Star Energy Group (LSE:STAR) — H1 2025 results

0:01 Good morning, and welcome to the STAR ENERGY GROUP PLC Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged, and they can be submitted at any time using the Q and A tab situated on the right hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company can review your questions submitted today and publish responses to it as appropriate to do so. Before we begin, I would like to submit the following poll. And I would now like to hand you over to CEO, Ross

0:32 Glover. Good morning to you. Good morning, and good morning, everybody. Thank you for joining us this morning. I'm joined by Francis Ward, who's our CFO. We have a short presentation, after which we will take your questions, and there's quite a few already submitted, which we are looking forward to answering. Think so just to start us off, the key key point is for for us in the business. Our our oil and gas business is has been made much more resilient over the past year. And certainly in this first half of twenty twenty five, we have seen the the overhead cuts that we've been made now bedded in properly.

1:19 You know, those are long term overhead cuts as opposed to sort of one off, and then we'll see the overhead bounce up again. We have maintained our production levels through the first half. We expect to achieve our production guidance in in in for 2025. And our OpEx, we are maintaining our our our level of OpEx as opposed to making large cuts to it. It is more incremental savings that really give us an offset against inflation. So that is still a work in progress. What I would say is actually that the the you know, we continue, and especially in this low oil price environment, we'd continue to to to work hard on making that core oil and gas business more resilient.

2:11 I think the second, key area is, disciplined investment. We are very, conscious that, as I we are in a lower price environment. Our geothermal spend has been curtailed quite significantly. We are not stopping geothermal spend. We firmly believe that that is a very good growth story, but we are maintaining our our sort of strong market leading position in The UK and our strong license position in in Croatia, and we'd be very well positioned to invest on the back of of some policy signals from government. And, of course, we continue to invest in our oil and gas business, and that is to do the things that I've just described, make it more resilient.

3:01 So all in all, we believe there's very significant upside potential within our business. We have the ability to to make production additions through executing some of our mature projects. We are well positioned in both The UK and Croatia from a geothermal perspective. And, of course, we've got a very significant tax loss position. So very well positioned for growth and with significant upside potential in the future. I'll just hand over to Francis, who'll take you through some of the financial highlights. Good morning, everyone. So Ross talked about financial resilience and improving that, and I think you can see the results of that in in our half year. We completed the Holly Brown sale. We've received the cash now that's in in our bank.

3:52 On g and a, we've reduced those costs by 1,600,000 compared to the same period last year, and we've also spent 1,500,000 less on our geothermal activities. We've managed to increase our operating working our operating cash flow, despite the low oil price environment. And we're meeting our commitments on under our facility and and repaid facility a at the end of June in line with those terms. On oil and gas, production was just under 1,900 bar BOE per day. We are maintaining our guidance for the full year at 2,000 barrels. We had we had some operational issues in the first half, and we also had some constraints, third party constraints where where the operator was updating the grid.

4:46 OpEx, we have our absolute costs increased slightly, because we had more worker overactivity in the period, but, we are managing to make some savings and and trying to offset inflationary impacts on that. On the CapEx side, we invested 2,000,000 in the first half. About half of that was on our Singleton gas to our project and the rest on, other projects to improve optimization and off offset our declines across the portfolio. Turning to geothermal, I guess the main message here is that, we are progressing our projects with with minimal spend.

5:34 So Ross talked about being very disciplined in our spend. You can see that in in the fact that we've spent a lot less this year this year compared to last year, but we are positioning ourselves for growth in that area. We believe there's a significant opportunity there, and, we will manage to keep our various projects moving along with minimal spend, and we're access accessing grant funding where possible. And just turning to our full year outlook. As mentioned, we are maintaining our production guidance at 2,000 BOE per day.

6:19 Capital expenditure, we've reduced our capital expenditure to 8,400,000, and that is real savings in life of the lower oil price commodity. So we've managed, for example, on the Singleton project to source, cheaper generators. Our geothermal spend is largely discretionary, and and dependent on seeing, that site to value. So in Croatia, subject to a farm down, and in The UK, subject to grant funding for most of our projects. Our facility we will draw down on finance facility to to fund some of the Singleton Gas Tomorrow project and and perhaps to fund some of our geothermal activity.

7:10 And you'll see the cost of the EPL, payments there in terms of the cash that we've got to spend, on that. It it really is a significant impact on our business, and and I don't think it was quite the intention that, a company such as ours would suffer a high EPL rate despite the low commodity prices we're seeing. Ross, I can hand over to you. And so just to just to sort of add to that, I mean, I'll I'll you know, and I think it is quite an important message. I know that there is a lot of sort of concern about us spending money on geothermal with no sort of clear value in sight.

7:58 You know, we have curtailed our spending. So, you know, I think, Francis, you just remind me of what our spending in in h one twenty five was versus or h one twenty four just to solve the difference anyway. Yeah. We said we spent 1,500,000 less in in the current period. Yeah. So, Yeah. And I mean, that that is us really focusing on in on, you know, maintaining a growth platform and maturing a smaller number of of projects to really give proof of concept or pilot project that that will demonstrate to shareholders,

8:39 the government that this that, you know, that this is a a good business that needs backing. I think just turning to the sort of operational milestones in the first half of this year, yeah, I'd really pick out just a couple of key ones here. Irritatingly, single to gas to wire project. It is the bulk of our CapEx spend over the the certainly this year and and the early part of next. Bringing that online has been delayed. We were hoping to get it on at the very, very back end of this year. We've been informed by the DNO that they're only offer able to energize the project or give final grid connection to the project in 2025.

9:29 Now we're working to bring that forward to the beginning of 2025 at the moment.

9:36 But, you know, that that that's the bulk of our our CapEx, and so it's very frustrating that that that we've seen that delay. I think from a UK geothermal perspective, we said that we were going to look for strategic partnerships. You've obviously seen and we've talked about the partnerships with Bring Energy down in Southampton and more widely with Veolia. I think the key there is that, you know, we are partnering with businesses of real scale, and that's in Veolia as a as a really good example, and that is starting to pay dividends. There is another round of NHS projects. These tend to now be fully funded from public sector decarbonization funds.

10:22 So, you know, fully funded for the life cycle of the project at the outset, and so we are partnering with Veolia in bidding for, you know, for for some of those at the moment. I think two things there. It it it brings relevance to government when a business to scale of the earlier is done to get involved. And, obviously, when we're bidding for projects, it should bring quite a lot of weight to that process.

10:53 So I think that's really the the the those are the key things to take away from our milestones in the first half of this year. Just on to wider sort of policy, and there's a number of questions within the the presubmitted questions,

11:15 and I I hope some of these will will some of us will answer answer those. You know, we're quite obviously within a a UK oil and gas setting, it is difficult at the moment. The EPL, as Francis said, I think it's, you know, unintended consequences, but it is severely constraining our our free cash. You know? And that constrains our investment into the core business, which is absolutely fundamental to to to make that more resilient, and it constrains our ability to invest in geothermal. And if you look at it through a Department of Energy Security and Net Zero lens where they talk about transition and they talk about moving jobs into low carbon industries, What we're doing is exactly what they want us to do, and we're being punished for it.

12:08 The EPL is brutal. Now we expect that there should be some changes in that in the first half of next year, and it certainly feels like the the the the winds are changing from an oil and gas perspective out in a positive way. So, you know, we'll we'll we'll wait and see on that. But more deeply red tape and regulation, we see increased regulatory costs across our oil and gas business delays. And often, you know, the costs and the delays don't actually bear any real world environmental benefits. So that's particularly frustrating. Having said all of that, we are having very constructive dialogue with the UK government. It's about renewable heat.

12:56 We are, you know, we're very clear on what the ask is. We are not asking for large handouts. Frankly, I think in this current in the in the current government finances the way they are, asking for a handout is not gonna get you anywhere. But we are absolutely asking for a strong policy signal, and we are starting to get some movement there, which is which is reassuring. So, you know, I think as a as a sort of a a frame a framework, you know, business is not easy in The UK. The the the the operating environment, which is oil and gas business, is not easy in The UK. It does, however, feel as though things may be getting better. And certainly from a geothermal perspective, we're starting to see the results of some of the lobbying we've been doing for the past few years.

13:51 And you would have you may have seen the Department of Energy Security in that area released a levelized cost of geothermal energy report a couple of months ago, and I understand that there are further reports to come. So I think, you know, what is our focus? I won't labor the point here, but, really, it's disciplined execution for us at the moment. We're very focused on on sort of our our two strands of of, you know, maximizing what we have on our oil and gas business and being very careful with where we invest money in geothermal. You know? Although we are maintaining our growth platform in what we believe could be a very, very large market.

14:43 But we have very clear capital allocation priorities. And where we spend a pound, we need to make sure we get real value for that. Very, very important to us. And I think I'll just sort of close with this. You know? Again, we believe we've got the fundamentals in place for growth, and that really is supported by our oil and gas business. We absolutely have huge growth opportunities, most notably in the heat or in the in the in the heat market in The UK where there is overarching sort of policy support, but what we're looking for is specific policy support.

15:33 And in Croatia, where we've got a very supportive government, I temper all of that with we are not spending lots of money on those very large growth opportunities until we can see sort of clear policy direction. We believe that's best for the business and best for the shareholders as well. I think with that, I will turn to some of the questions or the questions that we've that have been submitted, and we'll we'll do our best to answer those. So I think first up, you recently sold your site in Alton, Hampshire for £6,300,000. Do you consider that any of your other sites could be sold for material sums after decommissioning? If so, can you provide an estimate of aggregate sale value of these sites? Is the sale value of the sites reflected in the accounts, I. Within the £60,000,000 decommissioning provision?

16:34 Francis, you take that. Sure. So I guess the answer is in the near term, we use all of our sites for the oil and gas operations. There are a couple of those sites where with some investment, we could allow some redevelopment around a sort of more modernized or rationalized facility, either or else at the end of operations, and then it could be cleared and and redeveloped or sold. However, that does involve, some investment, and and it's subject to capital allocation decisions. The the value of any sale is not included in our decommissioning and provision.

17:22 K. Thank you. K. Second question. Actually, there's a cut there's a couple on the same theme. So when do you expect each geothermal project to be profitable? And this this is a overarching question. When will any revenue be generated from any of the geothermal energy projects at present? They are just a drain on resources. Francis, you take Sure. So, you know, we we expect each of our geothermal projects to be profitable and to stand on its own two feet economically, but they they are all different. They have different timelines and different funding structures with which does affect the payback period.

18:13 And for example, on the NHS projects, we're dependent on the NHS trust's internal processes and priorities and and their ability to access grant funding for each stage of development. And we've been very clear that we're not going to spend material amount of money to to to, on these projects until we see that value route, so dependent on grant funding and their approvals. What we are doing is is in the next PSDS round, we're targeting projects that are fully funded, and and that should help us have a quicker execution timeline. In Croatia, the timeline to profitability is really dependent on the farm the outcome of a farm down process.

19:07 Yeah. And I think just on the on Frances mentioned, PSDS funded, that's public sector decarbonization scheme funded projects. And and what those are is the public sector decarbonization scheme has actually come to an end. But before it came to an end, there were grants made to a number of projects for the whole life cycle cost. Or sorry. Not the whole life cycle. The whole capital cost of the projects, and a number of those includes a fair fairly significant proportion of funds dedicated to geothermal heat energy. And so that is where quite a lot of the focus is right now within the business in terms of bidding for those. We see them, obviously, as fully funded. That helps us.

19:59 They are also very likely to be a faster route to demonstrate that that you know, demonstrate that the projects work in The UK, you know, which we believe they should. Right. So I'll just turn to the next question. Would you consider paying a dividend in 2026 rather than using all the excess cash flows for geothermal projects? I think we must think that there are a number of, in fact, frankly, two key issues that we face or that we believe we face. Firstly, you know, we're in a low commodity price environment, and we're being hit with with really excessive taxes.

20:46 That's the the energy profits. Yeah. This means we need to be very careful with our our cash reserves and very disciplined with our cash allocation. The second aspect is, you know, we believe that that we we must provide growth opportunities to deliver some value to our shareholders. You know, the oil and gas you said and and I think so those two areas mean that we we believe that one care taking care of the cash in a low commodity price environment. And secondly, providing growth opportunities means that paying a dividend in 2026 is is pretty unlikely.

21:39 And the oil and gas industry in The UK is has very unsupportive government policy. That means that we direct our funds towards a growth to to geothermal, which where we believe there is a real growth opportunity. So, you know, that that is the strategy there. It's to develop a portfolio of long life cash generating assets, which we could own or, alternatively, we could sell for value for earlier value realization. I think in terms of, you know, the cap the excess cash that the business has, as Francis and I've explained, we've significantly curtailed our geothermal spend since the middle of last year. We're maintaining our position there as opposed to spending a lot of money on on business development.

22:33 And I think, you know, where we talk about where we're actually investing our money, well, you know, the lion's share of the CapEx for 2025 is going on oil and gas projects. It's going into the oil and gas business, and that's both new projects like the singleton gas and wire project, but it's also just into sort of incremental improvements all around our various fields. I think next question is, what are you doing to lobby for government support for geothermal? I think in in part, sort of answer that. I think there is what important, like, there's wider lobbying going on. Yeah. So we're obviously making the case to government on a on a, you know, a number of fronts.

23:27 We have a very consistent message around geothermal now. We have well, I think we have had a consistent message for a while. Others in the sector have not had a consistent message. I think that has not helped our our general cause. That is now coming together or has come together into a single consistent message. You know, we highlight the obvious benefits that Geothermal brings, and we are very clear about the strong market signal that we require. We use public updates, energy trade press to lobby for proper a proper market signal, and we're tying it to real projects with large companies like Veolia.

24:14 We highlight demand from sectors such as data centers so that the government can see exactly how support can unlock sort of an an investable low carbon energy supply in The UK. In terms of the oil and gas lobbying, we host local and national politicians at our at our operational sites. We demonstrate that we operate in a safe and environmentally sensitive manner and that we provide really important local employment. We work with DESNAS. We work with treasury officials to highlight the obvious benefits of producing oil and gas in The UK as opposed to importing it. But, really, the principal focus recently has been to lobby around the EPL, which I've said is absolutely crippling things.

25:00 And, you know, as I said, we we believe that in early twenty twenty six, there will be new policy. We don't quite know what it looks like, but things are certainly feeling more positive on that front right now. Let me go on to the next question. Right. Why do why do we think that is a viable business opportunity for STAR ENERGY? I think first and foremost, you know, it's a very strong fit for us. It plays directly ties us in strengths and addresses a very real market need. From a technical perspective, it's a natural extension of what we already do. We're experts in drilling, subsurface risk management, long term field operations, and those are directly transferable to geothermal.

25:54 Commercially, the opportunity is very large and growing. Half of Europe's total energy use is heat, and there's not many solutions for low carbon heating and cooling. In Croatia, we've got, you know, very strong government policy that supports geothermal development. And in The UK, there's really, really significant demand, you know, not just from hospitals and district heating, but also from things like data centers that require secure year round cooling. You know, from a financial perspective, the the project offer very stable long duration cash flows. And once the resource is proven, it's very scalable.

26:40 Drilling additional wells and and and you can drill additional wells and and there's modular plant expansion opportunities there. So it sits really well alongside our oil and gas business. I think strategically, it strengthens our relevance in a changing energy system. And, you know, all of the government policies around energy security, decarbonization, economic growth, they all depend on homegrown, reliable energy, and geothermal ticks all of those boxes. So, you know, it's not just a viable opportunity for us. You know, we feel it's a way to diversify revenues. It's to build resilience for the future and to position ourselves in a a changing energy environment in a very positive fashion.

27:34 I'll just go down the list. Sorry. Right. In light of reform UK's approach to shale gas extraction, can you give an update on the gas licenses STAR ENERGY holds and if any have been relinquished? So I think, in short, yes, we have relinquished some licenses. You may recall that we held held Shell exploration acreage across East Midlands of the Northwest. The Northwest acreage has gone, and these were in an area that had a significant subsurface complexity, was more densely populated, meaning that development was always gonna be more difficult. However, we do have our exploration acreage across the Gainsborough Trough, and this is where we drilled our Springs Road Tinker Lane exploration wells in 2018, 2019.

28:24 It demonstrates a world class, nationally significant shale resource. We think it's strategically important for for The UK, and also it's where our East Midlands operations are. It's where our skilled workforce is. It's where our track record as a trusted operator sits, and it's where our infrastructure sits. So, we have been, reiterating that point, pretty frequently recently. In fact, I've I've been talking about shale quite a lot recently. It is pretty relevant, and you'll also note that it's the East Midlands is a reform area. So I think we're coming to the end of the meeting.

29:13 I think we're a bit short of time. What I would sort of close on is what I've said before. You know, our oil and gas business is resilient. It is hugely important to us. It is certainly not the the sort of the forgotten sibling. I spend a huge amount of time on our oil and gas business that includes our shale opportunities. Our geothermal business and that the growth growth engine is equally important to us. It is very well positioned at the moment. We're not spending a lot of money on it, but we believe when the right policy signals come, that will be a very, very material engine for growth.

30:02 Thank you very much for joining us today. That's great, Ross Francis. Thank you very much indeed for updating investors today. Could I please ask investors not to close this session as you will now be automatically redirected to provide your feedback in order that the board can better understand your views and expectations? This will only take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of STAR ENERGY GROUP PLC, we would like to thank you for attending today's presentation, and good morning to you all.