Q2 2024 Archaea Energy Inc Earnings Call

So many customers around the world wants.

and help Carol build out her business.

Speaker Change: So many customers around the world want natural gas coupled with power, clean power, to start to decarbonize their own energy systems.

Speaker Change: And with the growth of hyperscalers, we're seeing just increased demand after demand after demand.

Speaker Change: So taking 100% control of that entity, given that incredible native demand we see for energy, especially from the hyperscalers now and the desire of nations to transition, makes an awful lot of sense.

Speaker Change: At the same time, once you've taken that control, you've restructured it.

Speaker Change: done some stuff to the portfolio based on where your customers sit, etc. You will then think about bringing a passive partner into this. You'll think about giving a passive partner it. They've got a very different cost of capital than we have, and so that should offer the chance to...

Speaker Change: arbitrage the price over time.

Speaker Change: I'm on it.

Speaker Change: Well, let's see when we complete and then probably over 12 to 18 months we'd bring somebody else in.

Speaker Change: So that's why we think it was a really good time, both given where the partner was, the opportunity we see in the market, and how we see that business moving forward. So that's how we think about LightSource BP. Emma, on Bungay?

Emma: Yeah, sort of a very short answer on Bungay

Emma: We've been in the joint venture since 2019, so we actually understand the operational performance metrics now quite well.

Emma: and saw the opportunity to take the 50% to then consolidate to 100% because the two biggest sources of value are inaccessible to us as just a 50%. Namely, the first one is about integrating with Carol's business on the trading side.

Emma: So that's a big source of value there.

Emma: It's very difficult to do when you're 50-50.

Emma: And then the other source of value is applying, Murray, you mentioned it earlier, some of the science.

Murray: but also some of our techniques from refining on automated control systems, for example, we see the opportunity to increase the mill uptime.

Murray: And so again, difficult to do when it's in a joint venture 50-50. So I think the source of the value, we can see them immediately ahead of us in the near term, and then there's tons to do long term. A lot to do on the biogas side. We can use the waste from the mills.

Murray: will take a relatively small investment.

Murray: waste from the mills to be able to then convert into biogas, digest biogas, and then either use in our own vehicle network. There's a massive vehicle network there. We have 1,500 vehicles, combine harvesters in the field.

Murray: either to use your own fleet over time or to sell into the grid, that's a big opportunity. Again, hard to do when you're 50-50 and you have different objectives for the joint venture and then there's more to do in the future on

Murray: on next generation ethanol. So I think those things we see both near-term sources of value and then in the medium to long-term opportunities for investment to really...

Murray: bring this to life. So our decisions are driven by how do we create the maximum value for shareholders. That's how we drive and that's the two examples in that case. Kate over to you on the other question.

Kate: Yeah, so when we update the fin frame at the fourth quarter

Kate: We deliberately stepped away from the quarter-on-quarter calculation of surplus cash because it was creating an awful lot of volatility and perhaps unhelpful focus on what's your absolute surplus cash in any one quarter. So we wanted to provide predictability and a level of certainty into the market with regard to the forward share buyback.

Kate: At 1Q we had a whiting outage that was significant, as you know, so the surplus cash was lower than we might have expected. At 2Q the level of share buyback compared to surplus cash is down to 59%.

Kate: So, what we're saying is 80% over time, at least 80% over time to surplus cash. And as the Board makes its decisions and as we had the conversation last week with regard to the second half of 2024, we take into consideration what's come today and what's coming forward.

Kate: and we're confident in the delivery of the business, we're confident in the improved performance. There's a lot of discipline that we're putting into the capital frame. As you know, we've tightened that right down to around 16 for the year and we're bang on that at the first half.

Kate: Divestments are slightly higher than 2023 at 2 to 3. We've probably got between 1 and 2 billion more to come on that and we've got a full year of cash flow from TA to take into consideration. So we're confident in our delivery and our outlook for the remainder of 2024.

Speaker Change: Thanks Kate. I realize that we're overrunning so I'm going to take one more call on the phone apologies for that with Doug Leggett at Wolf and then I'm going to have to close it down and we'll follow up with any other questions out there. Doug over to you.

Kate: Thank you Murray. Can you hear me okay? Yeah, I hear you great. Thanks Doug.

Doug Leggett: So I'll try two quick ones hopefully. I wanted to try and maybe circle back on the longer-term production outlook. A couple of quarters ago you talked about 2 million barrels a day.

Doug Leggett: been stabilized level, you're well above that and you're now sanctioning new projects. I don't want to front-run January or February when you report but is two million still the right number?

Doug Leggett: Okay. Did you have another question, Doug, or was that it?

Doug Leggett: Yeah, my follow-up is, I wanted to come up to the bye-bye question.

Speaker Change: I've had the pleasure of covering many of your peers for three decades and the big difference between those buying back stock and yourselves

Speaker Change: is a much, much stronger balance sheet. And if I look at your share performance since you started the buyback,

Speaker Change: You really haven't had any benefit, your share price is down and you've bought back a fifth of your stock, but your net debt remains relatively high if you include the hybrids. I'm just curious why you believe that method of cash return is still the optimal way to maximise value for shareholders?

Speaker Change: Okay, great. On long-term production, yes, we're running about 2.3 right now, but of course we've got some divestments. We've announced the divestment of Egypt into a joint venture that will take effect in

Speaker Change: the fourth quarter, I think, which should drop production about 50 KBD.

Speaker Change: So you'll be down at 2250 and then we have some other divestments that we

Speaker Change: continued to pursue low margin, high volume assets.

Speaker Change: That may or may not happen, but if they were to happen, that would drop their production to around 2-ish. As far as what the production outturn looks like...

Speaker Change: for the back end of the decade. Of course we'll update you on February and where that is and I'll just repeat what I said earlier. I'm focused on cash flow and returns.

Speaker Change: and production will be an outcome of that, but I'm really, really focused on growing cash flow. If I just wanted to grow volume, I could plow all the money in the world into the Haynesville, and I could grow volumes like crazy, but that's not the right thing to do for shareholders, is to create cash flow and returns.

Speaker Change: and so that's why I'm focused so much on that, so much on that Doug.

Kate: So I hope that helps you and Kate over to you. Thanks Murray. Doug Hyde, nice to hear your voice. We've already had one debate with regard to share buybacks versus debt. I'm sure we'll have others by the sound of it. Look, I think I said earlier on the call,

Speaker Change: The investors that we talk to, they like the balance of the financial frame as we've currently got it structured. As I said, it's sector-leading distributions.

Speaker Change: and the balance sheet's in good shape.

Speaker Change: It is strong. We have brought it down a significant amount since 2020.

Speaker Change: and the flywheel that the share buybacks give us to be able to continually increase dividends as we've seen in the last three years, we've done 10% each of the second quarters. It creates a flywheel for that and the increasing earnings per share. So, for now we're comfortable with where that sits and we like the balance and so do our investors.

Speaker Change: Great. Thanks very much everybody. Thanks for listening. Sorry we overran a bit and I hope everybody has a nice summer. Take care.