From stuff.co.nz
NZ Oil & Gas chief spreads good news about production
By BRUCE MCKAY - The Dominion Post | Wednesday, 17 October 2007
During the past couple of weeks David Salisbury, chief executive of NZ Oil & Gas, has been doing the rounds of the brokers and journalists doing what CEOs do not do often enough; meeting those people face to face and answering their questions.
Mr Salisbury joined NZ Oil & Gas earlier this year when the company was going through something of a quiet revolution.
As an exploration company, the prospects for revenue have often seemed somewhat distant, but now the company is enjoying its first real revenue in quite some time.
Also, NZ Oil & Gas has managed to get the Pike River IPO away after a few bumpy moments. Given the state of financial markets since August, it is an achievement to have raised $85 million from the public for a coal company.
But what's next?
Mr Salisbury's message is that the company is hunting for the next big thing, having boosted its exploration staff, and is ready to tackle some new offshore targets with all the cash flow coming in from, firstly, the Tui project and then from Kupe.
Though the company's share of these two projects is only 12.5 per cent and 15 per cent respectively, they are significant investments and profit generators.
The nature of the reserves means that Tui will flow strongly in the first couple of years and then rapidly reduce to a long tail, while Kupe, which is due to start production in the middle of 2009, will have a longer, more stable profile.
The company is planning to produce about two million barrels of oil equivalent on a continuing basis from both Tui and Kupe and from new discoveries. That's where the new staff come in.
One of the near-term opportunities for the company is drilling new wells in prospects that are near both the Tui and Kupe platforms.
The idea is that any new fields can be hooked into the existing production facilities, making the new fields relatively cheap to develop and prolonging the useful lives of the existing production assets.
There is also the possibility that the recoverable reserves estimates will increase from new drilling and testing in the existing fields.
The focus remains on offshore Taranaki assets rather than looking for new targets in areas such as the Southern Ocean.
NZ Oil & Gas knows the Taranaki structures very well and will continue to work in that area. It seems that the Taranaki basin is still highly prospective, even if a big replacement for Maui hasn't been found yet.
Mr Salisbury reckons that the company is in a good cash flow position, with no need to ask the bank or shareholders for money, at least in the foreseeable future.
The very nature of oil and gas exploration means that shareholders always risk being tapped on the shoulder for more money.
NZ Oil & Gas has a commitment to provide funding to Pike River. However, it would seem that if the company has to lend money to Pike River, it will do so only on commercially advantageous terms.
Mr Salisbury has been at pains to point out that the two companies are now separate entities in every sense, with the only contact between them at the board level.
It would also seem that NZ Oil & Gas will look to exit its holding in Pike River, but that is unlikely to happen for some time.
Pike River isn't due to start producing coal till March next year and any sale would probably happen only after Pike has established a production track record.
So will the company pay a dividend? It would seem unlikely.
Firstly, the company has $139 million of exploration and other tax losses that it can use, so it won't be generating any imputation credits in the foreseeable future.
It doesn't make sense for companies to pay dividends without imputation credits, so the most likely form of any payment to shareholders is likely to come from share buybacks.
Whether a share buyback programme is instigated remains to be seen as the only time a company should undertake a buyback is when the share price is trading at a deep discount to fair value.
In the oil and gas game it's a bit of a moot point to determine fair value, due to the volatility of the oil price.
NZ Oil & Gas has been in the NZX 50 Index for some time now, but is not that widely followed by analysts.
The company has more than 12,000 shareholders, but less than 20 per cent of the shares are held by institutional investors.
Given the "wall of money" hitting the market each week it seems surprising that the level of fund manager investment in the company is so low, given that it is in the headline index.
It could be that institutional investors have a hard time understanding the company.
There aren't many oil and gas analysts in New Zealand and the Australian analysts aren't about to divert their attention from much bigger companies in their own market to look at NZ Oil & Gas.
Another reason could be the need for the company to improve its corporate governance performance before institutional shareholders start taking more interest.
One of the issues here is the presence of Tony Radford as chairman of the company. He has been a key driver behind the company since it first listed in 1981.
However, at times the governance of the company has been somewhat opaque.
During the 1990s, Ron Brierley and GPG had a crack at Mr Radford and the cross shareholdings between related parties that were linked to NZ Oil & Gas.
While that has all gone away, it might be time for the company to look for a new chairman that has a good market profile and a sound corporate governance track record.
NZ Oil & Gas has certainly had a big year. The start of production from Kupe next year will be another major step forward and will provide ongoing cash flows and profits for the next few years.
Mr Salisbury's challenge is to find the next Tui and Kupe to ensure that the company can produce two million barrels a year. If he can do that, then one day the company may start paying tax and dividends will start to flow. That will be a major achievement.