Borders & Sth. Regulatory News (BOR)

18 Apr 2007 13:07

Borders & Southern Petroleum plc18 April 2007 This document replaces the announcement that was made on Monday 16 April 2007,RNS No. 9277U released at 14:47pm. Please note the changes to the column headings in the tables with reference to £ figures. Borders & Southern Petroleum plc Preliminary Results for the 18 months ended 31 December 2006 Borders & Southern Petroleum plc (or "the Company") (AIM: BOR) is pleased toannounce its preliminary results for the 18 months to 31 December 2006. Highlights • Borders & Southern has completed the processing and interpretation of its Falkland Islands 2D seismic data • The Company has commissioned and completed a number of technical studies aimed at technical risk reduction • A new fold belt play located to the south of the Falkland Islands has been defined, the heart of which is contained within the Company's 100% owned licensed area • The size of the Company's lead inventory has increased significantly, and contains numerous structures capable of holding giant oil or gas accumulations • The Company is currently assessing the design and cost of a focused 3D seismic acquisition programme aimed at further risk reduction prior to drilling • The management team is actively seeking to add new projects to its portfolio that are consistent with its strategy and meet its stringent screening criteria • Cash balance as at 31 December 2006 was £9.47 million Harry Dobson, Chairman of Borders & Southern, commented "The Company iscontinuing to make great progress towards its objective of building a successfulexploration and production business. The evaluation of the Falkland Islandslicences has delivered really exciting results. The 2D seismic programme hasproduced some spectacular images of large structures within an undrilled foldbelt and the subsequent mapping has defined numerous leads with the potential tohold substantial volumes of hydrocarbons. Earlier last year we invited a small number of companies to review the data withthe aim of becoming a joint venture partner. Discussions with some of thesecompanies are ongoing. In the interim, we are continuing to maintain the pace ofexploration, looking at ways to further reduce the technical risk with the clearintention of drilling the first well as soon as practical. In addition to our Falkland Islands work we are currently reviewing additionalfrontier opportunities with large upside potential with the goal of building theCompany's portfolio consistent with our strategy." For further information please visit www.bordersandsouthern.com or contact: Howard Obee Simon Hudson / Clemmie CarrBorders & Southern Petroleum plc Tavistock CommunicationsTel: 020 7661 9348 Tel: 020 7920 3150 Chairman's Statement Over the last 18 months the Company has made significant progress towards itsobjective of building a successful exploration and production business. Duringthis period it has completed the processing and interpretation of the FalklandIslands 2D seismic data and commissioned a number of specialist studies allaimed at reducing the technical exploration risk. The results of the technical work have confirmed our belief that an excellentfold belt play exists to the south of the Falkland Islands. The work alsoconfirmed the scale of the opportunity, with numerous structural leads mapped,seven of which exceed 50 square kilometres in size. These structures arepotentially capable of holding very large volumes of hydrocarbons. The evaluation has produced far better results than expected at the outset andthe Company has been fortunate to find that its acreage (in which we hold a 100%interest) contains the majority of the play fairway. The management team's strategy from the outset was to attract large independentand major oil companies as partners in the projects that we pursue. Thechallenge is to determine the right time to bring in such partners by way of afarmout. We need to optimise the commercial terms of any agreement whilstreducing the technical risk enough to attract the partner. In order to understand how major oil and gas companies would perceive thecurrent risk profile of Borders & Southern's licensed acreage, the Companyinvited a very limited number of targeted companies to review the data, with aview to them potentially becoming a joint venture partner. We did not believe itappropriate to launch a full farmout campaign at that time. The selected small number of companies took up our invitation and made multiplevisits to our offices to review the data. Discussions with some of thesepotential partners are ongoing. In the meantime, in order to maintain the pace of exploration the Company iscurrently evaluating the best way to further reduce the technical risk. Oneoption being considered is a focused 3D seismic survey. Therefore the Company isworking with consultants on 3D survey design and assessing how much data isrequired to deliver a significant risk reduction and how much it will cost. Ifwe proceed with 3D seismic acquisition then it is likely to occur in the lastquarter of 2007 at the start of the Austral summer season. Ultimately, of course, we want to drill our Falkland Islands prospects as soonas practical. The objective is to align the drilling programme with otherlicence holders in the Falkland Islands region so that we can take advantage ofthe cost benefits of a combined drilling programme. Discussions with theselicence holders are ongoing. However, if a joint venture partner is brought intoour acreage, the incoming partner is likely to assume operatorship of ourlicences and will accordingly seek input into the timing of explorationdrilling. In addition to progressing the evaluation of the Falkland Islands licences themanagement team has been assessing opportunities in other regions with theintention of adding new licences to the Company's portfolio. Applying strictscreening criteria, the Company has been and will continue to be very selectivewhen considering new licences. Borders & Southern will ensure that any additionsto the exploration portfolio will be consistent with our strategy, bothtechnically and commercially, of acquiring assets, the quality of which is atleast equal to those in our current portfolio. Exploration in frontier regions is always challenging. However the potentialrewards are great. Borders & Southern's current portfolio holds the potential todiscover and prove up significant volumes of hydrocarbons. We will continue toprogress towards testing this potential. Harry DobsonChairman Chief Executive's Review Falkland Islands Background and Operational Review In November 2004 Borders & Southern gained licences to explore in nearly 20,000square kilometres of the territorial waters of the Falkland Islands. Thisacreage is located in the untested South Falkland Basin. The Company's specific objective was to investigate the presence of a fold beltplay to the south of the Falkland Islands, the offshore continuation of theAndes Mountain trend. Throughout the South American continent, from Venezuela inthe north through Colombia, Peru, Bolivia and Argentina, fold belts provide oneof the most successful hydrocarbon plays. Fold belts usually contain numerous, simple geological structures suitable fortrapping hydrocarbons. Providing there are good reservoir rocks and workingsource systems then fold belts can contain prolific hydrocarbon provinces.Individual structures can contain billion barrel oil fields or multi-tcf gasaccumulations. Examples of such giant fields include: El Furrial (Venezuela),Cusiana (Colombia) and the San Martin / Cashiriari structures (Peru). Prior to our exploration programme in the South Falkland Basin there had beenonly limited evaluation of the fold belt play. Hints that a play could existwere seen on legacy regional seismic data from 1992. However, this data isinsufficient to define where the play might best be developed. In April / May of2005 we acquired 2862 kilometres of new 2D seismic data. Onboard processingallowed us to confirm that the play existed and enabled us to refine the surveyduring acquisition in order to cover the most interesting structures. Thisexplains the higher density of seismic lines in the west of the licensed area. There have been no exploration wells drilled in the basin. Calibration of theseismic data, necessary for interpretation, comes from Deep Sea Drilling Project(DSDP) wells located to the east of the Falklands on the Maurice Ewing Bank andfrom exploration wells located in the Malvinas Basin to the west. These wellsprovide critical stratigraphic information and demonstrate the presence of ahigh quality, organic rich Cretaceous / Jurassic aged marine source rock. Previous exploration drilling in the contiguous Malvinas basin during the early1980s resulted in several sub-commercial discoveries. Oil flow rates in excessof 3,000 barrels of oil per day (bopd) have been reported. Importantly the oilhas been typed to source rocks in the same stratigraphic interval as the sourcerocks cored in the DSDP wells. Similar aged organic rich shales are alsorecorded onshore South America, on the Antarctic Peninsula, in the Weddell Sea,and off the west coast of South Africa. This gives a high degree of confidencethat this is a regional source rock which will be present within Borders &Southern's licensed acreage. Indirect evidence that source rocks are present and generating hydrocarbonswithin the licences come from a clearly defined bottom simulation reflector,interpreted to represent gas hydrates. There are also many seismic amplitude andAVO anomalies within geologically sensible trapping configurations that might beindicative of hydrocarbons. Several prospective play fairways have been identified and mapped, but the maintargets are Late Cretaceous / Tertiary sands within large anticlinal closures.Additional stratigraphic plays also occur within this stratigraphic interval.Subsidiary plays include Lower Cretaceous sands within tilted fault blocks. Thisis similar to the proven play of the Malvinas Basin. Borders & Southern's regional work has demonstrated that Upper Cretaceous /Tertiary sands are likely to have been derived from the Falklands Massif to thenorth of the Company's acreage. Mapped canyons and channels indicate a northsouth sediment transport direction. The nearest outcrop to the licensed area is Beauchene Island, located almostmidway between the northern limit of the acreage and the main Falkland Islands.The geology of Beauchene Island is comprised of quartzitic sandstones andquartzites, interpreted to be of Devonian age by analogy to the quartzites ofthe Port Stephens and Port Stanley Formations on the main Falkland Islands.Erosion of these sandstones and quartzites would provide excellent reservoirs inthe contract area. 2D Seismic Interpretation Detailed mapping of our new 2D seismic data has revealed numerous structuralleads. These comprise four-way dip anticlinal closures, three-way dip thrustfault closed structures, and tilted fault blocks. Many of these structures arelarge. Seven leads have a mapped area of closure over 50 sq km, with onestructure exceeding 130 sq km. Significantly these structures display verticalclosure in excess of 2 km which allows the possibility of stacked reservoirs,providing multiple targets within the same prospect. During the last 12 months we have undertaken a rigorous technical evaluation.This started with a regional play fairway analysis taking in the whole of theSouth and East Falkland Basins. Once the new data had been acquired, we focusedon the licensed area, and brought in specialist help for specific projects,using experienced industry consultants and experts from British universities. Projects have included geochemical and thermal modelling, structural modellingand restoration, seismic AVO analysis, seismic reprocessing, seismic faciesanalysis, and lead specific mapping. All of these studies have been broughttogether to help reduce the exploration risks. In addition to the technical studies we have commissioned independent analysisof the operating environment and economics. The environment conditions aredescribed as similar to the West of Shetlands in the UK; challenging butcertainly within the capability of industry practice. Due to the water depths ofbetween 1,500 and 2,000 metres it is likely that a drill ship or a highspecification semi-submersible will be required for an exploration well. Again,we will be using standard oil industry technology and the oil industry isalready exploring in water depths out to 3,000 metres. Critically, the minimum field size required for a commercial development hasbeen investigated. This was found to be around 100 million barrels, assuming anoil price in excess of $34 per barrel (current spot oil prices for Brent Crudeare around US$67 per barrel). In the exploration success case, these volumesshould be easily achievable given the size of mapped structures. A discovery would be developed using standard technology involving a FloatingProduction Storage Offloading system (FPSO) whereby the crude oil is shippeddirect to market without the need for significant onshore infrastructure. Next Steps All the technical and commercial work we have undertaken to date has reinforcedour view that we have an excellent position in the South Falklands Basin worthyof exploration drilling. In order to progress further we are currently evaluating additional workprogramme options. One such option is 3D seismic acquisition. New 3D data wouldallow the Company to have greater confidence in the reservoir distributionacross the large structures and to better site exploration wells. It may alsoprovide direct hydrocarbon indicators such as flat spots and amplitude anomaliesconforming to the mapped structure thereby significantly reducing the technicalrisks. Strategy The Company's strategy is to build a portfolio of up to five explorationprojects in frontier basins, areas in which a prolific petroleum system has yetto be defined. As frontier exploration has a higher technical risk profile thanexploration in mature basins, the scale of opportunity and the potential rewardswill be very large. One overriding technical constraint to the screening is the focus on basinswhere there is a high degree of confidence of a working source system, througheither direct (oil flow in wells) or indirect technical evidence (directhydrocarbon indicators from seismic or seeps). The Company will seek to minimise the exploration risk through high qualitytechnical work and the application of leading edge technologies. We hope to secure large tracts of our targeted play fairways so that if thedrilling of the first prospect is successful there would be plenty of remainingpotential. The Company will also target those play fairways that containindividual prospects of significant size. In contrast to the relatively high technical risks, the Company intends to focuson countries where political and commercial risks are considered to berelatively low. The Company sees its role in the industry as one where it generates ideas,secures the acreage, funds the early stage of exploration with the acquisitionof 2D and / or 3D seismic data and thereby takes out significant explorationrisk from the opportunity prior to attracting the larger companies to help fundthe drilling campaigns. Despite the sustained high price of oil and increased pressure of reservereplacement, the industry majors are still relatively risk averse and are notpursuing frontier opportunities. This provides an excellent opportunity fortechnically proficient small companies like Borders & Southern for early entryand risk-reduction exploration work prior to farming out. New Opportunities With the price of oil still relatively high, the competition for acreage isfierce, particularly in proven and emerging petroleum basins. As the Companyscreens opportunities it needs to ensure the quality is as good as its existingproject and also that it focuses on projects that would appeal to the largercompanies. During the last 18 months we have screened a number of opportunities,but as yet have not secured a second project. The Company will continue to taketime in order to bring the right projects into the portfolio. Industry Outlook During the last 18 months the price of oil increased to over $75 per barrel(July / August 2006) but then gradually fell back to levels around $60 perbarrel. This is still very high when looking at a five year trend. During theearly part of the decade oil prices were around the $30 per barrel level. Whilstsome weakening of the price might occur many commentators believe that it isunlikely that oil prices will return to these levels in the short to mediumterm. The impact of high oil prices on our business is twofold. Firstly, there isincreased competition for acreage, particularly in the proven hydrocarbonbasins. Secondly, due to the increased exploration, appraisal, and developmentactivity there is a higher demand for services, such as seismic and drillingcontractors, which flows through to both costs and availability. Howard ObeeChief Executive Officer Consolidated Profit & loss AccountFor the period ended 31 December 2006 Note 18 months ended 8 Jun 2004 to 31 Dec 2006 30 June 2005 £ £Turnover - -Administrative Expenses (1,176,389) (204,785)Operating loss 2 (1,176,389) (204,785)Other interest receivable on similar income 649,365 63,539Loss on ordinary activities before and after taxation (527,024) (141,246)Loss for the financial period (527,024) (141,246) Loss per share - basic and diluted (see note 3) (0.39) p (0.26)p All amounts for both periods relate to continuing activities. The Company has no recognised gains or losses for the period other than theresults above. Consolidated Balance SheetAs at 31 December 2006 31 Dec 2006 30 Jun 2005 £ £ £ £Fixed AssetsIntangible Assets 1,637,066 1,497,668Tangible Assets 10,144 14,965 1,647,210 1,512,633Current AssetsDebtors 135,731 142,790Cash at bank and in hand 9,468,174 10,416,100 9,603,905 10,558,890 Creditors: Amounts falling due within one (65,804) (331,546)year Net current assets 9,538,101 10,227,344Total assets less current liabilities 11,185,311 11,739,977Provisions for liabilities - (42,955)Net assets 11,185,311 11,697,022 Capital and reservesCalled up share capital 1,276,875 1,276,875Share premium reserve 10,561,393 10,561,393Other reserves 15,313 -Profit and loss reserve (668,270) (141,246) Equity shareholders' funds 11,185,311 11,697,022 Consolidated Cash Flow StatementFor the period ended 31 December 2006 31 Dec 2006 30 Jun 2005 £ £ £ £Net cash flow from operating activities (1,472,230) (140,147) Returns on investment and servicing of 654,221 63,539finance Capital expenditure and financialinvestmentPurchase of intangible fixed assets (139,398) (1,326,875) Purchase of tangible fixed assets (5,832) (18,685) (145,230) (1,345,560)Cash outflow before management of liquid (963,239) (1,422,168)resources and financing FinancingIssue of shares and share options (net of 15,313 11,838,268issue costs)Change in cash on deposit 928,867 (10,000,000) 944,180 1,838,268Net cash flow (19,059) 416,100 Reconciliation of net cash to movement in net debt 31 Dec 2006 30 Jun 2005 £ £(Decrease) / increase in cash in the period (19,059) 416,100Change in short term deposits (928,867) 10,000,000Change in net debt resulting from cash flows (947,926) 10,416,100Net funds at the start of the period 10,416,100 -Net funds at the end of the period 9,468,174 10,416,100 1 Notes to the Preliminary Results Basis of preparation The financial information contained in this statement does not constitute theGroup's statutory accounts. The figures for the period ended 31 December 2006have been extracted from the Group's audited statutory accounts, which wereapproved by the Board on 16 April 2007 and will be lodged with the Registrar ofCompanies. The report of the auditors on those accounts was unqualified. The financial statements have been prepared in accordance with the historicalcost convention and in accordance with the applicable accounting standards andthe Statement of Recommended Practice "Accounting for Oil and Gas Exploration,Development, Production and Decommissioning Activities". In preparing these financial statements the group has adopted FRS 20'Share based payment' for the first time. The impact for the current period isto increase the loss by £15,335. There is no change in net assets. There is noimpact on the prior period as there were no share based payments in existence. The consolidated financial statements include the financial statementsof the company and its subsidiary undertaking made up to 31 December 2006. Theacquisitions method of accounting has been adopted. Under this method, theresult of the subsidiary undertaking acquired in the period is included in theconsolidated profit and loss account from the date of acquisition. Under section 230(4) of the Companies Act 1985 the company is exemptfrom the requirement to present its own profit and loss account. Its loss forthe financial period was £500,996 (2005 - £141,246). Turnover At the end of the period the group had not commenced commercialproduction from its exploration sites and therefore has no turnover in theperiod. Depreciation Depreciation is provided on tangible fixed assets so as to write offthe cost or valuation, less any estimated residual value, over their expecteduseful economic life as follows: Office Equipment 33 1/3% Assets are depreciated from the date of acquisition, and on a straightline basis. Exploration and evaluation expenditure The group has adopted the full cost accounting policy for expenditureon oil and gas projects. All costs associated with oil exploration arecapitalised on a project-by-project basis, pending determination of feasibilityof the project. Costs incurred include appropriate technical and administrativeexpenses but not general overheads. If an exploration project is successful, therelated expenditures will be transferred to tangible fixed assets and amortisedover the estimated life of the commercial reserves. Where a licence isrelinquished, a project is abandoned, or is considered to be of no further valueto the group the related costs are written off. All capitalised costs arereviewed annually against the underlying value of oil and gas reserves, unlessthe expenditure relates to an area where it is too early to make a decisionabout the value of the assets. Impairment tests When there is an indication that the value of an asset may beimpaired, the net amount at which the asset is recorded is assessed forrecoverability against the discounted future estimated net cash flows expectedto be generated from the estimated remaining commercial reserves. The assessmentis made on the basis of future oil prices, exchange rate and cost levels asforecast at the balance sheet date. A provision is made by way of an additionaldepreciation charge, where the carrying value of the asset exceeds thediscounted future net cash flows to be derived from its estimated remainingcommercial reserves. Foreign currencies Profit and loss account transactions in foreign currencies aretranslated into sterling at the exchange rate ruling at the date of thetransaction. Assets and liabilities denominated in foreign currencies aretranslated into sterling at the closing rates at the balance sheet date and theexchange differences are included in the profit and loss account. Operating leases Rentals payable under operating leases are charged in the profit andloss account on a straight line basis over the lease term. Share based incentives In accordance with Financial Reporting Standard 20 the fair value ofequity-settled share-based payments to directors and employees is determined atthe date of grant and is expensed over the vesting period. Fair value ismeasured by a Black-Scholes-Merton pricing model. Financial instruments - Other than the information about the group's exposure to foreign exchange risk, short term debtors and creditors have been excluded from the financial instrument disclosures;- The group does not hold or issue derivative financial instruments for trading purposes; and- Forward exchange contracts are used to fix the exchange rate of committed and anticipated foreign currency transactions. Gains and losses arising on such hedges are not recognised until the transaction occurs The group has not made use of any derivative financial instruments inthe period. Deferred taxation Deferred tax is provided in full on timing differences which representa liability at the balance sheet date, at rates expected to apply when theycrystallise based on current tax rates and law. Timing differences arise fromthe inclusion of items of income or expenditure in tax computations in periodsdifferent from those in which they are included in the financial statements.Deferred tax balances are not discounted. Liquid resources For the purpose of the cash flow statement, liquid resources aredefined as current asset investments and short term deposits, held on a rollingmonthly basis. 2 Earnings/(loss) per share The calculation of the basic loss per share is based on the lossattributable to ordinary shareholders divided by the weighted average number ofshares in issue during the period. The loss for the financial period for thegroup was £527,024 (2005 - £141,246) and the average number of shares in issuefor the year was 127,687,500 (2005 - 55,413,437). The effect of the shareoptions in issue is antidilutive. 3 Reconciliation of movements in shareholders' funds Group Company 31 Dec 2006 30 Jun 2005 31 Dec 2006 30 Jun 2005 £ £ £ £Loss for the period (527,024) (141,246) (500,996) (141,246)Share-based payment for the period 15.313 - 15,313 -New share capital subscribed - 11,838,268 - 11,838,268Net (reduction)/addition to shareholders' (511,711) 11,697,022 (485,683) 11,697,022fundsOpening equity shareholders' funds 11,697,022 - 11,697,022 -Closing equity shareholders' funds 11,185,311 11,697,022 11,211,339 11,697,022 4 Annual Report The Annual Report will be sent to shareholders shortly and will be available onthe Company's website www.bordersandsouthern.com This information is provided by RNS The company news service from the London Stock Exchange