GNE - Genesis Energy

[Bobdn]

On the Genesis website, Kupe is predicted to run dry by 2025. What's the deal now with the recent update?

[Snoopy]

On the Genesis website, Kupe is predicted to run dry by 2025. What's the deal now with the recent update?

The answer unfortunately Bobdn, is that the field life depends on several different things. As I base case I would assume that the extraction rate does not change. Work out today's extraction rate, then figure out how much more time the extra declared resouce will add to the field life in terms of years. Then you have an answer.

I believe that I have some understanding of the principles of gas field extraction, and a working knowledge of the laws of logic. But I am certainly no expert and have never worked in the gas extraction industry. So take my comments in that light, and please feel free to dissect them if you think that I have joined the wrong dots.

The first point I would make is that the Kupe field reservoir was declared larger in '2P' terms. Now 2P includes 'Proved' and 'Probable'. Genesis also said that the larger reservoir than expected means that they can defer further field exploration expenditure. Logic then tells me that the increased reservoir must fall into the 'proved' category, not 'probable'. Genesis are very definite about the deferral of further Kupe field exploration, so this implies that they know the field is bigger (1P), not merely that they probably believe the field to be bigger (2P). Yet 1P is a subset of 2P, so an increase in 1P (proved only) will automatically imply an increase of 2P (proved and probable) which is what was declared.

How does a field operator 'measure' that the reservior is larger than they think? I am guessing it is through pressure. The more gas/condensate compacted under the ground, the harder it will push to get out. This is how Genesis have declared the reserve to be larger without doing any significant more exploration work. To convert a 'probable' reserve to a 'proven', I think this means more drilling in an adjacent geotechnically similar petrochemical field pocket. You could look on a seabed map and have an educated guess as to where more resouces might be. But you won't actually know if resouces are there in an economically extractable form until you drill.

SNOOPY

[Bobdn]

Snoopy, thank you for your detailed answer which I devoured.

[Snoopy]

Time to use the latest extraction profile to update the all up value of Kupe Condensate (oil & LPG) as it applies to FY2016 up to and including the end (2028).

Year	No. of Oil & LPG
	Equiv barrels
Total	5.333E06

The 5,333,000 equivalent barrels of oil (condensate and LPG) in my table includes 3,141,000 barrels of condensate.

Compare this to the just 2,000,000 barrels of condensate of Genesis 2P 'light oil' after the just completed field evaluation and you can see my model is budgeting on extracting a lot more oil out of Kupe than the current 2P reserves.

My figures were obtained using data interpolated from the NZOG AR2015 which contained a fancy bar graph of all NZOG's projected Taranaki output, and a specific break down of what was due from Kupe. Worried at my apparent errors (+57% on petroleum reserves, +35% on gas reserves) I went back to that AR2015 NZOG graph and rescaled my input data again. The result though, was not meaningfully different.

My best explanation(s) at what is happening here is that:

1/ the NZOG Kupe field projected production data, stretching way out to 2028 (twelve years away) must contain some Kupe content that is currently 3P but is expected to become 2P in just a few years. After all, if more drilling will be required before 2028 to allow the field life to stretch that far, some of that information later in the graph in particular has to be educated guess work.

2/ Maybe the graph I am trying to scale data from is not drawn precisely enough to allow such data scaling to reliably take place. It all looks nicelty tarted up and flash in print. But put lipstick on a pig, and you still have a pig underneath.

Either way, it does appear that the just announced increased 2P reserves at Kupe are already built into my data, as is the next increase in reserves!

SNOOPY

[Snoopy]

Time to use the latest extraction profile to update the all up value of Kupe Condensate (oil & LPG) as it applies to FY2016 up to and including the end (2028).

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	$35,651,113
2017	620000	45	$39,558,818	$27,001,679	$12,567,139
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	$7,048,723
2021	476000	45	$23,291,139		$23,291,139
2022	393000	45	$17,995,312		$17,995,312
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	$126,897,802	$171,297,861
PV per share					$0.17
PV per share (tax paid)					$0.12

1/ Time value of money annual discount factor used: (1-0.0642)=0.9358

What we have here are changes in different figures leading to a result that is very similar.

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.

SNOOPY

[Snoopy]

The FY2015 annual report from NZOG has come out. This provides a better insight into the value of Kupe for FY2016 going forwards, because the projected production decay over time is more nuanced. So time to update my previous prediction of the wholesale value of Kupe gas (equity owned share only) to Genesis Energy.

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	$15,319,923
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	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				$0.21
PV per share (tax paid)				$0.15

Assumptions used:

1/ 80% of Gas at $NZ7/GJ (long term contract). 80% of Gas at $NZ5.80/GJ (spot price).

Prices sourced from here:
http://www.mbie.govt.nz/info-service...ry/prices.xlsx

2/ Time value of money annual discount factor used: (1-0.0642)=0.9358

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

SNOOPY

[xafalcon]

So based on your updated figures, which include the revised 2P reserves, the increase in company value as a result of the revised 2P reserves is

(($0.13 + $0.15) / 1.33) x 33% = $0.07 contribution per share. A 3.7% increase based on current SP

Or should I be working on pre-tax, since this is company value rather than profit/distributions to shareholders?

In which case, (($0.18 + $0.21) / 1.33) x 33% = $0.10 contribution per share. A 5.1% increase based on current SP

[Hectorplains]

Anyone have a take on Marc England's appointment?

[Snoopy]

So based on your updated figures, which include the revised 2P reserves,

xafalcon, using the gas figures as an example:

1/ my first iteration for FY2016 (based on the FY2014 NZOG annual report graph) modelled the field with 7.00E07GJ of gas.
2/ my second iteration for FY2016 (based on the FY2015 NZOG annual report graph) modelled the field with 6.43E07GJ of gas.
3/ my third iteration for FY2016 (based on the FY2015 NZOG annual report graph), but now stretching the depletion and depreciation costs over seven years , not five, modelled the field with 6.43E07GJ of gas (same as iteration 2).

All of these three iterations were based on graphs of P&P field contents before the October 1st 2015 measured field content re-evaluation.

After the field has be reevaluated we are told the gas content as at 1st October 2015 is 4.77E07 GJ.

This is less than any of the amount of gas I was modelling in iterations 1, 2 or 3. So I have to conclude that all three of my attempts to model the present value of equity accounted wholesale gas owned by GNE all unwittingly include the updated field revaluation contents, even though the re-evaluation was announced after the data I was working with was released!

It was lucky I was able to telepathically incorporate this information before it was announced, as well as the next field upgrade that hasn't yet been announced ;-). Or maybe the data I am using, all interpolated from NZOG bar graphs remember) is a bit sloppy? I guess what I am saying is that there was no 'before' and 'after' field upgrade modelling. It ended up all being 'after', even though I didn't know it at the time!

So I can't really give a 'before' and after' comparison! The bit about extending the depletion and depreciation (iteration 3) is really only a half pie accounting adjustment.

the increase in company value as a result of the revised 2P reserves is

(($0.13 + $0.15) / 1.33) x 33% = $0.07 contribution per share. A 3.7% increase based on current SP

Or should I be working on pre-tax, since this is company value rather than profit/distributions to shareholders?

In which case, (($0.18 + $0.21) / 1.33) x 33% = $0.10 contribution per share. A 5.1% increase based on current SP

I am using 'post tax' for my comparison purposes. (*) Adjusting the depletion and depreciation rates from five to seven years gives (the before and after between iterations 2 and 3) .

1/ the improvement for gas is 16c - 15c = 1c
2/ the improvement for petroleum is 13c -12c = 1c

I make that a grand total of 2cps : YAY! (or maybe that should be yay!). Hardly enough to get too excited about. Maybe that's why the market didn't excatly leap on the day the announcement was made?

SNOOPY

(*) Note: I have subsequently changed my mind and decided the field should be valued on a pre-tax basis.

[Snoopy]

Anyone have a take on Marc England's appointment?

It is interesting that unlike Mighty River, Genesis have chosen an external candidate for the top job.

From the announcement:

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"His vision, strategy and execution track record is exactly what Genesis Energy needs as we enter our next chapter to fulfil our aspirations of delivering further value for our customers, shareholders and stakeholders”, Dame Jenny said."

"Marc’s general management experience is also underpinned by strong finance, strategy, marketing and procurement experience with leading blue chip companies in the industrial sector. He has an MBA from the highly regarded Imperial College, London, and a degree in Mechanical Engineering. Marc also brings a very good understanding of investments like Kupe, from his time at Halliburton Energy Services in the Oman as a Petroleum Engineer."

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Genesis seems to have been in a kind of limbo since the government forced aquisition of Tekapo. It sounds like Dame Jenny is expecting Mark to 'shake things up'!

SNOOPY