GNE - Genesis Energy

[Snoopy]

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.

OK I have gone into detail as to how I have modelled the PJ of gas available to Genesis in the Kupe field. I will save readers the details of the similar exercise I did to derive:

a/ the kilotonnes of LPG and
b/ millions of barrels of light oil

that is the Genesis share of the Kupe resource.

But I will summarize the production figures that I used in deriving the value of Kupe to Genesis, compared to the resource that is on record as available to Genesis from their shareholding in Kupe.

Kupe	2P Reserves assumed by Snoopy valuation model at 30 June 2015	Actual 2P Revised Reserves at 30 June 2015 (GNE share)
Sales gas (PJ)	64.3 (+28%)	50.2
LPG (kilotonnes)	269 (+28%)	210
Light Oil (millions of barrels)	3.1 (+35%)	2.3

Readers will see that as well as overestimating the gas available for sale, I have also overestimated the amount of LPG condensate and light oil available for sale as well! The fact that all figures are consistently high would indicate that if I have made an error, then it is likely to be a 'conceptual mistake', not a 'procedural mistake'. The light oil overestimate error looks worst. But this could be explained by the fact that the oil figures were the least precise to begin with. So in my assessment it is the imprecision of the 'Genesis share of the revised field data' to begin with that has created this anomoly.

Nevertheless any overestimate of value on my behalf simply means that my valuations should be regarded as 'maximum' estimates. When I end up removing the overestimated value of Kupe to Genesis from the rest of Genesis, this will underestimate the value of what is left of Genesis. IOW I will overall be making a conservative valuation of Genesis when it eventually comes out!

SNOOPY

[fish]

Thanks for that thorough research snoopy.
Not the increase in value of increased reserves I expected.
I look forward to your valuation of genesis.

[Snoopy]

Thanks for that thorough research snoopy.
Not the increase in value of increased reserves I expected.
I look forward to your valuation of genesis.

Given my acknowledged 'errors', I have been staring today at the 'FY2016 NZOG Annual Report' and the actual and forecast 2P (Proven & Probable) production forecast. It now goes out to 2035. I was thinking, how can the owners of the Kupe field possibly know how much oil/lpg/gas will be produced from 18 years into the future? Then the answer hit me. They don't know! They can't possibly know, as evidenced by the recent revision upwards of reserves during FY2016 as new information was forthcoming.

I have no doubt that NZOG are experienced oil/gas investors and can draw on data both publically available and not, from their own experience. This means they can make an educated and informed guess at what might happen. But to actually know what will happen in 18-20 years time - no chance! So my proposition is that the Kupe '2P' production graph, once it goes out a few years, cannot be reliable. What do you think Oil and Gas investors? Am I on to something?

SNOOPY

[Hectorplains]

[QUOTE This means they can make an educated and informed guess at what might happen. But to actually know what will happen in 18-20 years time - no chance! So my proposition is that the Kupe '2P' production graph, once it goes out a few years, cannot be reliable. What do you think Oil and Gas investors? Am I on to something?

SNOOPY[/QUOTE]

Yep, that's what a 'prediction', or 'guess' - if you want to use the more pejorative synonym, is. It's reliable like a weather forecast, a broker's fair price or the Black Caps.

[Snoopy]

Yep, that's what a 'prediction', or 'guess' - if you want to use the more pejorative synonym, is. It's reliable like a weather forecast, a broker's fair price or the Black Caps.

I have been reworking my Genesis Energy Kupe production schedule, based on the latest projections in the NZOG AR2016 "Actual and Forecast 2P Production". The projections go out in a slow decay to year 2034. But I have stopped at year 2028, to compile the figures below.

Kupe	2P Reserves assumed by Snoopy valuation model at 30 June 2016 but from 30/06/2015	2P Reserves assumed by Snoopy valuation model at 30 June 2015	Actual 2P Revised Reserves at 30 June 2015 (GNE share)
Sales gas (PJ)	74.5 (+48%)	64.3 (+28%)	50.2
LPG (kilotonnes)	277 (+32%)	269 (+28%)	210
Light Oil (millions of barrels)	3.3 (+43%)	3.1 (+35%)	2.3

As you can see, the total production I will be assuming in my upcoming reevaluation of the field production data is even further above the 2P (Proven and Probable) reserves than I have been assuming up to now.

One thing missing from my analysis is any information on further incremental Kupe field production costs that are required to keep the forecast production schedule on track. We are told such expenditure has been pushed further out into the future than originally expected. But we have no information on what these costs might be. And this information is required to properly assess Kupe field profitability. It seems 'not right' to continue to book future gross returns, beyond 2028, as 'profits' when we have no information on the likely costs incurred to gain those profits.

Further, it seems clear that the '2P' production hinted at in the annually published NZOG projected field production data must contain more product that that deemed 'proven' and 'probable'. It must contain some of the 'possible' (part of the 3P 'proven', 'probable' and 'possible' Reserve Set) as well.

In summary, my next 'gas' and 'condensate' spreadsheet will be providing a 'hopeful high' valuation of Kupe as it relates to Genesis Energy. If we keep in mind the Genesis Energy valuation equation:

'Genesis Energy' = 'Genesis Gentailer' + 'Genesis Kupe'

then assuming 'Genesis Kupe' is valued slightly highly, this means that 'Genesis Gentailer' will be valued slightly lower than it should be when I do the

'Genesis Energy (market value)' - 'Genesis Kupe' = 'Genesis Gentailer'

subtraction.

SNOOPY

[Bobdn]

Newspaper article in 2012 said Kupe had a 15 to 20 year life span. That's plenty for me and, as I'm getting on in years, there's a reasonable chance I'll run out before Kupe does.

[fish]

Newspaper article in 2012 said Kupe had a 15 to 20 year life span. That's plenty for me and, as I'm getting on in years, there's a reasonable chance I'll run out before Kupe does.

Kupe will not run out its just that one day the costs of production will exceed the value of the products and then the field will be sealed.
As you can see there are so many inherent variables-as Snoopy is finding out-that we dont know how long the field will be profitable.
So far production and reserves has exceeded initial expectations.

[Zaphod]

Kupe will not run out its just that one day the costs of production will exceed the value of the products and then the field will be sealed.
As you can see there are so many inherent variables-as Snoopy is finding out-that we dont know how long the field will be profitable.
So far production and reserves has exceeded initial expectations.

Adding to the above, we may also see additional extensions to the life of the field in depending upon further advances in extraction technology and as the price of oil rises back to previous levels making extraction of the last barrels economic.

[Snoopy]

The reserves extracted during FY2016 have been officially 'depleted'. So what is the value of the oil and natural gas still in the ground in Kupe to 'Genesis Eneregy' today?

Year	No. of Oil & LPG	Oil Barrel	Kupe Condensate	Resource Depreciation	Net
	Equiv barrels	Price USD	Revenue	and Amortization	Proceeds
2017	620000	57.01	$53,070,511	$15,335,747	$37,734,763
2018	579000	53.58	$39,921,568	$14,262,245	$25,659,322
2019	537000	50	$32,253,563	$13,363,888	$18,989,675
2020	558000	50	$31,168,834	$12,235,416	$18,833,418
2021	476000	50	$24,727,275	$11,471,937	$13,255,338
2022	393000	50	$18,986,495	$10,668,901	$8,317,924
2023	434000	50	$19,499,565	$9,922,078	$9,577,487
2024	393000	50	$16,421,420	$9,227,533	$7,193,887
2025	269000	50	$10,453,299		$10,453,299
2026	227000	50	$8,203,702		$8,203,702
2027	145000	50	$4,873,433		$4,873,433
2028	62000	50	$1,937,946		$1,937,946
Total	4.693E06		$261,717,609	$96,487,745	$165,029,864
PV per share					$0.17
PV per share (tax paid)					$0.12

A few things have changed year to year.

1/ I have updated the FY2017 and FY2018 hedged positions for oil in accordance with the forward hedging disclosed in the AR2016 results presentation.
2/ I have lifted my 'spot value' of oil from $US45 a barrel to $US50 a barrel, in light of the rallying oil price on world markets over the last six months. In addition my 'spot value' exchange rate is now $NZ1 = $US0.72, up from $NZ1 = $US0.66.
3/ The depreciation that I previously modelled over 7 years from FY2016 inclusive has now been modelled over 8 years from FY2017 inclusive. Furthermore, because oil is now a lesser share of revenue, in percentage terms, the proportion of Kupe field depreciation that I have apportioned to oil has reduced.
4/ The discount rate for future cashflows remains at 7%.

The result, a mere 1cps decrease in the financial value of reserves after a full years operation, would have to be pleasing to shareholders. Previously undisclosed relatively favourable hedging positions to current market prices have helped. The rise in spot price I have assumed from USD45 to USD50 a barrel has been partially undone by the consummate rise in exchange rate. The slowing rate of depreciation and amortisation at Kupe is perhaps the most significant effect in the 'increased valuation' (when compared year on year).

What follows below is a look at the oil and condensate slated for production, but this time using the production schedule graphed in the FY2016 NZOG annual report.

Year	No. of Oil & LPG	Oil Barrel	Kupe Condensate	Resource Depreciation	Net
	Equiv barrels	Price USD	Revenue	and Amortization	Proceeds
2017	640000	57.01	$54,782,462	$15,335,747	$39,446,715
2018	515000	53.58	$35,508,821	$14,262,245	$21,246,576
2019	475000	50	$28,529,688	$13,363,888	$15,265,800
2020	395000	50	$22,063,959	$12,235,416	$9,728,544
2021	415000	50	$21,558,443	$11,471,937	$10,086,507
2022	415000	50	$20,049,352	$10,668,901	$9,380,451
2023	415000	50	$18,645,898	$9,922,078	$8,723,820
2024	515000	50	$21,519,163	$9,227,533	$12,291,630
2025	370000	50	$14,378,144		$14,378,144
2026	310000	50	$11,203,294		$11,203,294
2027	270000	50	$9,074,668		$9,074,688
2028	115500	50	$3,610,206		$3,610,206
Total	4.8505E06		$260,924,098	$96,487,745	$164,436,353
PV per share					$0.16
PV per share (tax paid)					$0.12

Note that slightly more oil and LPG is forecast to be produced overall. Also note that volume of production is already slated to be pushed out more over the later years being examined. Overall the revised extraction timing and slightly larger volume extracted has lead to a decrease in the value of Kupe Oil (the Genesis part of it) by 1cps over iteration 1. This is largely due to the projected lesser oil harvest (slowed down because of the falling oil price?) in the near years, not quiet balanced out by the increased extraction in latter years due to the 'time value of money' effect.

SNOOPY

[Snoopy]

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?

Time to rerun the Kupe valuation model (natural gas component) , this time using the 2P production chart in the NZOG FY2016 annual report.

Year	Kupe Gas	Value	Resource Depreciation	Net
	(GJ)	Received	and Amortization	Proceeds
2017	5.80E06	$38,616,400	$15,364,253	$23,252,147
2018	6.10E06	$37,770,834	$14,288,755	$23,482,079
2019	6.00E06	$34,551,025	$13,288,542	$21,262,483
2020	5.70E06	$30,525,831	$12,358,344	$18,167,487
2021	5.70E06	$28,389,023	$11,493,260	$16,895,763
2022	5.70E06	$26,401,791	$10,688,732	$15,713,459
2023	5.70E06	$24,553,666	$9,940,521	$14,613,145
2024	5.30E06	$21,232,459	$9,244,684	$11,987,775
2025	5.80E06	$21,609,035	$0	$21,609,035
2026	5.80E06	$20,096,403	$0	$20,096,403
2027	5.80E06	$18,699,454	$0	$18,699,454
2028	4.50E06	$13,485,552	$0	$13,485,552
Total	6.79E07	$315,921,673	$96,667,090	$219,254,583
PV per share				$0.22
PV per share (tax paid)				$0.16

Again we are looking at lower near term production , but with a fatter 'tail' that more than makes up for the slower start. The mysterious 'increase in the amoung of gas available to sell' well above last years uprated 2P field revaluation is a big help in boosting the gas component of the Kupe revaluation.

SNOOPY