NEW CITY ENERGY LIMITED
Date of Announcement: 28/06/2016
RELEASE OF INTERIM REPORT AND FINANCIAL STATEMENTS
The Directors announce the release of the Interim Report and Financial Statements for the 6 months to 31 March 2016.
CHAIRMAN'S STATEMENT FOR THE SIX MONTHS TO 31 MARCH 2016
After such a severe rout in the Oil price during the year to 30 September 2015, the six month period under review continued the same theme with the price of WTI (West Texas Intermediate) falling a further 18.7% from US$45.48 per barrel at the end of September 2015 to US$36.94 at the end of March 2016. Your Company's net asset value in total return terms was slightly down at -1.0% as the portfolio was defensively positioned. The ordinary share price (total return) was down by 0.1%, ending the period at a discount of 28.1%.
The investment managers have done a good job in ensuring the fund has weathered the storms affecting the energy sector. Their report on the following pages notes that the oil price has risen since the end of March to nearly US$50 per barrel at the time of writing and production cuts appear to be happening. Gearing in the Company has increased to 8 per cent after the reporting date and we have seen increased activity from the unquoted proportion of the portfolio.
The Board took the difficult decision at the end of 2015 to reduce the level of dividends to an annual 1.0 pence per share payable as to 0.25p per quarter. We believe that this level is sustainable in the current environment.
I would like to thank Shareholders for continuing to support the Company and for ensuring that the annual Continuation Vote was passed at the Annual General Meeting in March. The Board and the investment management team look forward to achieving better returns for Shareholders in the months and years to come.
David Norman Chairman June 2016
INVESTMENT ADVISER'S REPORT FOR THE SIX MONTHS TO 31 MARCH 2016
The Energy sector has had a difficult six months to the end of March 2016 due to excessive supply as OPEC removed its production quota restriction, led by Saudi Arabia's unwillingness to absorb rising global output from Iraq, Russia and North America, compounded by the untimely shift in US policy allowing crude exports for the first time in 40 years. Souring Middle Eastern relationships, which have traditionally boosted oil's risk premium, was more recently outweighed by increased regional production as warring Sunni and Shia factions pump more to fund campaigns in Syria, Iraq and Yemen. Crude sold off into the turn of the year as global growth expectations declined, before subsequently rising 30% from January lows to reach $41.34 per barrel at the half year end. Prices have been surprisingly resilient in the face of OPEC failing to agree production quotas at the previous three meetings. Our belief remains that Saudi- Iranian tensions are central to the lack of accord within the OPEC cartel as Iran, following the relaxation of US sanctions in January, seeks to restore its national output to former levels. Iranian production has subsequently recovered approximately 1 million barrels, reaching pre-sanction output levels.
Against this backdrop the actions of commercial US producers, often cited as a responsive industry segment likely to contribute significantly to restoring market balance, have received considerable investor focus. The 44.6% fall in the US rig count during the six month period led to a decline of 74,000 barrels per day, although at the time of writing output has fallen by a further 277,000 barrels per day. This reflects action by North Americas' overly indebted operators, including integrated multinationals, to make aggressive capex cuts and sell non-core asset sales to defend their credit ratings and equity dividends.
However, at the time of writing crude prices have pushed higher, briefly exceeding US$50 per barrel, due to the impact of the Canadian Wild fires on oil sands production, disruption to Libyan exports and attacks on oil infrastructure in Nigeria. A recovery in production from these regions may now act to depress prices. Further, after crude's price recovery there is now some evidence that US production may follow suit evidenced by news that drilled-but-uncompleted wells are now being brought on stream. With equities still discounting approximately US$65 per barrel, valuations of many operators appear unattractive. As a result the fund also retained minimal gearing over this period, and exposure is concentrated on companies that can operate profitably at a lower oil price.
Longer-term, delays to large, costly, long-lead projects will limit future supply with current global demand projections indicating the emergence of deficit conditions in 3-5 years time. We expect the more responsive, shorter lead time U.S. shale producers will be best placed to take advantage. While some U.S. operators have retrenched into the shale market we believe producers may undertake further cycle of M&A aimed at competitive on-shore, shale production. Meanwhile oil demand remains healthy, with EIA and IEA revising up their production expectations to 1.5 million & 1.4 million barrels year-on-year. This is largely driven by US demand and strong growth from China, committing to continued growth of its Strategic Petroleum Reserve.
Over the period the fund took positions in Amerisur, a low cost producer in Colombia which may benefit from improving margins and cash flow generation as completion of a new pipeline reduces transportation cost. The fund also reduced its exposure to UK shale as the low oil price added to concern on their competitiveness versus US peers, whilst adding to high yielding Crude shipper Euronav, due to benefiting from increased seaborne trade as OPEC production replaces declining US and Chinese crude supply. The fund reduced its exposure to private companies following the sale of Canadian International Oil Corp to Riverstone and, at the time of writing, the imminent listing of Francais De L'Energie.
The Fund holds an Antares convertible bond which went into administration in April. The investment is a holder of acreage in the Permian Basin in Texas. While we are of the view that the Company will receive the full nominal value back for the bonds, as we believe the Company's core assets exceed the bond, we have reduced the investment carrying value to 73% of the nominal value to reflect the timing uncertainty of this process.
Robert Crayfourd, Keith Watson and Ian Francis New City Investment Managers June 2016
For further information please contact:
Craig Cleland - New City Investment Managers - 0207 201 5368
Lisa Neil - R&H Fund Services (Jersey) Limited - 01534 825 336
Interim Report and Financial Statements: http://hugin.info/140891/R/2023669/751911.pdf
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Source: New City Energy Ltd via GlobeNewswire [HUG#2023669]
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