Perseverance with the decades-old offshore Kupe oil and gas field in Taranaki is providing the blueprint for New Zealand Oil & Gas' expanding exploration programme.
At its annual meeting last week, NZOG shareholders were told to expect a capital return of up to $60 million, on expectations of increasing revenue, albeit at the cost of getting no dividend.
Debt-free and with more than $130 million cash in hand, NZOG booked a 77% increase in exploration and appraisal during the past year, at just under $75 million, which was up from just $9 million during 2012, NZOG chief executive Andrew Knight said in a recent update.
''The Kupe story highlights what an uncertain business exploration can be,'' he said.
Forsyth Barr broker Haley Van Leeuwen noted the decline in global oil prices during the past three months had a dampening effect on NZOG's positive news.
NZOG had been ''sheltered to some extent'' because of its cash in hand. Also, in New Zealand-dollar terms oil prices had fallen about 16%, while in US dollars, oil was down 24% or more.
Mr Knight said Kupe-1 was first drilled in 1975 by Shell, BP and Todd, with some hydrocarbon shows, but it was assessed as sub-commercial, plugged and abandoned, and the licence handed back.
Later, in the 1980s, oil and gas reserves were estimated at about 10% of the size of the currently proven reserves.
''So we can learn from Kupe. Kupe would not have become the valuable producing asset it is today without a focus on commercial imperatives and investment patience,'' Mr Knight said.
Overall, NZOG's revenue for the year was up by 4.7%, from $99 million to $104 million, the main contributors being production from Tui and Kupe.
However, that was offset by some foreign exchange losses because of the strength of the New Zealand dollar, he said.
Mr Knight said sales from Tui would have declined more this year, as the field reserves were depleted, but Tui's performance was a success for NZOG after it increased its stake from 12.5% to 27.5%.
''The cost of that extra share has already been recovered from the incremental revenue received,'' he said.
The expectation of increased cashflows from the Tui field prompted NZOG chairman Peter Griffiths to tell shareholders to expect an up to $60 million return of capital, equating to 15c per share.
''Our cash on hand will grow well beyond what the business requires for its planned activities,'' he said.
The capital return requires shareholder approval and an extraordinary meeting is expected to be held before the end of December.
Mrs Van Leeuwen said while the capital return was ''a good move'' by NZOG, it was ''arguably quite late'', given the company had held a significant cash balance for the past six years.
She said from a tax efficiency perspective, it made sense for NZOG to stop paying any dividends in the foreseeable future.
Mr Knight said Kupe's production was ''steady'' during the year, which lifted the result compared with the previous year, when there was a maintenance shutdown.
''Kupe is a fantastic asset for us, and it will continue to produce for many years,'' Mr Knight said.
Only the gas and light oil prospects at the Kupe permit were producing, but Mr Knight said the company was still looking for oil, as well as further gas and gas condensate.
''This will be a focus for us in the coming year,'' he said.
During the year, Kupe gas sales were accelerated, which also helped to grow returns, and there was also a positive impact of more than $10 million, from settlement of the Kupe overriding royalty.
''We recognised around $10 million at year end from the settlement and it will add about $1 million to 2 million a year to the company's revenue in future,'' Mr Knight said.
The Kupe settlement dated back to agreements made when the permit was farmed out in the 1980s.
Mr Knight highlighted exploration successes during the past year, with production from the Pateke-4H well expected to be fed into production and storage vessel Umuroa, (the FPSO floating platform storage and offload servicing Tui), by the new year.
He said it was expected to begin producing before the end of the current financial year, but the reservoir's size was still to be determined.
''The joint venture hasn't come to a shared view yet but we will report our figure when we have the level of certainty required by the stock markets,'' Mr Knight said.
In Indonesia, NZOG had drilling success at Kisaran and a plan of development was progressing towards a final investment decision there, which could include three more new test wells.
Mrs Van Leeuwen said the Indonesian prospects, Kisaran and Bohorok, ''should be positive, but were not game-changers''.
''While NZOG is providing investors with a capital return, and has solid producing assets and a sound balance sheet, the value upside is hard to see in the near term,'' she said.
She said a lower global oil price assumption and higher than envisaged costs in Indonesia were the main drivers of the lower valuation, from 6c per share to 4c per share.
Mr Knight said NZOG was positive about the New Zealand acreage the company holds.
''Interest in New Zealand's deepwater basins is elevated. It's a matter of time before someone has some success.''
While wanting to be well positioned to be part of success when it arrived, Mr Knight said operating in deep water required considerable expertise and careful portfolio management to ensure NZOG did not become over-exposed.
NZOG's portfolio in deep water looked full for now, while the company was moving ahead to drill in Kaheru next year, and continuing in both Taranaki and offshore Canterbury to work up new prospects.
''We are always looking for opportunities to grow our production - as we did when we bought more production at Tui,'' he said.
As different prospects ''get churned out'' of the portfolio, NZOG would look to add new exploration acreage.
''At the moment the market is undervaluing some attractive producing assets ... if we find further opportunities to buy assets at appropriate value, and if they fit our portfolio, we will take them,'' Mr Knight said.
New Zealand Oil & Gas
• Revenue up by 4.7%, from $99 million to $104 million for the year.
• Debt-free, more than $130 million cash in hand.
• Exploration and appraisal costs boosted from $9 million a year ago to $75 million.
• Planned capital return of to $60 million to shareholders.
• $10 million settlement of historic Kupe field royalty dispute.
