GNE - Genesis Energy

[Snoopy]

I do see more value in kupe than suggested.
Its the value of synergy and insider knowledge that Genesis has through its large shareholding.
Contact has to pump surplus gas into an old field to store.
Can Genesis just ask for more or less flow as needed-I don't know but it would be a great way of getting more value if done?

I am not sure that Genesis has much 'insider knowledge' of Kupe, because Origin Energy operate Kupe and everyone else are just 'follow along' shareholders, albeit some being larger than others..
But I think p33 of the float prospectus will answer your question fish.

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FUEL SUPPLY - GAS

"Genesis Energy has a portfolio of natural gas supply contracts (of which Kupe is just one) under which it is permitted to purchase various volumes of natural gas for differing periods of time from a number of different suppliers and from different gas fields in the Taranaki region. This diverse portfolio means that Genesis Energy is not reliant on one supplier or one field for natural gas supplies and that its gas supply arrangements do not all terminate on the same date.

The company has sufficient contracted natural gas to meet the fuel requirements of its existing Thermal Generation and customers until the end of the decade (2020).

A feature of Genesis Energy's natural gas supply contracts is that the company is able to nominate daily and weekly quantities and to adjust the volumes of gas it takes for planned plant outages, within minimum and maximum take restrictions. This enables some flexibility for Genesis Energy to manage seasonal, operational and electricity-market-driven fluctuations in natural gas requirements. In addition it provides Genesis Energy with flexibility to increase its electricity generation levels in times of increased demand and high wholesale prices and to supply other natural gas users through short or longer term gas contracts.

Another feature of Genesis Energy's natural gas supply contracts are take or pay provisions which mean that Genesis Energy is required to pay for the majority of gas volumes it has contracted to purchase whether or not it takes the gas. Such provisions, including the long term nature of the contracts, provides certainty to the developers to invest in gas fields and are a common practice in the New Zealand market."

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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	$16,542,311	$21,936,898
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

Year	Kupe Gas	Value	Resource Depreciation	Net
	(GJ)	Received	and Amortization	Proceeds
2017	7.00E06	$46,600,000	$15,364,253	$31,241,747
2018	6.50E06	$40,247,610	$14,288,755	$25,958,855
2019	5.1E06	$29,368,371	$13,288,542	$16,079,829
2020	6.3E06	$33,739,076	$12,358,344	$21,380,732
2021	6.3E06	$31,377,341	$11,493,260	$19,884,081
2022	5.1E06	$23,622,655	$10,688,732	$12,933,923
2023	5.6E06	$24,122,900	$9,940,521	$14,182,379
2024	5.6E06	$22,434,297	$9,244,684	$13,189,612
2025	3.5E06	$13,039,935	$0	$13,039,935
2026	3.2E06	$11,087,670	$0	$11,087,670
2027	2.3E06	$7,411,415	$0	$7,411,415
2028	8.00E05	$2,615,820	$0	$2,615,820
Total	5.73E07	$285,673,090	$96,667,090	$189,006,000
PV per share				$0.19
PV per share (tax paid)				$0.14

There has been a deterioration in the 'gas' value of the Kupe field on the Genesis Energy balance sheet year to year. My modelling puts this deterioration as 3cps, or 2cps after tax. Note that this is slightly different to the Oil/LPG component which I estimate has shrunk by 1cps over that same period. So why has the 'gas' portion of the field shrunk in value faster than the 'oil ' portion of the field?

SNOOPY

[Snoopy]

There has been a deterioration in the 'gas' value of the Kupe field on the Genesis Energy balance sheet year to year. My modelling puts this deterioration as 5cps, or 4cps after tax. Note that this is slightly different to the Oil/LPG component which I estimate has shrunk by 1cps over that same period. So why has the 'gas' portion of the field shrunk in value faster than the 'oil ' portion of the field?

This question I pose above is somewhat contrived. There is only one Kupe field. Once you start pumping from a Kupe well, the field operator simply has to take whatever comes up from the ground.

For pricing for gas, I am using the 'energy' section (prices spreadsheet) of the mbie government website. The $NZ/GJ rate for CY2015 (the latest full year available) was $NZ5.29/GJ (nominal). (The nominal price figures are those not adjusted for inflation.) This is down from the $NZ6.25/GJ (nominal) figure for CY2014. This price decrease is principally, I believe, because of the announced closure of both the Otahuhu (Contact) and Southdown (Mercury) gas fired power stations, signalling a lower demand for 'spot gas' going forwards.

I use the pharse 'spot gas' advisedly. Under note 25 in Genesis Energy AR2016 there is information on 'price risk' which states:

"The Group has limited exposure to changes in the sale price for gas and LPG as most of the volume is forward sold." 'Most' could be anything more than 50%. But for modelling purposes I am using 80%. This means that despite the decay in wholesale gas price during the year, I am assuming that 80% of Kupe gas is contracted for sale at $NZ7.00/GJ (nominal). This $7 figure is representive of the spot gas price at the time the Kupe field entered production. No information is made available to the public on the exact prices at which Genesis Energy have signed their gas supply contracts. But I feel:

1/ given prevailing gas market prices at the time AND
2/ most gas is sold to large wholesale players who favour long term contracts rather than gambling on securing supply on the spot market in the future

my "80(Long Term): 20 (Spot)" modelling split with prices set at $NZ7.00/GJ (nominal) (Long Term) is reasonable. I am happy top be corrected if my assumption is wrong!

It should not go unnoticed that, as gas prices have trended down, over the past year, the price for a barrel of oil has trended higher. Despite this, the number of barrels of oil produced by Kupe over CY2016 was lower. And despite the oil price rising gross oil returns per barrel at Kupe were lower. This is because of even more highly priced hedged oil contracts expiring. I model Kupe depreciation and depletion according to the respective revenue split between 'oil (including LPG)" and "gas". So as the proportional revenue from oil has fallen, the depreciation/depletion costs are shunted more towards gas. A lower depreciation/depletion cost base for oil in turn implies higher profits for the 'oil division'.

I will end this post as I started, reminding readers that there is no separate 'oil division' and 'gas division'. There is only the one Kupe, selling two broad product streams. Given this, it probably makes most sense to look at the combined diminuation in value of 'oil' and 'gas'.

SNOOPY

[Snoopy]

i will end this post as i started, reminding readers that there is no separate 'oil division' and 'gas division'. There is only the one kupe, selling two brod product streams. Given this, it probably makes most sense to look at the combined diminuation in value of 'oil' and 'gas'.

Here is the short version for those who don't want to read the details. This is my estimate of the total fall in the 'forecast future value' of Kupe because of price changes and field depletion that have occurred over the FY2016 financial year.

	FY2016 (forecast)	FY2017 (forecast)
per share value Kupe Oil (pre tax) [A]	18c	17c
per share value Kupe Gas (pre tax)[B]	22c	19c
per share value all Kupe (pre tax) [A]+[B]	40c	36c
per share value all Kupe (after income tax)	30c	26c

Note that all of these comparative figures are on a 'post field revaluation reserve' basis. IOW the effect of the revaluation of the Kupe total field reserves during FY2016 has been applied to both sets of figures.

SNOOPY

[fish]

This question I pose above is somewhat contrived. There is only one Kupe field. Once you start pumping from a Kupe well, the field operator simply has to take whatever comes up from the ground.

For pricing for gas, I am using the 'energy' section (prices spreadsheet) of the mbie government website. The $NZ/GJ rate for CY2015 (the latest full year available) was $NZ5.29/GJ (nominal). (The nominal price figures are those not adjusted for inflation.) This is down from the $NZ6.25/GJ (nominal) figure for CY2014. This price decrease is principally, I believe, because of the announced closure of both the Otahuhu (Contact) and Southdown (Mercury) gas fired power stations, signalling a lower demand for 'spot gas' going forwards.

I use the pharse 'spot gas' advisedly. Under note 25 in Genesis Energy AR2016 there is information on 'price risk' which states:

"The Group has limited exposure to changes in the sale price for gas and LPG as most of the volume is forward sold." 'Most' could be anything more than 50%. But for modelling purposes I am using 80%. This means that despite the decay in wholesale gas price during the year, I am assuming that 80% of Kupe gas is contracted for sale at $NZ7.00/GJ (nominal). This $7 figure is representive of the spot gas price at the time the Kupe field entered production. No information is made available to the public on the exact prices at which Genesis Energy have signed their gas supply contracts. But I feel:

1/ given prevailing gas market prices at the time AND
2/ most gas is sold to large wholesale players who favour long term contracts rather than gambling on securing supply on the spot market in the future

my "80(Long Term): 20 (Spot)" modelling split with prices set at $NZ7.00/GJ (nominal) (Long Term) is reasonable. I am happy top be corrected if my assumption is wrong!

It should not go unnooiced that, as gas prices have trended down, over the past year, the price for a barrel of oil has trended higher. Despite this, the number of barrels of oil produced by Kupe over CY2016 was lower.
One reason for the faster deterioration

Great research and analysis snoopy.
Thanks for posting.
Pricing Genesis is so complex and subject to unknowns.
Kupe almost certainly is going to have its output increased-at a cost but relatively cheaply as the strucure is there-more perforations and bores I believe tied back to the unmanned platform.Processing is onshore including lpg so I guess they dont have to flood the market with natural gas and the price for natural gas over and above that contracted will reflect international prices

[Snoopy]

Pricing Genesis is so complex and subject to unknowns.

The main problem for analyst shareholders is that Genesis is a hybrid company. There is a nice clean exposure for shareholders to oil and gas at the wholesale level. Then laid on top of that is the NZ retail electricity and gas market operation. So yes Genesis is more complex than the other gentailers. But I believe my general method of trying to split off Kupe, then analysing what is left as 'Genesis the Gentailer' is the best way to understand it.

Kupe almost certainly is going to have its output increased-at a cost but relatively cheaply as the strutcure is there-more perforations and bores I believe tied back to the unmanned platform.

Do Kupe have the capacity to increase their output? Given their output was less this year than last, I guess they do. But 2P reserves on the books will be depleted faster if Kupe bump up production. So valuing Kupe on a lifetime production basis (as I am doing), the gross total field value will not increase(*) if the operators deplete the field faster.

Do you really think they will boost production fish? Would it not require the oil price to go much higher to justify such a move? I don't know the answer to that question, I am just asking. I see nothing in AR2016 that specifically says that production from Kupe will be increased.

Processing is onshore including lpg so I guess they don't have to flood the market with natural gas and the price for natural gas over and above that contracted will reflect international prices

How much natural gas (as opposed to LPG which is grouped with oil condensate) is exported to other countries from Kupe? I thought the answer was none! Happy to be corrected on this point. But I thought the pricing for natural gas is a purely domestic equation, with no reference at all to international prices. Hence the fall in the NZ gas price with the announcement of the closure of Otahuhu and Southdown, a purely domestic market price setting event?

SNOOPY

(*) apart from the increase in value in bringing revenue forwards because of the time value of money discount factor.

[fish]

[QUOTE=Snoopy;642807]The main problem for analyst shareholders is that Kupe is a hybrid company. There is a nice clean exposure for shareholders to oil and gas at the wholesale level. Then laid on top of that is the NZ retail electricity and gas market operation. So yes Genesis is more complex than the other gentailers. But I believe my general method of trying to split off Kupe, then analysing what is left as 'Genesis the Gentailer' is the best way to understand it.



Do Kupe have the capacity to increase their output? Given their output was less this year than last, I guess they do. But 2P reserves on the books will be depleted faster if Kupe bump up production. So valuing Kupe on a lifetime production basis (as I am doing), the gross total field value will not increase(*) if the operators deplete the field faster.

Do you really think they will boost production fish? Would it not require the oil price to go much higher to justify such a move? I don't know the answer to that question, I am just asking. I see nothing in AR2016 that specifically says that production from Kupe will be increased.


I am also an unfortunate shareholder of NZOG and they have increased the reserves.-have a look at their website on kupe.Several mechanisms but reserves by definition are what can be recovered-not the actual amount in the ground.So they are forecasting to increase production.They had no problem exporting oil and condensate from Tui.I havnt confirmed the process but kupe does have its own processing plant onshore and natural gas can be converted to lpg-dont know if they are doing it and just a bit short of time atm to check it out.However the plan is to increase kupe production

[fish]

a little more research about Kupe.
P1 resrves increased by 82% between june 2015 and june 2016.
Natural gas is used for 20% of our energy.
Surplus can and is converted to methanol and urea plus used in lots of other manufacturing.
Oil and LPG are exported to Australia.

Snoopy you are far more capable of research than I am and I probably have a lot more in invested in Genesis( I margin lend for long-term dividends-hence I invest in companies that pay higher dividends than the interest I am charged).
I really would appreciate if you could research Kupe more and if appropriate revise your valuations including future likely dividends from Genesis

[Snoopy]

a little more research about Kupe.
P1 resrves increased by 82% between june 2015 and june 2016.

<snip>

I really would appreciate if you could research Kupe more and if appropriate revise your valuations including future likely dividends from Genesis

Fish , I am not sure why Kupe is highlighting P1 reserves, as for planning purposes it seems to be P2 reserves that they normally use. Of most interest to me regarding Kupe is the NZOG news release of 27th October 2015 headlined:

"34.7% increase in Kupe Development Reserves"

In particular I would draw your attention to the table presented in that press release. I partially repeat this table below, together with a column on the end that I have added:

Kupe: New Zealand Oil & Gas Share	Previous 2P Developed Reserves less production since July 1	2P Developed Reserves at 1 Oct 2015	Change (A)	Previous 2P Developed Reserves at 30 June 2015 (B)	Revised Reserves at 30 June 2015 (A)+(B)
Sales gas (PJ)	17.4	23.3	5.9	18.4	24.3
LPG (kilotonnes)	75.7	97.4	21.7	79.9	101.6
Light Oil (millions of barrels)	0.7	1.0	0.3	0.8	1.1

That 30th June 2015 date is important because it represents the starting point for FY2016, the first year that the uprated reserve estimate was discernable. The next most important thing to remember is that the above table, published by NZOG, represents their 15% share of the Kupe field. Genesis Energy own 31% of Kupe. So to get the resource representing the Genesis shareholding, we have to multiply the NZOG figures by a factor of 31/15.

Kupe	Revised Reserves at 30 June 2015 (NZOG share)	Revised Reserves at 30 June 2015 (GNE share)
Sales gas (PJ)	24.3	50.2
LPG (kilotonnes)	101.6	210
Light Oil (millions of barrels)	1.1	2.3

As Genesis Energy shareholders, it is the last column of the above table that is of most interest.

SNOOPY

[Snoopy]

Fish , of most interest to me regarding Kupe is the NZOG news release of 27th October 2015 headlined:

"34.7% increase in Kupe Development Reserves"

In particular I would draw your attention to the table presented in that press release. I partially repeat this table below, together with a column on the end that I have added:

Kupe: New Zealand Oil & Gas Share	Previous 2P Developed Reserves less production since July 1	2P Developed Reserves at 1 Oct 2015	Change (A)	Previous 2P Developed Reserves at 30 June 2015 (B)	Revised Reserves at 30 June 2015 (A)+(B)
Sales gas (PJ)	17.4	23.3	5.9	18.4	24.3
LPG (kilotonnes)	75.7	97.4	21.7	79.9	101.6
Light Oil (millions of barrels)	0.7	1.0	0.3	0.8	1.1

That 30th June 2015 date is important because it represents the starting point for FY2016, the first year that the uprated reserve estimate was discernable. The next most important thing to remember is that the above table, published by NZOG, represents their 15% share of the Kupe field. Genesis Energy own 31% of Kupe. So to get the resource representing the Genesis shareholding, we have to multiply the NZOG figures by a factor of 31/15.

Kupe	Revised Reserves at 30 June 2015 (NZOG share)	Revised Reserves at 30 June 2015 (GNE share)
Sales gas (PJ)	24.3	50.2
LPG (kilotonnes)	101.6	210
Light Oil (millions of barrels)	1.1	2.3

As Genesis Energy shareholders, it is the last column of the above table that is of most interest.

Next I draw your attention to page 11 of NZOG AR2015, and in particular the forecast 'production graph' at the top of that page. I took that graph and enlarged it by photocopier to four times the printed out size. From that I was able to scale off the bottom three sub parts of each column: Kupe Condensate (light green), Kupe LPG (dark blue) and Kupe Gas (light blue). By enlarging that graph I was able to use an old fashioned 'double pointed divider' to accurately measure the height of each sub column. I was then able to scale that column height against the column graph scale and derive an expected production schedule in numerical form. It was this schedule that I used to supply the 'production numbers' to my Kupe valuation.

All the numbers derived from that page 11 of NZOG AR2015 graph were in 'Millions of Barrels of Oil Equivalent' (mbooe). For gas, the NZOG IR2015 gives the following conversion factor:

162.4 booe = 1TJ

Now there are one thousand Terajoules in a Petajoule. So

163,400 booe = 1PJ, which alternatively translates to

1,000,000 booe = 6.1PJ

So using that conversion factor, I was able to derive the expected gas production from Kupe in Petajoules (PJ), until field closure in 2028. I derived the production figures as carefully as I could. But I was taking the scalability and accuracy of the production graph as a matter of faith. The critical figure in my 'best guess' from SOFY2016 production schedule, is found right at the bottom of the table, and I have reproduced the total gas produced, according to my interpretation of the graph, below:

Year	Kupe Gas	Value	Resource Depreciation	Net
	(GJ)	Received	and Amortization	Proceeds
Total (2016 to 2018 inclusive)	64.3E06	$324,963,186	$116,306,640	$208,656,546
PV per share				$0.22
PV per share (tax paid)				$0.16

Now one PJ is equivalent to one million GJ. So from a Genesis Energy shareholding perspective, I was assuming 64.3PJ of recoverable gas in the field. Yet the revised 2P figure after field revaluation only came to 50.2PJ. So what is the casue of this discrepancy? There are many possibilities. But the important point to note is that because I am assuming more gas is pulled out of the ground than Genesis can claim to own, I have if anything overestimated the value of Kupe to Genesis Energy.

SNOOPY