NZ Oil & Gas (NZO)

[777]

From stuff.co.nz

NZ Oil & Gas chief spreads good news about production
By BRUCE MCKAY - The Dominion Post | Wednesday, 17 October 2007



During the past couple of weeks David Salisbury, chief executive of NZ Oil & Gas, has been doing the rounds of the brokers and journalists doing what CEOs do not do often enough; meeting those people face to face and answering their questions.
Mr Salisbury joined NZ Oil & Gas earlier this year when the company was going through something of a quiet revolution.
As an exploration company, the prospects for revenue have often seemed somewhat distant, but now the company is enjoying its first real revenue in quite some time.
Also, NZ Oil & Gas has managed to get the Pike River IPO away after a few bumpy moments. Given the state of financial markets since August, it is an achievement to have raised $85 million from the public for a coal company.
But what's next?
Mr Salisbury's message is that the company is hunting for the next big thing, having boosted its exploration staff, and is ready to tackle some new offshore targets with all the cash flow coming in from, firstly, the Tui project and then from Kupe.
Though the company's share of these two projects is only 12.5 per cent and 15 per cent respectively, they are significant investments and profit generators.
The nature of the reserves means that Tui will flow strongly in the first couple of years and then rapidly reduce to a long tail, while Kupe, which is due to start production in the middle of 2009, will have a longer, more stable profile.
The company is planning to produce about two million barrels of oil equivalent on a continuing basis from both Tui and Kupe and from new discoveries. That's where the new staff come in.
One of the near-term opportunities for the company is drilling new wells in prospects that are near both the Tui and Kupe platforms.
The idea is that any new fields can be hooked into the existing production facilities, making the new fields relatively cheap to develop and prolonging the useful lives of the existing production assets.
There is also the possibility that the recoverable reserves estimates will increase from new drilling and testing in the existing fields.
The focus remains on offshore Taranaki assets rather than looking for new targets in areas such as the Southern Ocean.
NZ Oil & Gas knows the Taranaki structures very well and will continue to work in that area. It seems that the Taranaki basin is still highly prospective, even if a big replacement for Maui hasn't been found yet.
Mr Salisbury reckons that the company is in a good cash flow position, with no need to ask the bank or shareholders for money, at least in the foreseeable future.
The very nature of oil and gas exploration means that shareholders always risk being tapped on the shoulder for more money.
NZ Oil & Gas has a commitment to provide funding to Pike River. However, it would seem that if the company has to lend money to Pike River, it will do so only on commercially advantageous terms.
Mr Salisbury has been at pains to point out that the two companies are now separate entities in every sense, with the only contact between them at the board level.
It would also seem that NZ Oil & Gas will look to exit its holding in Pike River, but that is unlikely to happen for some time.
Pike River isn't due to start producing coal till March next year and any sale would probably happen only after Pike has established a production track record.
So will the company pay a dividend? It would seem unlikely.
Firstly, the company has $139 million of exploration and other tax losses that it can use, so it won't be generating any imputation credits in the foreseeable future.
It doesn't make sense for companies to pay dividends without imputation credits, so the most likely form of any payment to shareholders is likely to come from share buybacks.
Whether a share buyback programme is instigated remains to be seen as the only time a company should undertake a buyback is when the share price is trading at a deep discount to fair value.
In the oil and gas game it's a bit of a moot point to determine fair value, due to the volatility of the oil price.
NZ Oil & Gas has been in the NZX 50 Index for some time now, but is not that widely followed by analysts.
The company has more than 12,000 shareholders, but less than 20 per cent of the shares are held by institutional investors.
Given the "wall of money" hitting the market each week it seems surprising that the level of fund manager investment in the company is so low, given that it is in the headline index.
It could be that institutional investors have a hard time understanding the company.
There aren't many oil and gas analysts in New Zealand and the Australian analysts aren't about to divert their attention from much bigger companies in their own market to look at NZ Oil & Gas.
Another reason could be the need for the company to improve its corporate governance performance before institutional shareholders start taking more interest.
One of the issues here is the presence of Tony Radford as chairman of the company. He has been a key driver behind the company since it first listed in 1981.
However, at times the governance of the company has been somewhat opaque.
During the 1990s, Ron Brierley and GPG had a crack at Mr Radford and the cross shareholdings between related parties that were linked to NZ Oil & Gas.
While that has all gone away, it might be time for the company to look for a new chairman that has a good market profile and a sound corporate governance track record.
NZ Oil & Gas has certainly had a big year. The start of production from Kupe next year will be another major step forward and will provide ongoing cash flows and profits for the next few years.
Mr Salisbury's challenge is to find the next Tui and Kupe to ensure that the company can produce two million barrels a year. If he can do that, then one day the company may start paying tax and dividends will start to flow. That will be a major achievement.

[dsurf]

Does anyone have a feel for whether the exercise price for the options could be lowered?

Appreciate the value transfer issues, need for resolution / EGM etc, but was thinking that the same issues would apply if the exercise date was extended and they have done that in the past.

[duncan macgregor]

Does anyone have a feel for whether the exercise price for the options could be lowered?

Appreciate the value transfer issues, need for resolution / EGM etc, but was thinking that the same issues would apply if the exercise date was extended and they have done that in the past.

Its more fun playing pass the parcel up to the time the music stops. Macdunk

[upside_umop]

you make it sound as though your sitting down in the circle maccy dee. or are you the one with the cassette tape stopping and starting the show?

[boysy]

macdunk i appreciate your input you are stright up im just wondering if there were any other stocks that you heap as much crap on as NZO and PRC, and why is this i mean surely you can diversify and bag other stocks as well ?. I mean it comes across as sour grapes, i assume you once held NZO and didnt do well out of it .

[sideline]

macdunk i appreciate your input you are stright up im just wondering if there were any other stocks that you heap as much crap on as NZO and PRC, and why is this i mean surely you can diversify and bag other stocks as well ?. I mean it comes across as sour grapes, i assume you once held NZO and didnt do well out of it .

Yes, dunky did once hold NZO - must have hurt him to sell when he did and he hasn't overcome his grief
yet. May need some counselling for that to let go.

[Toddy]

One way the management could boost the current SP (or atleast reflect some of the current value of NZO in the SP) would be to lock in future oil sales at the current oil price.

This would give the company certainty over future revenues and send a clear message to the market that they will be banking cash and be able to better forecast cashflows. The market will take on board the lower risk profile and re-rate NZO.

Yes, the long term trend is for the oil price to trend up. However, this is more likely to happen in the medium/long term and hence, taking advantage of spikes like we have today would be a positive move in my opinion.

[tim23]

Good call Boysy - Duncan must have had a really bad experience cause he has it really bad with NOG & PRC - its a bit tedious for me now.

Neopole - I guess people will exercise their options if they are in the money, otherwise why would you when they are not even close; however they are still 9 months out so its not an issue today - there is still about a 50c lag as there was when the options were about 30c (i.e cost of option + $1.50 minus share price)

[arjay]

Interesting that a dividend is seen as unlikely. With all that exploration and aquisition planned NZO must be keen for the ODs to be exercised. However, with no carrots for the shareholders in the forseeable future (any thrill/drills will likely be well past next June) I can't see how it's going to happen. Oil going up will increase profits for NZO but the shareholders won't see any of it until one of those dry holes turns up wet.

dSurf - doubt they'd be allowed to reduce the exercise price. To be fair to everyone they'd probably have to issue rights or OGs at a lower exercise price.

[boysy]

they hinted at a sharebuy back didnt they ? though it would have to be large to make up the curent deficit between current and excise price