Interview with Rob Shepherd, CFO, Dominion Petroleum

The Oil Council's Drake Lawhead (DL) interviews Dominion Petroleum CFO Rob Shepherd (RS). 

DL: East Africa is an exploration hotspot now. Why did Dominion first start to look for hydrocarbons in East Africa?

RS: To be honest, I think the founders of the Company were just lucky – as far as I am aware, they were actually in Tanzania in 2005 looking for minerals deals and happened to stumble across the onshore licences we hold which they opportunistically signed up in 2006 and only then started to think about what to do with them. One thing then led to another, offshore Block 7 (Tanzania) was secured as was Exp. Area 4B (Uganda), so without necessarily fully appreciating the potential, Dominion Petroleum (LON:DPL) was in late 2007 already sitting on what appear now to be highly attractive assets.

DL: From a financial perspective, what are the challenges of operating in East Africa?

RS: I think there are a couple of things that stand out, firstly that a lot of investors still associate such areas as having a high degree of political risk, and so we spend quite a lot of time trying to explain reality – whilst there is of course risk associated with East Africa, at the end of the day, some risks, such as change of investment framework, are actually lower than places like the UK (as evidenced by the recent tax grab) and I for one still wonder whether political risks in the Falklands are as low as many people seem to assume. Secondly, things always take far longer than expected to progress in Africa, which is just the way it is, but trying to explain this to an investor sitting in New York or London isn’t always easy.

DL: Big oil has moved into your neighbourhood, with the likes of ExxonMobil (NYSE:XOM), Statiol, Petrobras, Tullow Oil (LON:TLW) and Anadarko owning licenses nearby. What is the advantage of an independent O&G company like Dominion over the blue chip companies?

RS: Probably the single biggest advantage is to be able to move quickly, as evidenced by our recent licence acquisition in Kenya – the opportunity came up in December and so we jumped on it quickly without having to justify it to various new country entry committees, budget police or otherwise (although of course we still go through the same thought process, we just don’t have endless layers of middle management to go through in deciding whether or not to move).

DL: You’ve recently acquired an interest in a deepwater block off of Kenya. How does this fit in with Dominion’s strategy?

RS: I can’t really put it better than Andrew Cochran did when commenting for the RNS we put out when the Heads of Agreement was signed, “L9 represents one of the very few “ground floor” opportunities remaining in the highly prospective, and increasingly attractive, East African offshore basins. The PSC, when signed, will represent a significant expansion of Dominion’s deepwater footprint, in an area that is rapidly gaining the attention of major players in the industry.” As with Block 7 offshore Tanzania, little ol’ Dominion is once again sitting on a significant interest in an area surrounded by the big guys – BG, Apache and Anadarko (NYSE:APC) are fellow deep water operators in Kenya – with us having no drill commitment until 2013 / 2014 at the earliest, by which time a number of wells will have been drilled in adjacent acreage.

DL: What is Dominion’s long term strategy? Where do you hope to be in 10 years?

RS: In 10 years time, wow, I for one really want to be playing golf all day on my own little island in the Indian Ocean, bought from the proceeds of some huge finds we’re hoping to make between now and then, not sure about the rest of my colleagues! On a more serious note, 10 years is probably a long way for a company like us to plan, but having struggled for three hard years since I joined to help sort Dominion out, I for one think we’re in a great place right now and could, if allowed, build a really meaningful business, maybe the next Tullow, who knows?! Isn’t there a well known golf saying “the more you practice, the luckier you get”, so we’re focused on practising a lot right now!

DL: From a CFO perspective what challenges do you believe independents face in today’s energy markets?

RS: We’re at the small end of small, which brings its own challenges, but I think in general there are clear challenges for independents in terms of managing the ongoing risks that are prevalent in the industry, be they political (acreage in Egypt, Libya, Cote d’Ivoire anyone?), commercial (if only we could all be sure the oil price will remain above $100, it’d make future planning much easier) and of course technical – I’m a mechanical engineer by background so have some understanding of the challenges we face, but nevertheless I’m still amazed by those the industry manage to overcome every day, sub-sea engineers should in theory make great dinner party guests shouldn’t they?!

DL: Do you believe capital is freely available for independents?

RS: Again looking at the market from our perspective, we’ve been pleased to see the responses to recent fund-raisings by exploration-only stories such as Bpc (LON:BPC) and Chariot Oil & Gas (LON:CHAR) , it never ceases to amaze me that there are investors out there who have lost money for ever in exploration, but still can’t resist coming back for one more go, it’s addictive, and why not, who wouldn’t like to say they were invested in the next “multi-bagger”?

DL: What do you look for in your banking partners? What makes for a good energy banking partner?

RS: We have pretty basic banking needs right now, unless there are any of you out there who fancy lending debt to explore, but I think early stage companies want to find partners who “get” the potential and are willing to work with a company as they grow – I was at ABN AMRO for a long time and worked for example with Tullow prior to them acquiring Energy Africa in 2004, if I’m not mistaken, their market cap at the time was around £300 mln and there certainly weren’t the number of banks beating a path to their door as there are now. So if banks can see the early stage opportunity, there’s a lot of money to be made, even from good old “bread and butter banking” before the crowd wakes up.....successful companies aren’t short of friends.....

DL: What are the emerging trends in energy finance that you are either most concerned about, or most positive about?

RS: On the positive side, as I mentioned earlier, I think the fact that little guys like us still attract interest from sensible institutions is great and shows the sector appears to be over the troubles of recent years, which in my view reached the bottom when people were questioning whether the independent explorer model worked at all. And on the debt side, following the banking crisis, I know that banks have become a lot more cautious about lending, and when they do, loans are I’m sure coming with extremely onerous covenants, reporting obligations and otherwise, which I’m sure frustrates a lot of my fellow CFOs – it’s always frustrating to know that loan agreements are only ever really crafted to deal with the downside, and if a deal is sensibly structured following appropriate due diligence, in reality they may never need to be referred to again (and hence could in theory be replaced by a one pager – “here’s some money, promise to pay it back with interest, thanks”!)

DL: Which other oil companies do you admire currently, and why?

RS: I’ve always admired Tullow Oil (LON:TLW) , who appear to have achieved what I didn’t think was possible, namely to grow materially as a business and attract significant new talent into the business from much larger and more established companies whilst retaining what appears to be a great entrepreneurial spirit. It’s obviously not quite comparable, but when I was a non-exec at Imperial, the company was clearly struggling to manage the transition following a number of years of explosive reserves growth into one that was able to actually develop and produce them, requiring rather different management skills, and so systems were certainly starting to creak at the seams when the Indian cavalry came riding over the hill to save the day, so to speak! The jury is still out on another, but I think President Petroleum is one to watch for the future, as they’ve just hired a good friend of mine who I think is a great addition to the team they already had, and as I told Peter Levine, will more than make up for the shortcomings of the last person I introduced to him, who shall remain nameless but for his initials – JH.

DL: What was the wisest advice you ever received from a mentor?

RS: I’m not an accountant, but vividly remember wise words from my business school accounting professor, “Cash is King!”, and it’s certainly put me in good stead at Dominion, it isn’t far from the truth to say that I know where every dollar is in the Company and more importantly where it’s being spent, but I probably couldn’t wax lyrical about the finer points of recent amendments to IFRS.

DL: How do you enjoy spending your spare time?

RS: I actually spent the last few months preparing (i.e. trying to get in shape) to join some mates on the Haute Route, a ski-mountaineering expedition in the Alps but wasn’t able to go due to work commitments, really disappointed! Other than that, I play a bit of sport (five-a-side and squash) and also spend time in various local parks with our mad little working cocker spaniel, great fun! And given I ride a BMW “Pretend You’re Ewan McGregor” motorbike, I can occasionally be seen picking it up out of a river or off the ground having slipped on mud yet again.

DL: Finally, what are your three desert island luxuries?

RS: My girlfriend (in case she reads this), a KTM (lighter than the BMW) and a sand wedge (plus endless supply of golf-balls), although someone told me that when Martin Sheen recently chose this on Desert Island Discs, Kirsty Young told him he could have the complete bag of clubs!.