At first glance, the MGP acquisition looked like a smart vertical integration project with hopefully some OPEX benefits.
The latest announcement which aligns MGP progress with the timeline to FID (delayed) highlights it's actual significance.
So how does an unwanted Arrow asset that currently loses money get turned into a bridge to FID for QPME?
The first part is the economics of the MGP today. 10Pj production, 7Pj GSA to Incitec, 0.3Pj GSA to Glencore, residual 2.7Pj to TPS.
Putting aside the longer term requirements for TECH, QPME needs to lift production ASAP. The MGP is operating at under 50% of capacity. The MGP has hard operating costs that 10Pj production barely affrays, hence the modest loss. The table below shows the major impact on the bottom line of a modest increase in production as the revenue/opex at MGP meets breakeven point and then exponentially becomes more profitable as production increases. Near term opportunities to increase production exist from the MOU's but it's own 2P reserves will underpin future increases in production as MGP heads towards operating at nameplate capacity over time. Incitec needs MGP gas just as much as TECH does, so by providing the guarantees to ensure MGP remains operating, they gladly pre-purchase their gas in exchange for the funding to ramp up production to beyond both their ongoing requirements and the future needs of TECH, a win/win. Driving up production results in a lower cost per Pj to produce which opens up downstream opportunities to monetise the additional production in the period before TECH consumption begins.
Increasing production to meet TECH needs makes sense but how does that make a difference today? Surplus production over and above meeting the two GSA's will go straight to TPS in the first instance. The table below shows that TPS is constrained at 2.7Pj pa. Like the MGP, the TPS has hard costs where profitability increases exponentially after break even. TPS has a second kicker, the single vs combined cycle MW output vs Pjs used. So QPME's task is to lift production to the point where the second unit can be regularly operated thus lower the cost/MW produced. As per the table, a 50% increase in supply to 4Pj pa provides a 100%+ increase in MW output. The reduction in MW cost flows straight to the bottom line.
So MGP needs to ramp up to provide TPS with additional gas, how is monetised? The final table below shows the proposed operating times for the TPS. QPME now has control over when the TPS starts up, and when the TPS bids into the NEM. TPS optimal use is as a peaker. That is, operate in times when demand is highest which ofcourse translates to when price is highest as seen from the table. The table with proposed operating times show the price barely dips below the ASX guidance (ASX are tough on this type of anno) of $200/MWh. QPME will have the ability to switch on and off the TPS as demand and prices rise then fall below the target price. So, while the ASX gave the tick to guidance for the base price, QPME management will be expecting to comfortably exceed this even before volatility events are taken into account. Therefore, the $60M pa guidance is my base case, JMO.
MGPE impact on FID
CAPEX - CAH is superseded by MGP and expenditure moved out of Stage 1.
OPEX - Budget was $8/gj -> I expect with higher production at MGP, and hitting nameplate by the time TECH comes online, this should fall to $4-$5/gj. An approx. 50% reduction in one of the largest consumables and an indemnity from future input cost volatility.
DEBT/EQUITY - Given the MGPE expansion, and TECH FID, are now aligned, the expected base case $60M pa revenue flowing into QPM, plus the reduction in OPEX, is clearly an upgrade from nice to have to a key requirement. How this revenue shapes the final debt/equity mix will be up to management. Cash reserves will be available to contribute directly or to service additional debt. MGP derives ACCU's for QPME from today onwards and while their value is yet to be realised, sale of ACCU's will assist further in closing the gap to FID. It will take time to prove this up, but the picture should become clearer by end Q1CY24.
Have we got the right person at MGP? David Wrench could walk around the MGP blindfolded and not get a scratch on him, it's a bit of Bond/Packer type deal IMO.
ARROW - Surplus asset, too small, not connected to export market (doubt it ever will be, and not why QPM chose to buy it), retained while NBB was seen as a possible export option, no longer part of their Australian plans.
MGP plant and reserves - If that plant and those 2P reserves were located in just about any other part of Australia, they would be worth $100's of millions, that QPME can pick them up with for $5M is incredible.
SUMMARY MGP increase production -> lower cost per G/j Increased availability of gas to TPS -> increased production, increased revenue, lower cost per MWh Lower CAPEX, lower OPEX, ongoing revenue, and accrued cash to QPM -> close the gap to FID
All the above is just my opinion. DYOR. GLTAH.
QPM Price at posting:
6.7¢ Sentiment: Buy Disclosure: Held
(20min delay)
