On Wednesday NZO reported their interim half year results to December 31 sparking a significant breakout in the share price as the market begins to realise what we have been saying for the past several months. That this company (and PPP) has very significant cash flows from Tui. And NZO has two further projects closing in on production at Pike River and Kupe and its shares are fundamentally undervalued.
Our NZ correspondent participated in an analysts’ conference call after the result was announced and had the following to say:
“Wow, what a minter interim result from NZOG on Wednesday. And the 5 cents fully imputed dividend (for NZ shareholders) was a cruise missile that landed a direct hit on its target – the NZ investing public and as I write this the shares are now NZ$1.31.
By now you will be aware that they announced a NPAT of NZ$41m from turnover of NZ$91m. This equated to 15.7cps earnings for the 6 months.
Some points from the conference call worth noting: • The NZ$140m of tax losses reported in the 30 June 2007 accounts, only NZ$85m of these are available for use in the 30 June 2008 tax year. The $85m of losses are almost exhausted already and NZOG will be paying provisional company tax in March, so the April dividend will carry imputation credits accordingly. • The 5cps dividend is not an interim dividend, more a dividend to cover the whole financial year ending 30 June 07. The company intends to pay a reasonable proportion of profits each year as a dividend, but CEO David Salisbury (DS) said it was difficult to set a hard and fast dividend policy when faced with so many changing variables inherent to the oil business (ie. oil prices, capex requirements, changes in production etc). Fair enough. • when asked the potential size of the Momoho drill DS said the JV was not yet agreed on these figures and they will announce them when agreement is reached. Costs to drill Momoho looks to be around NZ$10m. • DS was asked whether successful Kupe development drilling would lead to a reserves upgrade and he replied that the analysis of such drillings is complex and can take several months to process and analyse. If such an upgrade was required, this information would not be known until towards the end of 2008 at the earliest. • DS advised that the Tui facility has continued to produce at 45,000 bopd and they had started to see some recent increase in water cut, but not to the point where oil production was decreasing at this stage. When asked to upgrade production figures to 30 June 2008, he stuck to the JV line of 12 million barrels. • DS noted very clearly that the company is completely fully funded based on current cash flow forecasting(barring a problem at Tui) and also with the debt facilities it has in place in all of its capex commitments at Kupe and also its Pike River rights issue participation. There is no need to raise additional capital. I would suggest this goes without saying that if they are able to paying a large dividend of 5cps, then they are fully funded. • DS noted that although Kupe has been developed as a gas project, that at current oil prices the liquids from the project currently represent two thirds of the estimated revenue of the project. • Also, when asked as to whether a discovery at Momoho has a market for its output, David noted that the liquids would be sold as normal, but any additional gas may be able to supply the gas to liquids plant in Taranaki that Methanex had recently decided to bring out of mothballs. • Whilst not being an oil trader, he personally does not see the price of oil dropping significantly in the near future and that current supply is very stretched to meet existing demand. • They do plan to drill further wells on their Taranaki licences in 2009, subject to joint venture approval, appropriate targets being assessed and rig availability. He noted that rig availability is a key issue in the industry at present. • When asked whether there are any further Kupe costs increases in the pipeline, he stuck with the JV figures of 10% above the $980M official JV figures as being the latest information. • It sounds like there is a contingency number built in there somewhere and it has been noted in the past most of these costs are denominated in US$ and the weaker US$ would be assisting the sums in this respect.
That all sounded good to me. Certainly it resulted in some very good press in the Thursday morning NZ papers and the results also featured on both main NZ news channels on Wednesday night. Also, Tui exports are positively influencing the NZ monthly trade figures and these figures are released worldwide in most money markets I would imagine and Tui gets a mention every time, month after month.
I have a personal opinion of what I think is in store for NZO in the medium term. Readers must note that these are my views and it is up to them to form their own opinion as mine could well be wrong.
We are all ‘big boys and girls’ so you have to make your own calls on this (the last time I used ‘big’ and ‘girl’ in this particular expression in a conversation with my girlfriend, she didn’t speak to me for a week, so be careful who you apply this to):
• It certainly begs the question that if Tui has produced significantly ahead of expectations and continues to do so, could this (or should this) lead to another reserves upgrade? • Having all seen the AED debacle at Puffin, I think the JV is being very conservative in its production and reserves forecasts and perhaps a de facto upgrade exists in there somewhere, but it is very unlikely the JV will officially acknowledge that (and certainly I must emphasise that NZOG is towing the JV line on this front, as they should). • Bear in mind none of us are reservoir engineers, so we are guessing, but I know which way I am leaning. It could simply be a case that a higher percentage of the oil in place is recoverable than first thought. I fully understand the JV’s desire not to spruik the market in this respect. We have to make our own judgements on this. They may never give such an upgrade (if indeed it is required at all), but the cash outcome of this could well end up sitting in their bank accounts eventually. • Similarly, if the Kupe development drilling goes according to plan and the current assessed reserves are confirmed, then the de-risking of the development would be worthy of a higher share price. Furthermore, given that Origin is leading this project and given the debacle at BassGas that they were associated with, does it further beg the question that these reserves may themselves also be on the conservative side? It is probably foolish to extrapolate the Tui experience across to a different project at Kupe, but if the development drilling there is successful, I suspect this may also give potential for a reserves upgrade down the track somewhere. • Bear in mind the Momoho prospect is only 5km from the Kupe platform and in the offshore oil business that is no more than a walk down to the shops. We need to be very cognisant of the fact that if Momoho discovers the same gassy liquids in commercial quantities, then having already spent the capex at the Kupe facilities both on and offshore, the minimal additional cost to produce a discovery like this could be very significant to the economics of the whole Kupe project. • For a $10M risk, the return to NZOG of a decent size success at Momoho could be many many multiples of the cost to drill this well. I would call this a “wildcat with nearby infrastructure” rather than just a straight wildcat. I do not think the market has grasped the significance of this yet. We all seem to be dancing in the streets with the success of Tui. This is however vershadowing the point that Kupe looks like it will be at least as big as Tui, if not bigger. • So really NZOG has two groundbreaking projects and only one of them is up and running at present, yet on its own has delivered a stellar result. • We need to really think what this could do to the company results when (an albeit reduced) Tui revenue and new Kupe revenue is produced in the same year. Just close your eyes for a minute and think about that. • The coal price assumption used in the Pike River Coal prospectus was US$95 a tonne. There are reports in the press that this figure could well be set at US$150 a tonne for the current contract year starting 1 April. Notwithstanding an increase in the number of PRC shares on issue as a result of the current rights issue, an increase in your main revenue variable from $95 to $150 can only lead to a significant increase in earnings. • Bear in mind PRC is a one project company and I cannot personally myself see it expanding into anything else, so once it is on top of it debt obligations, then that would have to be a pretty chunky dividend flow that its shareholders would be getting and NZO owns 31% of this company.
Disclosure of interest: I am both a NZOG and PPP ordinary shareholder.
NZO Price at posting:
0.0¢ Sentiment: ST Buy Disclosure: Held
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