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CHIEF EXECUTIVE OFFICER'S REPORT TO SHAREHOLDERS ANNUAL GENERAL MEETING |
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1. GOING PUBLIC To place ROC's August 1999 float in a global context it is necessary to highlight the following point: - As far as the Company's management is aware, ROC is one of only two start-up, upstream, oil and gas companies to make the transition from private ownership to a US$100 million, or more, public offering, anywhere in the world during the last three years. The public float of the Company was based upon at least nine, largely independent, circumstances (Attachment 1) all of which were perfectly aligned at the time. Specifically, and in no particular order of importance: - · The assets upon which the float was based included significant reserves and production. · The production and reserves were located in a part of the world which investors perceived to be "safe": onshore UK and in the UK North Sea. · The relevant fiscal regime was one of the best in the world - and still is! · International oil prices were strong and getting stronger. · Because of the strengthening oil price, investor attitude was positive and improving - although this proved to be only a very temporary warming of sector sentiment. · The management was known to the local investment community. · The relevant oil industry sector (Market Capitalisation: A$100 million to A$1 billion) was virtually empty. · Based upon the success of dot.com stocks, there was a general perception that almost any start-up company represented an excellent short term opportunity for investors to realise substantial profits. · There was a lot of exploration upside included in the offering, for no additional consideration. The absence of any one of the factors referred to above would have jeopardised the public float process. Ironically, since ROC's float, these factors have not been in alignment. In this sense, ROC's public offering was, fortuitously, well timed. Although the onshore UK assets captured most of the market's attention, as far as ROC was concerned, what it was offering to investors was a diverse portfolio of assets that stretched not only from exploration to production but also all the way from Lincoln to Ulaanbaatar. 2. ROC'S PORTFOLIO ROC now has interests in seven countries: UK (both onshore and in the North Sea), Morocco, Mauritania, Senegal, Equatorial Guinea, Mongolia and Australia (Attachment 2) One of the good things to happen within the Australian investment community over the last several years is the increasing realisation that, in the modern e-world in which we all live, distance is not as relevant as it used to be. Indeed, as far as Australian business is concerned, there is no longer any tyranny of distance. As far as ROC is concerned, we can't even find the word in our dictionary! (Attachment 3). That is not to say that ROC is unfocussed. Far from it. However, we do not define focus in terms of geography but rather in terms of world class petroleum opportunities, stable and supportive governments, and good fiscal terms. There are parts of the world where we do not have a presence and don't expect to establish one, including all of the Americas and Russia. Therefore, at least we know where we're not going! 3. AN EVENTFUL NINE MONTHS During the nine months that ROC has been a publicly-listed company a lot of things have happened, mainly good, although you would never know that from the share price performance. Consistent with ROC's sensibly contrary corporate strategy, I thought we should look first at these bad events rather than starting with the - more numerous and more significant - good events. 3.1 THE BAD EVENTS At meetings like this it is always tempting for a CEO to beat around the bush when talking about events which most other people would regard as being "bad". CEO's are often quite good at employing various euphemisms to obscure and/or soften an unpalatable corporate predicament. ROC's attitude is that, during the last nine months, it has successfully managed its way through a number of events which can only be described as "bad" and there is no point in trying to use any other adjective in this context. There were several bad events, some specific to ROC and some well beyond ROC's sphere of influence (Attachment 4). · First oil from the Kyle Field in the UK North Sea was delayed six months. This field, in which ROC has a 12.5% interest, only represented about 10% of the Company's asset base but it had a disproportionately high market profile. In some cases it seems as if the "delay" in production was considered by the market to be synonymous with "forever lost". · The Life of Field Development at Kyle was delayed by at least twelve months. · ROC's onshore UK drilling program was deferred pending a technical review. · All of the above reduced ROC's 2000 production profile by about one third, although the impact on revenue was cushioned by strong product prices. · There was also a flight of investors from value stocks to dot.com companies. These issues impacted upon ROC's share price and, although I don't want to dwell on the details, I suspect shareholders would welcome some further background comment. 3.1.1 Sector Sentiment Since late 1997 the oil industry has been beaten up quite badly. Many companies have shrunk themselves and many investors have jumped out of oil stocks for a variety of reasons. For the first 18 months of the down cycle it was the low oil price that hurt the industry and investors alike. More recently, the damage was largely the result of the competitive allure of the new internet economy. For what it is worth, ROC doesn't subscribe to the view that there is an "old" and a "new" economy (Attachment 5). To paraphrase both an electioneering slogan used in the United States and a Sydney Swan's football chant of recent years: there is only one economy! (Attachment 6). And the oil business is deep into it. In fact, the international oil industry is going to be one of the great beneficiaries of the new economy. Unlike many other industries, the oil industry has a track record of enthusiastically embracing innovative technology - that's how we find oil; that's how we make our living! In mid-1999 there was an unprecedented disconnection between a rising oil price and a fading enthusiasm for oil stocks. In Australia this occurred on 14 July 1999, coincidentally two days before ROC's public issue closed! (Attachment 7). The first person to point this disconnection out to me in August/September 1999 was Paul Ashby, ABN Amro's, Sydney-based, analyst, and I believe that this was one of the earlier recognitions of a phenomenon that has since become widely acknowledged. Unfortunately, ROC's share price has under-performed even relative to an underperforming sector (Attachment 8). The three basic reasons for this are outline below. 3.1.2 Acceptance of Oversubscriptions Immediately after the float, when the would-be "stags" failed to realise the instantaneous profit they sought, there was a suggestion that ROC had accepted too many oversubscriptions. Anybody who is really aware of ROC's modus operandi and has the long term interests of ROC shareholders at heart, would find it hard to support that suggestion. If ROC had accepted just A$20 million less - equivalent to 13% of the entire subscriptions accepted - and ROC's capital expenditure budget to end-1999 had not been underspent then, at the end of last year, a mere five months after listing, the Company would have had very little financial breathing space. Clearly, this situation would not have been in the best interests of ROC's longer term shareholders in an industry which is notoriously capital intensive. Because ROC accepted the maximum oversubscriptions - and still returned A$21 million of additional oversubscriptions to disappointed subscribers - the Company has been able to develop its business from a very sound financial base. 3.1.3 The Kyle Oil Field Well beyond ROC's tiny sphere of influence in the North Sea lies the Banff Ramform Floating Production Storage and Offloading facility (FPSO). ROC does not have any direct interest in this facility but the Company and its shareholders were acutely interested in its progress because, at the time of the float, the understanding was that the Kyle Field would be developed through the Banff FPSO. Towards the end of the year it became increasingly apparent that that was not going to happen within the designated timeframe. Very understandably, the market took a dim view of the delay and ROC's share price dropped as a result. ROC, with a 12.5%, non-operated, working interest in the Kyle Field - and no interest in Banff - was not particularly well placed to influence events (Attachments 9, 10 & 11). There was little we could do other than work with our Kyle co-venturers to rectify the situation - and that is exactly what has happened with first oil from an Extended Well Test at Kyle now scheduled for the end of the month. 3.1.4 The Deferral of the UK Onshore Drilling Program Soon after ROC's public listing, oil production at one of our single well onshore fields in the UK, Cold Hanworth, unexpectedly declined. More or less at the same time, something broadly similar, but totally unrelated, occurred at ROC's other single well field, Keddington, although this eventually recaptured part of its production profile. In themselves the under-performance of these two wells was not a big deal but after careful thought ROC chose to react to the situation in what it considers to be a conservative and prudent manner - by deferring an onshore exploration and appraisal drilling program pending a technical review. Understandably, the market did not like the lack of drilling and the share price suffered accordingly. However, if any market watcher now chose to look back at that decision in the light of the recently announced profitable sale of ROC's non-core onshore UK assets, they might find it hard to avoid the view that ROC's decision to defer the drilling programme was in the best interests of the Company's longer term shareholders - where "longer term" is defined as those who bought shares in the float and still owned those shares nine months later. 3.2. THE GOOD EVENTS In a soft sector bad news always gets a lot of attention, but the happy reality of ROC is that a lot of good events have occurred during the last nine months including the successful development of ROC's core asset, the Saltfleetby Gas Field; the acceleration towards potential development of two of ROC's UK North Sea oil fields, Chestnut and Blane; continuing strong product prices; excellent quarterly results and, most recently, the profitable sale of ROC's non-core UK assets. Some of these events are described in more detail below: 3.2.1 Saltfleetby Gas Field The Saltfleetby Gas Field has performed better than expected (Attachment 12). No gas field stays on peak flush plateau production forever but this gas field, the largest onshore UK, has stayed on plateau longer than we anticipated. We expect the field to start its natural decline very soon, coincident with the weaker gas prices of the northern Spring and Summer. Perhaps, it should be emphasised that when we talk about field decline, we are not talking about anything dramatic or sudden, all the engineering evidence available suggests that Saltfleetby is a robust field which has a relatively long productive life ahead of it. Saltfleetby's performance is one of the main contributors to ROC's sales revenue in the UK (Attachment 13). This, in turn, had a positive impact on the company's overall financial position. Bruce Clement will now detail ROC's financial position. By the way, until yesterday Bruce was ROC's "General Manager - Finance" but, from today, he has been promoted to the position of ROC's "Chief Financial Officer". In ROC's universe this means that he keeps doing the same job, doesn't get a pay rise but does get new business cards, but only when he has used up all of his current cards! Mr Clement then presented (Attachments 13, 14, 15 & 16) 3.2.2. Sale of Non-Core UK Assets The recent A$57 million sale of ROC's non-core UK assets crystallised a minimum A$18 million, unaudited, abnormal, profit on assets held over a seven month period. The details have been well documented in ROC's recent release to the Australian Stock Exchange (ASX) and they do not need to be reiterated here, other than to emphasise the following points: · As a result of the sale, ROC's 2000 profit forecast has been revised upwards from A$13.1 million to A$25.0 million. Although the increase is due to the abnormal profit relating to the non-core UK asset sale, it should be noted that that part of ROC's anticipated 2000 profit relating to the production which has now been sold has, of course, been excluded from the revised profit calculation. · Perhaps the most telling point is that, on the basis of an assumed long term average oil price of US$18.00/bbl - and the further assumption that the established natural decline of the Welton Oil Field continues - ROC believes it would have taken more than eight years for the Company to realise the discretionary cash flow which has been generated by the sale. · It should also be emphasised that the company which purchased the assets is very focussed on the type of operation which can add value to them and ROC believes that that company will be able to work the assets in an appropriate manner which is not part of ROC's broader corporate strategy. As with everything, the key to the asset purchase and subsequent sale was good timing. ROC has retained its 100% interest not only in the Saltfleetby Gas Field but also in the surrounding Humber Basin acreage because it believes that the exploration potential of this part of eastern England has not been fully explored, despite the presence of the large Saltfleetby Gas Field. ROC's people in Lincoln are busily interpreting seismic information which the Company gathered in late 1999 in areas where seismic vehicles had rarely, if ever, gone - such as Grimsby Beach. 4. NON-EXECUTIVE BOARD AND ADVISORS Another very good aspect of ROC which has been reinforced during the last nine months, although it receives scant public attention is the quality of the Company's non-executive directors and advisors. It is very difficult for a Chief Executive Officer to speak well of his, or her, non-executive Directors and Advisors without appearing to be sucking-up to them and/or giving the impression that everything at Board and Advisor level is just a little bit too cosy and friendly. Perhaps that is why few CEOs in Australia praise their non-executive Directors and Advisors in public! Whatever the reason, I would like to take a moment to bring this group of people into the shareholder spotlight because I really believe that they represent an extremely valuable corporate asset. Specifically: · To the best of ROC's knowledge its system of Directors and Advisors is very unusual, possibly unique, within the Australian oil patch. · All of ROC's non-executive Directors and Advisors have owned personal shares in ROC for more than twelve months because they invested in the company when it was privately-owned. This may explain why their sense of corporate ownership and responsibility is almost parental. This is a wonderful start-up advantage which members of the corporate establishment cannot easily replicate. · ROC's non-executive Directors and Advisors come from very different backgrounds and bring with them diverse skill sets. Each is very successful in his own professional field and, importantly, each has a deep knowledge of what makes the international oil and/or commodity business tick. This ensures that ROC stays focussed on strict business fundamentals - even if this sometimes means that its actions are contrary to short term stock market demands. · At the centre of the Board/Management relationship at ROC is an element which we consider to be very precious and which we describe internally as "positive harmonic torque". This is what you get when a company has a group of Directors, senior Executives and Advisors who have established a working relationship which is very harmonious, yet, at the same time it is one which encourages a healthy independence of thought. This is a marked contrast to the "clubby" atmosphere which seems to pervade many boards in corporate Australia. In summary: as ROC shareholders you've got a very smart, unpretentious, hard working, group of non-executive directors and advisors over-seeing your company. 5. WHERE IS ROC NOW? A CEO's report to shareholders at a publicly listed company's inaugural Annual Meeting should not just be a retrospective summary of what happened yesterday but also an outline of where the company is today and where it is going tomorrow. This is where ROC is at the moment: - · Following the sale of the Company's non-core assets in the UK, ROC is still producing about 9,000 BOEPD - 87:13; gas:liquids. We expect this to increase to 10,000 BOEPD (73:27 gas:liquids) in June when the Kyle Field starts an Extended Well Test. · As far as exploration is concerned, the company has a portfolio which has been considerably highgraded over recent months, particularly by ROC gaining access to new, deep water, exploration opportunities, offshore West Africa. · ROC is also fortunate to have been able to identify large prospects and leads in its 100%-owned acreage in Mongolia and Morocco as well as an attractive exploration play in the offshore Perth Basin. More details are provided below 5.1. ROC IN WEST AFRICA: OVERVIEW When ROC publicly listed nine months ago, it did not have any acreage offshore West Africa. Since then it has gained access to significant new opportunities offshore Senegal, Mauritania and Equatorial Guinea. When viewed from Australia the significance of this portfolio may not be immediately obvious but within the international oil and gas community the deep water potential which lies along Africa's Atlantic margin is regarded as being one of the global industry's "hot-spots". Certainly, it is recognised as such by large companies for reasons that are worth mentioning at this meeting. Specifically: · Discoveries were being made in deep water (defined as >500 metres) in the early 80s but it was not until the 90s that deep water exploration and development really started on its exponential growth path. · Now there are three prime areas of the world for deep water exploration: the Gulf of Mexico, offshore Brazil and offshore West Africa. Elsewhere there are only about 10 deep water fields scattered widely across Asia, the Mediterranean and the edge of northwestern Europe. · Within the three prime areas the statistics are quite stunning (Attachment 17). This is why big oil companies are active in the deep waters of the Gulf of Mexico and offshore West Africa - they need to find big reserves. · Reserve replacement can be a big problem for big companies and one that can easily be under-estimated by people who are not charged with the responsibility for finding such reserves. For example, ExxonMobil's annual production is between one and two billion barrels of oil equivalent which means that, sooner or later, it must find a similar amount of new oil to replace that production. That's a tall order. The goal becomes even more difficult when you realise that most big companies participate in exploration efforts through joint ventures. This means that, in order to replace its annual production, ExxonMobil needs to be at a, say, 50% equity level in two separate joint ventures both of which discover 1.5 billion barrels of oil - every year! Alternatively, ExxonMobil could be really lucky and find itself in a single joint venture which makes two such discoveries every year! These are rare situations to say the least. One of the few places where reserve replacement on this scale can be achieved is in the deep waters offshore West Africa 5.1.1 Equatorial Guinea One of the more important discoveries during 1999 was the Ceiba Oil Field in the Rio Muni Basin, offshore Equatorial Guinea (Attachment 18). ROC was pleased to be able to acquire an interest in two blocks in the northern part of this basin in April 2000. The blocks are on broad regional trend from the Ceiba discovery which flowed in the order of 12,400 BOPD in late 1999. That discovery, by the US-based Triton Energy Limited, had a positive impact on Triton's share price although, the exact extent of which cannot be easily measured because Triton was presumably doing other things at the same time as it was discovering and appraising the Ceiba Field. However, during the time span represented by the lead up to the company's Equatorial Guinea discovery and shortly thereafter, Triton's market capitalisation increased by more than A$1 billion and the view of many analysts is that this price rise was not entirely unrelated to its exploration success offshore Equatorial Guinea. 5.1.2 Mauritania ROC has also acquired an option that will allow it to access new opportunities in the deep waters offshore Mauritania at some stage during the next three years, subject to ROC choosing to maintain that option (Attachment 19). This is an area which has developed a reasonably high profile in Australia because of the direct participation in the joint venture of Woodside Petroleum Limited and Hardman Resources Limited. 5.1.3 Senegal ROC has also acquired acreage offshore Senegal as part of its African portfolio building process but this area is still at the very early exploration stage (Attachment 20). 5.2 Offshore Perth Basin, Australia As operator of WA-286-P, ROC plans to drill an exploration well on the Cliff Head South (Attachment 21) Prospect in late 2000 or early 2001 with the exact timing depending on rig availability. 6. MONGOLIA Mongolia was ROC's first exploration acquisition made when it was a private company in early 1998. ROC believes that the petroleum potential of the East Gobi Basin is significant (Attachments 22 & 23). As a result of an intense data acquisition and review exercise, ROC has identified four diverse prospects of substantial size and the company is currently planning to drill two of them starting in August 2000. A key exploration element is that ROC believes that better reservoir potential exists in the vicinity of these prospects than has been evidenced by the previous (mainly 1950 - 60s) drilling which has been almost entirely confined to a tiny part of one sub-basin within ROC's 16 million acre area. Of course, it is no good finding oil if you can't sell it, and this brings me to one of ROC's more significant achievements: the successful export sale of Mongolian oil to China. China's thirst for oil is well documented and predicted to grow (Attachment 24). ROC enjoys an excellent relationship with the Chinese purchasers of its Mongolian crude from whom the Company receives, in a timely manner, US dollars payments based on international parity pricing. The other key to ROC's acreage in Mongolia is the rail connection which, quite frankly, makes a world of difference (Attachment 25). The Trans-Mongolian railway which is also the designated route of the oil pipeline which has recently been proposed in order to provide China with oil from Russia. By happy coincidence, if and/or when that pipeline is built, it will run through the middle of ROC's acreage in Mongolia (Attachment 26). ROC has been working hard on its Mongolian project for more than two years and it is now coming to fruition with the Company's plan to drill two wells back-to-back starting in August 2000. As ROC clambered up its Mongolian learning curve we came to realise that there is a lack of understanding about Mongolia and its petroleum potential in the international oil community and that the reality of the country is, we believe, quite different to common perceptions (Attachment 27). Of course, ROC could be wrong about the petroleum potential of its acreage in Mongolia but we know we are not wrong about one thing: the exploration potential of the East Gobi Basin deserves to be tested with modern industry techniques. This is exactly what we plan to do later this year, subject to discussion with the relevant Government authorities. 7. RECENT DEVELOPMENTS During the seven trading days to yesterday (3 May 2000) ROC's share price increased by more than 40% from an intra-day low of A$0.98/share to a high of A$1.40/share. Some people may presume that the company is happy with this increase so I should make it very clear that we think that anything less than A$2.00 is unsatisfactory. We do appreciate that A$1.40/share is better than A$1.00/share, but we're not going to have a smile on our corporate face until the share price is comfortably above the A$2.00 issue price. There are a number of reasons why the ROC's share price bounced through Easter, including: · The weakening of investor interest in dot.com companies may have encouraged a return of some capital to value companies. · The realisation that although the Kyle Field was a source of bad news in 1999, that field is still on schedule for first oil production, through an Extended Well Test, which is due to start within a month. · Also, the Chestnut and Blane Fields, in the UK North Sea, have made tangible progress towards potential development within timeframes which represent an acceleration of Prospectus forecasts. For example, consideration is being giving to conducting an Extended Well Test at the Chestnut Field before the end of the year whereas, in the Prospectus, the field was not anticipated to be a candidate for any development activity prior to 2001. At Blane the operator has initiated dialogue with contractors to determine how best to develop the field. This compares with a Prospectus forecast which suggested that the Blane Field would not be considered for development prior to 2005. I should emphasise, however, that both the Chestnut and Blane field situation are best regarded as potential, rather than assured, developments. · ROC has also recently announced the acquisition of new exploration opportunities offshore West Africa, referred to earlier. Although, we don't think that the Australian market necessarily focused on that announcement we do know that it aroused interest in other parts of the world. · On a much more tangible level ROC was pleased to release on 28 April 2000, a strong quarterly result for the first quarter of the year. The potency of ROC's 1Q2000 quarterly is best summarised by the fact that the market capitalisation of the Company for much of April was around A$100 million which represented a 4 times multiple on the Company's A$26 million sales revenue for 1Q2000. It is important to note that ROC's "Easter bounce" occurred before, and was unrelated to ROC's latest announcement about the profitable sale of its non-core assets in the UK. As best can be judged, this has also had its own positive impact on the share price. 8. ROC'S CORE STRATEGY Your company is proactive by nature. We also place a lot of importance on our core corporate strategy which is best described as: sensibly contrary. We think that it is very hard for a company of ROC's size to make money for shareholders by walking with the crowd all the time. Quite simply, ROC's chequebook is too small to compete on that basis. We do realise, however, that if a company chooses to adopt a contrary approach it has got to be very disciplined and sensible about it, otherwise it can waste a lot of shareholder's money chasing rainbows but never catching them. ROC's sensibly contrary strategy influences our thinking in a number of ways, two of which have been clearly evidenced through ROC's recent activities. Specifically: · We take the view that adversity is synonymous with opportunity. This is why we were able to buy the UK assets at a time of low oil prices. It is also why we were able to deliver to shareholders a reasonable abnormal profit of A$18 million when we sold a non-core part of those assets seven months later. · Within the context of ROC's sensibly contrary strategic framework we are strong believers in proactive portfolio management (Attachment 28). In our business, value creation is usually achieved in the most spectacular fashion by successful exploration. Unfortunately, finding large oil and gas fields is never easy and it is even more difficult if a company regards its portfolio of assets as being static or inert. ROC commented in one of its recent ASX releases that if a growing company is managing its portfolio correctly, the prime assets which it has at one stage in its corporate development will, as its portfolio is continually upgraded, become peripheral at a later stage. This is a process not unlike gardening: there's a time not only for planting and watering but also for harvesting (Attachment 29). By harvesting I don't necessarily mean the sale of assets but rather the provision of appropriate benefits to shareholders. These benefits generally take one of two forms: strong cash flow leading to corporate growth, operating profits and an increasing share price or a sale of non-core assets leading to abnormal profits, corporate growth and an increasing share price. An example of the former approach is ROC's successful development of the Saltfleetby Gas Field while the recent sale of ROC's non-core UK assets is a good example of the latter process. 9. CONCLUSION Because of ROC's high level of activity it is sometimes difficult to realise it has only been a public company for nine months. During this relatively short period of time the Company has achieved a number of notable successes the full benefits of which are yet to be realised. Some of the challenges which the company faced last year, immediately after its public listing, prevented the share price from performing in a manner which reflected the underlying strength of the Company, but we have managed our way through these challenges and out the other side. While ROC cannot influence sector sentiment we take the view that we've got to out-perform all other investment opportunities regardless of the prevailing market attitude of the oil and gas sector (Attachment 30). Fortunately, there are many aspects of our business which we can influence and that is why ROC has been able to manage its way through all of the negative issues that we believe were causing undue consternation in the market. The company is now moving towards achieving its stated objective, although we have a long way to go yet. However, with the people and portfolio we have in place, we are very optimistic that we will be able to achieve our key goal: making a lot of money for shareholders. 10. ACKNOWLEDGEMENTS In addition to thanking my Board and Advisors for all their support through a prolonged and slightly challenging period, I would also like to thank all of ROC's staff and consultants around the world for the exceedingly hard work that they have expended, not only in the lead up to the public listing but also during the subsequent hectic nine months. I appreciate that in meetings like this most CEOs make that type of statement, but if you are close to the Company you would know that these comments are not made lightly. At ROC we are have a group of individuals who have a very special opportunity to build a very special company. I would also like to thank the shareholders for their patience and understanding. As I said in the Annual Report, ROC's workforce realises that it is the shareholders who own the company and, in this sense, each of us is well aware that we have 6,500 bosses to whom we are responsible. When a 50% share price erosion of a new float within seven months of listing generates only two abusive notes - lots of concerned queries, but only two really grumpy, negative, notes - you realise, with genuine gratitude, that most shareholders understand that from time to time bad things do happen in the resources sector - and that, in time, good management can generally resolve whatever problems arise, thereby creating value for their shareholders. That is what we've tried to do during the last nine months and that is what we're going to keep trying to do in the future. Dr John Doran Chief Executive Officer |
