NZ Oil & Gas Ltd: Gordon Ward
By Jenny Ruth
New Zealand Oil & Gas shares have tripled in value over the past year. Pushing them higher were the discovery of commercial quantities of oil at its Tui prospect off Taranaki, substantial progress towards starting production at its Kupe oil and gas field, also off Taranaki, and gaining consents to develop its Pike River coal mine on the West Coast of the South Island.
ShareChat: Have any parties expressed interest in buying the Pike River project outright?
NZ Oil & Gas Ltd general manager, Gordon Ward: It's possible a coal buyer, a steel manufacturer, will take an equity stake. A number have been looking at it. They have a need to secure coal supply and it could deliver good value for the shares. It is a possibility, but we're not looking at selling the entire Pike River mine outright.
SC: So you're going ahead with a Pike River IPO?
GW: As we said at the AGM, we consider an IPO for Pike River coal to be highly likely and that IPO would be next year.
SC: Will NOG shareholders get anything out of an IPO other than the right to buy shares?
GW: We see shareholders benefiting through an IPO in two ways. One is a preferential right to take up the shares and secondly, as a NZOG shareholder. We would expect there would be more share price appreciation of the PRCC (Pike River Coal Company) shares.
SC: Has a mine manager been appointed yet?
GW: We're currently recruiting for a mine manager. We've been advertising in both New Zealand and Australia. We anticipate the appointment of a mine manager early next year, if not before.
SC: How far advanced is the company with the logistics of getting the coal through Greymouth and onto barges? Is all Toll's rail capacity to Lyttelton taken up?
GW: PRCC has been looking at the different alternatives for transport. We've expressed a preference for Shakespeare By next to Picton in the past. That's obviously subject to commercial terms. We're looking at shipping from Greymouth to Shakespeare Bay. The other option has been Port Lyttelton in Christchurch. Solid Energy, the government SOE, has contracted a fairly substantial portion of the rail capacity. An extra train and locomotive would have to be put on to take additional coal to Lyttelton. I don't the likelihood we would be taking coal on that route is very high. We want a second export point so there's not the reliance on a single port and also to introduce some competition into that sector. This is an ongoing process. We've been working on the transport alternatives for many months. It's only be recently that we've gained the access agreement from the Department of Conservation. We anticipate this is going to take us three to six months to finalise the transport route.
SC: How much money is going to be required to fund the mine's development? One sharechat reader suggests it will cost between $80 m and $100 m, will take 18 months to come on stream and will produce 100 m tons at $US90 per ton rising to $130 per ton. Does this sound sensible?
GW: The funding requirement will be approximately $NZ75 million which includes approximately $10 million in working capital for the mine. About 18 months to come on stream is about right. We're trying to accelerate it. It depends on the transport option. It will take one year to construct the access road, including a 2.2 kilometre tunnel, to the mine. We've got to upgrade the existing access track, install a new section of road and install a coal slurry pipeline down to a de-watering complex.
SC: The coal price is doing very well at the moment, isn't it?
GW: It's a fantastic time for coal producers and soon to be coal producers. We think coal prices next year, based on what industry commentators are saying, will be $US110 to $US130 per tonne. Last year's average coal price was about $US65 or $US70 per tonne. (The previous record price of $US71 was achieved in 1985.) It's more than doubling, potentially. We also see that there's a view amongst market observers that prices for coal and oil are on a much higher plateau that previously. Whilst we will get fluctuations, we're not looking to see prices drop for either commodity. There's just a different feel and demand curve now with China and India being very significant economies and chewing up lots of steel. There's been a fundamental market shift.
SC: Have you got all the necessary consents for Pike River now?
GW: Yes, we have all the consents that we need and access agreements to commence mining.
SC: What is Pike River's estimated value?
GW: We plan to release some financial information on the three projects including Pike River in the new year - January or February next year. There's a lot of interest in that from shareholders. I believe brokers will be paying close attention to that issue. We've got to comply with the regulatory requirements and some information is commercially sensitive. We're not able to disclose what the Kupe gas price was (in the deal with Genesis). A big chunk of the costs (of Kupe) is whether we build or lease the production station. Until we have that information, it's pretty hard to provide meaningful information.
SC: When do you plan to drill further wells in the Kupe CFA?
GW: The next wells drilled in Kupe are likely to be production wells in 2006 as part of the development of the central field area.
SC: What is Genesis getting in exchange for its $40 million funding assistance? Will this money have to be repaid at some future date or will there be some offsetting reduction in the price Genesis pays for the gas?
GW: It's similar to project financing. It's not a loan per se, but it has a similar cost. We have to repay the funding and the way we do that is to net off a proportion of gas sales. As with most financing arrangements, there are a whole lot of detailed provisions that kick in and they generally have recourse back to the company. This is similar to non-recourse finance.
SC: Has there been any decision yet on where and by whom the Kupe gas/condensate will be processed? If a decision has been made, what are the capex implications?
GW: It's under consideration at the moment by the joint venture. (He can't comment on the capex implications), certainly not until the joint venture has released some public information including the results of the consideration of the production options.
SC: How far advanced is the Tui-Amokura-Pateke project? Has a FEED (front end engineering and design) contract been signed?
GW: We've commenced pre-front end engineering design studies. We're evaluating different options for the offshore production and storage unit. There are different ways you can store oil offshore - the oil won't be brought onshore through a pipeline. It will be stored offshore on a vessel of some nature until shuttling to export markets via a tanker or through the Omata tank farm at New Plymouth. There are several different options for offshore storage. You can buy or lease a floating storage unit. There's Whakaroppoa which is used for storage of Maui B oil, that's another option, or converting a vessel. We want to reduce the number of options and do engineering studies on the preferred couple of options. We're aiming for that decision by the middle of 2005. No, there is no FEED contract.
SC: How much more drilling are you planning?
GW: We will have production wells in the two discovered oil pools. As well as that, there are some exploration prospects. The joint venture is looking at two prospects, Kahu and Weka, as possible options for drilling. In the south of that permit and the adjacent permit, PEP 38483, NZOG is supporting 3D seismic survey. There are several prospects where we hope to be drilling next year.
SC: Has any progress been made towards farming out part of NZOG's interest in Mangatoa? Would NOG consider drilling Mangatoa on a 50/50 basis with Origin?
GW: Mangatoa is reasonably high cost. It will be more than $20 million to drill. Because it's a well drilled from onshore angled to drill a target five kilometres offshore. Onshore vertical wells might typically cost between $6 million to $10 million, depending on how deep they are - up to 1,800 metres it might only be $500,000. It all depends on the type of rock you're drilling. We're looking to share the cost of drilling - 50% is too high for us at that level of cost.
SC: But the company has a healthy balance sheet?
GW: We do have a healthy balance sheet (but) we're also funding development work at Tui, Kupe and Pike. We have ongoing commitments. We will need to farm out Mangatoa to participate in that well. We have something like 72 million options on issue and they're exercisable at 60 cents. That will raise approximately $40 million by June next year.
SC: Have you looked at getting the options underwritten?
GW: No, we haven't. It's something we might give some thought to over the next few months. We will be writing to shareholders next year advising them. We are giving thought to what happens with, say, elderly shareholders who just do nothing. It's a bit of a shame to see those options disappear. As far as the company's concerned, it could also raise more capital anyway.
SC: What are the tax loss positions of the three main projects?
GW: I can't really answer that question. As we said in the annual report on page 28, we have tax losses of about $47 million. The thing with the tax losses is that they're all grouped up to NZOG. They're not project specific.
SC: Can you give any indication of their likely future value? Approximately when will the company be able to provide a financial assessment, with likely cashflows, for the three major projects ?
GW: In January or February we will be giving likely cashflow information on a project by project basis. We've got to consider at board level what information we provide, but at the moment that's what we anticipate.
SC: Are there any brokers or financial analysts who are currently carrying out an assessment of the company?
GW: We're getting a lot of interest from brokers. Since I came back in February to head up the office here one of the things I wanted was to get more information out. I've made a few presentations. (Brokers who have shown interest include) First NZ Capital, ABN Amro Craigs, Citigroup, Direct Broking and Hamilton Hinden Green. We've certainly seen a much higher degree of market awareness as our projects have positively moved forward and the market interest has been higher because of the way oil and coking coal have been performing.
SC: Now the Head Office is in Wellington, will future AGMs be held in Wellington?
GW: We will certainly have some AGMs in Wellington but if we have an AGM in Wellington we will have an investor presentation in Auckland and vice versa and possibly in Christchurch. We've done that in the past.
SC: Can you comment on what measures are being taken to safeguard against a takeover?
GW: guess it's a good thing if people see hidden value or potential in the share price. The only comment we would make is that the company's subject to the same takeover rules as all listed companies.
SC: Do you think there will be a dividend paid this year?
GW: We're applying our funds to progressing our developments which is a necessary step to grow the company and therefore we're not in a position to pay a dividend. It's unlikely we will be paying a dividend in the current year. I would point out that shareholders have benefited from a very strong share price. An IPO of Pike may result in further value being achieved.
SC: How high do you think the shares will go?
GW: We've done a number of important things in the last 18 months such as farming out and bringing Mitsui as a partner in two of our permits. We've had follow up oil discoveries to Tui. We're in a climate of high if not record commodity prices and we've broken through with the consents for Pike River. We're working on the three major projects simultaneously. It's not appropriate for us to comment on the share price. We have to leave that to the brokers and analysts.
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