NEW CITY ENERGY LIMITED
Date of Announcement: 27/01/2017
RELEASE OF REPORT AND FINANCIAL STATEMENTS
The Directors announce the release of the Annual Report and Financial Statements for the year ended 30 September 2016.
CHAIRMAN'S STATEMENT
FOR THE YEAR ENDED 30 SEPTEMBER 2016
During the year to 30 September 2016 your Company's total return in net asset value terms was 6.3% as we saw a modest recovery in energy shares following the oil price collapse in 2015/16. The total return in ordinary share price terms was 28.6%, with the share price ending the year at a discount against net asset value of 14.7%.
The investment managers have coped well in a very volatile year but they believe the US commercial shale producers have fundamentally changed the shape of the energy market by replacing OPEC as the swing producer of oil. The US producers have utilised technology to improve yields from their acreage and at the same time reduce production costs. This dynamic means they are very flexible and able to cope with fluctuating prices and to pump oil even at levels that were thought uneconomic two or three years ago. The investment management team believe this will curtail oil price increases and makes a weak investment case for energy.
With the above in mind the Board of Directors has been reviewing, with NCE's investment manager, the future prospects of the Company ahead of the next continuation vote. Given the current market capitalisation of the Company, the prevailing share price discount and the short to medium term outlook for the oil price, your Board has decided that it would be in the best interests of Shareholders to propose that the Company be wound up and that the Company's surplus assets (after full provision for liquidation costs) be distributed in cash to Shareholders.
A circular to Shareholders is being prepared to convene an extraordinary general meeting of Shareholders to wind up the Company voluntarily. The circular will set out in full detail the proposals. A further announcement will be made in due course.
I would like to thank all Shareholders for your support for the Company since it was launched in 2008.
David Norman
Chairman
January 2017
INVESTMENT ADVISER'S REPORT
FOR THE YEAR ENDED 30 SEPTEMBER 2016
It has been an extremely volatile year for oil markets following the removal of a production quota by OPEC in November 2014, and the resultant increase in production from most members which was swiftly followed by a shift in US energy policy allowing crude exports from December 2014. Oversupply extended into a second year with global inventories rising 20% to 1.24Bn barrels, in turn dragging average oil prices down. Prices averaged around $40 average per barrel for the 12 month period with prices dipping into the $20's per barrel at their nadir. Capital expenditure has fallen dramatically and wellfield decline rates take effect which should support prices and provide a floor above the year lows.
It remains our belief that the oil market as we knew it has changed. We believe oil prices will continue to trade within a $45-60/bbl range for the foreseeable future with commercial shale producers resisting OPEC's dominant status as the swing producer. We believe the improved responsiveness of this segment will act to more rapidly balance balancing markets and reduce volatility in oil pricing. The removal of OPEC's quota mechanism in 2014 was in part a pre-emptive move to discourage unconventional oil and gas production. However, US shale production has proved impressively resilient, with production efficiencies from increased sand usage within individual frack's and a greater use of multi well drilling pads, driving significant cost reductions. While not all shale producers have survived, with multiple bankruptcies occurring on lower quality acreage, those that remain are stronger and leaner with many making good returns at $50/ bbl oil.
We believe the Permian Basin to be the most prolific of all the US oil shales, evidenced by the pick-up in land based rig deployment which has increased 46% since the low in May. Testament to the favourable economics of the Permian Basin, it remains the only US basin not to have seen a fall in production. Producers with Permian acreage should continue to benefit as unconventional technologies further improve costs and shortening investment cycles improve productivity. Such low cost, short production lead times provide a significant competitive advantage when compared to capital intensive, long lead time proposition of conventional offshore projects.
Reflecting this view the Fund's equity exposure remains focused on these unconventional oil producers and suppliers of drill fluids or sand for fracking, which are able to benefit from increasing production and activity rather than rely on higher oil prices. Approximately half of the fund's assets are focused on operators and suppliers in the US Permian Basin or similarly low cost on-shore producers in other geographies. Although all of these positions would undoubtedly benefit from higher oil prices they do not require it and will be able to tolerate crude prices at the lower end of our expectations.
At the time of writing OPEC has proposed a production cut of around 500-700k barrels per day. There is a lack of detail on which countries will contribute to these cuts although it appears that Iran, Libya and Nigeria will be granted exemption from the restriction. Iraq is also requesting exclusion in order to fund their military campaign against ISIS. Indeed the number of OPEC members exempted from discussions is placing even greater onus on Saudi Arabia. These exemptions similarly undermine the potential galvanising effect that the fiscal deficits being run by many OPEC's member economies could engender towards an agreement. It is hoped that greater clarity will be provided at OPEC's November meeting. OPEC is also seeking participation from some non-OPEC members. Putin has suggested that Russia, the world's largest oil producing nation, may contribute though this would be reliant on OPEC reaching a collective agreement to cut and even then Russia's track record of honouring such commitments has been poor.
Supply shocks remain an important consideration though for the time being threats of disruption appear to be easing. ISIS appears to be losing position in Libya while the Nigerian government appears close to agreeing terms with rebel groups which could reduce the risks of sabotage on key infrastructure. Social unrest in Venezuela, whose economy appears on the brink of collapse, could interrupt oil production. However, it is noteworthy that debt funding provided by China is structured for repayment in physical crude.
Oil Demand has been strong following the fall in pricing, with US miles driven up around 3% year on year, though this demand effect may conversely weaken with higher prices. Emerging market GDP growth remains an important driver of demand, with the growing middle classes of China, India and Indonesia key to increased demand. GDP growth in Asia ex-Japan is forecast to remain healthy at approximately 5.7% pa over the next 3 years. We monitor the development of electric vehicles closely and whilst the growth in usage is impressive, the low levels of penetration will limit their materiality is are unlikely to alter oil demand in the next 10 years. They will alter the rate with which demand grows which importantly could lead current OPEC producers to view their oil reserves as finite assets rather than multi-generational appreciating assets.
The Fund owns a few positions in shipping stocks, which have hindered the Fund's capital performance over the last 12 months. They were held due to what we had viewed as strong supply fundamentals, in the case of BWLPG from increased US propane production as a shale by-product and increased oil production from exporting regions in the case of Euronav. Both of these themes played out over the period, especially with increasing OPEC exports, although the stocks lagged as day rates were weak following the delivery of new ships. We continue to hold these positions as we believe the fundamentally supportive backdrop remains in place and we anticipate improving day rates going forward. These stocks are both leaders in their shipping subsectors and should be a key provider of income going forward. While income within the energy sector is increasingly scarce, as improving returns on investment and cash flows continue to be directed towards servicing balance sheets we believe the Fund's healthy income reserves leave it in a strong position to manage income expectations.
Robert Crayfourd, Keith Watson and Ian Francis
New City Investment Managers
January 2017
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
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