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Pike River worth the effort, says NZ Oil & Gas chairman

Wednesday 27th October 2010

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Pike River Coal remains worth supporting despite repeated delays in getting the underground coal mine up to anticipated production levels, the chairman of New Zealand Oil & Gas, Tony Radford, told shareholders at NZOG’s annual meeting.  

“The Pike River coal mine development has proved much more challenging than was originally contemplated, but that fact does not detract from the first-class coking coal it produces and the value it will represent once it has reached steady-state production,” Radford said. NZOG’s exposure to Pike is $85 million and it booked $11.5 million in the last year as its share of the coal miner’s losses.

Managing director David Salisbury told the meeting that the carrying value of NZOG’s 29.4% investment in Pike remained “above our investment cost notwithstanding its operating loss.”

“Our share of Pike River’s ordinary shares has a market value of approximately $120m. NZOG also has over 17 million 2011 options,” Salisbury said.

Last month, NZOG agreed to provide Pike River with a further short-term working capital facility of up to $25m. The facility has an interest rate of 13% and is to be repaid in December.

With the additional capital, NZOG’s support for Pike “goes beyond what we anticipated a year ago,” Salisbury said. “However, NZOG has commissioned its own technical and management reviews and believes that, despite the delays in the mine reaching full production, the fundamental value of the project remains intact.

“While the Pike River mine is still to deliver on its potential, NZOG considers that it has a positive long term outlook.”

Turning to its oil exploration activities, Radford said the company’s most exciting prospects were in the Kaukoponui licence area, between the producing Kupe and Maari oil fields, with potential for 200 million barrels of oil, unrisked.

NZOG will be the operator at Kaukoponui prospect and last month signed a new Australian oil and gas player, Peak Oil & Gas, which will take a 10% stake in the permit in return for meeting 20% of exploration drilling costs.

Peak is currently undertaking the largest float in the Australian oil and gas sector this year, Salisbury said.

“NZOG is encouraged by the continued level of industry interest in Kaupokonui and remains confident of signing up at least one more joint venture partner ahead of the drilling commitment required in January 2011,” he said.

Elsewhere, NZOG is assessing three new exploration drilling targets in the Tui field, despite the failure of two such wells earlier this year, and expects to target “one or two prospects” for drilling in 2012.  It dropped its rights in the Hoki prospect last month, after the failure of an exploration well this year.

The newly producing Kupe field’s production facilities are due for a scheduled shutdown for 25 days next month.

“The geological structure and reservoir character of the target formation in Hoki were very much as expected, but the absence of oil or gas has served to down-grade perceived prospectivity of the western part of the Taranaki Basin,” Salisbury said.

Pike River rose about 1% to $1.04 on the NZX today. NZOG was unchanged at $1.29.

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