Chairman & CEO Address at Auckland Investor Briefing 2014
Auckland Investor Briefing
Great Northern Room, Ellerslie Auckland Racing Club, 80 Ascot Ave
12 Noon Tuesday, 26 August 2014.
Peter Griffiths, Chairman, New Zealand Oil & Gas
This Auckland Investor Briefing represents a departure from our practice in the past. Previously we have always held the briefing on the same day as the Annual General Meeting in Auckland.
But this morning we released our Annual Results for the financial year just completed. It seems appropriate to discuss your company’s performance and our strategies while the data is fresh.
The strategic decision that underlies everything we do is that our role as a company is to be New Zealand’s oil and gas explorers.
What makes us New Zealand? There’s our name, the location of our head office, our ownership by 14,000 New Zealanders. But what really being a New Zealand company means is our set of New Zealand values.
We want to be seen as a dependable, capable and sought-after partner, both for commercial partners and for the communities where we work. The way we achieve that in practice is to work with integrity, being open, transparent and constructive, and seeking relationships that are mutually beneficial.
This strategy gives us a unique position in the marketplace - the company that commercial partners want on their team and the partner that communities welcome and trust.
In the past year our role in the New Zealand exploration sector resulted in Woodside’s decision to partner with us for a New Zealand country-entry. That was a vote of confidence by a very large and significant player. It provides us with the opportunity to participate in the exciting frontier stories that are bringing global majors to New Zealand. So it’s an example of how our strategy of being partner of choice allows us to build the strongest exploration portfolio we can, while maintaining a focus on the efficient operation of our asset base
Looking ahead, the strategy will need to achieve balance between further exploration and dividends that provide an immediate return to shareholders.
The Board has made a decision to fix the dividend for the half year at 3 cents per share, maintaining the full year dividend at 6 cents per share.
This return will allow us to maintain a targeted exploration spend in the coming year of around US$35 million
We need to invest to grow shareholder value in future. The opportunities that come from partnering with a company like Woodside in deepwater prospects off Taranaki and in the Great South Basin are exciting - but they are also demanding. It takes considerable resource to explore in deepwater frontier plays.
We manage that by balancing the portfolio across geology, geography, markets, regulatory regimes, and maturity.
Our onshore successes in Kisaran are an example, where wells are cheaper to drill, with the other side of the coin being smaller target resources. A final investment decision at Kisaran is still to be made, but if it goes ahead, the production from there would add a new strand of revenue.
We can continue to pursue our strategic options because of the strong operating cash-flow we have achieved in our producing fields this year.
A couple of achievements stand out for special mention.
We have announced today that the cost of purchasing a greater share of Tui has already been recovered. This is remarkable.
Tui is a declining asset, and even with our extra share of it, returns from the field are lower than last year’s. Next year we will have production from Pateke to boost Tui production some more.
Revenue from Kupe was also up, with contributions from accelerated gas sales and from the settlement of negotiations around over-riding royalties.
It all added up to strong operating cash flows that will fund further growth, allows us to maintain a dividend this year, and preserves the balance sheet strength for future growth.
This is a sound story that I am proud to commend to you as shareholders.
I would now like to invite Andrew Knight to discuss more of the specifics of this year’s result.
Andrew Knight, Chief Executive, New Zealand Oil & Gas
Operational performance over the last year has been excellent.
This is reflected in the strong production and operating cash-flow results.
The cash-flow from operations result, year on year, is very strong: Up by 62 per cent from about 54 million to 88 million dollars.
The primary driver of that was our success in getting more value out of our existing assets. Kupe production was steady throughout the year. One reason for increased performance was that there was a maintenance shut-in at Kupe in the previous year.
Alongside the steady production this year, gas sales contracts have been accelerated.
Sales from Tui would have declined much more this year as the reserves in the field deplete.
But in fact Tui performance has been another part of our success story after we increased our share of the Tui fields from 12.5 per cent to 27.5 per cent by buying some of Mitsui’s interest.
Overall, revenue for the year was up by 4.7 per cent, from $99 million to $104 million.
The major contributors to that revenue were production from Tui and Kupe, offset by some foreign exchange losses caused by the strength of the New Zealand dollar.
There was also a positive impact of just over ten million dollars from the settlement of the Kupe overriding royalty.
The history of Kupe — and of the overriding royalty - is a diverting story with a few lessons for us today about successful exploration, and the timelines involved in recovering revenue.
So I’d like to take a minute to cover it.
Kupe-1 was first drilled in 1975 by Shell, BP and Todd. They had some hydrocarbon shows, but Kupe-1 was assessed as sub-commercial and plugged and abandoned, and the licence was handed back.
In 1981 New Zealand Oil & Gas started up, won the prospecting licence over Kupe and listed on the stock exchange.
The company farmed out a share in the Kupe prospect to the state owned oil company,
Petrocorp. It’s illuminating to see that the seismic surveys conducted back then indicated oil and gas reserves that were about ten per cent the size of the currently proven reserves. Anyway, New Zealand Oil & Gas as operator drilled Kupe in 1986 and had a discovery. Other companies bought an interest in return for promise to pay an extra share of future production. In the midst of all this there were corporate restructurings and reorganisations.
For example, Petrocorp was sold to Fletcher Challenge, which was also later broken up and sold.
The end result of it all was that two of the current partners in Kupe, Origin and Genesis, had an obligation to pay an extra share to New Zealand Oil & Gas - called an over-riding royalty. Origin’s obligation relates to 10 per cent of its 50 per cent share in Kupe; The Genesis obligation relates to 20 per cent of its 31 per cent share.
This year we were able to agree a settlement with Genesis, and talks with Origin are at a sufficiently advanced stage that we have included the anticipated settlement in this year’s accounts.
The settlement is worth around $10 million and it will add about a further $1-2 million a year to the company’s revenue in future.
Looking back over the Kupe story we can see some familiar patterns. It took a long time from when they first started exploring in Kupe in the early seventies, to first production in 2009.
It was a long time from the agreement to pay an overriding royalty to its impact in our financial statements today.
We can also see that exploration is an uncertain business. Initial failure was followed by persistence, and persistence produced success.
Kupe is a fantastic asset for us, and it will continue to produce for many years. Only the gas and light oil prospects in the permit are producing, but we are still looking in the permit for oil
as well as further gas and gas condensate.
What the founders of New Zealand Oil & Gas knew was that you can’t give up at the first set back. You have to keep investing in exploration to succeed. Kupe would not have become the valuable producing asset it is today without investment patience.
This is why, in the past year, we have recorded a high level of investment in exploration and evaluation - up 77 per cent from the previous year, to just under $75 million, and up from $9 million in 2012.
Exploration investment has had an impact on net profit, but we have been able to sustain the dividend even while we accessed the opportunities that exploration can bring.
Exploration is an exercise in balancing investment risk. If we don’t take risks we can’t replace and grow our reserves and asset base.
There were two exploration successes during the year.
The Pateke-4H well will by tied back to the Tui FPSO and it will increase production from the Tui fields from next year. We are still working on the size of the reservoir there. Engineers are modelling the porosity of the rock (that is, how fast the oil flows from it) and the pressure they are getting (which gives them idea of the size of the resource.)
The joint venture hasn’t come to a shared view yet. Our own calculations are consistent with the operator’s public, pre-drill estimates of around 2.5 million barrels of oil, or somewhere between 650,000 and 700,000 barrels net to us.
We also had drilling success at Kisaran, in Indonesia. The plan of development has been drafted there and it’s being worked through with the regulator. In a production sharing contract, the joint venture gets 85 per cent of the revenue from the field until it has been able to recover its development costs (and a margin). After that it receives 15 per cent of the production profits. So you can see that the regulator has a strong interest in the cost of development, and it has to be worked through.
If a final investment decision is made later this year, production will begin next year. It would involve a series of low cost wells each accessing a modest resource.
We have been strengthening our position in Indonesia because it offers opportunities that are complementary to our New Zealand portfolio.
The onshore prospects are lower cost to access, although they are often smaller targets.
They are similar in many ways to onshore Taranaki opportunities.
The Indonesia opportunity-set compliments the extension of our New Zealand portfolio into deepwater permits.
Peter Griffiths spoke earlier about our ability to attract Woodside as a partner. When other global majors look at New Zealand, they are seeing an attractive prospect in our frontier basins:
Shell and Statoil are looking off the north west of the North Island and out towards New Caledonia.
Woodside is with us in deepwater off Taranaki.
Anadarko is in Pegasus east of Wellington. They drilled outside our permits off South Canterbury last summer.
We are joining Woodside in the Great South Basin; and Shell is intending to drill there too.
Interest in New Zealand’s frontier basins is elevated. It’s a matter of time before someone has some success. I want us to be positioned to be part of success when it comes.
But operating in deepwater frontier basins requires considerable expertise and careful management of our portfolio to ensure we don’t get over-exposed. We need to invest enough to keep up.
We also need to be able to add value to our partners in these frontier basins. We are always looking for further opportunities to grow our production - as we did when we bought more production at Tui.If we find further opportunities to buy assets at value, and they fit our portfolio, we will need to take them.
So this review illustrates three key components in our strategy to grow shareholder value:
- First, looking to optimise current assets. We have been successful this year in getting more value out of both Kupe and Tui. There is more to do in Kupe, in particular.
- Second, we need to keep exploring across a range of geological, jurisdictional and investment risk-types. Our portfolio in Taranaki is looking full, and we have exposure in frontier basins in New Zealand. In Indonesia we have a portfolio of assets at a range of stages in the pipeline, including appraisal, seismic underway, and early stage evaluation. As different prospects get churned out of the portfolio we will look to add new exploration acreage in places where our New Zealand identity and values can provide a strategic opportunity.
- Third, we intend to be open to new opportunities to extend the asset base where there is value to be extracted. In the Kupe gas contracts and in our Tui extension we have proved we can be successful at this.
I believe we are well-positioned, with a strong balance sheet, and a value set that allows communities and commercial partners to want to work with us.
The next year will be about leveraging these advantages.
We will use our strong cash generation capability and our enduring community partnerships to deliver growth through exploration investment.
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Amended Prospectus Annual Meeting Annual Result Barque Block Offer Bohorok Canterbury Capital Return CEO Chairman Clipper Consents Received Consolidated Financial Statements Cue Energy Deed of Indemnity Directors Dividend Galleon Great South Basin Half Year Results Indonesia Investor Briefing Ironbark Kaheru Kakapo Kan Tan IV Karoro Kisaran Kohatukai Kupe Leaders Address Mahakam Hilir Management Management Matuku MNK Kisaran Oi Oi-2 Palmerah Baru Pateke IIII Paus Biru-1 PausBiru-1 Quarterly Report scheme scholarship program Seismic Survey Share Buyback Shareholders Stock Exchange Takeover Taranaki Te Kiri Toroa Tui Waru
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