THE FINANCIAL DIRECTOR INTERVIEW - Oiling the wheels of high finance is a monume

Liz Airey, FD of Monument Oil & Gas, is something of a rarity for the Financial Director Interview: she doesn’t have an accountancy qualification.

While the number of FDs without formal accountancy training is rising, in the oil industry Airey has to cope with some of the most complex number-crunching tasks in business. True, she had been involved in banking since she left university, but even her higher education wasn’t exactly business-focused.

In fact, Airey graduated from Cambridge with a degree in history. “I always try and persuade people that history qualifies them perfectly for investment banking – and the oil industry,” she says. In fact, although oil industry accounting is often highly technical, Airey also thinks that the absence of formal training helps her see the bigger picture.

“Understanding the finer detail of anything can – well, to say ‘clutter the mind’ would be unkind, but it doesn’t necessarily help you see the wood rather than the trees,” she explains. “I actually find it quite helpful not to be an accountant myself.”

Airey’s expertise for her current position derives from her time in merchant banking, starting as a graduate trainee at SG Warburg. After five years learning the investment banking trade and working in corporate finance, she left to join County Bank (part of NatWest) and in 1988 was offered the FD’s post at Nimex Resources. Nimex had used her as an adviser on the purchase of a 40% stake in Monument, and she clearly made an impression.

“When Tony Craven-Walker (now Monument’s chairman) first asked me to join the company, I said, ‘But I don’t know anything about the oil industry,'” Airey recalls. “He said, ‘Well that doesn’t matter, I know about the oil business; I want someone who knows about financing.'” Despite a salary cut of around 50% and, as she found out, similar long hours to her banking job, Airey left the high-pressure world of the City and joined the Nimex board.

While Monument’s own investment bankers might find her background a stumbling block – “They’re always wondering whether I’m going to ask them a technical question,” she says – Airey’s experiences in the City have also helped in other ways. Not least of these is an understanding of the best way both to raise money and return spare cash to shareholders, a common occurrence for many oil companies.

Monument’s problem in this respect is that it isn’t very big. “The financing requirement for our 23.9% share of the development of Liverpool Bay (Monument’s most successful production site) was the same size as the market capitalisation of the company,” she explains. But the opportunity was potentially huge, and such calls on capital are not uncommon in a business where high returns require timely and sizeable investments at the outset.

Monument was able to find some of this cash by actually selling 3.9% of its interest in Liverpool Bay itself to PowerGen for around #50m. One other notable benefit of selling a small part of the interest was to demonstrate to the City what the rest of field was worth.

“If we’d taken the view that we needed to have extra equity in the company, a rights issue to fund that development,” she explains, “by the time the field came on-stream, we would have found that we had effectively over-capitalised the company, because the huge cash-flow would either have to be re-invested or returned to shareholders.” Unlike a Shell or a BP, which have a large number of projects at various stages of development – either requiring investment or generating large revenue streams – to even out their cash-flow, Monument can swing between immediate need for cash and throwing it off in spades.

This, of course, makes dividends a problem. The solution is simple: don’t pay them. “If you do, you’re paying out a dividend which is actually killing you while you’re going through a huge capital investment programme,” Airey points out. “We are also careful not to regard times of high cashflow (when a field is on-stream) as an opportunity to have a field day with re-investment. The history of the North Sea shows that if you simply re-invest every pound of returns from these large projects, the likelihood is that your investment return requirements will actually go down.”

While some other mid-sized oil firms, such as Premier Oil, will do a scrip dividend, Monument’s strategy is to find better ways of returning cash to shareholders. Share buy-backs are not uncommon these days, but Airey was confident there were better ways to reassign excess cash.

In 1996 – as Liverpool Bay came on-stream – Airey performed a capital restructuring for that very purpose. This involved creating a new holding company above Monument, which offered redeemable shares to both Monument and Monument’s major shareholder. Using schemes of reconstruction, shareholders could elect either to take the redeemable shares and cash up, or ordinary shares and maintain their investment.

“We could foresee that we were going to have this excess capital and we didn’t see near-term investment opportunities,” she says. Around #50m was effectively on offer to the shareholders, although the total take-up ended up being roughly #33m. “It’s the right financial discipline to put ourselves under to return excess capital to shareholders at that point, but we won’t mind coming back and asking for it again if we find the right re-investment opportunities. It’s also a good discipline for us to come and justify them to the shareholders.”

Earlier this year, such opportunities arose, and Airey then constructed a rights issue to generate much-needed cash for Monument’s fast-developing Caspian Sea interests, as well as other projects in Pakistan, Turkmenistan, Columbia and elsewhere. The fact that a defective pipeline from Liverpool Bay had affected production there for a nine month period also increased the need for investment cash.

But rather than pay large underwriting fees, Airey felt the close relationship with Monument’s investors would enable the company to perform a highly cost-effective rights issue (see Insight, page 11). “We had absolute commercial certainty that the issue would succeed in any event,” she stresses, with major shareholders all happy to bid for their allocation.

Interestingly, the rights issue was followed by a new debt financing structure, again to free the company to seize opportunity. “We financed our debt after the rights issue because we wanted more flexibility to make funds available for general group purposes,” Airey says.

Oil field accounting is astonishingly complex. For example, if an oil company sells part of an interest in a particular producing asset, the profit doesn’t just appear in the p&l. Instead, it is run through the accounts over the lifetime of the asset, making each subsequent barrel of oil produced, in effect, more profitable. There are also huge differences between full cost accounting and “successful effort” accounting and reporting changes hugely if the company has a global pool of assets rather than a series of regional pools.

“Oil and gas accounting is great fun,” Airey – the non-accountant – says, revealing herself as something of a masochist. “It’s actually very, very logical in its building blocks, but it can produce strange results.”

Being an E&P – exploration and production – oil company has many other specific problems. Not least of these is government interference, which is one of the constant pressures the world over. No country with reserves can afford to ignore the huge potential revenues from oil strikes, but some governments may appear a little greedier than others. The UK is no exception.

So it has come as something of a relief that Gordon Brown’s threatened reimposition of petroleum revenue tax has been scrapped – for the moment.

It was a happy coincidence that Financial Director should visit Airey on the day that the change in policy was announced.

“Why put taxes up when it’s not actually going to derive any revenue for the Exchequer?” Airey asks. Monument, in common with most oil companies, has seen its share price fall over the last few months as the price of crude has stubbornly refused to shift, and the last thing it needed was increased taxation. And a small percentage of $13 a barrel would probably hit the oil firms more than it could ever benefit the Treasury.

But despite this breathing space on PRT, Airey still faces a tough job handling the vaguaries of the state. “In our experience, the UK has probably been one of the least stable fiscal regimes for the oil industry,” she says. “We’re quite often talking about a 20-year time frame for the full cycle of investments to take place. It could easily be 10 years before you actually produce your first barrel of oil (from a concession), and if you’ve got a tax regime which is constantly changing, it’s pretty difficult to make investments.”

Chairman Tony Craven-Walker has gone even further, declaring that doing business is easier in Turkenistan than it is in the UK. But the stability of the fiscal regime is only the tip of the iceberg. In the oil business, almost everything a company does is a major risk issue – risk with a capital “R”.

“Of course, your chances of having a successful discovery are not even,” Airey says. “In the UK, maybe one-in-five will be successful.” And getting from concession to oil well is a complex business, involving preliminary studies, seismic surveys and trial drillings, not to mention coping with environmental issues, appraising the well and coping with hostile surroundings.

So it’s no wonder Airey likes the idea of fiscal stability. It doesn’t increase the chances of striking oil, but it does make the viability projections easier. “We model everything here,” she explains. “We must do all of the spreadsheets, analyse it every which way it comes. We’re drilling at the moment in Columbia, and we’ve carefully modelled the technical risk. We’ll then do all of the economic risks – what it would cost to develop, what the local infrastructure is like, the price of oil and so forth. But we mustn’t ever believe the spreadsheet is right, because that can result in paralysis.”

The problem is that each potential drilling site has so many variables that even scenario planning almost certainly won’t yield the actual final returns on a project – as Airey puts it, the result is always binary, no matter how complex or fluid the model. “You mustn’t believe the expected monetary value of any one well,” she cautions. “One thing you can be sure about is that it’s wrong.”

Monument partly offsets this problem with a portfolio of projects. “For us, the philosophy is one of spreading the risk,” Airey continues. “It’ll mean fiscal risk in the UK” – as well as all the other economic and geological risks – “but the profile of risk in the UK is very different from the Caspian.” So portfolio management comes into play: Airey likes a spread of geological, political and economic risks.

“You can’t always have an exploration portfolio of low-risk, high-reward prospects, although that’s what we like,” she says. “So you have a mix of low-risk and quite possibly higher cost prospects with higher risk, but lower ‘exposure to capital’ projects. That’s our game, it’s risk management.”

A good example of this is the company’s Caspian interests. The cost of production there is in fact lower, and the relationship with the government is both predictable and lower cost than in the UK. But Monument also faces high transportation costs to get the oil to market, and although these are falling (and the company can offset some of the difficulties using oil swaps with Iran, for example) the fields will really come into their own when a new pipeline from Baku to Georgia is complete.

The political risks associated with some of the countries where Monument does business are also high, although Airey takes a typically practical view of the geographical risk portfolio. “Most of our cashflow is coming out of the UK at the moment, and the tax regime is where our real risks are,” she says. Overseas – Algeria, Columbia, Pakistan – there are other problems, but it’s simply balancing the risk-reward equation. “If it’s a high-risk country, there should also be a high reward for being there.” The fact that Monument helps governments tap a huge source of revenue must also make them a more attractive partner than many companies in other industries.

Back home, it’s taxation and accounting standards rather than unstable regimes or regional conflicts that cause trouble. In addition to her other duties, Airey is also on the Oil Industry Accounting Committee, a job which has brought home to her how many of the problems that Monument faces are in fact industry-wide. Each time a new standard is released, the industry has to take in the implications and often lobby for change.

There can be few FDs in companies of a similar size to Monument that have such a complex job as Airey. When she moved from the banking world, she had assumed things would get easier, but the 12-hour day is still a norm rather than the exception. “But I think perhaps because banking is a service industry, it can be a little more frustrating,” Airey claims.

She now makes a point of setting real deadlines for her investment houses; too often as a banker, a client would demand a report first thing in the morning, but after working all night, she would discover they hadn’t time to look at it until two days later.

But surely coping with all the factors outside her control – tax regimes, accounting standards, foreign governments, geological surprises, environmental campaigners, complex cost-centres – makes the job a little bit scary?

“No,” she concludes. “It’s a good challenge.”

CURRICULUM VITAE

NAME              Liz Airey
AGE               39
SALARY            #150,229 (1997, inc. #229 benefits)
CAREER
1977-80           Churchill College, Cambridge BA Hons in History (2:1)
1980-85           SG Warburg & Co Ltd
1980-82           Graduate trainee
1982-85           Corporate finance department
1985-88           County Bank Corporate finance specialist
1988-             Nimex Resources Ltd, FD
1990-             Monument Oil & Gas, FD
1994-             Fleming Natural Resources Investment Trust plc, Director
1997-             Emerging Markets Country Investment Trust plc, Director

Airey on         It's very short-sighted to have an immediate knee-jerk
investment:      reaction and cut back your investment in the current low
                 oil price environment. Actually, you're investing for
                 five and ten years hence, and we're in a very cyclical
                 business.

Airey on moving  It was one of those very instinctive decisions. The oil
from banking     industry seemed a huge amount of fun, a new challenge,
to oil:          and after nine years in investment banking, you wonder
                 whether you'll be burnt out by the time you're 35 or 40.

Airey on her     It keeps you very closely aligned with all the
0.56% holding    shareholders. It's one of the real strengths of this
in Monument:     company: everybody has a shareholding. So when the share
                 price comes down, we know exactly how it feels to be an
                 institution.

Airey on         It's enormously helpful when presenting to shareholders,
banking          when you're raising finance - whether it's a rights issue
experience:      or debt finance - because I've been on the other side. I
                 know where the people on the other side of the table are
                 coming from.

                          1997       1996
Turnover                 89.0m      52.6m
Operating profit         34.6m      18.0m
Pre-tax profit           19.6m      12.4m
Earnings per share       2.80p      1.76p