29 Apr 2009 07:00
29 APRIL 2009
FORTUNE OIL PLC
("Fortune Oil" or "the Company")
Annual Financial Report Announcement
Fortune Oil invests in and manages oil and gas supply and infrastructure projects in China. Fortune Oil is quoted on the full list of the London Stock Exchange and has its headquarters in Hong Kong. Fortune Oil today reports its results for the financial year ended 31 December 2008.
FINANCIAL HIGHLIGHTS
Revenues increased by 66 per cent to £365 million (2007: £220 million).
Operating profit almost doubled to £17.6 million* (2007: £9.7 million).
Profit attributable to equity holders doubled to £9.0 million* (2007: £4.5 million).
Gas distribution operating profit increased by 134 per cent to £6.4 million (2007: £2.7 million).
Earnings per share doubled to 0.49 pence (2007: 0.25 pence).
Balance sheet significantly strengthened:
£9.9 million raised through placing of Fortune Oil shares to Kerry Holdings Limited
US$36 million raised through investment by Wilmar International Limited in 15 per cent of Fortune Gas
Net cash at 31 December 2008 of £5.6 million (2007: net debt of £5.9 million)
* including the gain of £8.6 million recognised following the investment by Wilmar International Limited and write- downs of £3.9 million at Bluesky.
OPERATIONAL HIGHLIGHTS
Gas sales increased by 40 per cent to 354 million cubic metres (2007: 252 million).
Fortune Gas now has 128,800 connected customers, 862 km of pipeline and 23 CNG stations.
Bluesky made a negative contribution because of inventory write-down and bad debt provision following unprecedented volatility in price of jet fuel.
Trading business tripled operating profit to £1.2 million.
Maoming SPM throughput was broadly level with the previous year at 9.1 million tonnes.
CURRENT TRADING & OUTLOOK
Liulin CBM Block declared a State Pilot Project, accelerating the development programme. Gas production from 4 of the 5 pilot production wells has already exceeded threshold requirements for reserves certification, planned for later this year.
Continued strong growth in the gas distribution business throughout the economic downturn.
More stable operating environment:
China's economic growth is now recovering, fuelled by domestic demand
Less volatility in commodity prices
Continued growth in demand for clean energy
Mr. Qian Benyuan, Chairman of Fortune Oil, commented:
"Despite all the uncertainty in world markets, Fortune Oil achieved an outstanding result in 2008, delivering a record performance in the Fortune Gas and Trading subsidiary operations and successfully raising £32 million to ensure ongoing growth.
We expect demand in the oil sector to strengthen again in the coming year. The gas sector continues to show healthy growth and the Company has already made considerable strides in developing an integrated gas business. Fortune Oil now has a net cash position in addition to strong positive cashflow from operations and we are seeking further acquisition opportunities. Fortune Oil remains well-placed to help meet China's energy demand as it reverts to strong growth."
ENQUIRIES:
| Fortune Oil PLC John Pexton - Deputy Chief Executive | Tel: 00 852 2583 3113 (Hong Kong) |
| Pelham Public Relations Archie Berens | Tel: 020 7337 1509 or 07802 442 486 |
| Robert Koh | 020 7337 1525 |
FORTUNE OIL PLC
ANNUAL FINANCIAL REPORT ANNOUNCEMENT 2008
In accordance with the Disclosure and Transparency Rules, we set out below the extracts from the 2008 Annual Report and Accounts in unedited full text. The Annual Report and Accounts is available on the Company's website www.fortune-oil.com and hard copies will be posted to shareholders no later than 19 May 2009.
CHAIRMAN'S STATEMENT
Introduction
Every year in China brings change but 2008 will be noted as one of the most eventful ever seen. Last year we witnessed the tragedy of the Sichuan earthquake, the astounding success of the Beijing Olympics and then the collapse of global trade and financial markets. In early 2008 government policy was aimed at slowing China's headlong growth but by the end of 2008 the government had implemented a massive growth stimulus package. In mid 2008 the domestic oil prices were 40 per cent below international levels but a few months later they were 40 per cent above, as international commodity prices climbed then crashed.
Despite all this uncertainty Fortune Oil achieved an outstanding performance in 2008 as profit attributable to equity shareholders doubled to £9.0 million. The Company's gas business was the key contributor: the operating profit of the gas business more than doubled and there was also a gain of £8.6 million arising from a US$36 million (£22.3 million) investment by Wilmar International Limited in 15 per cent of the gas business. This was a significant milestone both for Fortune Oil and for the gas business and it vindicated the Company's gas strategy. This fund-raising, following a £9.9 million placement of Fortune Oil shares to Kerry Holdings Limited, was completed in the fourth quarter of 2008 despite the economic downturn. The Company now has a strong cash position, an expectation of ongoing revenue growth and positive cashflow from its operations.
Operations and Results
The unprecedented oil price volatility in 2008 severely affected the aviation industry and also resulted in severe dislocations in pricing between the international and domestic China markets. Volume sales from the Bluesky aviation refuelling business increased in 2008 but the oil price volatility caused the joint venture to make its first negative full-year contribution since commencing operations ten years ago. We expect Bluesky's profit contribution to become positive again in 2009. The Company's other oil sector operations (West Zhuhai Products Terminal, Maoming SPM and Trading) were not so affected by these pricing changes. Our Trading business had a particularly successful year with a tripling in its earnings contribution. The combined profit contribution of these oil sector operations, excluding Bluesky, increased in both RMB and sterling terms last year.
The gas business continues to be the Company's principal engine for growth: in 2008 gas volume sales increased by 40 per cent and operating profit increased by 134 per cent to £6.4 million (including the share of results of jointly controlled entities). Gas is distributed to our customers through spur pipelines, city gas networks, as CNG (Compressed Natural Gas) and as LNG (Liquefied Natural Gas) and there was substantial sales growth in each of these distribution channels in 2008. Despite the slowing of the Chinese economy in 2009 we continue to see strong growth in gas demand through each of these distribution channels.
In early 2009 Fortune Oil's coal bed methane block at Liulin was designated a State Pilot Project. It was a unique honour to have our block designated as the nation's key demonstration project for CBM development in the Ordos Basin, one of the largest gas basins in China, and it is a clear indication of the commerciality of the Liulin gas resource. We look forward to significant progress over the coming year in reserves certification and supplying clean fuel to the local communities.
Management and Governance
I would like to congratulate the management team on the successful 2008 fund-raisings which have put Fortune Oil in a strong position and which were carried out at a low cost and completed in a difficult economic environment. The team has also been strengthened by the appointment of Mr. Stanley Chau as Group Financial Controller in September 2008. I believe that the Company's management has demonstrated considerable skill in 2008 in growing our subsidiary businesses, particularly Fortune Gas and Trading, which are the fruits of many years of hard work. I am particularly gratified by the gesture made on behalf of the management team by Ms Li Ching, our Chief Executive, in returning her entire bonus compensation for 2008 in recognition of Bluesky's impact, despite her exceptional contributions last year and even though the recent problems in the Bluesky affiliate were caused by events largely beyond the Company's control.
In June 2008 our Non-Executive Director Mr. Li Anxi retired from the Board and I would like to thank him for his service to the Company. Mr. Trevor Bedford will also step down after the forthcoming AGM after ten years of service. As Senior Independent Director and Chairman of the Audit Committee, Trevor's wisdom and enthusiasm for our Company were unmatched and he played a critical role in guiding our Directors and senior management in growing the business. We will miss Trevor and we wish him well in his retirement. We are pleased to announce that Mr. Frank Attwood has agreed to join the Board from June 2009 as Senior Independent Director. Frank is a chartered accountant and is already familiar with the Company's operations and he is the Deputy Chairman of the International Ethics Standards Board for Accountants.
This year's Board evaluation gave me assurance that all members continue to perform well and I would like to thank all the Directors for their support. Our retired Board Directors remain loyal supporters of Fortune Oil and it is heartening to see that many of them continue to assist the Company on an unofficial basis.
Future Prospects
While the collapse in export markets has adversely impact many industries in China, we continue to see significant infrastructure investment and unmet demand for clean energy, particularly in the inner provinces. The nation has the resources, both financial and human, to invest in continuing growth. While there are still considerable uncertainties for 2009, China's economy now seems to be recovering from the recent downturn and we remain very positive about the nation's growth prospects.
In 2008 the Company's results were adversely affected by the oil price environment. In 2009 we are already seeing less oil price volatility and we expect the government to continue to support the aviation sector. We expect demand in the oil sector to remain weak in the short term but to strengthen again from 2010 with increasing demand in our oil sector operations. The gas sector continues to show healthy growth again this year, particularly as it is less susceptible to changes in international energy prices. Development of a clean and lower carbon energy approach is still at an early stage in China, with the industry landscape and regulation still evolving, and the Company has already made considerable strides in developing an integrated gas business. Fortune Oil remains well-placed to help meet China's energy demand as it reverts to strong growth.
CHIEF EXECUTIVE'S REVIEW
Overview
The last 12 months have seen record highs and record lows in almost every market both inside and outside China. The Fortune Oil management experienced success in raising funds to help grow the gas business and recently pride in having the Liulin block declared a State Pilot Project. By contrast, following unprecedented movements in oil prices, we were required to make write-downs in Bluesky, one of our cornerstone investments. These unforeseen losses were more than offset by the profits in Fortune Oil's other operations. We are already looking to an even better operating performance in 2009, with ongoing strong growth in the gas business and a more stable operating environment for Bluesky.
Higher fuel prices as well as higher volume sales in 2008 helped Fortune Oil revenues to increase 66 per cent to £365 million (including the Group's share of jointly controlled entities). Growth in the gas business resulted in the Group's operating profit almost doubling to £17.6 million, including a £8.6 million gain arising from investment by Wilmar International Limited for 15 per cent of the gas business. Profit attributable to shareholders doubled to £9.0 million and earnings per share in 2008 increased to a record high 0.49 pence, compared with 0.25 pence in 2007. Our balance sheet was significantly strengthened as net assets increased by 115 per cent to £137 million with a net cash position. This was primarily due to a share placement, the investment in the gas business, exchange rate gains and higher profit in 2008.
China Energy Demand
The stimulus programmes enacted by the Chinese government have already begun to buoy domestic demand, with GDP growing 6.1 per cent in the first quarter of 2009. This was lower than the 2008 annualised GDP growth of 9 per cent but significantly higher than most analysts had expected given the collapse in export markets at the end of last year. China's economy is likely to recover from the downturn earlier than Western economies and the security of supply for energy, particularly clean energy, will again be a priority. Almost all investors in the China energy sector, from power companies to fuel distributors, were adversely affected in 2008 by the combination of volatility in international energy prices and domestic pricing controls. The exception was the gas business, where stable pricing and unmet demand for clean energy resulted in high growth rates despite the economic downturn. China's policy planners recognise the need to increase energy efficiency and to develop cleaner domestic resources. But they also recognise that the transportation industry will still be reliant on petroleum-based fuels for the foreseeable future and therefore are trying to introduce policies that link domestic prices closer to international levels, while protecting vulnerable sectors such as the rural poor.
Oil Sector Operations
In 2008 volume sales at the Bluesky aviation refuelling joint venture (South China Bluesky Aviation Oil Company) grew 7.5 per cent to 1.7 million tonnes. The average domestic tariff and operating costs per tonne of jet fuel received by Bluesky in 2008 were similar to those in 2007. However, Bluesky recorded a negative contribution in 2008 for Fortune Oil of £3.0 million. This unexpected loss was primarily due to record volatility in the jet fuel market, resulting in higher financing costs, a bad debt provision and inventory write-down for 2008. Fortune Oil and Bluesky made significant and successful efforts to reduce the accounts receivable, including legal actions to enforce earlier repayment, and I thank the Bluesky management for their efforts in a very challenging environment. Almost all the accounts receivable are owing from government-invested airlines which continue to receive significant financial support from regional and national government. The oil price has stabilised in early 2009 and we expect Bluesky to return to profit this year.
Crude oil deliveries through the Maoming SPM (MKM subsidiary) in 2008 were 9.1 million tonnes and net profit fell slightly to £4.2 million, of which Fortune Oil's share was £1.7 million. The buoy system was recently overhauled and we expect higher monthly throughput in the future as refining margins have recently recovered in China.
Throughput for the West Zhuhai Oil Products Terminal joint venture was 1.9 million tonnes. Net profit for the joint venture increased by 26 per cent to £1.8 million, of which Fortune Oil share was £0.7 million, in part because of increased use of the storage facilities by third parties.
Our independent Trading business expanded in 2008 with the import and export of non-regulated oil products and petrochemicals on a low-risk agency or back-to-back basis, and made a record high earnings contribution of £1.2 million. In 2008 the Company completed the disposal of its interest in the non-core Fu Duo LPG business and recorded a gain on disposal of £0.3 million. None of the oil or gas operations of the Fortune Oil Group had significant exposure to derivatives as of 31 December 2008.
Fortune Gas
In 2008 Fortune Oil established a new holding company (Fortune Gas) for all of the Group's gas business, principally being retail and wholesale gas distribution and the Coal Bed Methane block at Liulin. In November 2008 Wilmar International Limited invested US$36 million (£22.3 million) to acquire new shares in Fortune Gas representing 15 per cent of the enlarged capital. Fortune Gas is a Hong Kong registered company and is owned 85 per cent by and controlled by Fortune Oil.
The Fortune Gas retail and wholesale gas operations sold 354 million cubic metres (m m3) of gas in 2008, a 40 per cent increase over 2007. This gas distribution business generated an operating profit contribution to the Company of £6.4 million, a 134 per cent increase over 2007. In 2008 there was growth in all our gas operations and we now have 128,800 connected customers, a pipeline network of 862 km and 23 CNG stations. In February this year we commissioned our second LNG plant and we are in discussion to install skid-mounted LNG plants to monetise gas that would otherwise be vented or flared at coal mines or isolated gas fields.
Our focus is north and central China, covering Beijing, Tianjin, Henan Province, Hebei Province, Shandong Province and Shanxi Province. Currently there is already partial integration of the operations across the gas chain, for example supplying our wholesale CNG and LNG to our retail city gas companies. Significant further value across the gas chain can be captured from the creation of a truly integrated upstream-wholesale-retail gas business with further acquisitions and new build.
Coal Bed Methane Upside
Our coal bed methane (CBM) project at Liulin took a major step forward recently with the designation of the Liulin block as a State Science and Technology Significant Project for demonstrating CBM production in the Ordos Basin. Our government partner, CUCBM, plans to drill wells this year in Liulin to expedite the appraisal and development of a larger area of the block. This will complement the ongoing investment by Fortune Liulin Gas Company, our subsidiary that has the foreign contractor rights in the PSC and in which Fortune Gas now has a 66 per cent interest.
This government investment in Liulin is prior to the official certification of reserves and approval of an overall development plan (ODP) and the preferred Pilot Project status will accelerate gas sales at Liulin. Such investment demonstrates the confidence that CUCBM has in the commerciality of the Liulin block. It also confirms Fortune Oil's view that investment in the Liulin block is commercially attractive: four of our five pilot production wells have produced gas at flows above the required threshold, gas sales should commence next year and previous studies have demonstrated a significant resource of high quality CBM.
Strategy
As a result of the £32 million fund-raising in 2008 Fortune Oil now has a net cash position in addition to strong positive cashflow from operations and we are seeking further acquisition opportunities. In 2009 China needs to source energy resources for the long term both domestically and internationally, this at a time when many Western energy companies are struggling financially. We expect that the coming year will present Fortune Oil with many opportunities not only to broaden the integrated gas business but also to forge strategic relationships in both the oil and gas sectors and to acquire energy assets at attractive prices.
FINANCIAL REVIEW
Revenue and Expenditure
Revenues including the Group's share of jointly controlled entities increased by 66 per cent to £365 million (RMB 4,658 million, US$673 million) in 2008 from £220 million (RMB 3,345 million, US$441 million) in 2007. Group revenue excluding jointly controlled entities increased substantially in 2008 to £132.1 million from £72.7 million in 2007 due to substantial growth in natural gas sales and trading activities.
Operating profit was £17.6 million in 2008, compared with £9.7 million in 2007, an increase of 82 per cent. This increase included a gain on a deemed disposal of interests in a subsidiary of £8.6 million (after tax and minority interests). Without this one off special income from the deemed disposal the operating profit was £9.0 million, a 7 per cent decrease from last year.
The after tax net profit attributable to equity shareholders was £9.0 million (US$16.6 million), an increase of 100 per cent over 2007 (£4.5 million, US$9.0 million). Earnings per share jumped to 0.49 pence compared with 0.25 pence in 2007. Excluding both the gain arising from the gas investment and the Bluesky write-downs and provisions this net profit was £4.2 million.
Administrative expenses increased by 64 per cent to £8.5 million in 2008. Major reasons for the increase were associated with the growth of the gas business where full year expenses were included this year from subsidiaries acquired in 2007, and extra expenses from Xinyang, a city gas business acquired in 2008. Other reasons include higher staff numbers associated with expansion and some exchange losses due to depreciation of the pound sterling during the year.
Capital expenditure and acquisitions
Capital expenditure and acquisitions totalled £12.7 million (2007: £13.1 million), of which £10.8 million was capex and £1.9 million was in respect of acquisitions. During the year, the Group acquired 100 per cent of a city gas company in Xinyang, Henan Province, through a public tender process. The Group had a net cash position of £5.6 million (US$8.2 million) as at 31 December 2008, compared to a net borrowing position of £5.9 million (US$11.8 million) in the previous year. The improvement in cash position was mainly due to the placement of £9.9 million in the Company to Kerry Holdings Limited and an investment of US$36 million (£22.3 million) in the gas business by Wilmar International Limited during the year.
Balance Sheet
The balance sheet was substantially strengthened as net assets of the Group doubled in 2008 to £136.6 million (US$199.7 million) from £63.6 million (US$126.2 million) in 2007. This was mainly a result of the increase in share capital and retained earnings from the placement of Company shares and investment in Fortune Gas. Foreign currency translation differences on consolidation result from the depreciation of the pound sterling also contributed to it.
Cash position was strong and net cash at 31 December 2008 was at £5.6 million compared with a net debt position of £5.9 million at 31 December 2007. The cash balance exceeded the outstanding Group bank loan balances and the Group envisages no difficulties in meeting both current loan repayment obligations and investment commitments.
Financial Costs and Tax
Finance expenses for the Group were £2.7 million in 2008, compared to £1.2 million in 2007. The increase was largely due to draw-downs from the US$50 million syndicated loan and interest expenses at Xinyang, the newly acquired business in the gas division. Group borrowings at 31 December 2008 totalled £62.2 million compared to £33.2 million at the end of 2007. This included a £4.3 million loan outstanding to First Level Holdings Limited, the largest shareholder in the Company, that increased from £3.2 million as at the end of 2007. The increase was totally due to an exchange rate difference. As required by the syndicated loan covenant, repayment to First Level Holdings was halted again during the year. With a net cash balance of £5.6 million as at 31 December 2008 the net gearing ratio (after deduction of cash) for the Group was negative, compared with 9.3 per cent in 2007.
The Group's tax charge in 2008 was £1.5 million (2007: £0.6 million) representing a tax rate of 9.6 per cent compared with 7.0 per cent as in 2007.
From January 2008 the corporate tax rate has been unified for both domestic and foreign companies at 25 per cent, being previously 15 per cent for foreign enterprises and 33 per cent for domestic corporations. The overall impact for Fortune Oil in the coming few years should be neutral as most of the existing tax privileges will be retained. In MKM the period for tax privilege expired and from 2008 onward the tax rate has changed from 9 per cent to 18 per cent.
Starting in January 2008 dividends distributed overseas by foreign invested enterprises in China were subject to tax. Tax rate is 10 per cent if there is a tax treaty concluded between China and the country of which the investor is a tax resident. It is 5 per cent for Hong Kong companies, 10 per cent if share ownership is below 25 per cent. Dividends from Maoming Single Point Mooring, Bluesky and West Zhuhai Terminal to the holding companies in Hong Kong are subject to this new tax.
Foreign Exchange
The revenues and expenses of the Group are primarily denominated in China's renminbi (RMB). Some expenses are denominated in pound sterling (£) and in Hong Kong dollar (HK$), which is pegged to the US dollar (US$). On average from 2007 to 2008, the RMB appreciated against the US$ again by 8.7 per cent and the pound sterling depreciated 8.1 per cent against the US$, hence there was an overall 16.1 per cent depreciation of the pound sterling against the RMB. This currency movement has had the effect of increasing our profit and net assets as measured in pound sterling.
The Company has not hedged currency risk, and any revaluation or devaluation of RMB or change in US$/£ exchange rate in 2009 is likely to affect the Group's results as denominated in pound sterling.
Capital Structure
Most of the Group's investments and expenses take place in the PRC and are held through Fortune Oil PRC Holdings Limited, a 100 per cent-owned Hong Kong based subsidiary of the Company. To facilitate inter-company restructuring most of the investments in China are held through subsidiary Hong Kong registered companies. The Company's UK operations consist only of local representation as a direct expense to the Company.
Dividend Policy
As the Group is in a stage of high growth with a good flow of acquisition opportunities, the policy of reinvesting profits rather than declaring cash dividends has remained in place.
DIRECTORS' RESPONSIBILITY STATEMENT
We confirm to the best of our knowledge:
1. The financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair value of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
2. The management report, which is incorporated into the directors' report, includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face.
By order of the Board
| Li Ching | John Pexton |
| Chief Executive Officer | Deputy Chief Executive Officer |
FORTUNE OIL PLC
Annual Financial Report Announcement
Group Income Statement for the Year Ended 31 December 2008
| Amount in £'000 | Note | 2008 | 2007 |
| Revenue including share of jointly controlled entities | 2 | 364,722 | 219,887 |
| Share of revenue of jointly controlled entities | 2 | (232,586) | (147,199) |
| Group revenue | 2 | 132,136 | 72,688 |
| Cost of sales |
| (112,852) | (61,831) |
| Gross profit |
| 19,284 | 10,857 |
| Other income | 8,648 | - | |
| Administrative expenses | (8,483) | (5,169) | |
| Share of results of jointly controlled entities |
| (1,800) | 4,012 |
| Profit from operations | 2 | 17,649 | 9,700 |
| Finance costs | (2,722) | (1,243) | |
| Investment income |
| 749 | 364 |
| Profit before taxation | 15,676 | 8,821 | |
| Taxation | 3 | (1,501) | (619) |
| Profit for the year |
| 14,175 | 8,202 |
| Attributable to | |||
| Equity shareholders of the parent | 8,977 | 4,487 | |
| Minority interests | 5,198 | 3,715 | |
|
|
| 14,175 | 8,202 |
| Earnings per share | |||
| Profit attributable to equity shareholders | |||
| Basic | 5 | 0.49 | 0.25 |
| Diluted | 5 | 0.49 | 0.25 |
| All results shown are from continuing operations. |
FORTUNE OIL PLC
Annual Financial Report Announcement
Group Statement of Changes in Equity for the Year Ended 31 December 2008
|
| Share |
| Total | |||||
|
| Ordinary | Treasury | premium | Translation | Retained | Shareholders' | Minority | Total |
| Amount in £'000 | shares | shares | account | reserve | earnings | equity | interests | equity |
|
| ||||||||
| At 1 January 2007 | 18,363 | (795) | 22 | (2,717) | 23,805 | 38,678 | 11,288 | 49,966 |
| Movement in treasury shares | - | 201 | - | - | (201) | - | - | - |
| Currency translation differences | - | - | - | 1,785 | - | 1,785 | 705 | 2,490 |
| Acquired on acquisition of subsidiaries | - | - | - | - | - | - | 4,610 | 4,610 |
| Capital contribution by minority shareholders of a subsidiary | - | - | - | - | - | - | 1,333 | 1,333 |
| Profit for the year | - | - | - | - | 4,487 | 4,487 | 3,715 | 8,202 |
| Share-based payments | - | - | - | - | 200 | 200 | - | 200 |
| Dividend paid | - | - | - | - | - | - | (3,178) | (3,178) |
| At 31 December 2007 | 18,363 | (594) | 22 | (932) | 28,291 | 45,150 | 18,473 | 63,623 |
| Issue of share capital | 919 | - | 8,910 | - | - | 9,829 | - | 9,829 |
| Currency translation differences | - | - | - | 22,360 | - | 22,360 | 10,312 | 32,672 |
| Deemed disposal of interest in a subsidiary | - | - | - | - | - | - | (8,648) | (8,648) |
| Consideration for acquisition of 15% interest in a subsidiary | - | - | - | - | - | - | 21,130 | 21,130 |
| Other capital contribution by minority shareholders of subsidiaries | - | - | - | - | - | - | 6,784 | 6,784 |
| Profit for the year | - | - | - | - | 8,977 | 8,977 | 5,198 | 14,175 |
| Share-based payments | - | - | - | - | 350 | 350 | - | 350 |
| Dividend paid | - | - | - | - | - | (3,305) | (3,305) | |
| At 31 December 2008 | 19,282 | (594) | 8,932 | 21,428 | 37,618 | 86,666 | 49,944 | 136,610 |
| Included in the retained earnings is £2,008,000 (2007: £1,972,000) Reserve Fund which is not distributable to shareholders. | ||||||||
FORTUNE OIL PLC
Annual Financial Report Announcement
Group Balance Sheet as at 31 December 2008
| Amount in £'000 | Note | 2008 | 2007 |
| Assets |
|
|
|
| Non-current assets |
|
|
|
| Property, plant and equipment | 6 | 90,086 | 43,283 |
| Investment properties |
| 2,017 | 1,561 |
| Goodwill |
| 7,935 | 2,100 |
| Other intangible assets |
| 4,002 | 3,941 |
| Prepaid lease payments |
| 5,185 | 3,263 |
| Investments in jointly controlled entities |
| 27,405 | 22,593 |
| Available-for-sale investments |
| 934 | 470 |
|
|
| 137,564 | 77,211 |
| Current assets |
|
|
|
| Inventories |
| 4,672 | 1,064 |
| Trade and other receivables |
| 18,937 | 8,759 |
| Cash and cash equivalents |
| 67,823 | 27,263 |
|
|
| 91,432 | 37,086 |
| Total assets |
| 228,996 | 114,297 |
| Liabilities |
|
|
|
| Current liabilities |
|
|
|
| Borrowings |
| 27,593 | 5,212 |
| Trade and other payables |
| 26,572 | 15,410 |
| Current tax liabilities |
| 1,032 | 549 |
|
|
| 55,197 | 21,171 |
| Non-current liabilities |
|
|
|
| Borrowings |
| 34,633 | 27,976 |
| Deferred tax liabilities |
| 2,556 | 1,527 |
|
|
| 37,189 | 29,503 |
| Total liabilities |
| 92,386 | 50,674 |
| Net assets |
| 136,610 | 63,623 |
| Shareholders' equity |
|
|
|
| Ordinary shares |
| 19,282 | 18,363 |
| Treasury shares |
| (594) | (594) |
| Share premium account |
| 8,932 | 22 |
| Translation reserves |
| 21,428 | (932) |
| Retained earnings |
| 37,618 | 28,291 |
| Total shareholders' equity |
| 86,666 | 45,150 |
| Minority interests |
| 49,944 | 18,473 |
| Total equity |
| 136,610 | 63,623 |
FORTUNE OIL PLC
Annual Financial Report Announcement
Group Cash Flow Statement for the Year Ended 31 December 2008
| Amount in £'000 |
|
|
| Note | 2008 | 2007 | |
|
|
|
|
|
|
|
|
|
| Cash flows from operating activities |
|
|
|
| |||
| Profit for the year |
|
|
|
| 14,175 | 8,202 | |
| Adjustments for: |
|
|
|
|
|
| |
| Share of post-tax results of jointly controlled entities |
| 1,800 | (4,012) | ||||
| Taxation |
|
|
|
| 3 | 1,501 | 619 |
| Amortisation |
|
|
|
| 222 | 150 | |
| Depreciation |
|
|
| 6 | 5,080 | 3,079 | |
| Loss/(gain) on disposal of property, plant and equipment |
| 293 | (26) | ||||
| Gain on disposal of investment properties |
|
| (17) | - | |||
| (Gain)/loss on disposal of subsidiary undertakings |
| (317) | 17 | ||||
| Gain on deemed disposal of interests in a subsidiary |
| (8,648) | - | ||||
| Share-based payments |
|
|
| 350 | 200 | ||
| Investment income |
|
|
|
| (749) | (364) | |
| Finance costs |
|
|
|
| 2,722 | 1,243 | |
| (Increase)/decrease in inventories |
|
|
| (2,700) | 386 | ||
| (Increase)/decrease in trade and other receivables |
| (5,737) | 2,319 | ||||
| Increase in trade and other payables |
|
| 5,082 | 604 | |||
| Cash generated from operations |
|
|
| 13,057 | 12,417 | ||
|
|
|
|
|
|
|
|
|
| Interest paid |
|
|
|
| (2,722) | (1,243) | |
| Taxation paid |
|
|
|
| (1,175) | (227) | |
| Net cash generated from operating activities |
|
| 9,160 | 10,947 | |||
|
|
|
|
|
|
|
|
|
| Cash flows from investing activities |
|
|
|
| |||
| Interest received |
|
|
|
| 749 | 364 | |
| Dividend received from jointly controlled entities |
| 5,188 | 2,868 | ||||
| Payment for property, plant and equipment |
|
| (10,816) | (6,534) | |||
| Payment for other intangible assets |
|
| (2,825) | (2,486) | |||
| Payment for prepaid lease payments |
|
| - | (2,395) | |||
| Receipt from disposal of subsidiary undertakings |
| 629 | 166 | ||||
| Payment for acquisition of subsidiary undertakings | 7 | (1,675) | (5,730) | ||||
| Receipt from disposal of property, plant and equipment |
| 380 | 110 | ||||
| Receipt from disposal of investment properties |
| 125 | - | ||||
| Investments in jointly controlled entities |
|
| (1,637) | (73) | |||
| Payment for available-for-sale investments |
|
| (251) | - | |||
| Loan to jointly controlled entities |
|
|
| (3,900) | (501) | ||
| Total cash flows used in investing activities |
|
| (14,033) | (14,211) | |||
|
|
|
|
|
|
|
|
|
| Cash flows from financing activities |
|
|
|
| |||
| Proceeds from issue of share capital |
|
| 9,829 | - | |||
| Loan from minority shareholders |
|
|
| - | 245 | ||
| Repayment of loans to minority shareholders |
|
| (51) | - | |||
| Dividend paid to minority shareholders |
|
| (3,305) | (3,178) | |||
| Consideration for acquisition of 15% interest in a subsidiary |
| 21,130 | - | ||||
| Other capital contribution from minority shareholders | 6,784 | 1,333 | |||||
| Increase in bank loans |
|
|
| 1,338 | 23,460 | ||
| Total cash flows generated from financing activities |
| 35,725 | 21,860 | ||||
| Net increase in cash and cash equivalents |
| 30,852 | 18,596 | ||||
| Cash and cash equivalents at beginning of the year |
| 27,263 | 8,202 | ||||
| Effect of foreign exchange rate changes |
|
| 9,708 | 465 | |||
| Cash and cash equivalents at end of the year |
| 67,823 | 27,263 | ||||
FORTUNE OIL PLC
Notes to financial information in respect of year ended 31 December 2008
1. General Information
The financial information set out in this announcement does not constitute the company's statutory accounts for the years ended 31 December 2008 or 2007 as defined in section 240 of the Companies Act 1985 (Act), but is derived from those accounts. Statutory accounts for 2007 have been delivered to the Registrar of Companies and those for 2008 will be delivered before 30 June 2009. The auditors have reported on those accounts; their reports were unqualified, did not draw attention any matters by way of emphasis without qualifying their report and did not contain statements under s237(2) or (3) of the Act 1985.
Basis of preparation
The financial information set out in the announcement is extracted from the Company's full financial statements for the year ended 31 December 2008. Whilst the financial reporting included in this dissemination announcement has been computed in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs), this announcement does not itself contain sufficient information to comply with IFRSs. The company has published full financial statements that comply with IFRSs at the same day of this announcement. The accounting policies applied are consistent with those adopted and disclosed in the Company's financial statements for the year ended 31 December 2008.
2. Segmental Reporting
For management purpose, the Group is currently organised into four major business segments, or divisions. These divisions are the basis on which the Group reports its primary segment information.
Business segments
|
| Natural Gas | Single point mooring facility | Aviation | Oil Trading, Terminal & Office overhead * | ||||
| Amount in £'000 | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 |
| Revenue including share of jointly controlled entities | 48,762 | 26,096 | 12,094 | 10,666 | 221,325 | 138,821 | 75,756 | 39,554 |
| Share of revenue of jointly controlled entities | (2,689) | (2,156) | - | - | (221,325) | (138,821) | (1,787) | (1,472) |
| Group revenue | 46,073 | 23,940 | 12,094 | 10,666 | - | - | 73,969 | 38,082 |
| Other income | - | - | - | - | - | - | - | - |
| Profit from operations (including share of results of jointly controlled entities) | 6,435 | 2,746 | 5,035 | 4,738 | (3,004) | 3,178 | 1,345 | (283) |
| Finance costs | ||||||||
| Investment income | ||||||||
| Profit before taxation | ||||||||
| Taxation | ||||||||
| Profit for the year | ||||||||
| Attributable to | ||||||||
| Equity shareholders | ||||||||
| Minority interests | ||||||||
| Capital additions | 9,159 | 5,158 | 1,496 | 1,332 | - | 30 | 161 | 13 |
| Depreciation | 2,813 | 1,304 | 2,160 | 1,653 | 6 | 4 | 100 | 117 |
| Net assets: by class of business | ||||||||
| Assets | ||||||||
| Segment assets | 162,409 | 55,372 | 21,148 | 15,152 | 18,231 | 17,054 | 25,608 | 24,806 |
| Unallocated assets | ||||||||
| Consolidated total assets | ||||||||
| Liabilities | ||||||||
| Segment liabilities | (43,038) | (13,700) | (846) | (487) | (534) | (356) | (8,807) | (6,653) |
| Unallocated liabilities | ||||||||
| Consolidated total liabilities | ||||||||
|
| Others* * | Central administration | Group | |||
| Amount in £'000 | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 |
| Revenue including share of jointly controlled entities | 6,785 | 4,750 | - | - | 364,722 | 219,887 |
| Share of revenue of jointly controlled entities | (6,785) | (4,750) | - | - | (232,586) | (147,199) |
| Group revenue | - | - | - | 132,136 | 72,688 | |
| Other income | 8,648 | - | - | - | 8,648 | - |
| Profit from operations (including share of results of jointly controlled entities) | 8,827 | 140 | (989) | (819) | 17,649 | 9,700 |
| Finance costs | (2,722) | (1,243) | ||||
| Investment income | 749 | 364 | ||||
| Profit before taxation | 15,676 | 8,821 | ||||
| Taxation | (1,501) | (619) | ||||
| Profit for the year | 14,175 | 8,202 | ||||
| Attributable to | ||||||
| Equity shareholders | 8,977 | 4,487 | ||||
| Minority interests | 5,198 | 3,715 | ||||
| Capital additions | - | - | - | 1 | 10,816 | 6,534 |
| Depreciation | - | - | 1 | 1 | 5,080 | 3,079 |
| Net assets: by class of business | ||||||
| Assets | ||||||
| Segment assets | (409) | 133 | 524 | 219 | 227,511 | 112,736 |
| Unallocated assets | 1,485 | 1,561 | ||||
| Consolidated total assets | 228,996 | 114,297 | ||||
| Liabilities | ||||||
| Segment liabilities | - | (4) | (985) | (98) | (54,210) | (21,298) |
| Unallocated liabilities | (38,176) | (29,376) | ||||
| Consolidated total liabilities | (92,386) | (50,674) | ||||
| 136,610 | 63,623 | |||||
| * | Includes overheads in Hong Kong/PRC offices. |
| ** | Others include distribution. |
b) Geographical operations
With the exception of operating loss of £926,000 (2007: £732,000) in respect of central administration in the United Kingdom, all of the Group's activities are carried out in the PRC and Hong Kong. The Directors are of the opinion that the PRC and Hong Kong form one geographic segment.
c) Analysis of group revenue
| Amount in £'000 | 2008 | 2007 | |
| Sales of goods | 124,397 | 68,561 | |
| Income from construction contracts | 4,929 | 2,526 | |
| Rental income | 1,084 | 770 | |
| Others | 1,726 | 831 | |
| 132,136 | 72,688 |
3. Taxation
| The taxation charge for the year is analysed below: | ||||
| Amount in £'000 |
| 2008 |
| 2007 |
| Withholding tax | ||||
| Group withholding tax | 160 | - | ||
| Total withholding tax |
| 160 |
| - |
| Current tax | ||||
| Group current tax |
| |||
| UK tax | - | - | ||
| Foreign tax | 1,408 | 601 | ||
| Total current tax |
| 1,408 |
| 601 |
| Deferred tax | ||||
| Group deferred tax | (67) | 18 | ||
| Total deferred tax |
| (67) |
| 18 |
| Tax on profit on ordinary activities |
| 1,501 |
| 619 |
| The tax charge for the year differs from the standard rate of corporation tax and is explained below. | ||||
| Amount in £'000 |
| 2008 |
| 2007 |
| Profit on ordinary activities before taxation | 15,676 | 8,821 | ||
| Theoretical tax at PRC corporation tax rate 25% (2007: 33%) | 3,919 | 2,911 | ||
| Effects of: | ||||
| - Share of results of jointly controlled entities | 450 | (1,334) | ||
| - Nil or lower tax in PRC | (1,760) | (1,980) | ||
| - Tax losses not recognized | 264 | 330 | ||
| - Utilization of tax losses credit not previously recognized | (197) | (19) | ||
| - Other expenditure that is not tax deductible | 1,760 | 733 | ||
| - Income not taxable | (3,095) | (22) | ||
| - Withholding tax on dividend income | 160 | - | ||
| Total tax | 1,501 |
| 619 | |
The above reconciliation uses a 25% (2007: 33%) standard rate of tax, being the standard rate of tax payable in the PRC, where the majority of the Group's activities take place.
The Group tax charge above does not include any amounts for jointly controlled entities, whose results are disclosed in the income statement net of tax.
4. Dividends were not paid in any of the periods reported upon and no dividend is proposed.
5. Earnings per share
Earnings per share have been calculated on the earnings activities after taxation and minority interest of￡8,977,000 (2007: profit of ￡4,487,000).
| 2008 | 2008 | 2007 | 2007 | ||
| No. | No. | ||||
|
| '000 | pence |
| '000 | pence |
| Basic | 1,827,321 | 0.49 | 1,777,015 | 0.25 | |
| Share option adjustment | 7,004 | - | 4,538 | - | |
| Diluted | 1,834,325 | 0.49 | 1,781,553 | 0.25 |
6. Property, plant and equipment
| Group | Motor | Single | Short | |||||
| Assets in | vehicles, | point | Leasehold | Exploration & | ||||
| the course of | fixtures | mooring | property & | LPG tanks | evaluation | |||
| Amount in £'000 | construction | & fittings | buoy | improvements | & facilities | Pipelines | assets | Total |
| Cost | ||||||||
| At 1 January 2007 | 447 | 4,372 | 19,133 | 2,549 | 2,282 | 11,290 | - | 40,073 |
| Exchange differences | 80 | 313 | 937 | 333 | 113 | 912 | - | 2,688 |
| Acquisition of business assets | 926 | 708 | - | 2,183 | - | 9,622 | - | 13,439 |
| Additions | 3,396 | 1,215 | 1,284 | 451 | 4 | 184 | - | 6,534 |
| Disposal of subsidiaries | - | (19) | - | (141) | (122) | - | - | (282) |
| Other disposals | - | (330) | - | - | - | (89) | - | (419) |
| Reclassification | (3,920) | 2 | - | 150 | - | 3,768 | - | - |
| At 31 December 2007 | 929 | 6,261 | 21,354 | 5,525 | 2,277 | 25,687 | - | 62,033 |
| Exchange differences | 4,553 | 3,303 | 9,556 | 3,153 | 906 | 12,008 | - | 33,479 |
| Acquisition of business assets | 12,794 | 129 | - | 489 | - | 37 | - | 13,449 |
| Transfer from other intangible assets | - | - | - | - | - | - | 6,636 | 6,636 |
| Additions | 6,259 | 2,300 | 1,464 | 212 | 1 | 580 | - | 10,816 |
| Disposal of subsidiaries | - | (916) | - | (1,577) | (3,184) | - | - | (5,677) |
| Other disposals | (17) | (119) | (842) | (110) | - | (453) | - | (1,541) |
| Reclassification | (17,633) | (540) | - | 63 | - | 18,110 | - | - |
| At 31 December 2008 | 6,885 | 10,418 | 31,532 | 7,755 | - | 55,969 | 6,636 | 119,195 |
| Depreciation | ||||||||
| At 1 January 2007 | - | 1,820 | 9,689 | 821 | 2,169 | 1,035 | - | 15,534 |
| Exchange differences | - | 91 | 208 | 60 | 107 | 93 | - | 559 |
| Charge for the year | - | 432 | 1,588 | 238 | 13 | 808 | - | 3,079 |
| Disposal of subsidiaries | - | (12) | - | (30) | (43) | - | - | (85) |
| Other disposals | - | (306) | - | - | - | (31) | - | (337) |
| At 31 December 2007 | - | 2,025 | 11,485 | 1,089 | 2,246 | 1,905 | - | 18,750 |
| Exchange differences | - | 1,552 | 5,703 | 1,031 | 851 | 1,740 | - | 10,877 |
| Charge for the year | 12 | 783 | 2,082 | 284 | 6 | 1,913 | - | 5,080 |
| Disposal of subsidiaries | - | (697) | - | (1,007) | (3,103) | - | - | (4,807) |
| Reclassification | - | (82) | - | (18) | - | 100 | - | - |
| Other disposals | - | (102) | (436) | (7) | - | (246) | - | (791) |
| At 31 December 2008 | 12 | 3,479 | 18,834 | 1,372 | - | 5,412 | - | 29,109 |
| Net book value | ||||||||
| At 31 December 2008 | 6,873 | 6,939 | 12,698 | 6,383 | - | 50,557 | 6,636 | 90,086 |
| At 31 December 2007 | 929 | 4,236 | 9,869 | 4,436 | 31 | 23,782 | - | 43,283 |
7. Acquisition of subsidiaries
On 15 July 2008, the Group acquired 100% of the issued share capital of Xinyang Fortune Gas Company Limited and its subsidiaries for consideration of £1.92 million. This acquisition has been accounted for using the purchase method. The amount of goodwill arising as a result of the acquisition was £2.66 million.
The net assets acquired in the transaction and the goodwill arising are as follows:
| Xinyang Fortune Gas Company Limited and its subsidiaries | ||||
| Amount in £'000 | Acquiree's carrying amount before combination | Fair value adjustment | Fair value | |
| Net assets acquired: | ||||
| Bank and cash balances | 245 | - | 245 | |
| Trade and other receivables | 1,168 | - | 1,168 | |
| Inventories | 518 | - | 518 | |
| Prepaid lease payments | 718 | 219 | 937 | |
| Plant and equipment | 1,202 | (547) | 655 | |
| Construction in progress | 12,794 | - | 12,794 | |
| Intangible assets | 849 | 1,881 | 2,730 | |
| Trade and other payables | (3,858) | - | (3,858) | |
| Long term borrowing | (15,533) | - | (15,533) | |
| Deferred tax - long term | - | (388) | (388) | |
| Deferred tax | (3) | - | (3) | |
|
| (1,900) | 1,165 | (735) | |
| Goodwill |
|
| 2,655 | |
| Consideration |
|
| 1,920 | |
| Total consideration satisfied by: | ||||
| Cash |
|
| 1,920 | |
| Net cash outflow arising on acquisition | ||||
| Cash consideration paid | (1,920) | |||
| Bank balance and cash acquired | 245 | |||
|
|
|
| (1,675) | |
Xinyang Fortune Gas Company Limited and its subsidiaries contributed £15,033 to the Group's profit for the period between the date of acquisition and the balance sheet date.
If the acquisition had been completed on 1 January 2008, the total group revenue for the year would have been £150.4 million, and profit for the year would have been £14.1 million. The proforma information is for illustrative purposes only and is not necessarily an indication of revenue and results of the Group that actually would have been achieved had the acquisition been completed on 1 January 2008, nor is it intended to be a projection of future results.
The fair value of the property, plant and equipment, construction in progress and intangible assets has been determined on a provisional basis, pending the finalisation of valuation reports.
8. Deemed Disposal of Interests in a Subsidiary
During the year, the Group disposed 15% of its wholly owned gas division - Fortune Gas Investment Holdings Limited for £22.3 million.
The net assets of Fortune Gas Investment Holdings Limited at the date of disposal were as follows:
| Amount in £'000 | 2008 | ||
| Net assets disposed of: | |||
| Investment | 7,646 | ||
| Goodwill | 8,214 | ||
| Available-for-sale investments | 1,107 | ||
| Other intangible assets | 9,806 | ||
| Property, plant and equipment | 66,784 | ||
| Prepaid lease payments | 5,816 | ||
| Cash at bank | 14,038 | ||
| Trade and other receivables | 39,026 | ||
| Inventories | 4,384 | ||
| Borrowings | (21,436) | ||
| Trade and other payables | (22,987) | ||
| Due to related company | (789) | ||
| Due to shareholders | (10,425) | ||
| Deferred tax | (2,333) | ||
| Minority interests | (16,914) | ||
| 81,937 | |||
| Share 15% net assets | 12,291 | ||
| Add: Direct expenses | 1,132 | ||
| 13,423 | |||
| Exchange reserves | 191 | ||
| Gain on deemed disposal | 8,648 | ||
| Total cash consideration | 22,262 | ||
| Net cash inflow arising on disposal: | |||
| Cash consideration | 22,262 | ||
| Less: Direct expenses | (1,132) | ||
| 21,130 |
9. Related party transactions and significant contracts
The Group's related parties, the nature of the relationship and the extent of transactions with them are summarised below:
| Amount in £'000 | Sub note | 2008 |
| 2007 |
| Loans from equity minority interests to subsidiaries | 1 | (3,237) | (2,723) | |
| Other loans from major shareholders | 2 | (4,299) | (3,165) | |
| Interest paid and payable to major shareholders | 2 | 51 | 232 | |
| Trade account receivable from minority shareholders | 3 | 1,652 | 1,254 | |
| Shareholder loans to / (from) jointly controlled entities | 4 | 5,154 | 925 | |
| Sales of goods to Vitol Asia | 5 | 3,494 | 5,153 | |
| Sales of goods to Vitol SA | 5 | - | 2,273 | |
| Purchase of goods from Vitol Asia | 5 | 123 | - | |
| Purchase of goods from jointly controlled entities | 5 | 489 | - | |
| Current account with Vitol Asia | 5 | (481) |
| - |
Sub notes
1. The loan included ￡Nil (2007: ￡461,000) from Zhanjiang Gas Company Ltd, the corporate shareholders of the Group's subsidiary - Zhanjiang Fu Duo Gas Company Limited ("Fu Duo"). The Fu Duo group was disposed of during the year. The remaining £3,237,000 (2007: £2,262,000) comprised loans from the minority shareholders of Shuozhou Jingshuo Natural Gas Limited, Beijing Fuhua Dadi Gas Company Limited (DADI), Luquan Fu Xin Gas Company Limited, Shuozhou Jingping Natural Gas Limited, Shuozhou Fu Hua Natural Gas Limited, Qufu Fu Hua Gas Company Limited and Henan Fortune Green Energy Development Company Limited. Except for 2008: £1,440,000 (2007: £961,000) from minority shareholders of DADI which is interest bearing of range from 6.138% to 8.217% p.a. (2007: 6.435% to 8.019% p.a.), the loans are unsecured, interest free and without fixed payment terms.
2. Other loans at 31 December 2008 were from the major shareholder First Level Holdings Limited (FLHL) £4,298,000 (2007: £3,165,000). The amount due is unsecured, interest bearing of LIBOR plus 2% and without fixed payment terms. The interest paid and payable to FLHL was ￡51,000 (2007: £232,000). The interest owed at 31 December 2008 to FLHL was £64,000 (2007: £157,000).
3. Maoming Petrochemical Corporation (MPCC) is a corporate shareholder of the Group's subsidiary, Maoming King Ming Petroleum Company Limited and has representatives on the Board. Throughputing turnover from MPCC amounted to £10,912,000 (2007: £9,394,000), of which £1,652,000 was owed at 31 December 2008 (2007: £948,000). Trade account receivable from ZGC amounted to ￡Nil at 31 December 2008 (2007: £306,000) as ZGC was disposed during the year.
4. The shareholder loans are part of shareholders' investment in the jointly controlled entities. These are common methods of making an investment in jointly controlled entities in China. £5,019,000 (2007: £830,000) was due from Tianjin Tianhui Natural Gas Limited, Shandong Green Energy Gas Company Limited and Jining Qufu New Fu Hong Gas Limited at the end of 31 December 2008. The remaining balances relate to a number of other jointly controlled entities.
5. Sales from a Group's subsidiary, Fortune Oil Holdings Limited, to Vitol Asia Pte Ltd and Vitol SA amounted to £3,494,000 (2007: £5,153,000) and £Nil (2007: £2,273,000) respectively. Purchase from Vitol Asia Pte Ltd to a Group's subsidiary, Fortune Oil Holdings Limited amounted to £123,000 (2007: £Nil) and purchase from jointly controlled entity - Shandong Green Energy Gas Company Limited to a Group's subsidiary, Henan Fortune Green Energy Development Company Limited amounted to £489,000 (2007: £Nil). Current account due to Vitol Asia Pte Ltd and Vitol SA who represented on the Board, was £481,000 (2007: £Nil). Vitol Energy (Bermuda) Limited is one of the substantial shareholders of the Group, and is a shareholder of Vitol Asia Pte Ltd and Vitol SA respectively.
10. Copies of this report are available from the Group's Registered Office at 6/F, Belgrave House, 76 Buckingham Palace Road, London SW1W 9TQ.
GOING CONCERN STATEMENT
The Group's business activities and associated opportunities and risks are set out in the Operational Review of the Annual Report and Accounts. The financial position of the Group, its cash flows and liquidity position are described in the Financial Review in the Annual Report and Accounts and notes to the financial statements include the Group's objectives, policies and processes for its managing its capital; its financial risk management objectives; details of its financial instruments; and its exposure to credit risk and liquidity risk.
The Group meets part of its capital expenditure requirements from medium term loan facilities. One of these facilities matures in April 2010. The current economic conditions may create uncertainty over (a) the level of demand for the Group's products and services; (b) international exchange rates that affect commodity prices and hence the Group's revenues in China as denominated in US dollars or sterling; (c) the availability of bank or equity finance in the foreseeable future; and (d) counter-party credit risk.
Following two share placings in the period, the group has considerable cash balances. The Group's current forecasts and projections, adjusting for reasonably possible changes in trading conditions, show that the Group will be able to meet its obligations under the loan agreements, including full repayment of the maturing loan, and to operate within the required covenants.
After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.
RISK FACTORS
The business of the Fortune Oil Group is focused on the distribution in mainland China of hydrocarbon fuels with recent expansion into coal bed methane, and it is subject to a variety of business risks. Outlined below is a description of the principal risk factors that may affect the Group's business. Any of the risks, as well as the other risks and uncertainties discussed in this document, could have a material adverse effect on the business. In addition, the risks set out below may not be exhaustive, and additional risks and uncertainties may arise or become material in the future.
General Business Risks
Country risk
The Group's principal assets and operations are located in China where there may be risks over which the Group has no or limited control. These include economic and social risks; political change; currency non-convertibility or instability; and changes in laws affecting foreign ownership, government participation, taxation, working conditions and exchange controls as well as government control over domestic production.
Regulatory approvals
The energy sector in China is subject to a variety of regulatory regimes covering many of the Group's operations, both at the national and local government levels. The regulatory environment is subject to change but includes restrictions on foreign ownership and participation in certain activities; land use and industry permitting; and health, safety and environmental obligations; and approvals may not be renewed upon expiry.
Health, Safety and the Environment (HSE)
The Group operates facilities in the oil and gas industry wherein there is an inherent risk of accidents that may harm employees, assets, the community or the environment. Such accidents may have an adverse impact on the ongoing operations, revenues and profits of the Group. These operations are also subject to laws and regulations relating to the protection of human health and safety and the environment. The Group's HSE policies entail observing all local and national legal and regulatory requirements. Safety and environmental regulations in China are likely to evolve in a manner that will require stricter standards and enforcement measures being implemented, increases in fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies, their directors and employees.
Relationship risks
Many of the Group's individual businesses are operated via joint ventures. The maintenance of a good relationship with the Group's partners is necessary for the success of the joint ventures. In addition, the maintenance of good relations with local and national government and with regulatory agencies is vital for the future development of the Group's business.
Attraction and retention of key employees
The Group relies heavily on a small number of key individuals, in particular the Executive Directors, for the operation of its day-to-day activities and implementation of its growth strategy. In addition, personal connections and relationships of its key management are important to the conduct of its business.
Speed of development
The need to obtain national and local government consents, obtain appropriate equipment and services and to build the necessary infrastructure may extend the completion of projects and delay the start of their income production beyond that planned.
Current and future financing
The Group's business necessarily involves significant capital expenditure and for which the Group may need to seek further external debt or equity financing. There is no guarantee that such additional funding will be available on acceptable terms at the relevant time. Furthermore, any additional debt financing may involve restrictive covenants which may limit or affect the Group's operating flexibility.
Uninsured risks
Substantial damages may be claimed against the Group due to events arising from the nature of its operations and omissions of sub-contractors. Any indemnities the Group may receive from such sub-contractors may be difficult to enforce if they lack adequate resources. The Group considers that the extent of its insurance cover is reasonable based on the costs of cover and the risks associated with its business and industry practice.
Foreign exchange risk
The revenues and expenses of the Group are denominated primarily in China's renminbi. Some expenses are denominated in pound sterling and in Hong Kong dollar, which is linked to the US dollar. The Group has no current plans to enter into ongoing currency hedging arrangements. The Company reports in pounds sterling and the results of the Group are subject to foreign exchange risk.
Liquidity risk
The Group primarily borrows in United States dollars, Hong Kong dollars and China renminbi and has raised equity funding denominated in pound sterling. Cash balances are maintained in a mix of currencies as determined by the forecast cash expenditure needs of various parts of the Group. The mismatch between the currencies of debt and cash flow exposes the Group to potential liquidity risk.
Commodity price risk
International oil and gas prices have fluctuated widely recently and are affected by numerous factors over which the Group has no control. In addition the prices of most fuels in China are fixed, capped or strongly influenced by government, based on factors such as international pricing, domestic economic growth, consumption patterns and the supply locations, all of which are outside the control of the Group. The government may make immediate changes to such domestic prices without prior notice.
Fuel Distribution Risk
In addition to the General Business Risks detailed above the Board considers that the following specific risks apply to the fuel distribution segment of the Group's business, which currently incorporates storage and transportation of liquid fuels and natural gas and the processing of gas for compression and liquefaction:
Energy demand
The level and structure of energy demand is driven by a number of factors beyond the Group's control, including local and national economic factors, the pricing and availability of competing suppliers and alternative fuels and local government directives.
Technical risk
The storage and transportation of hydrocarbons and the processing of gas require a high level of technical expertise in the design, development and operation of the relevant facilities. There can be no assurance that the facilities when in operation will be able to deliver the quantities for which they were planned or that the volume can be maintained under all operating conditions. In particular the Group has began the construction and operation of small scale plants for production of LNG, a technology that has existed for some time but where there remains implementation risk.
Physical security
A facility for the storage or transportation of hydrocarbons is required to maintain physical security, which may be breached by accident, earthquake or deliberate activity. Insurance in respect of lost product and environmental damage may cover some of these events but may not cover all of them.
Gas availability
Whilst the Group is seeking to produce its own independent supplies of gas, it is and will remain reliant on third party suppliers for gas. There can be no assurance that third parties will continue to supply gas in the quantities Fortune Oil requires for its current and future needs.
Exploration & Production Risks
In addition to the General Business Risks detailed above the Board considers the following specific risks apply to the upstream gas segment of the Group's business:
General exploration, development and production risks
Exploration and production activities by their nature involve significant risks. Risks such as delays in the construction and commissioning of gas collection networks or other technical difficulties, lack of access to key infrastructure, adverse weather conditions (such as winter snows), environmental hazards, industrial accidents, occupational and health hazards, technical failures, labour disputes, land use and access restrictions, unusual or unexpected geological formations, explosions and other acts of nature are inherent to the business. The occurrence of any of these incidents can result in the Group's current or future project target dates for drilling or production being delayed or interrupted, increased capital expenditure and production costs.
Gas reserves or resources
Reserves and resource estimates have been prepared by independent consultants in accordance with the definitions and guidelines of the 2007 Petroleum Resources Management System approved by the Society of Petroleum Engineers. Estimating the quantity of reserves and resources and projecting future rates of production is a subjective process and has inherent uncertainties, including factors beyond Fortune Oil's control. Reserve and resource estimates are based on production, prices, costs, ownership, geophysical, geological and engineering data and other information collated by Fortune. The estimates may prove to be incorrect after further drilling, testing and production. Forward-looking statements contained herein concerning the Group's reserves and resources definitions should not be unduly relied upon. Certain categories of reserves and resources (such as Prospective and Contingent Resources) are inherently riskier than certain other categories (such as Proved Reserves).
Work programme
The Group's PSC requires a minimum work programme to be fulfilled such as the number of wells to be drilled. Failure to comply with such obligations, whether inadvertent or otherwise, may lead to fines, penalties, restrictions and withdrawal of PSC rights.