nexus slumps on shrinking longtom

http://afr.com/p/business/companies/nexus_slumps_on_shrinking_longtom_J


Nexus Energy has written down the value of its Longtom gas asset by more than half after it cut the estimate of reserves in the field, triggering concerns among some analysts about its ability to service its debt.

Nexus slashed $163 million off the carrying value of the gas asset off the south-east coast, reducing it to about $148 million, after an independent assessment of reserves at the field cut proven volumes by 56 per cent.

The write-down will be included in Nexus’s first-half results, to be released today.

The downgrade had been well-flagged and chairman Michael Fowler yesterday pointed out that the remaining reserves still allow Nexus to meet its contract obligations with Santos, which processes gas from the deposit at its Patricia Baleen plant.

He dismissed suggestions the write-down could put Nexus in breach of covenants on the $80 million to 90 million of debt linked to Longtom.

But Wilson HTM analyst John Young said Nexus’s debt position was still a concern, particularly as it appeared Nexus would need to drill two more wells to extract all the reserves at Longtom, at a total cost of up to $180 million.

“I still want to check whether the company has the capacity to meet its debts as and when they fall due,” Mr Young said.

“Obviously there’s the Longtom debt – and there’s going to be less cash flow available for servicing that because some of that will be used on drilling these additional wells – but on top of that, there are convertible notes that need to be redeemed.”

The notes start to come due in 2013.

Mr Fowler noted that the revised reserves figure excludes resources in the yet-to-be-drilled Gemfish prospect, which had the potential to hold 200 billion cubic feet of gas and could be worth an additional “hundreds of millions of dollars” for Nexus.

Nexus sought to soften the impact of the Longtom write-down with more positive news on progress on the Crux deal with oil heavyweight Royal Dutch Shell which is on track to complete next month.

It also pointed to approaches by third parties keen to buy the company’s stake in the Crux asset, which is now set to be developed as an add-on to Shell’s $US12 billion Prelude floating liquefied natural gas project in the Browse Basin.

Nexus and Shell hammered out a deal in January that should see gas from Crux produced through Prelude. Shell is to take 80 per cent of a combined gas and liquids project at Crux, while Nexus will hold 17 per cent and Osaka Gas 3 per cent.

The deal included a put option that implies a value for Nexus’s stake of $637 million, more than double the company’s market value.

Nexus shares have, however, failed to respond as investors focused on the deferral in the development date for the deposit, now only expected after 2020.

The stock has slipped 23 per cent since the Crux deal was announced, closing yesterday at 20¢ and giving Nexus a market value of $265 million.

But Mr Fowler said yesterday that keen market interest in Nexus’s stake in Crux showed the deal did create value in the shorter term and was indeed a “company changer”.

“Our 17 per cent stake in the integrated project obviously puts us on the radar of those large international energy companies looking to secure LNG supplies,” Mr Fowler said.

Analysts said they expected Nexus to sell at least part of its stake in Crux, potentially using the proceeds to reduce debt.