the economic case for my return

New post on Richard Cottee and Nexus Energy - What's going on?

The economic case for my return
by richardcottee

To date I have covered my dismissal and some corporate governance issues. The philosophical point is simple enough: corporate governance is important because a board and management must be single-mindedly focused and motivated by the creation of shareholder wealth. Otherwise the creation of shareholder wealth is left to happenstance. The real reason why people invest in stocks is because they believe the board will deliver a return on their investment, rather than some hope that they might!

Today I will explain why I believe the removal of the executive chairman, the executive chairman of the remuneration committee and the chairman of the audit committee, to be replaced by the directors in the proposed EGM notice, will be more likely to create superior returns for the shareholder, and not fall short and collapse, as has happened before.

When I came to Nexus it had four main problems namely:
1) balance sheet;
2) cash-flow management which exposed an over-dependence on Longtom performance;
3) the deal with Shell in which it sold the gas rights to Crux (and any future discoveries in the title area) and agreed to a back-stop date on which it would hand-over title to Shell; and
4) a title condition on Crux which required the commencement of Commercial recovery operations by Feb 2014.

The first 2 problems were addressed in my first year though the over-dependence on Longtom can only be finally resolved by development of any one of Crux, Echuca Shoals or Longtom South.

It is the resolution of the last 2 issues which remain the challenge – they are long standing. They are also the key to shareholder wealth in the short-term with the successful resolution leading to untold opportunities to a well-managed mid-tier oil and gas company in a resource-constrained world. What a platform for QGC-like wealth creating performance!

Under the strategy which Mike Maloney and I developed to address the last 2 items Nexus was to reach FID on Crux by late November by farming down 35% of Crux and tying the farm-down to the financing of Crux. Mike was to concentrate on getting the engineering in a state acceptable to the financiers and I was to concentrate on the financing and farm-down. I was hopeful that the tremendous efforts in this regard were sufficiently advanced that the issue could be resolved by the AGM. My concern was that the board always seems to believe that it has a stronger hand than it has in reality, and would continue to over-play its hand. This may work for big companies with multiple assets. But for small companies with huge immutable time constraints and an uncertain economic climate it is potentially fatal. Indeed on my dismissal, the A FR reported a Merrill Lynch analyst saying that the outcome could lead to the liquidation of Nexus! Once one overly believes in one's own propaganda, without planning for the inevitable one minute to midnight issues, you are almost destined to fail.

Clearly our strategy to address problems 3&4 above required an experienced commercial management which knew how to close (as opposed to promising to close) complex multi-dimensional deals. The track record of Nexus is not the best. In my view the prospects are worse when the board assumes the mantle of management.

The counter-party to the Echuca Shoals deal has advised me that the deal could be resurrected if I returned to Nexus. The recent Nexus presentations confirm that my strategy outlined above is on track, though apparently already falling behind time. It is difficult to believe that the return of the person who set up the deals would not improve the likelihood of their closure. There was no interface with the board members with those parties prior to my dismissal.

Reaching FID on Crux, whilst in itself important, was not the only outcome. Contiguous to the Crux discovery there are 2 good prospects, particularly Auriga. With both Crux FID and Echuca Shoals farm-down there was the possibility of including in the Crux drilling campaign exploration wells at Auriga etc and Echuca Shoals; drilling them first and if successful returning after the development wells on Crux to develop them. Success at the contiguous Crux prospects would arrest the decline in the condensate to gas ratio (“CGR”) after years 3/4 with a quantum leap forward in the economics - more product for minimal extra costs. Success at Echuca Shoals was even more tantalising as it could lead to Nexus being a participant in an exciting FLNG project.

This was all in front of me provided I had board support. It still is if the shareholders have confidence in me, and assert themselves over their board. The choice the shareholders must make is: do they think the board acting also as executives, creates a better prospect of closing my strategy than the alternative which I am offering. The choice and decision are for shareholders.

No doubt in keeping with a ‘Nexus tradition’ there will be the AGM eve announcement stating that the deal is imminent. Please take into account the track-record of such announcements. Deal announcements come only when the ‘ink is on the paper’ – promises are just talk. I ask you also to judge me – and the board - on their record of performance.

Shareholders need to act at the AGM

The quickest and most direct way to get Nexus back on track is for shareholders to vote “NO” to the following resolutions:
1) Remuneration Report
2) Re-election of Director – Mr Michael Fowler
3) Re-election of Director – Mr Michael Arnett
5) Approval of Executive Director and Employee Plan

And vote “YES” to Resolution 4) Re-election of Director – Mr John Hartwell, and Resolution 6) Appointment of Auditor.
The remaining board members (they still have a quorum) will have received a clear instruction from the shareholders which would clear the way for the appointment of myself and the other directors as proposed in the EGM notice. That would also avoid the need for the EGM to proceed.

If, on the other hand Nexus shareholders vote at the AGM to return Mr Fowler and Mr Arnett, and vote to accept their Remuneration Report and Executive Director and Employee Plan, then it will be a clear message to me that I lack the shareholder support to return to Nexus. In that case also there is no reason for me to continue with the EGM.

If not I have no desire to be in charge of what may turn out to be a train wreck where the shareholders have made their choice. There is a future outside Nexus for me and I am content to go to that future with a clear conscience having given the shareholders a choice.

Recommended Actions for Shareholders

1. Complete the NXS AGM proxies recording your vote for resolutions. I have indicated how I will be voting.
2. Email a copy to [email protected]
3. Download and execute the Nexus Energy - Shareholder EGM Requisition Form. Email a copy of this signed EGM Requisition document to [email protected] and then mail original to:-

Gadens Lawyers,
Level 25,
600 Bourke St
Melbourne Vic 3000