Why do you think Genesis is prepared to pay such a premium.
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Why do you think Genesis is prepared to pay such a premium.
Neopole asked:
First:
While reading the report I noticed a graph projecting the POO into the future and the graph say the POO will be about US$70 in 10 years from now?
How did they work this out?
Most of OPEC cant survive with sub $70 ....all you have to do is read the news to see the damage done in OPEC countries.
ANDREW SAYS:
We use a forward price of oil based on the Bloomberg consensus curve (we use a modified curve that removes predictions older than 180 days). This is an industry standard forecast.
You may be right that the oil price will be higher. It also may be lower. To value an asset fairly we have to make a decision on a reasonable basis, and the consensus curve provides a way to do that. A consensus curve is the average of the prediction of a range of analysts about the future price for years into the future.
The Northington Report uses a valuation method similar to this, although it uses a range of sources to forecast a forward price curve, including the Bloomberg curve. It also forecasts higher and lower cases. Those are displayed in the report on page 17, and the resulting impact of the valuation is included. The price we have achieved for Kupe is a premium even to the high case.
It's also important to remember that the present value of revenue ten years away is much less than revenue today, and consequently has a much smaller impact on the overall valuation. So a higher oil price ten years away has a small impact on valuations compared to earnings this year.
Neopole also mentions:
"if they don't buy assets they might distribute more cash.....earning 3% on cash is a lot less than Kupe income especially since the Saudis need to raise the POO."
ANDREW SAYS:
You are right, there is not much point in us sitting on huge piles of cash. That's why we are returning $100 million to shareholders, and if we can't find an acquisition where we can earn a better return than the cash rate shareholders would be better off with the rest as well. But I am confident that we can find opportunities that will earn a productive return, as well as provide opportunities for enhancement, even after shareholders enjoy a return of $100 million.
It should be remembered that since 2012 the company has returned about $150 million to shareholders by way of dividends and capital returns. We are not sitting on unnecessarily high cash balances.
ANDREW SAYS:
You would need to ask Genesis but from our point of view that have strategic reasons to want more of Kupe in their portfolio to do with uncertainty around uncertainties in the electricity market that could impact the gas sector.
It's unlikely that the SP would return back to 50 cents if a decision to not sell Kupe occurs. OPEC have cut production and oil price is looking to hit $60 pb. With NZO's decision to put any exploration on hold for sometime.. this represents good income for the company and in retaining Kupe the future looks bright.
What discount rate was applied in the net present value calculation ?
Shareholders need to arrive at their own conclusion about what is likely to happen to the shareprice if the transaction does not proceed, but the markets were valuing Kupe at effectively $60-80 million prior to the transaction being announced, based on the market cap less our cash, and market value of Cue. We agree Kuep's future cashflows look bright but we can realise all those potential cashflows, including the upside, through this transaction today without the risk.
Thanks for your questions, sharetraders. Please email us at enquiries@nzog.com if you have further questions or comments. Please remember to vote and/or attend the meeting on the 16th. Thanks again - ANDREW JEFFERIES.