GNE - Genesis Energy

[Snoopy]

Snoopy

Thanks for the detailed analysis. Much appreciated.

I'll have an amateurish go at answering your question.

Not an amateurish answer at all Traineeinvestor. I think you nailed it.

The answer to is B (30 cents) - assuming (i) no changes to the underlying assumptions during the life of the asset and (ii) the entire cash flow is paid out as fully imputed dividends each year to an investor whose marginal tax rate matches the imputation credits. The investor will pay 30 cents today and receive back the discounted equivalent of that 30 cents over the life of the asset (net of tax). The depreciation does not affect the cash payments to investors (other than for the purpose of calculating the amount of tax payable).

I take your qualifications regarding:
1/ the underlying extraction assumptions not changing, and
2/ there being a match in the imputation credit rate of the old owner and the new owner.

So the next question would be whether all the cash flow can be paid out as dividends with full imputation credits attached. If the answer to this question is "no" (which may well be the case) then the investor should only be prepared to pay less than 30 cents a share.

(I realise that investors with different marginal tax rates would place different values on the shares.)

If I could get it for 13 cents (instead of 30 cents) I would be a very happy investor indeed.

Yes, but isn't it odd that if Genesis owns the field it is 'worth' a PV of 13cps, yet if they sell the same interest in the field to someone else it suddenly becomes worth 30cps! That was the bit I had problems getting my head around.

Side question: at the end of Kupe's life, are there remediation costs which the owner has to meet like onshore mining companies have to? Or is that already provided for in your numbers?

If we assume that remediation costs are not included in the figures I have presented, then the owner of the field at wind up will face them. At that point the cost of wind up should be the same, whoever owns the field. So I think it is reasonable to leave the remediation question out of the problem I presented.

SNOOPY

[Xerof]

Snoopdog, there are some updated numbers on whats hedged for the next 24 months in today's presentation on Kupe. Much higher hedge prices and %, although with that goes a higher currency hedge price too. I noted they hedge against Brent, (because thats the most liquid benchmark contract available I guess) You'd still need to adjust for physical sales in Tapis ($3 to $5 higher than Brent)

Anyway, grist for the mill.

[Snoopy]

Yes, but isn't it odd that if Genesis owns the field it is 'worth' a PV of 13cps, yet if they sell the same interest in the field to someone else it suddenly becomes worth 30cps! That was the bit I had problems getting my head around.

The difference I refer to above is based around the treatment of 'sunk costs'. Genesis with their field development partners have put a lot of money into making Kupe the asset it is today. All that capital expenditure became capitalised into the cost of the field and sits on the books as an asset, even as that asset on the books is gradually run down as the field runs down. A new buyer of the field doesn't have any of those sunk costs, but they still get all the cashflow. Hence the field is worth 'more' to the new buyer.

However, as far as Genesis is concerned the cost of developing the field, while done and dusted, is still on the books. There may not be more significant field development costs in the future. But at some time in the past the development of Kupe absorbed real cash. And that real cash is now on the books at Genesis as an asset that must be depleted as the field depletes.

I (now) agree with Traineeinvestor that the answer to the question I posed was 'B'.

However, if I rephrased the question as

"What is the worth of the Genesis share of the Kupe field to Genesis today?", I think the answer might be 'A', 'discounted value of future cashflows' be damned! Have I got that right - finally?

SNOOPY

[traineeinvestor]

The difference I refer to above is based around the treatment of 'sunk costs'. Genesis with their field development partners have put a lot of money into making Kupe the asset it is today. All that capital expenditure became capitalised into the cost of the field and sits on the books as an asset, even as that asset on the books is gradually run down as the field runs down. A new buyer of the field doesn't have any of those sunk costs, but they still get all the cashflow. Hence the field is worth 'more' to the new buyer.

However, as far as Genesis is concerned the cost of developing the field, while done and dusted, is still on the books. There may not be more significant field development costs in the future. But at some time in the past the development of Kupe absorbed real cash. And that real cash is now on the books at Genesis as an asset that must be depleted as the field depletes.

I (now) agree with Traineeinvestor that the answer to the question I posed was 'B'.

However, if I rephrased the question as

"What is the worth of the Genesis share of the Kupe field to Genesis today?", I think the answer might be 'A', 'discounted value of future cashflows' be damned! Have I got that right - finally?

SNOOPY

I think so but (just to create some confusion), if the difference between the accounting value and the cash flow value (if I can use these terms) is real, that means that the asset is worth more to a third party with no sunk costs than to the developer which has incurred sunk costs - which implies that it would always (?) make sense for any company which discovers an oil field, gold mine etc to sell it rather than operate it?

I think I understand how and why we get there but the conclusion is a troublesome one.

[Beagle]

Snoopdog. The last proper look that Craigs did regarding the value of the Kupe field was way back on 25 February when oil was $70 barrel and the exchange rate was 75 cents. At that point they saw a NPV for Kupe of 32 cps.
They are still assuming 100% imputation credits for FY16 and FY17 which simply aren't going to happen and are still forecasting 16 cps divvies for FY16 and FY17. Good luck with that folks.
Best guess is current value is somewhere in the mid 20's IMHO. Interest rates are going to plumb low's later this year that few of us have ever seen in our lifetime...that's the most supportive factor for the SP.

[Snoopy]

I think so but (just to create some confusion), if the difference between the accounting value and the cash flow value (if I can use these terms) is real, that means that the asset is worth more to a third party with no sunk costs than to the developer which has incurred sunk costs - which implies that it would always (?) make sense for any company which discovers an oil field, gold mine etc to sell it rather than operate it?

I think I understand how and why we get there but the conclusion is a troublesome one.

Yes I agree the conclusion seems troubling Traineeinvestor

The problem with selling an oil field when you have developed it is that you would have to make sure the money received from the buyer covered the sunk costs that remain on the sellers balance sheet.

Let's say Genesis sold their interest in Kupe for 30cps. Genesis would then

1/Lose an income stream worth 13cps AND
2/Lose 17cps of capitalised value

(13cps +17cps =30cps)

Despite the buyer being able to recover the equivalent of 30cps form Kupe , verses only 13cps for Genesis, there would be no incentive for Genesis to sell unless the purchase price also cleared that 17cps of 'capitalised oil field value' on the balance sheet. So a sale at a price of less than 30cps, wouldn't happen in practice.

SNOOPY

[DarkHorse]

Thanks Snoopy. Have you reached a (preliminary?) verdict on the approximate value of Genesis as a whole?

[Snoopy]

Thanks Snoopy. Have you reached a (preliminary?) verdict on the approximate value of Genesis as a whole?

Shut the door and turn out the lights DarkHorse. Now bring your ear right up to your computer. You should be able to just make out a slight chuffing sound. Got it? That's the over the wire sound of the boiler of my steam powered calculator -still going unlike other peoples fancy German electronic ones- blowing off excess steam, gradually working away. I know in this age of instant gratification patience is no longer regarded as the virtue it was. But some things just take time. Have no doubt that this forum is getting the live feed of my results. I am not sitting on a Winston Peters style winebox of figures waiting in ambush.

But for those who find tables of numbers washing over them, the thrust of what the old steam calcuator is doing now comes down to this. Kupe is being 'valued' so it can be unplugged from the rest of Genesis. I want to unplug Kupe from Genesis because then what is left is more directly comparable to the other Gentailers. That gives us a better measuring stick of value.

The higher the value of Kupe, the better for the rest of Genesis overall, because that means the rest of Genesis is valued by the market less, and that means it is trading on a lower PE ratio. IOW Genesis is more conservatively valued, the lower the underlying price. A better buy relative to other options in the gentailer space out there.

SNOOPY

[Snoopy]

Snoopdog. The last proper look that Craigs did regarding the value of the Kupe field was way back on 25 February when oil was $70 barrel and the exchange rate was 75 cents. At that point they saw a NPV for Kupe of 32 cps.
They are still assuming 100% imputation credits for FY16 and FY17 which simply aren't going to happen and are still forecasting 16 cps divvies for FY16 and FY17. Good luck with that folks.
Best guess is current value is somewhere in the mid 20's IMHO. Interest rates are going to plumb low's later this year that few of us have ever seen in our lifetime...that's the most supportive factor for the SP.

I like to cross reference other valuations, just to check that I am not leading myself down my own accounting blind alley. So I have taken some of those Craig's figures supplied by Roger, and stuck them into my own model to see what comes out.

That means we go back to February 2015, before the latest hedging figures were available when oil was hovering around $US70 per barrel and $1US = NZ70c. I have no idea what discounting factor Craigs used for future earnings. But I am using a 7% interest rate, which translates to a future year discounting multiple of 1-0.07= 0.93 for each future year.

Year	Oil Revenue (eps)	D,D & A (ps)	Company Tax (ps)	Net Profit (ps)	Net Cashflow (ps)
2015	0.070	0.033	0.0103	0.026	0.060
2016	0.038	0.031	0.0020	0.005	0.036
2017	0.036	0.029	0.0019	0.005	0.034
2018	0.033	0.027	0.0017	0.004	0.031
2019	0.029	0.025	0.0012	0.003	0.028
2020	0.030	0.023	0.0019	0.005	0.028
2021	0.027		0.0074	0.019	0.019
2022	0.025		0.0069	0.018	0.018
2023	0.022		0.0061	0.016	0.016
2024	0.021		0.0060	0.015	0.015
2025	0.021		0.0058	0.015	0.015
2026	0.018		0.0052	0.013	0.013
2027	0.016		0.0046	0.012	0.012
PV per share (Sum)	0.39	0.17	0.06	0.16	0.33

Roger says Craigs got an NPV of 32c. If by that they mean an NPV for a buyer of those assets today based on future cashflows, then that figure is remarkably close to my 33c from the table. If it means the NPV of value to the current owner then my figure of 16cps is way out. Until proved otherwise, I choose the first interpretation!

The other complicating factor is the NPV of the value of wholesale gas, as a result of Genesis's 31% equity stake in Kupe. This part of the business is not a vertically integrated detachable unit like the oil/condensate part of the business. This gas equity share represents a saving in input cost of gas that would otherwise have to be purchased by Genesis on the wholesale market. I have no idea how Craigs have valued that, or even if they have valued that.

The above valuation is now outdated due to changes in oil prices and exchange rates since. But it nevertheless provides me with enough of a yardstick to give me confidence to keep pressing on down my own thought track.

SNOOPY

[Snoopy]

You'd still need to adjust for physical sales in Tapis ($3 to $5 higher than Brent)

I put 'Tapis'and 'Kupe' into the search engine and finally found out what you are talking about!

https://www.nzog.com/dmsdocument/53, on page 4

Written on 24th July 2007

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Global oil supply is tight. While there may appear to be spare oil production capacity globally, much of this is thought to be in heavy sour crude oils, which are not as marketable to refineries as sweeter light crude oils, such as WTI and Tapis. The end result is much less spare capacity and therefore a tight market for high quality crude oils. This situation makes the market very sensitive to any supply disruptions, such as the shut in of Nigerean crude oil, northern hemisphere summer storms, geopolitical concerns and maintenance down time of production facilities. Considerable uncertainty also surrounds the willingness and capability of OPEC to increase supplies of crude oil and reduce prices.

{there is a graph on the page showing APPI Tapis Oil is sold at a premium to Nymex WTI. The premium price margin of APPI Tapis Oil over Nymex WTI is shown diagramatically. The price looks to vary between $7 per barrel and $2 per barrel, with the APPI Tapis Oil price nudging USD80 a barrel. There is no mention of the premium to 'ordinary' Brent Crude Oil.}

<snip>

Tui crude oil has been sold against the Tapis benchmark.

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The booklet says 'Tui' not 'Kupe'. But of course Kupe was not producing anything in 2007, the field was still under development.

SNOOPY