(Please click on the attached PDF file to view the presentation's slides).
Ladies and Gentlemen
I will talk about our activities over the last year and what the future might hold for us. I will not be covering the reasons we have recommended that shareholders accept Government’s $25 million settlement / buy-back offer. In the following meeting, Len Gill will cover the settlement offer, the reasons for our recommendation and some near term plans.
The 2014/2015 year was never going to be what we would have liked: drilling wells and field activities to start producing gas in NSW. Instead, we needed to devoted our efforts to two areas; firstly, fighting the government in court over the unlawful Rosella suspension and then negotiating for compensation; and secondly, seeking new business opportunities outside NSW.
Slide 2 Disclaimer
To start with the Rosella drilling suspension, you will recall the events 2014.
In May 2014, only days before we were about to start drilling the Rosella exploration well, the Office of Coal Seam Gas suspended our drilling approval. It did so without any notice whatsoever and on the basis that we had not consulted properly with the community. We incurred significant losses as we cancelled drilling contracts and our share price fell by 40%.
We did our best to get the government to lift the suspension without needing to resort to court action but were not successful. As such, in June we initiated NSW Supreme Court action to have the drilling suspension lifted.
We were successful in having the court process expedited, with the result that the NSW Supreme Court heard the case in late October, 2014.
On the 24th April, 2015, the Court handed down its judgement.
The Court result was a huge win for Metgasco.
Justice Button found decisively in favour of Metgasco in what is considered to be a land-mark decision. He found that:
- the suspension decision was unlawful – it was contrary to the powers specified in the Petroleum Onshore Act;
- procedural fairness concepts, which are also hard-coded in the Petroleum Act, had not been observed; and
- the decision itself was flawed because it confused consultation with persuasion.
Those of you who have read the Justice Button’s findings will know that he made a number of comments that were very critical of Government.
He also awarded costs to Metgasco.
It was really a resounding win, so much so that a month later the Government decided not to appeal.
It is very important to understand that while the drilling suspension was lifted, the Court decision did not give us rights to compensation. We needed to negotiate with government for compensation or initiate separate legal action.
Following the Government’s decision not to appeal, we immediately initiated work to allow additional seismic to be obtained and to drill the Rosella well.
We also started the preparation to commence legal action for compensation.
We contacted government and expressed the preference to negotiate an out of court settlement. Government rejected any liability for damages (compensation) but wanted to negotiate an overall settlement that would see Metgasco withdraw from its Northern Rivers exploration licences. We agreed to talk and put a hold on our field and court actions provided that the negotiations were handled in a timely manner.
Government appointed two very senior managers to conduct the negotiation, supported by external legal and commercial advisors.
In September we withdrew from the formal discussions. Progress was too slow and an informal offer from government in early September was way below anything the Board could seriously consider.
We immediately contracted with Terrex to conduct the seismic program and moved to complete a drilling contract for Rosella.
We also initiated court action to seek compensation for the unlawful Rosella drilling suspension and advised government that we were about to take legal action to have PEL 426 renewed and a production licence for PPLA 9 awarded.
Discussions with Government resumed, with the result that Government made the $25 million settlement – buy back offer, with the proviso that shareholders must make the decision to accept or reject the offer no later than 1 January 2016.
In the meeting immediately following this one, Len Gill will explain why we, Metgasco’s Board, recommend that the $25m offer is accepted. The vote on the offer will be taken at the same meeting.
If the $25 million settlement is supported by shareholders, we will need to decommission and rehabilitate the two remaining CSG wells, close our shop front (shown here in the slide) and workshop in Casino. We will also sell the land we purchased some time ago for the Richmond Valley Power Station. Clearly, we will no longer need any staff in the area.
The cost of the decommissioning is relatively small and should be covered to a large extent by bonds held by Government. Government will return these bonds upon successful completion of rehabilitation activities.
I would now like to talk about our efforts to develop business opportunities outside NSW.
We have been firmly of the belief that it is in the company’s interests to diversify our business beyond NSW.
We have reviewed many opportunities which have varied from pure exploration plays to development opportunities, existing production operations through to more exotic opportunities. Very few have met our technical and commercial requirements.
We also found that some opportunities were complicated by the uncertainty related to our NSW licences.
Despite not concluding a new business opportunity to date, the work has prepared us well to pursue new opportunities if the $25 million settlement offer is accepted by shareholders.
In mid-2014 we became aware of an opportunity to work with an ASX listed company, Elk Petroleum, to pursue enhanced oil opportunities in the USA and in particular, the development of the Grieve field in Wyoming.
After thorough technical and commercial reviews we concluded that the Grieve field was an attractive opportunity. We negotiated terms for a merger with Elk that we believed were strongly in our favour and initiated the merger. The merger, which was negotiated when oil prices were about $100/bbl, was dependent on being able to obtain debt finance for the Grieve project through to expected first oil in 1Q 2017. Based on discussions with a number of parties we were confident of getting the funding.
Unfortunately, oil prices dropped to below $50/bbl very soon after making the merger agreement, with the result that debt financing was not possible. As a consequence, we withdrew from the merger. We maintain our view that, other than near term oil prices, the Grieve project was a good opportunity and recognise that there is scope for Elk to negotiate better terms with the field operator, Denbury, and make this into an attractive project.
We are confident that investment in the oil and gas industry can provide significant value to shareholders.
There is little question in our minds that demand for oil and gas will remain strong and, in fact grow.
The left hand chart, which comes from BP’s 2015 Energy Outlook, shows historical and forecast energy consumption by fuel type. Demand for liquid fuels, primarily oil production has been steady and is forecast to continue growing in the future.
The world currently consumes more than 90 million barrels of oil every day – discovering a new field this size over recent years is a considerable success.
Gas consumption has more than doubled over the past 30 years to more than 110 trillion cubic feet per year and is forecast to continue growing.
When natural decline in field capacity is considered, this means the oil and gas industry needs to run very fast to keep pace with demand.
The right hand charts show that the proportion of energy consumed in the Asia Pacific region has grown and is forecast to continuing growing relative to other regions.
This chart show oil prices over the last 30 years. You can see that they have been volatile and the very steep decline over the last 12 months.
Clearly, new investment in the oil and gas business has to take into account what oil prices will do in the future. This chart shows two possible outcomes, one that tracks the troughs of oil prices, the other that assumes that price trends over the last ten years are indicative of future prices.
We all need to make our own judgment about where prices will trend and, if there is an upturn, when will it be. Our belief is that there will be an improvement in oil prices and that conditions over the next 6 months will provide attractive investment opportunities for a cashed up company.
Many shareholders have asked what our new business strategy will be. Clearly, I cannot provide details about specific projects today, but I can give you an outline of our plans.
Firstly, if the $25 million proposal is accepted by shareholders, as of January 2016 we will have about $30 million in cash. This is an unusual position for a small oil and gas company, particularly given that stresses in the industry might make this “a one in twenty year opportunity”.
It is our expectation that in the first six months of 2015, distressed sellers will continue to bring assets to the market. Exploration potential will become available for relatively low value on the back of production asset acquisitions. There will be opportunities for which Metgasco can help finance development opportunities that other small to medium companies are struggling to finance. We might also be able to add value to shareholders through an M&A strategy, bulking up with well- considered M&A deals.
I can tell you some of the features we will seek and the things we will avoid.
- Firstly, we will be seeking established oil and gas producing assets rather than pure, green field exploration projects. While we believe that there is a sound basis for an exploration component in our overall portfolio, production and near term development will be given priority.
- We are likely to pursue onshore rather than offshore opportunities given the huge cost of offshore drilling activity relative to the cash we have available.If we pursue any offshore activity it will be by taking small stakes in projects.We do not want to risk large portions of our cash on a single exploration well.
- If we pursue any pure exploration opportunities we will seek to back-end work and expenditure commitments to avoid large expenditures over the next few years, in a depressed funding environment.
- We are unlikely to invest in tight gas or shale opportunities largely due to the large capital requirements and time to take projects from concept to production and positive cashflow.Any involvement in these sort of projects will need to be on the basis that there is clear and timely path to value creation and positive cash flow.
- We will be investing in places that have a supportive investment climate – not NSW, not Victoria.
There are many approaches we will consider, from acquisitions, to farmins and mergers. Indeed, in the area of mergers, we cannot dismiss the chance that other parties will approach us for a merger or acquisition on attractive terms, in which case shareholders will need to give their approval.
We will discipline ourselves to set the company on its new course within the first half of 2016, with a very strong focus on costs.
Ladies and Gentlemen, we are confident that we can revitalise the company, take it away from the frustrating and value destructive regime in NSW and make Metgasco a company that provides good returns to shareholders, one in which you are proud to invest.
Peter J Henderson, Managing Director & CEO
Sean Hooper, Chief Financial Officer
Phone: +61 02 9923 9100
Helen McCombie, Citadel
(02) 9290 3073 or 0411 756248