Corporate Review
Reported profit after tax was $89 million, lower than the previous year’s record due to reduced production and lower realised oil prices. This result was negatively impacted by some exceptional items, which reduced net profits by approximately $43 million. These exceptional items relate to asset and investment impairments following the merger with Arc Energy Limited, in addition to expensing costs associated with the merger. These negatives were partially offset by gains on foreign currency holdings, specifically US dollars, and a gain on the close out of oil hedges.
Sales revenue for the financial year fell to $590 million, with lower oil and gas production and sharply lower oil prices both contributing to the decline. Production costs also rose during the year, following the integration of the onshore Perth Basin assets and the higher equities in the BassGas and Cliff Head projects.
Amortisation charges were lower, in line with the reduced production rates. Exploration write-offs fell by $14.2 million, following the expensing of unsuccessful exploration activity in line with the Company’s successful efforts policy. In the year, exploration expenses were incurred for work in Australia, New Zealand, Indonesia, Yemen and Vietnam.
Effective tax rates were again high at 58.4%, mainly as a consequence of the application of the tax effect accounting to both PRRT liabilities in our Australian operations and APR liabilities in our New Zealand operations, in addition to the non-deductibility of overseas exploration costs incurred outside of Australia and New Zealand.
AWE’s balance sheet remains very strong, with $356 million of cash and no debt. During the year, the Company completed the merger with Arc Energy through a combination of cash and scrip, spent $133 million on exploration and development activities, paid a special dividend of $52 million and managed to grow its cash balance. This active year underlines the strong cash generation of the core production business.
Directors have determined that no further dividend is to be paid in respect of the 2009 financial year. The future payment of dividends will only be considered if it can be reasonably sustained, with due regard to the forward capital requirements of the business, and paid in a tax effective manner to shareholders.
The share price performance of AWE was disappointing in the financial year, with the Company underperforming its peer group of Energy companies and the Australian market, in the form of the ASX 200 Index. The underperformance against the Energy Index was partly driven by the strong performance of a number of the coal seam methane companies in the Index, where a frenzy of deals were completed at premium prices during the period. AWE strives to outperform these indices over a rolling three year period and provide superior total shareholder returns to shareholders.
Changes to Directors
Mr Edward (“Eddie”) Smith resigned from the AWE board on June 17, after some ill health. Eddie had been a Director of AWE since January 2000, following the merger with Omega Oil NL. Eddie has made a substantial contribution to the early stage development of AWE and remains a large shareholder. The board, management and staff wish Eddie a speedy recovery and best wishes for his plans post AWE.
Subsequent to the end of the year, AWE announced planned board changes to further strengthen the board with Mr Ken Williams being appointed to the board in August 2009 and Mr Bruce Phillips being nominated as a Director.
Ken Williams has over 20 years operational experience in corporate finance with an emphasis on treasury and financial risk management with significant Australian enterprises including Renison Goldfields, Qantas, Normandy Mining and Newmont Australia.
Bruce Phillips is also joining the board of AWE, subject to shareholder approval at the 2009 Annual General Meeting. Bruce is well known to AWE shareholders as the founding managing director, with extensive technical, commercial, strategic and leadership skills, which will be important in the future development of the Company.
We are also sad to report that Mr Colin Green will be retiring from the board of AWE at the 2009 Annual General Meeting. Colin was the first director of AWE and has made an outstanding contribution especially in the areas of financial discipline and corporate governance. His contribution to the business will be missed.
Future Outlook
AWE has not been immune from the difficult financial conditions which have prevailed over the past 12 months. Sharply lower oil prices have severely impacted revenues and overall returns, but the strong balance sheet and appetite for growth means that AWE is better positioned to prosper into the future than a number of our peer group in the oil and gas sector.
AWE’s total oil and gas production for the 2009-10 financial year is forecast to fall to 7.0 million BOE principally due to the natural field decline at Tui. A planned shutdown of the BassGas facilities late in 2009 is also expected to impact on the year’s production performance.
After two years in planning, it is now expected that exploration expenditure in the 2009-10 financial year will increase significantly to $175 million. AWE has embarked on a very exciting exploration program, which will continue for the next nine months. This program will see continuous drilling activity in four countries; Australia, New Zealand, Indonesia and Yemen. It must be noted that under the Company’s accounting policy, any costs associated with unsuccessful drilling will be expensed which will impact on reported profits.
The major exploration program in the current year includes drilling in five basins across four countries. This is a very important exploration program for AWE and one for which we hold high hopes for success; success that could more than double AWE’s reserves. The program includes a combination of lower risk appraisal wells in both the Taranaki and Bass basins together with high potential exploration wells in New Zealand and Indonesia.
In parallel with the high level of exploration spending, AWE is continuing with a capital expenditure program to complete the Henry gas development and to maximise the value of the existing Yolla asset. This year AWE plans to spend approximately $125 million of capital expenditure on these assets. In addition to exploration
AWE is seeking to utilise its strong balance sheet to identify and evaluate asset and corporate acquisitions which could add value for shareholders.
AWE management have continued to evaluate new opportunities, both for exploration and for undeveloped producing assets. This activity will crystallise value for shareholders if the right opportunity is unearthed and delivered.
In this light, AWE’s geographic focus has also expanded with the AWE/Mitsui scouting alliance in Europe. AWE and Mitsui are working together to search for new investment opportunities in Europe that will deliver new growth to the Company and reward shareholders.
AWE’s prime driver is the creation of long-term shareholder value. Oil prices were volatile in the 2008-09 year and we expect further volatility in the future as the world economy recovers from the global financial crisis. AWE remains well placed to thrive in these conditions; our long-term oil and gas reserves, solid current cash flow and strong balance sheet place AWE in a very advantageous position.
The Company looks forward to the next year. AWE is financially strong and debt free, with an ongoing appetite for growth in shareholder value.
Bruce Wood
Managing Director September, 2009.
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