Grant Samuel report 'materially overstates' Cue Energy value, says Woodward

The "independent expert report valuation conclusions (are) difficult to defend," writes Kidd in the March 9 report.

A report being used by Cue Energy Resources to fend off a takeover bid from New Zealand Oil & Gas `materially overstates' the target company's value, says Wellington-based Woodward Partners in a report for clients by its oil and gas specialist, John Kidd.

Where Australian investment house Grant Samuel values Melbourne-based Cue at between 11.5 Australian cents and 15 Australian cents a share in its independent expert report to the Cue board, Kidd effectively suggests NZOG is paying a premium in its offer, pitched at 10 Australian cents per share. Kidd values Cue shares at between 5 Australian cents and 9.5 Australian cents.

The "independent expert report valuation conclusions (are) difficult to defend," writes Kidd in the March 9 report, which also highlights the growing risk of cost blow-outs and under-recovery by the joint venture developing the Maari oil and gas field, offshore Taranaki. Those risks were analysed in specialist technical risk analysis for Cue by the independent oil and gas consultancy firm RISC, and published on the ASX last week with the Grant Samuel report.

The RISC report shows a material deterioration in the expected cost and recoveries from the field since its last such report, published in June.

Cue owns 5 percent of Maari and is a primary target of NZOG's interest in the company, in which it seeks sufficient control to force Cue to focus on existing producing assets rather than investment in various exploration prospects, mainly offshore Western Australia.

"RISC's report serves to confirm the extent of time, cost and outcome pain being felt by the Maari joint venture as the Maari growth programme nears its end," the Woodward report says. "The cost of the programme is now expected to exceed $500 million, around $130 million more than sanctioned, and performance to date from completed wells appears to to have undershot expectations.

"Further drilling and therefore spend is possible before the end of 2015," the report says, but the Grant Samuel report does not include any such costs in its Cue valuation.

The RISC report estimates the Maari programme's costs have blown out 34 percent between June last year and last month, that estimated total production of 40 million barrels of oil equivalent is 28 percent below the June estimate, and that production rates this year will be 38 percent lower than estimated.

The NZOG offer documents indicate the Wellington-based oil and gas field developer would settle for owning 30 percent of the company, up from the 19.9 percent it acquired from Todd Energy before Christmas. Todd still owns a 7 percent stake, but after standing in the market for Cue shares for more than a week, NZOG has yet to announce acceptances amounting to even 1 percent of the issued capital of the company. The takeover offer is open until March 27, but can be extended.

"The success or otherwise of the offer will hinge on the responses of existing cornerstones Singapore Petroleum (PetroChina), Todd Energy and ICM-managed entities which in total control 36.3 percent," said Kidd. "While there appear to be strong strategic reasons why each might accept, whether they indeed will is uncertain."

If all these substantial shareholders sold, NZOG would emerge with around 57 percent of Cue, before any other minority acceptances were counted.

Cue is understood to have retained the Australian offices of global investment bank UBS to fend off the unwelcomed bid from NZOG.

The Woodward report also questions Grant Samuels's treatment of Cue's annual overheads of A$6.5 million, which Kidd says are "significant for a company of its size and profile" and which have shown a recent increase to around A$7.6 million. Yet the Grant Samuel implies much lower ongoing overheads of A$400,000 to A$800,000 under current ownership. This has "the most material impact" on the difference between the Grant Samuel and Woodward valuations.

The 9.5 percent weighted average cost of capital that Grant Samuel used for the discounted cashflow valuation is also "in our view low compared to benchmarks more commonly applied across the exploration and production sector, particularly given Cue's profile and size," the Woodward report says.

It also questions the A$39 million of cash recorded in the Grant Samuel valuation. "With revenue offset, we estimate net third quarter cash flow of negative A$4 million, inferring a cash balance at the close of the third quarter of the 2015 financial year of A$35 million."

"In aggregate these and other issues have the effect in our view of materially overstating Cue's standalone value to its shareholders," Kidd says.

Cue shares are quoted on the ASX today at 10.25 Australian cents apiece, while NZOG shares stood at 61 cents.


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