ADZ Energy’s strategic vision aims to overcome past challenges and reap tangible upstream gains
Rising from the ashes of Armour Energy, ADZ Energy has fresh owners, money in the bank and a three-year development strategy that aims to boost production and reserves.
ADZ acquired Armour's Australian assets in January after the latter entered liquidation late last year. Armour had been struggling under a substantial debt burden for many years amid poor financial and operational performance. This led the company to enter receivership in November 2023.
ADZ — founded by Daniel Liu and Aiden He, who represent two private family investment companies — aims to do what Armour could not: make a broad portfolio of upstream assets profitable.
ADZ CEO Christian Lange, who transitioned with his team from Armour, spoke to Energy News Bulletin about the new company's A$150 million, three-year road map to success.
Armour Break
Armour, a company originally founded in 2009 to pursue an exploration and divestment strategy, struggled to realise the full potential of the decommissioned Kincora gas project after acquiring it from Origin in 2016.
After the first full year of operations at the Kincora Gas Plant in the financial year 2019-2020, the project experienced consistent production declines.
Kincora's average gas production plummeted from 9 Tj per day in FY 2019-2020 to 3.8 Tj per day in FY 2022-2023. Oil and condensate production, meanwhile, roughly halved from a little more than 154 barrels per day to just over 77 bpd.
Lange said his appointment as Armour's CEO in July 2022 came with a mandate to solve Kincora's collapsed production. This collapse, he explained, was the result of the company's lack of experience with production plays.
Lange said: "Not a great deal of capital was injected into Armour's production licences — the last new well drilled on Kincora was in 2019. This goes a long way to explaining why production has declined there in recent years."
The problem Lange faced in turning things around at Armour, however, boiled down to a lack of available funding. The executive said: "Having a recovery plan still requires upfront capital, which was a persistent challenge at Armour."
Despite managing to bring Kincora back onstream, Armour recorded millions in annual losses each year. Its worst was its final financial year, with the company posting a A$21.66 million loss in FY 2022-2023.
Despite the sizable shadow that Armour's past difficulties cast, Lange is confident that ADZ's more robust financial footing will allow him to deliver on the development plan he and his team initially devised while at Armour, showcasing the assets' full potential in the process.
Three-Phase Development
ADZ's investment plan for 2024-2026 amounts to around A$150 million, divided across three equal tranches of A$50 million.
Shareholders are expected to fund most of the company's first-year activities, with second-year funding coming from a mix of cash flow and shareholder investment. ADZ hopes to have boosted production enough for cash flow to cover its capital and operational expenditures in the third year.
The first year of investment will be solely devoted to turning Kincora's production around, with ADZ aiming to boost output to 20 Tj per day by the end of 2025. Lange said: "In the first 12 months, which will likely spill over into 2025, because we've had a delayed start to the year, we expect to drill four to five wells at Kincora and conduct a 3D seismic survey."
ADZ anticipates expanding the Kincora gas processing plant from 20 Tj to 30 Tj per day, though this is a longer-term priority. While Kincora "can wash its own face" in terms of covering operational expenses, ADZ needs the project to cover development costs at its other projects.
Lange said: "We have two levers to ensure the project can do that: production and price. When [Armour] renegotiated the price of the GSA with Shell last year, we pulled the price lever. Now it's a matter of boosting production, and increasing the plant's capacity to 30Tj per day is part of our longer-term asset strategy, with that investment underwritten by cash flow."
He added: "We'll continue focusing on boosting Kincora's production in 2025 but hope to widen our focus to our Otway and MacArthur assets that year. From 2026, we expect to have more investment capacity for non-core projects."
ADZ wants to drill its first well on PEP 161 in Victoria's Otway Basin, which it owns 51%, by 2026. The company estimates the Enterprise North conventional gas prospect could hold hundreds of billions of cubic feet of gas and associated condensate.
The project's "quick path to commercialisation" has excited the management team. ADZ has three nearby gas processing plants — Lochard Energy's Iona Gas Plant, Beach Energy's Otway Gas Plant or Cooper Energy's Athena Gas Plant — the project can potentially tie into.
After its Victorian drilling plans, ADZ is set on testing the Glyde discovery in the Macarthur Basin. Glyde is a shallow conventional gas discovery that flowed at 3.3 million cubic feet per day without fracking. However, the company's modelling suggests the discovery could flow up to 6.2 mmcf per day.
Armour signed a heads of agreement (HoA) with Lucapa in February 2023 to supply gas from Glyde to the Merlin diamond mine for around 14 years from mid-2025. The mine lies around 20 km from the gas field.
Lange said: "After [Glyde], comes the Cooper Basin and revisiting Armour's original game plan of derisking plays to drive value for farm-in opportunities. We'd much rather derisk these assets before going to the market. Despite the size of the opportunity, without a discovery in hand, we'd likely only end up with a cheap deal."
Beyond its immediate plans for the drill bit, however, the company is also conducting a strategic review of many of its exploration assets to trim the fat.
Strategic Review
While Lange stressed the company was not looking to exit any states, he noted that the portfolio had reached an unmanageable size.
The executive said: "Armour built up a huge portfolio of assets, far larger than it could fund. Holding tenure costs money. I'm currently carrying out a strategic review of ADZ's exploration assets in Queensland, South Australia and Northern Territory as I'm not convinced of the economics of such a large holding."
ADZ holds interests in 12 PLs, six ATPs and two PCAs in Queensland, two PEPs in Victoria, six EPs and seven EPAs in the Northern Territory, and three PELs and 27 PRLs in South Australia.
ADZ's acquisition of Armour's assets marks a turning point in the trajectory of these resources. With a fleshed-out recovery roadmap, robust investment plans and a focus on operational efficiency, ADZ is poised to revitalise production.
The year ahead for the company will serve as a litmus test for the management team's development plans. Can ADZ Energy's strategic vision overcome past challenges, paving the way for tangible upstream gains? Time will tell.
Source: Energy News Bulletin
