GNE - Genesis Energy

[Snoopy]

Not sure if it has already been discussed, but what does everyone think of the new CEO?

Refer to my post 1920

SNOOPY

(speaking for myself, not 'everyone')

[Snoopy]

Just to reprise. The re-evaluation of the Kupe petrochemical field looks good for GNE. But it appears my modelling has (largely) already taken this into account. Nevertheless there is one benefit I have not yet modelled. Because the field will last longer, that means the field depletion and depreciation charges incurred to date should be spread out over a longer time frame. If I add two years into that timeframe, here is what happens.

Year	No. of Oil & LPG	Oil Barrel	Kupe Condensate	Resource Depreciation	Net
	Equiv barrels	Price USD	Revenue	and Amortization	Proceeds
2016	640000	76.6	$64,189,474	$20,610,081	$43,895,113
2017	620000	45	$39,558,818	$19,286,913	$20,271,905
2018	579000	45	$34,571,102	$18,048,694	$16,522,408
2019	537000	45	$30,004,886	$16,883,967	$13,114,919
2020	558000	45	$29,176,617	$15,805,632	$13,370,986
2021	476000	45	$23,291,139	$14,790,910	$8,500,229
2022	393000	45	$17,995,312	$13,841,334	$4,153,978
2023	434000	45	$18,596,859		$18,596,859
2024	393000	45	$15,758,884		$15,758,884
2025	269000	45	$10,094,114		$10,094,114
2026	227000	45	$7,971,221		$7,971,221
2027	145000	45	$4,764,859		$4,764,859
2028	62000	45	$1,906,558		$1,353,062
Total	5.333E06		$298,195,663	$119,273,530	$178,922,132
PV per share					$0.18
PV per share (tax paid)					$0.13

Not exciting. But that extra cent added onto the value of each Genesis share is still worth noting.

I have done a backflip on my previous opinion that the value of Kupe prior to the October 1st 2015 valuation was not worth detailing. Iteration 4 is not a better version of Iteration 3 (Iteration 3 still stands as my best guess valuation).

For Iteration 4 I have taken a couple of years of production (827,000 barrels of oil equivalents based on actual oil and LPG) which roughly approximate the increase in 2P resrves just announced. There are several ways I could have done this. I have chosen to take out the old FY2023 and FY2024 (434,000+393,000=827,000). In turn I have moved the production from what was 2025 and beyond up the table. This adjustment preserves the expected production decay, but sees the field life shortened by two years. Consummate with this, I have returned the depletion and depreciation write off so that it all expires after five years again, not seven.

Year	No. of Oil & LPG	Oil Barrel	Kupe Condensate	Resource Depreciation	Net
	Equiv barrels	Price USD	Revenue	and Amortization	Proceeds
2016	640000	76.6	$64,189,474	$28,854,113	$35,651,150
2017	620000	45	$39,558,818	$27,001,679	$12,556,139
2018	579000	45	$34,571,102	$25,268,171	$9,302,931
2019	537000	45	$30,004,886	$23,645,954	$6,358,932
2020	558000	45	$29,176,617	$22,127,884	$7,048,733
2021	476000	45	$23,291,139	$0	$23,291,139
2022	393000	45	$17,995,312	$0	$17,995,312
2023	269,000	45	$11,526,624	$0	$11,526,624
2024	227,000	45	$9,102,460	$0	$9,102,460
2025	145,000	45	$5,441,085	$0	$5,441,085
2026	62,000	45	$2,177,162	$0	$2,177,162
Total	4.506E06		$267,350,449	$126,897,802	$140,452,648
PV per share					$0.14
PV per share (tax paid)					$0.10

We can see the October 1st 2015 revaluation has resulted in the value per share of Genesis increasing by 3cps (condensate component only)

SNOOPY

[Snoopy]

As with the oil and condensate, the gas field proportion of depletion and depreciation can likewise be spread out over 7 years, not 5. So here are those changes.

Year	Kupe Gas	Value	Resource Depreciation	Net
	(GJ)	Received	and Amortization	Proceeds
2016	7.00E06	$47,320,000	$18,889,919	$28,480,081
2017	7.00E06	$44,282,056	$17,677,187	$26,604,869
2018	6.50E06	$38,479,209	$23,159,236	$15,319,973
2019	5.1E06	$28,253,093	$15,480,295	$12,772,798
2020	6.3E06	$32,660,243	$14,486,460	$18,173,783
2021	6.3E06	$30,563,455	$13,556,421	$17,007,026
2022	5.1E06	$23,153,418	$12,686,106	$10,467,312
2023	5.6E06	$23,981,181	$0	$23,791,181
2024	5.6E06	$22,263,788	$0	$22,263,788
2025	3.5E06	$13,021,533	$0	$13,021,533
2026	3.2E06	$11,141,075	$0	$11,141,075
2027	2.3E06	$7,493,556	$0	$7,493,556
2028	8.00E05	$2,540,580	$0	$2,540,580
Total	6.43E07	$324,963,186	$116,306,640	$208,656,546
PV per share				$0.22
PV per share (tax paid)				$0.16

For Iteration 4 I have taken a couple of years of production (11.2PJ) which roughly approximate the increase in 2P resrves just announced. There are several ways I could have done this. I have chosen to take out the old FY2023 and FY2024 (5.6PJ+5.6PJ=11.2PJ). In turn I have moved the production from what was 2025 and beyond up the table. This adjustment preserves the expected production decay, but sees the field life shortened by two years. Consummate with this, I have returned the depletion and depreciation write off so that it all expires after five years again, not seven.

Year	Kupe Gas	Value	Resource Depreciation	Net
	(GJ)	Received	and Amortization	Proceeds
2016	7.00E06	$47,320,000	$26,445,887	$20,874,113
2017	7.00E06	$44,282,056	$24,748,061	$19,533,995
2018	6.50E06	$38,479,209	$23,159,236	$15,319,973
2019	5.1E06	$28,253,093	$21,672,413	$6.580,680
2020	6.3E06	$32,660,243	$20,281,044	$12,379,199
2021	6.3E06	$30,563,455	$0	$30,563,455
2022	5.1E06	$23,153,418	$0	$23,153,418
2023	3.5E06	$14,869,488	$0	$14,869,488
2024	3.2E06	$12,722,164	$0	$12,722,164
2025	2.3E06	$8,557,007	$0	$8,557,007
2026	8.00E05	$2,785,269	$0	$2,785,269
Total	5.31E07E07	$283,645,402	$116,306,640	$167,338,762
PV per share				$0.17
PV per share (tax paid)				$0.12

We can see the October 1st 2015 revaluation has resulted in the value per share of Genesis increasing by 4cps (gas component only).

The total boost to per share value of Genesis (gas and condensate) as a result of the field revaluation is therefore 7cps, based on this particular valuation model.

SNOOPY

[Snoopy]

<snip chart>

The total boost to per share value of Genesis (gas and condensate) as a result of the field revaluation is therefore 7cps, based on this particular valuation model.

FYI this is what my formula did in red - the division of your theoretical value contribution per share divided was by 1.33 to remove the "extra" 33%

((($0.13 + ($0.16*67%)) / 1.33) x 33% = $0.06 increase in company value per share.

This value was then multiplied by 33% in blue to calculate the "field increase effect" on company value per share, as 33% was the magnitude of the increase

My calculation was never intended to be super accurate. I just wanted a guide to better understand the effect on company value that the increased 2P reserves provided.

xafalcon, in this instance my reworking of the spreadsheet, and your quick adjustment calculations have produced quite similar results (6cps vs 7cps is only 1cps difference.) Or looked at another way my valuation is (7/6= 1.16666) is 16.7% higher than yours, a reasonable difference, but not that much when expressed in per share GNE value.

So I take back what I implied about your quick and dirty recalculation not being good enough :-). You should also remember that my calculation, despite being more complex, is not 'super accurate' either.

There are other factors like:

1/ royalties and
2/ an estimation of the explortion costs needed to convert 2P to 1P

that I have not modelled.

Having thought more about using your pre- v's post- tax figures, I think pre-tax is more appropriate as asset appreciation isn't taxed until it is sold and partially distributed as a dividend

So using your most recent figures, the increased company value becomes

((($0.21 + ($0.22*67%)) / 1.33) x 33% = $0.09 increase in company value per share, or 4.7%

PS. I really do appreciate the well researched and clearly explained analysis that you provide us with Snoopy

I think it doesn't really matter which figures you use for comparison, as long as you are consistent in your bias, one way or the other.

I continue to favour the after tax comparison. My logic here is that any profit from the Kupe field will ultimately be taxed and dividends from the gentailer part of GNE are certainly 'tax paid' once shareholders get them.

SNOOPY

[Snoopy]

I know Roger(??) is concerned about the impuation credit position going forward so lets have a more detailed look.

Per the stats on p81, they have 0.1m of IC's so not enough to impute a dividend so they will have to pay more tax (before 31 March 2016) to be able to pay this dividend.

A positive company Imputation Credit balance means that the company concerned has already paid their legal tax requiremnet to IRD. This means that when those profits are passed on to shareholders, by the way of dividends, that the tax is paid (barring a wash upwithholding tax) so that the company profits are not taxed twoice (at company level and owner level).

Provisional tax is normally paid in three bites, with a wash up settlement due months later on, in the February following the close of each tax year. Any company would no doubt have a very good idea of what their provisional tax bills will be. Am I correct in saying that this 'future tax due' is recorded as a deferred tax liability (p81, AR2015)?

Can the deferred tax liability, if it is too low, be a measure of excessive forward payment of tax that will allow unrealistic expectations of fully imputed dividends going forwards?

But lets look at their tax position. Current Tax is an asset of $16.9m (Note 8 AR2015, Snoopy correction from $16.2m) which given their third installment wasn't due to after year end, means they have already prepaid, not just their final P3 payment, but $16m in excess of that, to be able to be used for 2016. And how much tax do they have to pay a year. Current tax expense per the notes is only $16m, so if 2016 is the same, then they have already prepaid their full 2016 tax liability,

If you look under note 8, you will see that the underlying current year tax was $37.6m (not $16.9m). There was a significant tax remediation settlement of $18.5m, based around Tekapo canal remediation costs. It is this, I believe, that has boosted the imputation credit balance to allow up to:

$18.5m/0.28 = $66m

of profits to be paid to shareholders with full imputation credits, when this otherwise would have required -further- huge prepayments by Genesis to the IRD to achieve the same result.

even though they need to make an additional payment to be able to impute the 2015 final dividend (that means to be able to impute the final 2015 dividend, they will be paying their 20167 tax liability early!!!). This is not sustainable unless they expect their tax liability to increase significantly going forward or they change their imputation ratio.

Maybe the imputation of dividends is even more precarious than you thought? I think the dividend going forwards (all dividends from here) will probably only be 50% imputed. That would be a major blow to dividend hungry shareholders

SNOOPY

[Harvey Specter]

Snoop Dogg.

Deferred tax relates to items like fixed assets where accounting and tax depreciation is different. As such, you know you are going to pay tax, just not this year.

Current tax is like your account with IRD. You know how much you have owed and how much you need to pay. Ideally when the 3rd installment is paid (1 month after balance date) it should be zero (ie. you have paid the right amount for the year). So without re-looking at their accounts, the fact they had a $16.9m asset, and their third installment wasn't due yet, means they have prepaid their tax. (normally you would expect the year end current tax liability to be 1/3 or the expect current year tax due which represents the 3rd installment payment).

The only reason to prepay tax is to impute a dividend. DM me if you have any questions.

[Bobdn]

Am I right in thinking that dividends are increasing next year and this will make up for the loss of imputation credits?

[xafalcon]

Am I right in thinking that dividends are increasing next year and this will make up for the loss of imputation credits?

GNE did say that F16 dividends would be higher and they also said that dividends will no longer be fully imputed. But I did not see any finer details about either to judge the offsetting effect

Regardless of future imputation credits, I see GNE as a stock that has been (and I believe still is) under-valued.

[Snoopy]

GNE did say that F16 dividends would be higher and they also said that dividends will no longer be fully imputed. But I did not see any finer details about either to judge the offsetting effect.

You have summed the situation up succinctly xafalcon.

The following table shows what has happened over the last two years

	2014	2015
Free Cashflow (per share)	16.2c	19.8c
Dividends (per share)	12.1c	14.6c
Earnings (per share)	8.0c	8.5c

As you can see there is plenty of free cashflow there to increase dividends, if the company wanted to do that. 5.6c of that cashflow relates to depletion and depreciation of the Kupe resource in FY2015. Lets say all of that (equating to 5.2c, because 0.4c has already been added) was added to the dividend in FY2016. That means the final and interim dividend would both rise to 10.8cps.

However if only 50% of that dividend was imputed, the net half year dividend (equivalent to what Genesis pays now) reduces to:

5.3 + (0.7)5.3 = 9.0cps

In this case, the increase in dividend has more than compensated for only having 50% imputation.

However, one could argue that a dividend which is paid unimputed is in effect a return of capital to shareholders but with a tax bill attached. This begs the question. Why not sell your shares now? That would return your capital without the associated tax bill!

SNOOPY

[Snoopy]

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

----

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.

--------

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

A bit more information on the quality of Kupe Oil.

From: https://www.nzog.com/producing-asset...and-oil-field/

----

The hydrocarbons in the field were derived from Late Cretaceous to Paleocene, organic-rich, sedimentary source rocks which were thermally cooked in the basin kitchen areas after deep burial, and then migrated updip into the shallower sandstone units within the structural traps. This geological evolution has created one of New Zealand’s richest condensate fields.

The output from this geological structure is waxy condensate and an untreated crude at a pour point of around 18 oC.

-----

A 'high pour point' is apparently between "+30 °C to +36 °C" (reference below)

http://www.thefreelibrary.com/Sudan+...de-a0238031772

Pour points can vary between 32 °C to below −57 °C

http://www.britannica.com/technology/pour-point

The pour point is the lowest temperature at which a particular crude oil will flow. It is an indication of the wax content of the oil. Some of the famous Indonesian Waxy oils have pour points of 37.8 dec C

Heavy oil characteristics such as high pour point, paraffin deposition, and higher viscosity, cause problems in production systems, particularly wellbore and pipeline and increase production costs. Dissolved gas in oil can improve flow and reduce heavy oil's viscosity.

The pour point is generally increased by a high paraffin content. The chemical term for paraffin is an alkane, a saturated hydrocarbon.

Different hydrocarbon chain lengths all have progressively higher boiling points, so they can all be separated by distillation.

The proportion of light hydrocarbons in the petroleum mixture varies greatly among different oil fields, ranging from as much as 97 percent by weight in the lighter oils to as little as 50 percent in the heavier oils and bitumens. The hydrocarbons in crude oil are mostly alkanes, cycloalkanes and various aromatic hydrocarbons.

84 percent by volume of the hydrocarbons present in petroleum is converted into energy-rich fuels (petroleum-based fuels), including gasoline, diesel, jet, heating, and other fuel oils, and liquefied petroleum gas.[38] The lighter grades of crude oil produce the best yields of these products.

Oil refineries are increasingly having to process heavy oil and bitumen, and use more complex and expensive methods to produce the products required. Because heavier crude oils have too much carbon and not enough hydrogen, these processes generally involve removing carbon from or adding hydrogen to the molecules, and using fluid catalytic cracking to convert the longer, more complex molecules in the oil to the shorter, simpler ones in the fuels.

SNOOPY