Since early 2001 Novus' strategy has been to focus on using free cash flow to fund its growth, largely through exploration, in areas where discoveries can be quickly commercialized. This has led to increased investment principally in the US and Persian Gulf regions. The divestment of these two Indonesian assets, which comprise mature oil production and undeveloped gas discoveries with minimal growth potential, is entirely consistent with this strategy.
The two low-value Indonesian assets being sold are in stark contrast to the two remaining Indonesian properties, Kakap and Brantas. Both Kakap and Brantas are powerful cash and profit generators and are important to the delivery of the company's strategy. They are worth substantially more than the properties sold, both in absolute terms and in terms of dollars per barrel-equivalent.
The Malacca Strait PSC (Production Sharing Contract area) lies principally onshore in central Sumatra and is a mature property which has produced over 80% of its ultimate recoverable reserves since inception in 1984. Remaining reserves amount to 48.4 mmboe i (2P ii as of January 1, 2002), of which 12.5 mmboe are net to the working interest being sold. The producing basins have been extensively explored and while some gas and gas potential remain, there is no local market for gas.
Novus considers there to be little or no remaining commercial upside in the Malacca Strait property unless the fiscal regime were to be improved.
Novus acquired its original interest in Malacca Strait as part of a package of assets from Oryx at float in 1995. The value then ascribed to Malacca Strait was US$8.4 million. Subsequently, the property has produced US$8.3 million of surplus net cash flow and taking into account the sale proceeds, the property has generated an annualised rate of return of 19% over the time Novus has held the asset.
Novusí entire 26.03% working interest in the Malacca Strait property has been sold to Reliance Universal Ltd, a private company. The consideration for the sale comprises a purchase price, including working capital, of US$13.2 million less net cash proceeds of US$1.2 million between the effective date and closing. The effective date for the transaction was January 1, 2002 and financial closing occurred on January 17. 2003.
Novus farmed into the Lematang PSC in 1996 and participated in the discovery of the Singa gas field in the following year. While reserves attributed to the field amount to 6.2 mmboe (2P as of January 1, 2002, net to the 15% working interest being sold), the gas remains undeveloped.
A sale of Novus' 15% working interest has been agreed with a third party for a price of US$1.3 million and an effective date of October 4, 2002. However, the sale has been pre-empted by another member of the Joint Venture and financial closing will not occur until after the approval of the Indonesian government authorities.
In the immediate term, the proceeds from the sales will be used to retire debt drawn under the Company's revolving credit facility. Novus' net debt to equity ratio will be reduced from approximately 45% to 40%. With its existing cash flow and undrawn debt facilities, the company is in a strong financial position to fund its existing commitments across the portfolio and to pursue further growth opportunities.
While no transaction is imminent, Novus is evaluating a number of properties with a view to acquiring reserves and production with upside in its focus areas.
Following completion of these sales, Novus' Indonesian portfolio will consist of a 25% working interest in the Kakap PSC and a 50% working interest in the Brantas PSC. Kakap and Brantas each have unique features which set them aside from most other Indonesian properties.
Brantas sells gas into the eastern Javan domestic market, again at a price specified and paid in US dollars. The potential of this prospective block is currently being realised with gross gas sales moving from 4 mmcf/d at end 1999 to 11 mmcf/d at end 2001 and over 40 mmcf/d now. Plans are in place to expand production from existing, demonstrated reserves to 50 mmcf/d in 2003. In addition, significant exploration potential remains, perhaps for oil as well as gas. Government imposts on the Brantas revenue stream will remain modest for many years to come.
On a dollar per barrel-equivalent basis, the two assets sold are markedly lower in value compared to Kakap and Brantas, which are subject to more favorable fiscal regimes and contain youthful producing fields. In comparison, the Malacca Strait fields are in a high operating cost environment subject to high tax and declining production. An economic market for Singa gas has not emerged and the field remain undeveloped. Hence, despite a relatively high contribution to net production and reserves, the financial contribution from the assets being sold is modest.
Bob Williams, Managing Director of Novus Petroleum Ltd, commented: "These sales, together with our recent acquisition of production in Louisiana and the low-cost farm-in to the Maryborough Basin in Queensland, are consistent with Novus' strategy to expose the company to growth opportunities in places where there are market-driven energy prices favourable to the producer.
"We had no need to sell Malacca Strait but of course anything is for sale at the right price. I'm very happy with the price. Lematang was going nowhere, and we think the chances of a commercially attractive development there are poor.
"As a consequence of these sales, Novus will see a reduction in its reserves, production, cash flow and debt. Our challenge is to reinvest the resources that have been unlocked into other areas where we have numerous projects and prospects with the potential to replace the lost cash-flows and profitability many times over."
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