NCE New City Energy

 
TIDMNCE 
 
 
   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 
 
   Annual Financial Report for the year ended 30 September 2016: 
http://hugin.info/140891/R/2074089/779697.pdf 
 
   This announcement is distributed by Nasdaq Corporate Solutions on behalf 
of Nasdaq Corporate Solutions clients. 
 
   The issuer of this announcement warrants that they are solely 
responsible for the content, accuracy and originality of the information 
contained therein. 
 
   Source: New City Energy Ltd via Globenewswire 
 
 
 
 

(END) Dow Jones Newswires

January 27, 2017 11:42 ET (16:42 GMT)

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