Cadogan Regulatory News (CAD)

18 Dec 2008 07:00



18 December 2008

Cadogan Petroleum

Operational Review Update

The Board of Cadogan Petroleum plc ("Cadogan" or the "Company") today provides an update on its operational review, which we announced in our Interim Management Statement on 19 November.

INTRODUCTION

Since the Company's IPO in June 2008, Cadogan has continued to invest in the appraisal and development of its assets in Ukraine. For various operational reasons, first production from Pirkovskoe and Zagoryanska is not now expected until Q1 2009. In view of this deferral of revenue, and taking account of future production risks and external factors, the Board has undertaken a review of the Company's planned operations to ensure that it retains appropriate financial headroom going forward. Under the revised operational plan, the Company remains able to finance itself independently during 2009 and 2010, by which time it expects to be generating significant revenues from production. 

The objective of the revised operational plan is to focus the Company's available resources in the most cost efficient manner on those assets which are most likely to produce near term cash flow benefits, with the longer term objective of adjusting the capital expenditure profile to be consistent with internal cash flow generation. In this way we are confident of our ability maintain a viable stand-alone funding strategy. As a result of these measures, the Board is confident that we will maintain a positive net cash position for the foreseeable future, with the near-term low point of in excess of $20 million expected in September 2009.

Cadogan's revised operational plan incorporates the following key components:

complete a total of 8 exploration and development wells in 2009 and 2010;

invest some $76.2million (£50.8 million) in capital expenditure in 2009 and some $56.7 million (£37.8 million) in 2010 thereby deferring some $179.0 million (£119.3 million) of capital expenditure in total over those two years ;

monthly average expenditure rate to be $15.7 million (£10.5 million) in the first quarter of 2009, reducing to $3.8 million (£2.5 million) in the third quarter of 2009, leaving in excess of $20 million (£13.3 million) headroom in September 2009;

decide whether to incur further drilling expenditure in relation to the Pokrovskoe field in March 2009, depending on the outcome of testing of the V20/V21 horizons in the Pokrovskoe 1 well which is due to commence in mid January and be completed by mid March;

bring production on line from our Pirkovskoe 1 and Zagoryanska 3 wells by the end of Q1 2009;

defer delivery of the Pirkovskoe gas plant which is being constructed for us by Global Process Systems Inc. in Dubai until 2010, thereby deferring significant capital expenditure associated with the import, installation and commissioning of the plant until after we are generating more significant revenues; and

a rigorous cost control plan to minimise our overhead expenditure.

We will continue to maintain a close and proactive dialogue with the relevant authorities in relation to our licence obligations with a view to protecting the value inherent in those licences which we choose to develop further. 

The Board also continues to explore additional financing and strategic options to enable the Company to develop its assets more quickly and efficiently with a view to optimising the NAV. However, the Board believes that the revised operational plan outlined above is an essential precursor to any other strategic options in the present market environment.

OPERATIONAL DEVELOPMENTS TO DATE

Since its IPO, Cadogan has made the following progress on drilling its core wells:

Target depth ("TD") reached on Pirkovskoe #1 and Zagoryanska #3

Testing has been carried out on these wells as follows:

Pirkovskoe #1 - testing of the V26 (Lower Visean) horizon is currently being undertaken. Further testing is due to be carried out on the V24 and V25 horizons which is due to be completed by the end of January, following which the well will be prepared for production;

Zagoryanska #3 - testing results are currently in line with expectations over a total net pay of 30 metres. Following completion of the ongoing tests, the well will be prepared for condensate production during February 2009 with gas production added during April 2009 on completion of the required processing facilities; and

Drilling activity has been carried out on the following additional wells: Pirkovskoe #2, Pokrovskoe #1, Pokrovskoe #2, Zagoryanska #3, Borynya #3 and Bitlya #2.

REVISED OPERATIONAL PLAN

As outlined above, the revised operational plan focuses activities on 8 wells during 2009 and 2010, the details of which are outlined below:

Pirkovskoe

Pirkovskoe #1 - as outlined above, the well is in the final phase of testing. Cadogan has no further capital expenditure scheduled on this well;

Pirkovskoe #2 - has been drilled to 4580m and 245mm intermediate casing will be set at this depth. The well will be suspended until Q1 2010 when it is planned to re-enter the well and drill to a TD of 5800 metres, test and complete the well for commercial production in Q3 2010.;

Pirkovskoe #460 - initial test results were ahead of expectations, but following acid stimulation, significant water influx occurred and as a result, further work on this well has been suspended with no further expenditure scheduled. There is the potential to undertake a future workover of this well which we will consider at a future point.

Zagoryanska

Zagoryanska #3 - as outlined above, the well is being tested and aside from $2.3 million (£1.5 million) associated with the installation of the required gas processing facilities, Cadogan has no further capital expenditure planned on this well;

Zagoryanska #2 - the workover on this well will commence in July 2009 and is planned to be completed in January 2010. Production is expected to commence during Q2 2010.

Pokrovskoe

Pokrovskoe #1 - currently at 4810m where the 245mm intermediate casing will be set. The V20/V21 horizons will be tested between mid January and mid March 2009. The well will then be drilled to a planned TD of 5400m during 3Q 2009 with production planned to commence during Q4 2009;

Pokrovskoe #2 - currently drilling at 5048m with TD of 5400m, expected to be reached in April 2009 with production expected to commence in mid 2009.

The testing programme that Cadogan has initiated on Pokrovskoe #1, once completed in mid March 2009, will allow us to achieve greater certainty of the viability of the field for commercial production.

Bitlyanska Licence Area

Borynya #3 - following encouraging gas shows in the upper unit of the Oligocene horizons between 2700m and 3300m, we are now drilling at 3375m. Testing will shortly be carried out on the 2700m - 3300m interval. 

Management's current intention is not to continue drilling to the original TD of 4500m, but instead to start producing from the upper unit of the Oligocene with production expected to come online in late 2009 when our new gas plant for the Bitlyanska licence area will have been imported and commissioned.

Bitlya #2 - the commencement of this well has been delayed until October 2009 with production expected in late 2010.

Facilities

As stated above, the construction of the two gas plants ordered in mid 2008 remains on track in Dubai

Cadogan will take delivery of the first gas plant in Q2 2009. This plant will be commissioned on the Bitlyanska licence area and is planned to process gas from the Borynya and Bitlya fields

Following our operational review, the second gas plant, intended for the Pirkovskoe field, will not now be commissioned during 2009 and will remain in Dubai. We intend to take delivery of the plant during 2010 and commission it on the Pirkovskoe field as originally intended;

Cadogan is commissioning lower cost, temporary gas processing plants on both the Zagoryanska and Pokrovskoe licence areas to facilitate gas production from these fields during 2009;

It is also intended that initial production from Pirkovskoe will be processed via the existing Kraznozayarska gas processing facility.

CASH POSITION

Cadogan's cash position as at 17 December 2008 is £88.1m. We set out below the key areas of expenditure since our IPO in June 2008 (the net cash position immediately following IPO was £153.3 million):

Expenditure of £18.3 million on ongoing drilling activities;

Interim payments of £19.8 million in relation to the new gas plants for Pirkovskoe and Bitlyanska;

Payments of £5.1 million in relation to pre-ordering sufficient casing and tubing for the wells scheduled to be drilled during 2009 and 2010. Pre-ordering was required to avoid import restrictions and higher duties on such casing and tubing from 1 January 2009 in Ukraine;

Payments of £13.3 million in relation to the purchase of additional western drilling equipment such as Triplex mud pumps and Twister Spin hydraulic power tongs, designed to address bottle-necks in our drilling operations and as a result to increase the efficiency of our operations over the intensive development period we have planned in 2009;

£8.1 million of expenditure on G&A costs, which includes legal costs of £5.1 million in relation to our ongoing defence of our Pirkovskoe and Zagoryanska licences; and

Net operating costs and other income of £3.4 million and £2.7 million, respectively. 

As stated above we expect the monthly average expenditure rate to be $15.7 million (£10.5 million) in the first quarter of 2009, reducing to $3.8 million (£2.5 million) in the third quarter of 2009, leaving in excess of $20 million (£13.3 million) headroom in September 2009.

OUTLOOK

Focus on implementation of new operational plan and optimisation of available cash resources; 

Gaffney Cline and Associates assigned to reassess reserves with a view to converting contingent and prospective resources to reserves during the early part of 2009;

Cadogan continues to have a positive outlook on the Ukrainian gas price and the move toward netback parity with Western European levels. The current Ukrainian market price is $180/mcm;

Continued and vigorous pursuit of a satisfactory and timely conclusion to the unwarranted legal challenges against the Company's licences.

Mark Tolley, Chief Executive commented:

"Mindful of the current challenging market and economic backdrop, we have revised our operational plans to optimise the use of our cash resources while delivering meaningful production in the near-term. At the same time, significant expenditure has been deferred to preserve funding and strategic flexibility. We continue to believe that we have a diverse and exciting portfolio, which will give us options to develop the most attractive assets further from our existing cash resources and build internally generated cash flows following the implementation of our revised operational plan. We also remain confident that we will be successful in the continued defence of our Pirkovskoe and Zagoryanska licences"

Enquiries

This operational review update includes forward-looking statements which reflect the Company's current expectations and objectives in relation to future operations. These forward-looking statements, as well as those regarding the Company's financial position, reserves, business strategy, asset development plan and any statements preceded by, followed by or that include forward-looking terminology such as the words "targets", "believes", "plans", "estimates", "expects", "forecasts", "aims", "intends", "will", "can", "may", "anticipates", "would", "should", "could" or similar expressions or the negative thereof, are subject to risks, uncertainties, contingencies and assumptions about the Company and its subsidiaries and investments, including, among other things, the development of its business, trends in its operating industry and future capital expenditures and acquisitions, commodity price fluctuations and political risk as well as other risks detailed in the Company's prospectus which can be accessed at www.cadoganpetroleum.com and elsewhere in documents filed from time to time with applicable regulatory authorities. In light of these risks, uncertainties, contingencies and assumptions, many of which are beyond the control of the Company, the actual results could differ materially from the forward-looking statements included in this operational review update. These forward-looking statements speak only as at the date of this operational review update and the Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after that date except as may be required by applicable securities laws.

Overview of Cadogan's licence interests

Cadogan is an independent oil and gas exploration, development and production company with onshore gas and condensate assets in Ukraine. Cadogan currently has significant working interests in 11 licence areas covering 14 fields in Easter and Western Ukraine with a combined area of approximately 1,150 sq. km. The headquarters in Kiev are supported by operational offices in eastern and western Ukraine together with a representative office in London.

The Group's assets are located in two of the three proven hydrocarbon basins in Ukraine, the Dnieper-Donets basin and the Carpathian basin. The Dnieper-Donets basin is the major oil and gas producing region of Ukraine accounting for approximately 90 per cent. of Ukrainian production from over 120 oil and gas fields. The Carpathian basin is one of the largest petroleum provinces in Central Europe.

The Group classifies its assets into Major Fields, being those assets containing greater than 40 million barrels of oil equivalent ("MMboe") of reserves, contingent resources or prospective resources, and Minor Fields, being those containing less than 40 MMboe of reserves, contingent resources or prospective resources. 

Gaffney Cline and Assocaites ("GCA"), an independent petroleum engineering consulting firm, estimates that, as at 31 January 2008, the Group had:

• proved net reserves of 109 Bcf of gas, 7.6 MMbbl of condensate and 0.16 MMbbl of oil;

• proved and probable net reserves of 320 Bcf of gas, 22 MMbbl of condensate and 0.77 MMbbl of oil; and

• proved and probable and possible net reserves of 588 Bcf of gas, 42 MMbbl of condensate and 1.6 MMbbl of oil.

GCA also estimates that, as at 31 January 2008, the Group had net best estimate contingent resources of 1,583 Bcf of gas, 48 MMbbl of condensate and 1.5 MMbbl of oil. In addition, GCA estimates that the Group has significant prospective resources.

For illustrative purposes, the Group has converted the net reserves and resources figures into MMboe, using the conversion factor of one MMboe equals 0.18 Bcf. This conversion results in proved net reserves of approximately 27.4 MMboe, proved and probable net reserves of approximately 80.4 MMboe, proved and probable and possible net reserves of approximately 149.4 MMboe and net best estimate contingent resources of approximately 334.4 MMboe.

Further information can be located on the Company's website at www.cadoganpetroleum.com