Company: New Zealand Oil and Gas Ltd  


Share Price: $1.35

Market cap: $525

Recommendation: ‘Buy’

All of New Zealand’s producing oil and gas fields are located in the Taranaki Basin, an area covering 100,000 sq km on the west coast of the North Island. Although its first oil discoveries date back to 1865, the area is still regarded as underexplored relative to similar basins around the world. Perhaps this is why recent discoveries such as the 50million barrel offshore Tui fields have featured amongst the nation’s largest.

The Tui oil fields project is the first stand-alone offshore oil stgelopment in New Zealand, and was fast-tracked into production only 4 years after its initial discovery. Tui has surpassed all expectations since production commenced in mid 2007 and as a result, its reserves were almost doubled from their original estimate of 27million barrels. With a 12.5% stake in the field, New Zealand Oil and Gas (NZO) has been a key beneficiary of its success. Production revenues underpinned a profit of $NZ53m ($A43m) last year, and have seen the company’s cash balance swell to $NZ175m ($A142m). Although production is now in natural decline, Tui’s riches have provided NZO the financial strength to pursue other treasures buried beneath the Taranaki.

The company has a 15% interest in the soon to be commissioned Kupe Gas-Condensate field. NZO originally discovered this gas and condensate field in 1986, but stgelopment was considered uneconomic until recently. New Zealand has in the past obtained its gas supply from the rival Maui field, which brought about large volumes and a relatively low, contract based domestic pricing regime. But since the Maui field entered into natural decline, the potential for Kupe was invigorated. An investment decision was made in mid 2006 and the project is now due to come online.

Kupe has the potential to offset declining Tui revenues. The company’s share of 2P Reserves stands at 38PJ gas, 165,000 tonnes of LPG, and 2.2million barrels of light oil. NZO’s share of production is expected to initially be around 1million barrels of oil equivalent (boe) per year. Together, Tui and Kupe are forecast to underpin NZO’s annual production profile above 1m boe through to 2015, but upcoming regional drilling has the potential to fuel additional growth.

Exploration activity in the Taranaki Basin is heating up, with NZO participating in at least four offshore wells this summer. Of particular interest will be two planned within the Tui permit area near to existing production reservoirs. Although ‘dry wells’ are more common than not, recent activity in the Taranaki has yielded enviable results. Commercial discovery success rates of one in three have been reported by the Government’s Crown Minerals Group, but in our view NZO’s share price is factoring in little chance of success, which is where the opportunity lies.

More than half of its $550 market cap is backed by cash and listed investments, while its forecast production profile in excess of 1million boe should insulate downside risks in the event of dry wells. On the other hand, further gains in the oil price, or a sniff of exploration success is all that’s needed to fuel further share price growth. Such a balanced risk to reward offering is quite rare for the oil and gas sector, hence we rate the stock a ‘buy’.

Tim Morris is an analyst at Please note that simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of You should seek professional advice before making any investment decisions.


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