Investors give raspberry to Contact Energy offshore investment plan

Contact Energy shares dropped 8.4 percent to $6.34 by late afternoon following an announcement that it is considering an offshore geothermal energy investment strategy in the absence of growth opportunities in the New Zealand market, disappointing investors who had expected capital returns or higher dividends as the company starts throwing off cash after six years of heavy capital investments.

"I'm a bit dumb-founded," said Grant Swanepol, a leading energy stocks analyst at Craigs Investment Partners.

Contact's chief executive, Dennis Barnes, had met market expectations with today's profit announcement for the six months to Dec. 31, declaring a statutory profit down 54 percent to $51 million, largely due to one-off and non-cash factors, and an unchanged interim dividend of 11 cents per share.

"So what is the new news?" said Swanepol. "It's that he (Barnes) is not giving the cash back. Did we expect to get the cash back? Yes, we did. Had he promised to give it back to us? Yes, he had.

"I wouldn't have minded so much if he'd said: 'guys, I just want to hang off for six months in declaring a dividend policy because before I offload my capability for geothermal build, I want to make sure I can't utilise on an NPV (net present value) positive basis and I'd be remiss not to do that'.

"But he didn't do that. He said I plan to go offshore and must just see if my plans are correct or not. So things have changed."

"Where we had seen a positive in the industry with no risky growth capex with limited hope of return, and rather give back this cash generation which had been promised and now being delivered on has been dissipated," said Swanepol. "So is the market justified in knocking $350 to $400 million off its value? Well, that's the metric."

Barnes himself acknowledged at the company's media briefing before midday that the initial negative reaction from investors reflected disappointment that higher cashflows in future years might not all be applied to dividends or, more likely, capital returns.

"Our results are never really a surprise. I suspect the reaction in the share price is markets telling us cash returns are their preference."

Contact has yet to formulate or have plans for offshore expansion approved, but Barnes indicated investment in the order of $1 billion over five to six years was conceivable, roughly the same as the cost of the proposed Tauhara geothermal power station near Taupo, for which Contact can see no demand over that period.

Opportunities in geothermal construction were likely to exist in the so-called Pacific Ring of Fire, encompassing Indonesia, Chile, the US, Mexico, the Philippines and Peru, he said.

Craig Stent at funds manager Harbour Asset Management echoed Swanepol's view.

"There's disappointment around the capital management," he said. "Nothing's really materialised. They've been talking about dividends and capital returns to shareholder for some time and now they've surprised the market."

A decision to invest offshore would change risk perceptions of Contact, which would be moving in the opposite direction to its competitor, MightyRiverPower, which has been progressively quitting geothermal investments in Chile and the US.

"One of the key points it highlights for the whole industry is that there's not much growth in the New Zealand market," said Stent.