 The 2008 financial year was a watershed for AWE, marking the company’s transition to one of Australia’s major oil and gas companies. Higher than expected production and strong global oil prices produced record revenue of $821 million, profit before tax of $504 million and bottom line earnings after tax of $264 million, equating to 58 cents per share, all signifi cantly above previous years.
The highlight of the year was the successful commissioning of the Tui oil fields and the stronger than anticipated reservoir and production performance which resulted in a substantial increase in oil reserves.
The higher commodity prices also gave the Australian operations a major boost with Cliff Head, in particular benefi ting while also achieving a solid production result for the year. The BassGas project also reached planned production rates and liquid recoveries by the end of the year.
Exploration efforts were rewarded with two gas discoveries, at Lengo-1 in Indonesia and Netherby-1 in the offshore Otway basin, although earlier exploration wells did not produce the anticipated results.
On the corporate front, AWE completed the merger with ARC Energy in late August 2008. The ARC assets will strengthen AWE’s production base and will provide several exploration opportunities which will be pursued vigorously.
The following operational review highlights AWE’s recent activities and provides a number of plans for the continued long term growth in shareholder returns.
Review of Operations
Australia
Bass basin, offshore Tasmania
AWE holds a 30% interest in the BassGas project (increasing to 42.5% following the ARC merger) which will provide a strong cash fl ow base for the business over the life of the project. Near fi eld exploration and appraisal activity within the adjacent permits offers upside for AWE, with two high potential wells planned in the coming fi nancial year.
The BassGas project achieved a signifi cant step during the year, with gas throughput and associated condensate and LPG recoveries achieving design throughput rates. Total gross gas sales of 18.4 PJ were achieved, a rise of 7% on the previous corresponding period. Importantly, liquid production and sales also improved while revenues were buoyed by the increase in prices.
In the adjacent areas, AWE is now focusing on the development of the next phase of gas projects. A substantial 3D seismic survey has highlighted a number of drilling prospects in the area to the west of the Yolla field, with drilling now anticipated for the March quarter of 2009 on the Rockhopper prospect. This activity is expected to be followed by the appraisal of the Trefoil gas field.
This second phase of potential development activity in the Bass basin is attractive as some of the existing infrastructure may be utilised, thereby reducing development costs.
In addition, the growing use of natural gas as a fuel of choice for power generation will improve the prospects for new gas contracts being executed at higher prices, commensurate with the growth in demand. The initial stage of this trend towards higher real gas prices, which will benefit new and existing gas projects in the region, is already being seen.
Otway basin, offshore Victoria
AWE holds a 25% interest in the Casino joint venture, where a solid production performance was again achieved during the year. Gas sales are made under contract to TRUenergy, where to date in excess of 100 PJ of gas has been delivered and sold since the project startup in January, 2006. Furthermore, exploration activity continues to yield positive results for the joint venture.
Gross gas sales from the Casino gas field reached 40 PJ during the year, down slightly on the previous period. In the prior year, gas sales above contracted rates were undertaken as market opportunities emerged. Condensate production remained at modest rates, as expected.
The joint venture approved the development of the Henry gas field (AWE 25%) during the year and this new development has progressed on schedule. Henry, located only 12 kilometres north west of Casino, is being developed utilising the infrastructure and pipeline network associated with the Casino gas field. Development drilling at Henry-2 has commenced with production planned to start in the first half of 2009.
Exploration activity recommenced in the eastern portion of the permit, with the drilling of the Pecten East-1 and Netherby-1 wells. Although the results from Pecten East were disappointing, potential remains in the area up-dip from the initial well. Subsequent to the end of the year, the Netherby- 1 well fl owed gas at 51 million cubic feet per day, confi rming the commerciality of the discovery. Initial estimates of the gross 2P recoverable gas reserves at Netherby are in the order of 110 PJ.
Initial exploration work has been conducted in the western portion of the permit, with a substantial 3D seismic survey completed during the year. Drilling candidates will be considered following the interpretation of the data, particularly in light of the improving trend of gas prices through the region.
Perth basin, offshore Western Australia
The fi eld performance at Cliff Head achieved budget expectations in the year. Natural fi eld decline was offset by improved reliability of the offshore equipment and the improved oil prices ensured that project returns remained at strong levels, providing further encouragement for additional exploration in the region. Total production for the year was 3.0 million barrels, an average of 8,236 bopd.
To the north of Cliff Head, AWE and its partners had previously made the discoveries at Frankland and Dunsborough. The original discoveries provided encouragement that the area could hold more than one economic hydrocarbon accumulation. However the initial appraisal of these two discoveries was disappointing, with Frankland-2 displaying poor reservoir development and Dunsborough-2 encountering a large, residual oil column. A 3D seismic survey has been undertaken in the northern portion of the permit, interpretation of which may lead to further drilling.
Following the ARC merger, AWE’s equity in the Cliff Head permit has risen from 27.5% to 57.5%. The merger also expands AWE’s footprint into the onshore Perth basin, where exploration trends overlap in some areas. AWE plans to develop further exploration opportunities in this area, utilising the strong geological knowledge base from both the offshore and onshore operations.
New Zealand
Taranaki basin, offshore North Island
Over the past year, these assets generated gross revenues of approximately $1.5 billion for the joint venture – a real success story!
The Tui oil fi elds development phase was completed in mid-2007 and fi rst oil production was delivered into the FPSO Umuroa on July 30, 2007. The development process, managed by AWE in New Zealand, progressed successfully and the fi rst oil delivery saw only minor delays from the ambitious development and installation schedules.
Production performance from the four horizontal wells has exceeded expectations and further fi eld studies have subsequently resulted in a substantial rise in oil reserves for the three fi elds; Tui, Amokura and Pateke. Ultimate recoverable 2P oil reserves have increased from 26.8 million barrels at project sanction to 50.1 million barrels at the latest upgrade in June 2008.
In the fi rst 11 months of operations, the Tui oil fi elds produced 14.2 million barrels of crude oil. Tui crude oil sales of 13.8 million barrels were made in the year to customers in Australia, Singapore, Malaysia, South Korea and Hawaii. The oil has been benchmarked against the regional “Tapis” crude, with recent transactions trending towards a premium against this strong crude.
The offshore operations have run smoothly, a credit to the professional skills of the FPSO Umuroa operator, Prosafe Production. A minor oil spill incident was recorded in October 2007, where some water contaminated with oil was accidentally discharged overboard during routine operations. Further commentary on this issue is covered in the ‘Sustainability Report’, including a summary of the offshore operating changes that have been implemented since this incident.
Following the oil discharge in October 2007, AWE and its major contractor Prosafe Production, accepted the prosecution charges as laid by the regulator, Maritime New Zealand.
AWE takes its health, safety, environmental and regulatory responsibilities very seriously and deeply regrets this operational incident. The local management has worked closely with local authorities and community groups towards the restoration of the foreshore area affected by the spill.
A high level of exploration activity was completed in the Taranaki basin during the year. While strong oil shows were encountered in Tieke-1 and Taranui-1, as well as in Kopuwai-1, which has extended the area of known oil generation and migration in the region, the overall results were disappointing with several high profile exploration targets being plugged and abandoned.
Despite the lack of success in the 2007 exploration campaign, further exploration activity is planned in the current year, in conjunction with development and appraisal work around the Tui field. This programme may comprise up to seven wells, with planning advanced for the drilling of the Kahu prospect and the other Tui satellites, as well as a test on the large Hoki oil prospect defined by seismic recorded in mid 2007. The programme timing remains subject to signing of a suitable rig contract.
Further acreage was also acquired in the D’Urville basin, a southerly extension of the Taranaki basin. Additional seismic will be acquired in early 2009 over a prospect in this area as well as over several other prospects in our Taranaki permits. If the results of this work are encouraging, the drilling programme may be extended to include these new targets.
Indonesia
East Java basin, offshore Indonesia
Indonesia represents AWE’s initial foray outside the company’s heartland of Australia and New Zealand. AWE has had an exploration scouting office in Jakarta for over two years and the exploration acreage holding is growing. AWE has elected to concentrate its exploration efforts in the prolific East Java basin, where a number of oil and gas fields have been discovered in recent years.
The Bulu production sharing contract was AWE’s initial investment in Indonesia. Two exploration wells were drilled in the contract area during the year, with both encountering signs of hydrocarbons. Lisah-1 encountered encouraging oil shows, while Lengo-1 tested gas and confirmed a small gas discovery. The commerciality of this discovery is being assessed.
The results from these wells have provided enough encouragement to undertake two 3D seismic surveys in the Bulu contract area to define potential follow-on targets. This next phase of drilling is currently scheduled for late 2009.
Merger with ARC Energy Limited
The merger with ARC Energy was implemented in late August 2008, following months of intensive work by both companies. The merger has united two like-minded companies, which will provide benefits to both sets of shareholders.
The merger has increased AWE’s interests in the BassGas and Cliff Head projects, where AWE is already a major participant and will expand the exploration and development options for the company. The transaction has also added immediately to the cash generation for the combined business.
The immediate focus of the implementation team will be to access the additional opportunities in the merged group and ensure that the enlarged group maintains the strong technical and financial culture, dedicated to delivering strong shareholder returns.
Further, the transaction has provided interests in two listed oil and gas companies, Buru Energy Limited (AWE 15%) and Adelphi Energy Limited (AWE 34%). AWE has already shown its support for these exploration-focused companies, particularly demonstrated by the recent contribution to the Adelphi capital raising.
Corporate Review
Finance
Reported profit after tax was $264 million, a substantial lift on the previous corresponding period. The profit growth was directly attributed to the rise in oil and gas production and the sustained high oil prices over the period.
Production costs rose to $82.5 million following the commissioning of the operations in New Zealand and the increased production levels. Similarly, amortisation rose to $134 million, in line with the stronger production levels. Exploration and evaluation expenses also jumped, following the disappointing exploration results and the write-down of some previously capitalised exploration expenditures in the offshore Perth basin.
Tax expense was high at $240 million, with an effective tax rate of 47%. This high rate is worthy of further comment as it includes income tax provisions but also provisions in New Zealand and Australia for secondary taxes (APR in New Zealand and RRT in Australia). During the year income tax of $128 million was paid.
The balance sheet remains very strong, with zero debt and approximately $339 million in cash at year end. The ARC merger implementation, completed in late August 2008 has consumed some of this cash surplus, with approximately $160 million being paid as the partial cash consideration for the transaction. Furthermore, the repayment of the ARC debt and the unwinding of the ARC oil hedge position are expected to account for a further $110 million.
Directors have determined that no dividend is to be paid in respect of the 2008 financial year. The future payment of dividends will only be considered if it can be reasonably sustained over a longer period in a tax effective manner.
Changes to Directors
Mr Bruce Phillips, the founding Managing Director of AWE, retired as a director in August 2007. Bruce’s leadership and guidance was instrumental in the position of the business today and the ongoing success of the company is a testament to his vision. Following the retirement of Bruce Phillips, Bruce Wood assumed the role of Managing Director.
Mr Andy Hogendijk also joined the board of Directors in October 2007. Andy has had an extensive career in financial management with Suncorp Metway, the Commonwealth Bank and John Fairfax.
Future Outlook
The past financial year has been a watershed year for AWE. The four cornerstone projects that shareholders have been following for many years are now developed and producing strongly. Led by the performance from the Tui fields in New Zealand, AWE’s production rose strongly to almost 10 million barrels of oil equivalent and revenue, cash flow and after tax profit were all at record levels.
The record after tax cash flow in the year has allowed AWE to not only fund its entire exploration and development expenditure and repay all its debt but to also build cash reserves of $339 million at the year end.
It was against this record performance that AWE decided to merge with ARC to expand not only AWE’s production assets but also to provide opportunities for future growth. After acquiring ARC, a transaction finalised after the end of the year in August, AWE still had cash reserves at the end of August of more than $200 million. In addition the 2008-09 financial year should see another year of strong profits and cash flow for the enlarged AWE.
AWE is in a very strong position to grow. For the first arm of that growth the company will rely upon its traditional area of growth: exploration. Over 11 years since its inception AWE has had an enviable 20% plus commercial success rate in its exploration programme and AWE plans to continue that record. Over the next two years AWE will not only undertake extensive exploration around all its key production areas but also continue its search for success in new areas.
Over the next two years in its core areas in the Taranaki, Bass, Otway and offshore Perth basins, AWE plans to participate in up to nine exploration wells. In addition plans are already underway to expand exploration drilling in the onshore Perth basin areas acquired in the ARC merger.
AWE will be active in both Indonesia and in the Yemen permits acquired with ARC. Both of these areas offer significant upside for shareholders. AWE is also actively seeking exploration opportunities in other areas in which it can apply its core exploration competencies.
AWE’s exploration philosophy is dual focussed. Firstly the majority of the company’s exploration capital should be spent on lower risk prospects targeted to provide an ongoing chain of development projects. Secondly however, shareholders should also be regularly exposed to the upside potential of a smaller number of higher risk but high potential prospects; prospects that, if successful, are big enough to change the size of the company. There are some upcoming projects in this latter category being planned for drilling over the next two years.
In addition to exploration AWE is also seeking corporate and other opportunities to expand, subject of course to ensuring that any opportunity selected can be demonstrated to add value to shareholders. In the current financial climate AWE’s strong cash position and strong cash generation will be a clear advantage.
Bruce J. Wood
Managing Director
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