The Scheme of Arrangement booklet for the New Zealand Oil & Gas (NZOG) takeover starts with the familiar message: "We are delighted to present this booklet, along with our unanimous recommendation to vote in favour of the scheme as it outlines".
The "we" are Dr Rosalind Archer and Rod Ritchie, the two independent NZOG directors.
Archer is a professor at the University of Auckland, and head of its Department of Engineering Science, while Ritchie has extensive executive experience in the oil and gas sector.
There is no mention that Archer has had any listed company director experience in her NZOG website bio.
The front cover of the booklet contains the big, bold words "VOTE IN FAVOUR". This signals that the independent directors are recommending the 62c a share offer from O.G. Oil & Gas (Singapore), even though Northington Partners values NZOG between 62c and 84c a share.
The 62c a share offer values the company at $101.9 million compared with its cash resources of $105.6m, although about a quarter of that is held by Cue Energy, which is just over 50 per cent NZOG owned.
In addition, NZOG has no borrowings and balance sheet equity of $146.3m.
What is wrong with our directors? Why don't they put up a fight to resist low-priced takeover offers, or at least try to extract a higher price from a bidder?
If directors continue to acquiesce to these low-ball offers it won't be long before the NZX has fewer than 100 listed domestic companies compared with 127 at present.
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Nevertheless, some market participants will be happy to see NZOG go because of its chequered history. This includes the infamous 1980s oil boom, the Pike River Coal disaster and disappointing oil exploration results.
NZOG, which listed on the NZX in September 1981, had a quiet start but interest in the stock increased throughout most of 1983. This was because of heightened offshore exploration activity by global and domestic companies.
New Zealand individual investors had strong interest in the resource sector at the time, with 29 Australian mining companies and 19 Australian oil companies listed on the NZX. Most of these stocks were actively traded on this side of the Tasman.
Interest in the NZ exploration sector increased dramatically in early 1983, with several new NZX listings including: Petro Taranaki; Southern Petroleum; Horizon Oil Exploration; Oilfields; and Kupe Petroleum.
The oil boom took off in earnest on May 26, 1983 when Petrocorp announced a promising find at its Tuhua-1 well off the Taranaki coast. This immediately boosted the listed oil exploration sector.
New Zealand's offshore oil exploration activity was mainly focused on the calmer summer period and the arrival of two huge rigs in September 1983 created further excitement.
These were due to drill offshore Taranaki and the Great South Basin.
By early November, viewing galleries at the major exchanges were overflowing with enthusiastic investors as positive news began to leak from the offshore Taranaki rig. The Auckland Stock Exchange considered hiring security guards to deal with the crowds and moving its administration offices to another building so it could enlarge the exchange's viewing gallery.
But the 1983/84 summer exploration season was a major disappointment and by late autumn 1984 the rigs had departed without major discoveries.
NZOG's share price went from 30c in 1982 to 160c in 1983 but had slumped back to 52c at the end of 1984.
These booms and busts are an ongoing feature of sharemarkets, and the 1983 NZ oil exploration euphoria attracted many new investors to the NZX. These subsequently switched their attention to the property and investment companies that drove the market higher in the mid-1980s.
Boom and bust sectors come and go, with most of the 1980s market drivers — particularly forestry, which was dominated by Fletcher Challenge, along with oil exploration and investment companies — having minimal NZX representation these days.
NZOG purchased Pike River Coal from the NZX listed United Resources in 1998. NZOG and United Resources were chaired by the stubborn Australian Tony Radford, who ruled both companies with an iron fist.
Progress was slow at Pike River, but the company decided to go ahead with its underground mine after an early 2000s feasibility study.
Gordon Ward, NZOG's general manager in Wellington, had overall responsibility for the project while Peter Whittall was recruited as the mine manager. The new mine was beset by delays and cost overruns, with Whittall giving a hint of trouble ahead when he told a mining conference that the mine had "medium to high" methane levels that would be "difficult to control by ventilation means alone".
There was also a major conflict between NZOG and Pike River Coal, partly because the former launched a major capital raising initiative as Pike River was attempting to raise pre-IPO funding.
Three Pike River directors resigned, with one of them writing in his resignation letter: "Put simply, my decision relates to governance issues, the relationship with NZOG". He went on to write that NZOG was charging Pike River "outrageously high" fees and had insufficient money "for the prudential funding of the project".
Pike River listed on the NZX in July 2007 after raising $85m from the public. After the IPO the public owned 42.5 per cent, NZOG 31.1 per cent, two Indian mining groups 18.5 per cent and pre-IPO minority shareholders 7.9 per cent.
Ward, who according to the prospectus "has been responsible for all aspects of the Pike River Project (since 1998)", resigned on October 1, 2010 and 49 days later, on November 19, 2010, the mine exploded with 29 men losing their lives.
NZOG received a substantial insurance payment after the Pike River disaster and it has sold several assets in recent years. As a result, the oil exploration company returned $63.2m to shareholders in 2015, $9.2m in 2016 and a further $100m in early 2017.
In August 2017, Zeta Energy, which was controlled by Duncan Saville, made a partial bid to acquire just over 50 per cent of NZOG at 72c a share. This was quickly followed by a partial offer from O.G. Oil and Gas (Singapore) to purchase 67.55 per cent of NZOG at 78c a share.
Directors recommended the latter offer after Northington Partners valued the target company between 78c and 93c a share.
NZOG endorsed the 78c per share partial offer because the Singaporean company had global exploration expertise that would benefit the NZX listed company.
However, this time the independent directors are recommending the 100 per cent offer through a Scheme of Arrangement for several reasons, including:
• The inherent uncertainty of deepwater exploration prospects
• The difficulty of raising additional equity capital to fund growth in the current environment
• The changed operating environment for oil and gas investment in New Zealand following the Government's 2018 decision to stop awarding new offshore exploration permits.
Independent director Dr Rosalind Archer wrote: "The proposed scheme presents an alternative that we are pleased to recommend: the certainty and timeliness of achieving a significant premium at a time of difficult market conditions, a changing policy environment and uncertain prospects".
This is consistent with the short-term focus of many independent NZ directors when recommending takeover offers for their listed companies. The NZOG independent directors don't seem to have put much emphasis on the potential removal of the offshore exploration permits ban by a new government.
NZOG shareholders will meet in Wellington on Wednesday October 16 to approve the Scheme of Arrangement.
The motion requires a 75 per cent approval, with the Singaporean offeror unable to vote its 69.9 per cent shareholding.
- Brian Gaynor is a director of Milford Asset Management.