentioned previously, we’ll be looking to be sub-15% on the spots to the extent we can through that FID process.

Okay, great. Thanks, Peter.

Your next question comes from the line of Mark Samter from MST. Please ask your question.

Yes. Good morning, guys. A couple of questions if I can. First of all the point of clarity we often talk about the Scarborough volumes and that you want to contract 50%. Can we speak absolutely clear that will be a total of 50% based on initial annual production rather than reserves, because obviously, you could be signing five, 10-year deals you do 50%, but you’re actually talking about 20% of Board is being contracted, or is the Board wanting to see 50% of total reserves contract?

That’s question, Mark. Now it’s just simply on production volumes. it’s not on total reserve.

Okay. Thank you. Then just on the cost side and you say still a very friendly cost environment. Does that surprise you [indiscernible], because there’s an awful lot of LNG capacity that’s already been sanctioned. There’s an awful lot that’s either ahead of you or alongside you and the key traditionally, this wouldn’t be seen it as a time when you’re going to be getting bargains on the cost side of things. Just wondering if you could help me understand what the cost environment is so friendly towards you?

I think there’s two parts to it. One is the offshore cost environment is very friendly. So if you look at the mix on the spin on the projects, about half of the project spin is still in the offshore part of it. And then, of course, I think you might be referring to the LNG plant side of it. So the offshore market is still a very poor market, particularly around drilling and subsea. So we’re getting still very competitive costing in that area. Having said that, we are starting to see early signs of escalation. So some recent tendering that we’ve gone out with one of the projects is starting to indicate the expectation of escalation starting to come into the market. So we are reaching the end of that window, I believe. And I think we thought that was going to happen a year ago and then we got it pushed out a bit, but we’re starting to see that – the end of that. So it is critical for us to move forward with these projects now and be able to lock in those costs. In the onshore side of it, it’s a little different. We’re not seeing a lot of pressure. For us, of course, in the Australian market, there’s two parts to it. One is the onshore plant will be modularized and will be built in a yard somewhere in Asia. That’ll be up to the contract to decide finally what the idea is. And then, of course, the construction costs in Australia is still quite manageable, particularly compared to what it was during the mining boom. So was there is a lot of infrastructure work happening on the East Coast, which is drawing labor? We haven’t seen that flow through to unit labor prices yet. And we’re not expecting that it will in any material way. But I think, it’s kind of a bathtub, which slid down into the bathtub. We’ve been on the bottom for a while. And I think the costs are starting to rise everything out there would indicate that cost rises in the market are not far away. And you’re right. There are a lot of projects getting ready to move forward. But there are not that many directionally physically being built, there’s something completed, such as Cameron and Freeport in the US. And there’s a backlog of projects that want to move forward, but they haven’t gone to FID yet or moving forward. And it’s still early days with respect to Mozambique and so forth with respect to the labor and cost requirements. So I just think it is coming, Mark, but we haven’t seen it yet.

Okay. And then just one final question if I can and particularly when we think about the rest you’re taking on the uncontracted part of the portfolio. And the chart on Page 7, of course, never suggest that would McKenzie get anything wrong. But I – that chart and the LNG market seem to be mutually exclusive, because of 11 floats and a lot of people think falling lower than that, doesn’t suggest 50-million-ton surplus in 2025, which is fundamentally trying to market into at the moment. So do you not think they are going to be mutually exclusive or why aren’t they mutually exclusive?

I think the demand there is low slopes and low oil prices, particularly low Henry Hub. You have seen the TTF pricing as well, which has been around $3.50. In fact, you have seen appropriate results of the U.S. Gulf Coast manufacturers have been heavily hit by European pricing. So that should increase demand. And we’re seeing lot of buyers now coming into the market trying to lock in longer-term contracts to increase demand. I think what then says is, that it’s going to put pressure on projects to actually move forward to FID. So I think that’s the issue in my mind at the moment with slopes. How long is that going to last? I don’t know, but I don’t think growth in most slopes is mutually exclusive. I think that’s more a supply issue to be honest with you on that demand issue at this point.

Maybe just a really, really quick last question. Just with the OUS volumes coming very soon, do you think we can be talking about pairing and not taking with those U.S. volumes?

Look, we’re looking at those volumes very closely. About half of the near-term volume is already contracted. So we’ve got options for that. So if you think about the first three years of those volumes coming up, roughly half of that commitment that we have at Pilbara contracted in place. So we are talking about small number of cargoes coming out. If you look at those cargoes today, on the forward pricing curves, of course, they are quite marginal or just slightly out of the money. So, of course, you can imagine our gas market is working group closely with our Treasury function to look for opportunities in the market when they arise to place those cargoes. And so, I would expect over the next 12 months or so that we will place more of those cargoes in the market as the forward curves work in our favor.

Okay. Got it. Thank you, Peter.

Thanks, Mark.

Your next question comes from the line of Hayden Bairstow from Macquarie. Please ask your question.

Yes, thanks. Just a couple from me on, just circling back to your early comments around the negotiations with the Browse and Scarborough JV partners. I mean, can you give a bit more color as to where – and is there a broad agreement now about, where the molecules actually go and as you say, Browse before Scarborough in the Northwest shelf or – and maybe just moved on to sort of try to workout what the agreed tolling treatment charges are going to be. Obviously, [indiscernible] sitting in the North West Shelf at lower right at the moment and [indiscernible] having to pay more if they are going through Pluto. Is that sort of where those discussion are at, or are we still in the earlier phases of working out where the molecule is going to go?

It is a good question Hayden. It depends on who you talk to. If you talk to the majority of the partners, it’s all pretty clear that you probably picked up on one who still thinks there is an option. And it still keeps coming back and says we need to work out sequencing. Sequencing was – is two years old. So it is done. There is an agreement – a draft agreement in place based on certain sequencing, it’s done. There is no about turn on this. So anybody with that kind of noise out there is, to be honest with you, I think they are in Lala Land. On – with respect to the actual negotiations or the gas processing agreement, we did have a point here six or eight weeks ago. We have the North West Shelf partners and a couple of partners in there what we will call the underlying partners, basically say that started to drift away from where we think it should be and if it is just what we said. There were 31 items in that agreement. We have overturned that around very quickly and we’re now down to about six items to seven items that we need to resolve. So I would say now that the agreement is with, is very close and we are starting to get – once we get down to two or three items, we are at a point where we will be able to close that pretty quickly.

Okay, great. Thanks. And just on the dividend, is there anything you sort of provide in terms of a minimum level we should think about in terms of payout ratio just as you go this rising CapEx side for the next few years?

And again, it’s a great question. It is a healthy tension we have within the organization around this. The purist that exist within our finance group and then the practitioners who are lot more practical and shareholder-friendly. So it’s one of those ones I’m getting a lot of surprises for them. But it’s one of those ones where at the end of the day we’ve always had a commitment and certainly since I have been here and before me that we need to meet the needs of our shareholders first and foremost. And we’ve taken on a challenging part in having a 80% payout ratio, but equally it provides a discipline in any organization. And we’ve always trusted ourselves and it’s a big trust that if we need additional money then we should have growth plans in place that our shareholders, both existing and potentially new hold back. I think that was the case last year when we raised equity – when we acquired Exxon Mobile’s interest in Scarborough and that was as you know, very well supported. So that’s kind of a testament to that process. I think we’re going to keep on that path to be honest with you. There are certainly tax advantages in Australia for the Australian President shareholders for us to maintain our current payout ratio. We, as you know, we have a banking credit balance that is extremely healthy and unlikely to be drawn down in the short-term. And so, once you put all of those back to [indiscernible], it says that you go down on particular path that may not be the normal path of the companies we go down, if they will work in a different jurisdiction. So we understand we are different. We’re very happy and fine with that, and we know the mix of our shareholder base, particularly those who rely on our dividend and then we have got over $200,000 moms and dads on averages. So we are not like some of our peers, particularly U.S.-based peers, we don’t have moms and dads in great proportion on the register. So we always need to be mindful of that, as well as in-stores as we think about dividend policy and so forth.

Okay, great. Thanks. Cheers.

Your next question comes – all right. there are no questions at this time. I would now like to hand the conference back to today’s presenters. Please continue.

Well, thanks, everybody, for joining us in the call this morning and particularly thanks for your questions, I hope I would provide further clarity to. I think the real message for us in the first-half, we executed a very difficult turnaround on our major assets, which is Pluto, turnaround itself, primarily was executed on time and on schedule. Unfortunately as we went to restart the plant, we found a piece of equipment that we’d actually replaced as preventative action, was not able to be restarted. So we had to tear it apart again. Very disappointing for us. I know disappointing for our shareholders as well. But nonetheless, it was done very quickly, very efficiently and most importantly, safely, and I’m proud to say at this day saying that the plant is producing above its mine capacity prior to the turnaround. So the things we control, I think we’ve done well. I think our marketing organization responded extremely well to be able to go out and meet our cargo commitments. So that’s really the operating business. If you look at each asset, whether it be North West Shelf, whether it be Wheatstone or whether it be Pluto today, they are all operating extremely well. With respect to the growth projects, there is a clear path. We’re in that difficult negotiation, commercial negotiation phase. What I’d say to you though in the next six to seven months is going to bring together a lot of those negotiations. So things that have kind of been out there for the last year-and-a-half and all moving to a single point over the next six months and the organization and certainly our Board is ready for the decisions that we need to make in that period of time. So you will continue and I think you will continue to see news out of us over the next few months as we progress our way through that. And then, of course, we get into execution phase. And, as I mentioned, all of the technical work, execution work, the procurement tendering, environmental approvals, government approvals work is all on track for the dates that we have said. We have no delays in that at all. The only thing that’s holding us up, making the announcements that we need to at the moment is just finalizing some of the commercial negotiations. So we know what we need to do. We know where our boundaries are and we’ve got the team in place to do it, and we look forward to giving you more of an update on that as we get to our investor briefing day later this year. So thanks very much for joining us.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now all disconnect.