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NZOG reports first-half loss

Wednesday 24th February 2010

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New Zealand Oil & Gas reported a $6.5 million loss for the six months to December 31, from a year-earlier profit of $54 million, reflecting reduced volumes from the Tui oilfield, lower global oil prices, the cost of writing off the Albacore exploration well, and its share of Pike River Coal's losses.  

The result also includes $14 million in unrealised foreign exchange losses, caused by NZOG's large U.S. dollar cash balance - a position NZOG expects to reverse out in the second half as long as the New Zealand dollar stays below 72 US cents.

"The reported loss does not reflect the underlying health of the company's balance sheet and expanding petroleum production," said chief executive David Salisbury, in a statement to the NZX. The earnings per share loss was 17 cents, compared with positive earnings of 13.9 cents in the prior corresponding period.

The latest result was heavily influenced by the fact that NZOG's production from the Tui oilfield fell, in line with expectations, to 340,000 barrels in the period under review, from 700,000 barrels in the same period a year earlier. Tui is now in the declining phase of its production.

The average price per barrel of oil also dropped by almost a third, from $150 a barrel to $104 a barrel, so that revenue from oil production was $37.7 million in the six months to December, compared with $103.2 million in the same period a year earlier.

Meanwhile, the company booked no revenue in the first half from the Kupe oil and gas field, which was brought into production in December and is expected to product long-term annual revenue of $60 million to $65 million.

"Along with ongoing, albeit reducing production from Tui, this will provide the strong cash flows that will support the company's growth strategies," Salisbury said.  "NZOG's production in the second half of 2010, on a barrel of oil equivalent basis, is expected to be approximately double that of the first half, as a reuslt of the contribution from Kupe."

The other major item depressing the result was a $10.9 million write-off on the costs of the Albacore-1 well, drilled before Christmas offshore Taranaki, which failed to show commercial quantities of hydrocarbons.

The NZOG share price fell 0.6% to $1.56 in early trading, following not only the earnings announcement but its support package for Pike River Coal Ltd, of which it owns 29.5% and which reported a widening first half loss of $14.1 million.

NZOG will support a new rights issue, provide $15 million in short term funding and subscribe to new convertible bonds for US$28.9 million, in exchange for Pike granting NZOG a two year option to purchase coking coal.

The package was "value-creating" for shareholders while supporting Pike to "focus on ramping up to full production," said Salisbury.  However, the first-half result also included a $4.2 million hit from NZOG's share of the Pike first-half loss.

NZOG will drill at least three more exploration wells in its summer campaign, with the Kan Tan IV jack-up rig due in New Zealand waters any day for positioning over the Hoki-1 prospect, the deepest offshore Taranaki exploration well ever attempted, and which Salisbury described as "relatively high risk".

In the highly prospective Tui field, NZOG would drill two initial wells at Tui South West-1 and Kahu-1, with further activity influenced by the result in an area where "at least half a dozen potential drilling targets around existing oil fields" have been identified.

Meanwhile, NOG has renamed its Gamma prospect Kaupokonui and has begun famring down its interest, and is seeking also to farm down some of its 40% interest in the Barque exploration licence in the Canterbury Basin.  A drilling decision is due by August.

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