DES.L Regulatory News (DES)

22 Sep 2005 07:01

Desire Petroleum PLC22 September 2005 Desire Petroleum plc ("Desire" or "the Company") Interim results for the six months ended 30 June 2005 Chairman's Statement Dear Shareholder, The profit after tax for the half-year ended 30 June 2005 was £739,000, entirelydue to interest received and currency exchange gains. Following the successfulPlacing and Open Offer of the Company's shares completed on 8 March 2005, yourBoard considered it prudent to convert the major part of the net proceeds ofapproximately £ 24.4 million into US dollars, as by far the greater proportionof drilling costs are in dollars. Because of the increase in the strength of thedollar in recent months, this has resulted in a significant currency exchangegain and has also preserved the purchasing power of the Group's funds. In my letter to shareholders, dated 14 February 2005, in the Prospectus for thePlacing and Open Offer, I wrote that increasing oil prices were leading toincreasing rig rentals and decreasing rig availability and that the sooner theGroup could enter the rig market the better would be the prospects for an earlydrilling campaign. In the event, oil prices have increased even further, rigrentals have increased by more than 50% and current suitable rig availabilityhas reduced to almost zero at the time of writing and is likely to have worsenedfurther as a result of Hurricane Katrina. When the Group conducted a survey of rig availability at the end of 2004, of theten companies contacted, seven expected to have a suitable drilling unitavailable. However, following discussions with the rig contractors who repliedto the rig tender in March, it emerged that there was only one suitable rigavailable. Despite lengthy negotiations with the owners of this rig the Groupwas unable to agree an acceptable contract for drilling in the Falklands. Thecurrent situation as regards drilling in 2005 or 2006 is unclear but Peak WellManagement, the Group's drilling consultants, continuously monitor world-widerig availability on the Group's behalf. The world-wide shortage in rigs has arisen because of the lack of new rig buildsin recent years coupled with the sharp increase in oil prices. In particular,many rigs are being used to appraise and develop fields previously considereduncommercial in addition to the world-wide increase in exploration drilling.This has led many companies to enter into long-term rig contracts which tie uprigs for up to three years. However, this situation has occurred before and, inthe past, has led to the building of new rigs, a process already underway now.In addition, many companies that have entered into long-term contracts, as inthe past, may not be successful in their drilling campaigns and will have toseek other companies to fulfil their contract obligations. It is not surprisingthat drilling companies are reluctant to undertake a three-well drillingprogramme in a remote location, such as the North Falkland Basin, when there issuch high demand in their core drilling areas and Desire does not have theresources or programme to take a long-term contract, however the rig market isoften subject to quite rapid changes. Accordingly, as the market stabilises, rigavailability may well improve in 2006. In the meantime, the Group has pressed ahead with its drilling preparations inorder to be ready to drill as soon as a rig becomes available and is alsoconsidering other ways of securing a rig. In particular, the Group continues toreceive approaches from companies interested in participating in the NorthFalkland Basin and, although another farm-in partner is not required to financethe project, should a potential farminee have access to a rig it might be to theGroup's advantage to reach an agreement with them. As a consequence, the Groupcontinues to welcome such approaches. On the plus side, the increase in the oil price means that the Group's drillingprospects, should they result in discoveries, are likely to be twice as valuableas indicated in the Prospectus for the Placing and Open Offer published on 14February 2005, in which a maximum oil price of $30/barrel was assumed, eventaking into account increasing costs. It is particularly pleasing, therefore,that, as already announced, the Group has identified additional prospects inTranches C and D and has acquired a 100% interest in Tranche F. It has been the Board's policy to incentivise the Company's Directors andManagers via the award of share options under the Company's Unapproved ShareOption Scheme. However, following the introduction of new accounting standards,share options are no longer seen as the most appropriate form of reward. TheRemuneration Committee has, accordingly, been considering a number ofperformance-based schemes. Because the Group does not have an income, and itssuccess or failure is a direct function of drilling success, the mostappropriate performance yardstick is the Group's market capitalisation.Accordingly, the Group intends to replace its current option scheme with a bonuspool, payable in shares, of up to 5% of any increase in the marketcapitalization of the Company over a period of three years, receivable at theend of the three-year period, thereby ensuring a mutuality of interest andreward as between the Company's Directors and Managers and its shareholders. In conclusion, although the present lack of a rig is both disappointing andfrustrating, the underlying potential values of the Group's prospects have beengreatly enhanced. Hopefully, once the rig market has normalised, that potentialcan be swiftly put to the test. Group Profit and Loss Account for the six months ended 30 June 2005 6 Months 6 Months Year ended ended ended 30.6.05 30.6.04 31.12.04 £'000 £'000 £'000 Oil exploration costs - - (56)Administrative expenses (412) (324) (626)Foreign exchange movement 984 - (1) --------- --------- --------- Operating profit/(loss) 572 (324) (683) Interest receivable 214 24 38Interest payable - (1) (1) --------- --------- --------- Profit/(loss) on ordinaryactivities before taxation 786 (301) (646) Taxation (47) - (6) --------- --------- --------- Profit/(loss) on ordinary activities aftertaxation retained for the period 739 (301) (652) --------- --------- --------- Earnings per share (pence): Basic 0.37 (0.19) (0.41)Earnings per share (pence): Diluted 0.36 n/a n/a --------- --------- --------- Group Balance Sheet as at 30 June 2005 As at As at As at 30.6.05 30.6.04 31.12.04 £'000 £'000 £'000Fixed assets Tangible assets 3 2 3Intangible assets 5,863 5,454 5,508 ---------- --------- --------- 5,866 5,456 5,511Current assets Debtors 163 54 41Investments - 1 -Cash at hand and in bank 25,252 987 459 ---------- --------- --------- 25,415 1,042 500Creditors: amounts duewithin one year (270) (265) (129) ---------- --------- --------- Net current assets 25,145 777 371 ---------- --------- --------- Total assets less current liabilities 31,011 6,233 5,882 ---------- --------- --------- Capital and reserves Called up share capital 2,186 1,627 1,627Share premium account 44,781 20,950 20,950Merger reserve 13,343 13,343 13,343Profit and loss account (29,299) (29,687) (30,038) ---------- --------- --------- Equity shareholders' funds 31,011 6,233 5,882 ---------- --------- --------- Group Cash Flow Statement for the six months ended 30 June 2005 6 Months 6 Months Year ended ended ended 30.6.05 30.6.04 31.12.04 £'000 £'000 £'000 Net cash outflow from operatingactivities (440) (682) (1,069) Returns on investment and servicing offinanceInterest received 214 24 38Interest paid - (1) (1) TaxationTaxation paid - - - Capital expenditure and financial investmentPurchase of tangible fixed assets - (2) (3)Purchase of intangible fixed assets (355) (3,106) (3,160) ---------- --------- --------- Net cash outflow before financing (581) (3,767) (4,195) FinancingIssue of share capital (net ofexpenses) 24,390 4,708 4,708Repayment of loans - - (100) ---------- --------- --------- Increase in cash in period 23,809 941 413 Foreign exchange gain 984 - - ---------- --------- --------- Movement in net cash 24,793 941 413 ---------- --------- --------- Reconciliation of operating loss to netcash outflow from operating activities 6 Months 6 Months Year ended ended ended 30.6.05 30.6.04 31.12.04 £'000 £'000 £'000 Operating profit/(loss) 572 (324) (683) Exchange differences (984) (2) -(Increase) / decrease in debtors (122) (17) (5)Increase/(decrease) in creditors 94 (339) (381) ---------- --------- --------- Net cash outflow from operatingactivities (440) (682) (1,069) ---------- --------- --------- Notes to the Interim Financial Statements for the six months ended 30 June 2005 1. Basis of preparation The interim financial information has been prepared on the basis of theaccounting policies set out in the accounts for the year ended 31 December 2004.The interim financial information is unaudited but has been reviewed by theAuditors and their report is set out on page 6. The financial information does not constitute statutory accounts as defined bysection 240 of the Companies Act 1985. Full accounts of the company for the yearended 31 December 2004 on which the Auditors gave an unqualified report, havebeen delivered to the Registrar of Companies. 2. Earnings per share The calculation of basic earnings per share is based upon the profit/(loss) forthe period and the weighted-average number of 197,265,075 (2004 - 159,664,501)shares in issue during the period. The diluted earnings per share is based upon the profit/(loss) for the periodand the number of shares in issue as follows: 6 Months 6 Months Year ended ended ended 30.6.05 30.6.04 31.12.04 thousands thousands thousands Weighted-average number of shares 197,265 156,615 159,665 DilutionShare options in issue 9,307 n/a n/a --------- --------- --------- 206,572 156,615 159,665 --------- --------- --------- When the group reports a loss for the year then, in accordance with FinancialReporting Standard Number 14, the share options are not considere dilutive. 3. Taxation Taxation comprises a provision for taxation on the interest receivable less anyallowable expenses, and any adjustment for over or under provision in priorperiods. 4. Copies of report Copies of this interim statement will be despatched to shareholders and will beavailable to the public at the Registered Office, Mathon Court, Mathon,Malvern,Worcestershire WR13 5NZ. 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