AWE Swings to Loss in 2Q10
A strong underlying performance by the company's core production operations have been offset by exploration write-offs and one-off abnormal items. As a result, in the year to June 30, 2010, AWE reported a statutory net loss after tax of $28.9 million.
The exploration write-offs ($113.1 million) are largely related to unsuccessful drilling activity in New Zealand, Australia and Indonesia, while the abnormal items relate predominantly to asset impairments ($23.4 million in the onshore Perth Basin). After adjustment for abnormal items, the Underlying net loss after tax was $21.1 million.
A decline in oil and gas production, primarily due to natural field decline at Tui, planned maintenance at the BassGas project plus lower oil prices resulted in a 40% fall in revenues to $354 million.
AWE Limited increased proved and probable (2P) oil and gas reserves for the year by 4% to 71.6 million BOE, after production of 6.1 million BOE.
EBITDAX, the pre-tax cashflow generated by the production business, was $A225.6 million which represented a strong cash flow contribution for the company.
The year to June, 2010 was a year of investment, with approximately $306 million allocated to investment for potential future growth. Of this sum, $42 million was invested on development projects, specifically in the Otway and Bass Basins, and a further $115 million primarily on the BassGas and Adelphi acquisitions. Approximately $149 million was invested in exploration, where despite some disappointments; some discoveries were made, in particular in the Perth Basin and in Yemen.
The purchase of additional equity in the BassGas project will enhance continued long term cashflow from a core asset of the Company. The Adelphi purchase, while still to be finalised, is showing promise with the initial reserves report from the Sugarloaf AMI highlighting the considerable potential in this unconventional asset. We remain encouraged by the return profile of both of these acquisitions.
Exploration and appraisal success was reported in the Perth Basin (Redback and Redback South), Yemen (Al Meashar) and the Bass Basin (Trefoil). These successes will provide opportunities for growth in the future.
The year end financial position of the company was strong, with cash of $135 million and no debt (but with a $150 million undrawn corporate debt facility).
AWE Limited increased 2P oil and gas reserves for the year by 4% to 71.6 million BOE, after production of 6.1 million BOE. This excludes the recent reserve announcement related to the Sugarloaf AMI, which reported net reserves to Adelphi Energy Limited of 6.3 million BOE.
A further 57 million BOE has been allocated as a Contingent Resource. These resources are largely located in the Bass Basin (Trefoil and White Ibis), Otway Basin (Netherby and Martha) and Indonesia (Lengo).
2010 – 2011 Guidance
Production guidance for the current financial year has been set in a range of 6.5 to 7.0 million BOE. The range includes some uncertainty related to the timing of the BassGas shutdown for the MLE project, if any, during the year.
Capital expenditure (particularly exploration) will be lower in 2011 when compared with the levels invested in the year to June 2010.
The year to June 2010 has been disappointing for the company and our shareholders. Whilst revenues and cashflows remained solid, the high-profile exploration program did not produce the anticipated results.
However, the core production business is providing strong cash flow for the Company. This is expected to continue, based on the long reserve life of these assets, with 2011 production expected to represent an increase on the 2010 levels.
In our conventional oil and gas operations, we are clearly focused on the commercialization of our considerable oil and gas resources, particularly Trefoil, Lengo and the recent exciting discovery in Yemen. Our total resource base of 57 million BOE represents a considerable value opportunity for AWE and this will be pursued with vigor.
Increasingly, AWE will also focus on the potential in unconventional oil and gas. This is currently being targeted in both the onshore Perth Basin, where Shale Gas is being sought in a strong gas market and more-recently in the USA, where AWE has invested in the Sugarloaf AMI via the Adelphi takeover. Both of these opportunities provide significant resource and reserve potential for AWE. The initial reserve report at Sugarloaf demonstrates a strong start to this program, with an active ongoing drilling campaign.
Exploration will continue to be a long term value driver for AWE, but drilling and expenditure levels will be significantly lower in the 2010 – 2011 year than over the past 12 months.
The balance sheet remains strong, with net cash and a large undrawn credit facility available for growth opportunities. However, while the Company has evaluated over 100 opportunities for asset acquisitions over the past 2-3 years and despite the strong financial position, it has only pursued those with the potential to deliver superior shareholder returns. In the past year, the purchase of additional equity in BassGas and the Adelphi takeover are expected to provide such returns. The Company will continue to monitor opportunities in the future and will act if we believe the investment proposition is value accretive for our shareholders.
In the near term, AWE will focus for growth in the development of our known oil and gas resources and in the staged increase in unconventional opportunities. The Board and management are committed to improving the recent performance of the Company.
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