Chairman''s Address, Annual Meeting 2016
10.00AM Thursday, 27 October 2016 Te Wharewaka Centre, Wellington
Good morning ladies and gentlemen.
As a quorum is present I call the meeting to order.
I would like to welcome you to the 2016 New Zealand Oil & Gas annual meeting.
In addition to the shareholders in the room I am advised we have received
proxies and postal votes for 123 million shares representing some 37% of the
company''s capital.
I would like to begin by introducing my fellow members of the Board. Shortly
I would like to introduce you to our acting-CEO Andrew Jefferies.
It''s the first time he has had the opportunity to speak to shareholders, and
with his background as an engineer he will be able to go into some detail
about our operational activity.
Later the meeting will turn to shareholders'' questions and then we will deal
with the election of directors foreshadowed in the notice of meeting.
We will hear from both of the director nominees, and you will have the
opportunity to put questions to them. After the meeting, please join us for a
cup of tea.
I would like to focus my remarks on the Board''s strategy, including our plans
for growth, our tight focus on cost containment, and I know many of you are
interested in our ongoing approach to capital management.
I am very pleased that earlier this week shareholders received a fully
imputed dividend of four cents per share.
Together with a 35 per cent increase in share price since the market opened
for the year in January, the dividend means that shareholders are 45 per cent
better off over all for the year to date.
Distributions resumed following several reforms that have been put in place
since the company chose not to declare a dividend when it was not in a
tax-paying position, which in turn meant it was not producing imputation
credits.
We have been able to minimise our cash burn.
We have changed our method of accounting so that exploration spending is
immediately expensed, unless it leads to a successful discovery of
hydrocarbons.
We have also pulled back on exploration because, in the current environment,
oil prices are considerably lower than they were two or three years ago.
As a consequence, the company has been able to move through the downturn in
oil prices with significantly positive cashflows, which we are now able to
distribute.
In September, the shareholder-approved program of buying back shares
accelerated with a liquidity event, when we were able to purchase around 17
million shares on-market.
Together with other purchases we have now bought back and cancelled around 6
per cent of our capital base.
I see a statement of considerable confidence in the company from that event,
because we would have been prepared to buy many more shares at that price,
which was a premium to the recent market price.
That there were not more sellers demonstrates confidence the business is on
the right track and positioned to deliver further growth and further gains
for shareholders.
Our share buyback will continue.
So I would like to turn attention to the areas where the board sees future
performance.
First, we will continue to keep tight control of our costs.
We have seen the effectiveness of this in the past year. For example, head
office employee costs this year are down by 35 per cent. Other overhead costs
have also been reduced.
While we have been able to achieve savings, we have been able to maintain a
focus on health and safety, where our biggest exposure is through our
non-operated joint ventures.
Both management and the Board want New Zealand Oil & Gas to be known by our
joint venture partners for our insistent focus on health and safety
processes.
We insist on reviewing near misses incidents and accidents, audit joint
facilities and ask tough questions over and over.
One of the greatest insights from health and safety practitioners is that
businesses which get their health and safety processes right also get other
business processes right and tend to be well-run operationally.
So our active involvement in non-operated joint ventures helps to deliver
better performance from our assets, and helps to deliver cost savings.
While we are taking a hard look at our costs, the drill bit looks less of a
priority as oil prices remain subdued.
We have been exiting our lower priority exploration acreage around New
Zealand.
The remaining prospects are deepwater, very large potential blocks that can
only be accessed after lengthy investigation.
The Clipper permit off Canterbury is one example.
The Barque prospect in Clipper is a potential game changer for the Otago and
Canterbury regions, for New Zealand, and for our company if we were able to
drill it successfully.
I can update you today on the progress of Clipper: We have recently received
approval from the regulator for a change of conditions, which allows us to
continue further analysis.
Potential partners are actively screening the data and reviewing our
scientists'' work on Clipper.
Their interest is significant in economic conditions when frontier basins
like Canterbury have to clear high hurdles to beat the other opportunities on
offer around the world.
Likewise, our partner Woodside continues its analysis of deepwater prospects
in Taranaki and the Great South Basin, where we are seeking opportunities of
world class scale.
When we look at resources in New Zealand, however, one opportunity on our
radar is the potential to gain more from the producing Kupe field. Andrew
Jefferies will talk more to that shortly.
Kupe is our most valuable asset and a good model for the sort of asset we
would like to acquire more of - In a jurisdiction we understand, providing
resources into a market where we can achieve sound prices, and with long term
upside potential.
Other companies that have weaker balance sheets than ours are beginning to
bring similar assets to market. We screen them rigorously.
In the latest twelve months your executive has reviewed around 20
opportunities, none of which have met our investment hurdles.
We have a balance sheet capable of supporting acquisitions and the board is
prepared to move, but only where we see a clear pathway to value.
Last year our major acquisition was Cue Energy. In the last week you have
seen announcements that we have consolidated our Cue position to confirm we
control close to 50 per cent of it.
Cue has announced its intention to cut costs and exit low priority
exploration. It has already exited its New Zealand exploration acreage.
As the largest shareholder in Cue, we share with minority shareholders an
interest in better performance and value. I have great confidence in the
strategy and governance.
Ladies and gentlemen, you will be aware of the social context of our
industry.
In the past year virtually every government in the world signed up to the
Paris agreement on climate change and the New Zealand Government ratified it
recently, committing New Zealand to playing a part in reducing global carbon
emissions.
So I want to take a moment to talk about our role in this context.
The oil and gas we produce helps to power our way of life. More than half the
world''s primary energy today comes from oil and gas.
Oil helps to keep a billion cars on the road, 20,000 commercial jet airliners
in the air and 50,000 ships at sea.
Gas heats 40 per cent of the world''s homes, generates 22 per cent of the
world''s electricity and powers much of the world''s industry and
manufacturing.
Just about everything we use, buy, eat, wear or do requires fuel generated
from oil or gas.
So, while the world is transitioning to renewables, it will take decades for
the costs of new energy sources to fall to levels that make them realistic
replacements in the energy mix.
We need to meet energy needs during this transition.
Natural gas is a clean, accessible, affordable, reliable and flexible energy
source.
In parts of the world that rely heavily on coal - that''s most of the world -
natural gas can help reduce carbon emissions by replacing coal for uses such
as generating electricity.
At home, as the government is incentivising a switch away from carbon through
its emissions trading scheme, we have begun to prepare for increasing
emissions liability.
So we have a role to play in the energy mix and we will have for a long time
into the future. We do need to tell our story.
It''s essential to earn the trust and support of our community.
That''s why I am proud of the work we are doing.
Our company has community panels to provide a sounding board so that we
better understand outside perspectives on our activity - as well as to advise
us on social investment.
This year we asked community panels to report back about how they think we
are going. I would like to read you some of their comments:
"We have found New Zealand Oil & Gas excellent to engage with and very
supportive of the suggestions and ideas we have put forward.
"We have found New Zealand Oil & Gas very open and transparent about its
motives...New Zealand Oil & Gas has been very proactive in seeking the views
of members of the South Taranaki Community about social and environmental
issues that they may be influencing in the region. ... This showed total lack
of arrogance on behalf of New Zealand Oil & Gas. If this approach is
maintained there is little need for further improvement in this area."
This is a resounding endorsement of the responsible, positive role we are
playing.
Our engagement reduces risk and builds the foundation upon which we can earn
returns from our investment - as well as making a wider contribution.
This year, for the first time, we have published on our website a
sustainability report, to be open and transparent about our activities.
I hope you will take the opportunity to read about our performance on all our
sustainability measures, including our environmental impact and safety as
well as our community relationships.
They show a company that is responsible, ethical, working in a way you can be
proud of and making contributions that will sustain support into the future.
So to sum up: The business has come through a difficult year for the industry
performing soundly from an operational point of view, delivering an excellent
health and safety record, and, financially, delivering positive cashflows.
Distributions are being made again in the form of imputed dividends and, with
our tight control of costs and excellent assets, I expect this to continue
while our remaining exploration involvement minimises costs and offers
exposure to profound opportunities.
I would now like to introduce Andrew Jefferies to you.
In doing so I would like to acknowledge and pay tribute to Andrew Knight, who
completed his service with the company at the end of the financial year after
nearly a decade first as an independent director and then as CEO.
Andrew Jefferies has been in charge of our engineering and operations since
joining the company in 2013, and has been an impressive executive with around
25 years in the industry.
It''s my pleasure to invite him to address you.
Annual Meeting 2016, Acting CEO''s address
Mr Chairman, thank you for your introduction. Members of the Board
Ladies and gentlemen
I''m delighted to be able to address you this morning, I am a Petroleum
Engineer.
I first went to university in Sydney. Nine years ago I brought my family
here, after sixteen years in Asia and Europe.
I found a land of opportunity, and it is now our home. Three years ago I came
to work at New Zealand Oil & Gas, I feel a real sense of privilege to be
leading it forward, and hope today to share with you my excitement about our
company.
As Rodger has talked you through the Board''s strategy, I will sum up how we
did last year and go into detail about some of our operations.
Disappointing oil prices over the past year affected the industry the world
over.
Asset values were written down across the industry, and we were not spared.
This reduction in asset values resulted in a headline loss of $52 million, of
which $43 million was from Cue Energy.
Once we net out the loss to the other Cue shareholders, the loss attributable
to New Zealand Oil & Gas shareholders was $29.8 million.
However: our producing assets continue to generate a heathy cash flow and,
combined with a firm control of our costs, we are in a position to turn the
dividend tap back on.
Looking underneath the result, earnings from operating and investing
activities were up from $7 million to over $21 million.
When you consider that the average oil price fell by 43 per cent, from US$68
to US$39 per barrel, and average US oil and gas earnings fell 60% our
underlying result is strong.
Cash in the group at balance date was around $97 million, which was up from
$84 million a year ago.
If we take this cash balance, and add the market value of our holding in Cue,
then our share price values our investment in Kupe and Tui at less than $100
million - far below a fair assessment of the true value of these assets given
their future ability to generate cash returns and sustain a dividend.
It makes sense to be buying back our own shares when they look this cheap in
comparison to a fair valuation.
So let''s take a journey through where we are producing returns.
The joint venture has done significant work to identify growth opportunities
at Kupe. The highlight of the past year was a substantial increase in total
Kupe 2P reserves.
Through analysis of production, and well data we found more resources than we
previously thought were present, in addition - we can improve our recovery
and at the same time we have been able to push out the requirement to invest
capital to develop these additional reserves.
Installing onshore compression will help to optimise gas recovery.
Onshore compression is a relatively cheap initiative that, in simple terms,
means we suck harder on the straw, and get more out of the reservoir.
We believe additional perforations in existing wells will allow more
petroleum to flow from the rock into the wells. This sort of activity has an
excellent rate of return.
The other good news from Kupe is the identification of structures within
drilling reach of the platform that will be the targets of at least one
infill well in the future.
In short Kupe has more gas, with a plateau lasting longer, and costing less
to access....more for longer for less...more for longer for less.
A lot to like there!
Our Tui asset, in contrast, is coming to the end of its economic life.
We don''t yet know when that will be because we will call time when the cost
of getting the oil out exceeds the value we realise from selling the it.
It will be an economic decision.
When oil prices fell into the $30 range we were operating the Tui field at a
loss - it was costing us more to get the oil out than we could sell it for.
So that was why we took an impairment on the remaining value in the Tui
field, which contributed to last year''s loss.
When the oil price rose back to the high $40s again, we couldn''t write the
value of the asset back up because of the way the accounting rules work.
But we are again selling Tui oil at a profit and it makes sense to keep
producing.
When we do decommission Tui, there will still be quantities of recoverable
but uneconomic oil, as there is in all decommissioned oil fields. The Tui
wells will be the first subsea production wells to be decommissioned in New
Zealand, though it is done regularly worldwide.
Work on planning the end of field life has begun. The operator is intending
to remove all the production equipment from at least 2 meters below the
seabed on up - the well heads, production pipelines, mooring buoy and of
course the floating production vessel Umuroa which will restart its engines
and sail away.
The joint venture will go through a consenting process with the Environmental
Protection Agency. This will take time.
So we need to make decisions looking further ahead, such as whether to renew
the lease on the Umuroa.
On our current assumptions we estimate that Tui production will end in 2019.
At the same time as planning abandonment, management and the joint venture
have worked hard to cut costs at Tui. Despite unfavourable exchange rates,
Tui costs were reduced by more than 20%, a great help to extending field
life.
Costs were also minimised during the year in Indonesia.
Overall the group is cashflow positive from Indonesia because of production
from the Sampang facility, where more work is planned to extend the life of
that field.
By now we hoped to be producing from the Kisaran discoveries, where we have
government approval of a Plan of Development, but lower oil prices are a
significant headwind in the short term.
There are a few years available before a decision has to be made on
commencing production.
For now we are looking hard at how we can maximise returns from our
Indonesian portfolio.
As Rodger mentioned earlier, we have concluded our discussions with the
government about a change of conditions in the Clipper permit.
To summarise the situation - we need more time to look at new information
about the geology of the region.
Our scientists have analysed the Endurance seismic survey we performed in
2014, and identified a prospect called Barque.
To get an idea of its size, we estimate reservoir sands draped over a
structure the shape of Banks Peninsula, and looking out the window here, an
area equal to twice Wellington Harbour.
We have received some great new information from a well in a nearby permit.
Its modern logging is helping fill in the gaps in our knowledge of the rock,
resolving uncertainties so we can get to a decision about a well.
Meanwhile we have made promising progress in our other deepwater permits that
we hold with Woodside in the Great South Basin and in North Taranaki.
At the petroleum conference in March Woodside revealed some of the technical
work they have done at Toroa, which is south east of the South Island.
They are seeing three separate layers of potential resource there, stacked on
top of each other. Each layer is itself very large and the permit has seen 2
wells in the 1970''s that had clear indications of an oil and gas system.
We are maintaining exposure to these deepwater permits because they would be
game- changers. These are potentially huge fields, each one multiples of Maui
and any of them big enough to establish a new industry in the South Island.
A discovery would deliver staggering returns, not just to our partners and
shareholders; to the local area in terms well paid jobs, and economic growth;
and to the country with money for hospitals, schools, universities, and
infrastructure.
But these are frontier basins, where wells are few and little is known about
the geology, so we need to be careful to manage our spending in developing
concepts while maintaining exposure to profitable new assets.
I am happy to tell you that even in this difficult price environment we are
in continuing negotiations with potential partners about joining these
deepwater ventures.
As Rodger indicated, we continue to look at potential assets.
Looking for assets in the oil and gas space is similar to fishing....and as
John West say "it''s the Salmon that John West reject that makes John West the
best". We have the same excellent team that delivered the value at Kupe,
looking at potential assets, and we will be bringing forward the only the
best that can improve our rate of return and provide you, with growth.
So, in summary, we have a portfolio that provides hope for a substantial
discovery, production that is capable of sustaining our dividend as long as
we keep a tight grip on our costs, and the balance sheet strength to look for
significant acquisitions at value.
In New Zealand Oil & Gas you have a business that is using our technical,
commercial, legal, financial, engagement and management skills to harness
these rich opportunities and turn them into returns for you.
I''m proud that we are focussed on safe operations, and on being good partners
for everyone who has a stake in our industry. I''m proud of the business we
are building, and I''m proud that we are doing it by living our values.
I''ll look forward to discussing more of these issues with you as the chairman
opens up the floor for questions, and I hope to chat with as many of you as
possible over a cup of tea after the meeting.
End CA:00291581 For:NZO Type:ADDRESS Time:2016-10-27 09:55:32