AWE Limited (AWE) 2015 AGM Voting Intentions

Company/ASX Code : AWE Limited (AWE)
Registry : Computershare Services
Poll/Show of Hands : Show of hands
Webcast : No
Venue :
10.30am Museum of Sydney
Cnr Bridge and Phillip Streets
Sydney, New South Wales
Monitor : Mr Geoffrey Orrock
AGM Details / NoM : Friday 20th November, 2015
ASA Position
Not Applicable
Consideration of accounts and reports

In FY15, AWE had a successful exploration and appraisal drilling program with a net 25% increase in 2P Reserves to 114 mmboe (million barrels of oil equivalent) and a 59% increase in 2C Resources to 122 mmboe. Sugarloaf (USA) and the Perth Basin were the main contributors. At current production rates of around 5 mmboe pa 2P Reserves are equivalent to more than 20 years of operation. The company says that it is likely, with further appraisal in the next few years, that up to 80 mmboe of Resource will be transferred to Reserves.

Following our remarks last year suggesting that AWE’s financial performance was lack lustre at best the company’s financial performance has continued to slide and the sharemarket excitement the company expected to generate from the Perth Basin exploration success has failed to materialise. 

In FY15 production fell by 9% to 5.09 mmboe. Sales revenue fell 16% to $284.9M, impacted by the lower volumes and lower oil prices. However cost of sales increased again, up 9.5% to $259.6M in FY15 and up 36% in the last 4 years.

The company has been profitable in only two of the last six years. Statutory NPAT for FY15 was $(230.1)M after impairment of $243M on oil and gas assets as the oil price declined. (NPAT FY14: $62.5M due to an after tax gain on sale of a 50% interest in AAL).

The company’s share price, which at the start of the 2010 financial year was $2.57 slumped to around $1.20 by mid-2011 where it remained until late in 2014 when it finished FY14 at $1.80. During FY15 it fell to $1.21 and has subsequently almost halved to $0.65. During the 6 year period the only dividend was in 2012 when a special dividend of 5 cps, franked to 30% was paid.

The company’s market capitalisation at the end of October 2015 was $350M which was more than 60% below the level it was at the start of FY15. 

In 2015, we reminded the AWE Board again we were keen to improve the relationship between ourselves, as representatives of retail shareholders, and the Board. Once again the Board declined our request to meet with us telling us that AWE’s protocol, which also applied to proxy advisors was for shareholders to meet with company management. We indicated our surprise that the Board who are elected by shareholders to represent them felt it was management’s job to meet with the shareholders. 

We also have concerns with the independence of the Chairman. Mr Phillips was founder of AWE and in 1997 when AWE Ltd became a listed public company he was appointed its founding Managing Director, a position he held until August 2007. He was appointed a non-executive director in November 2009 and Chairman in November 2010. 

The ASA believes that Chairs of public companies should be independent. We also believe that directors who have served for 12 years or more may not be independent and their circumstances and associations should be carefully considered. 

As the company’s founder, a director in both executive and non-executive positions for 16 years of the company’s 18 year history, and recently as Chairman, and as a significant shareholder in the top 8, we believe that Mr Phillips should explain to the meeting why he believes he is independent in terms of the relevant factors listed in s 2.3 of the ASX Governance Guidelines, and if not, why AWE Ltd should have a non-independent Chair, contrary to ASX Governance Guidelines.

ASA Position
Resolution 1: Adoption of Remuneration Report

Shareholders look to remuneration policy for alignment of executive rewards with shareholder returns. ASA’s voting guidelines seeks to ensure that incentive payments also strongly relate with performance which produces returns to shareholders. 

AWE has implemented significant changes to remuneration policy, changes which, from July 2014, include deferral for 12 months of one half of STI granted and half of vested LTI to provide a clawback pool. AWE also established the maximum number of rights that can be issued, with the actual number of rights that are granted being determined by the Board, based on company and individual performance in the previous financial year. AWE also reduced the participation scales for the Managing Director and senior executives.

The vesting criteria applying to rights have also been tightened by increasing the hurdle rates applying to both absolute performance measures and relative performance measures, and decreasing the retention component for senior executives.

Further changes ASA would like to see include the payment of the deferred portion of STI in equity, and an LTI minimum performance period of 4 years. ASA is also generally against retention payments and where they are made the Board should explain why such a payment was necessary in the Annual Report. ASA also thinks that where a rel TSR hurdle is used no LTI grant should vest if the absolute TSR is negative, regardless of relative performance against the comparator group. 

The Remuneration Report would also be more readable if a Table of Actual Remuneration Received was included.

In FY15 the MD’s fixed remuneration (FR) inclusive of superannuation and other income was $930K and senior executives received between $450K and $600K.

Short term incentive is paid all in cash, half is banked for one year and is subject to the clawback provisions. For the MD the maximum STI opportunity is 50% of FR and for executives its 40% of FR.

The performance metrics are achievement of Base Business targets, including financial and non-financial targets (50% of award), Strategy and Growth (30%) and Board discretion to cover unexpected occurrences (20%). 

In FY15 the MD received $208K as STI and senior executives between $78K and $110K, which was around 40%-50% of maximum STI opportunity.

The company currently operates a share rights plan as LTI. The MD is granted LTI in 2 tranches, 50% based on an absolute TSR and 50% based on relative TSR, with the total maximum opportunity 100% of FR. For the senior executives LTI is granted in 3 tranches including absolute TSR grant (30% of FR), relative TSR grant (30%) and a retention grant (15%) with a total maximum opportunity of 75% of FR. For the relative TSR grant the comparator group is the oil and gas companies in the ASX 300 Energy Index. The performance period is relatively short at 3 years. The Board decides the actual amount of the grant based on the previous year’s performance.

The retention grant only requires executives to remain employed to fully vest. For the absolute TSR grant 25% will vest if the 3 year absolute TSR equals 8% pa compounded, then linear so that 50% will vest at 10% pa compounded and then linear so that 100% will vest at 12% pa compounded. For the relative TSR grant, 25% will vest if the company’s TSR relative to the comparator group ranks at the 50th percentile, then linear so that 100% vests with a ranking at the 90th percentile.

For the FY13 LTI grant the company said the absolute compound TSR was -9.7% pa and the relative TSR was at the 70th percentile. None of the absolute TSR grant vested, however 62% of the relative TSR vested and were settled with share issues. 

In FY15 the MD’s and executive grants were around 75% of the maximum opportunity. 

The Board voted itself a 3% pay rise with the Chairman receiving $242K and Board members around $125K. The total Board remuneration fell just $3K to $872K, despite the retirement of Mr Hogendijk in November 2014.

Last year, we noted that Board fees had increased by 46% since 2010 while shareholder return for the same period was just 7cps. It was suggested we were being selective in our timing.

Over the 5 year period to the end of FY15 shareholder value has fallen by 2cps, in FY15 it fell 59cps, and since balance date has fallen a further 55 cps.

Furthermore since 2009 when the share price was $2.57 shareholders have suffered a $1.92 cps loss on their investment to the end of October 2015.

The Board claims that the first objective of the company’s remuneration policy is to align the interests of senior executives, employees and shareholders. ASA does not find any evidence of alignment between the substantial rewards paid to both the Board and executives and the corresponding shareholder returns. 

ASA intends to vote against this resolution.

ASA Position
Resolution 2a: Re-election of Mr Kenneth Williams as a Director

Mr Williams was appointed an independent non-executive director in August 2009. He chairs the Audit and Governance Committee and is a member of the People Committee.

He is currently a non-executive Chairman of Havilah Resources NL.

Mr Williams has over 20 years operational experience in corporate finance with an emphasis on treasury and financial risk management as well as diverse experience in mergers, acquisitions, divestments and corporate reconstructions. He holds BEc (Hons), MAppFin, and is an MAICD.

Mr Williams holds 20,000 AWE shares currently valued at $13,000.

ASA Position
Resolution 2b: Re-election of Mr Raymond Betros as a Director

Mr Betros was appointed an independent non-executive director in November 2012. He is a Member of the Sustainability Committee and the Audit and Governance Committee.

Mr Betros has worked over 35 years in international business, project development and technical management. He has held senior positions in resource companies and worked extensively internationally including Indonesia, United Kingdom and Egypt. He has held various senior executive positions at BHP/BHP Billiton, BG Group  and most recently Santos  where he held the position of Executive Vice-President Technical until his retirement from executive duties.

He holds a BEng Chemical, and a Grad Dip Process Plant Engineering.

ASA Position
Resolution 3: Renewal of proportional takeover provisions

Under these provisions registration of shares in a proportional takeover bid is prohibited without shareholder approval. This resolution is in the interests of shareholders.

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