FTO.L Regulatory News (FTO)

28 Apr 2005 07:00

Fortune Oil PLC28 April 2005 28 APRIL 2005 FORTUNE OIL PLC ("Fortune Oil" or "the Company") Announcement of Preliminary Results for Year Ended 31 December 2004 Fortune Oil invests in and manages oil and gas infrastructure projects in China.Fortune Oil is quoted on the full list of the London Stock Exchange and has itsheadquarters in Hong Kong. KEY POINTS * Turnover increased by 19 per cent. to £118.1 million (2003: £99.0 million). * Net profit doubled to £2.6 million (2003: £1.3 million). * Earnings per share increased by 78 per cent to 0.16p (2003: 0.09p). * Continued record throughput of crude oil through Single Point Mooring Facility of 10.3 million tonnes (2003: 9.4 million tonnes). * Bluesky Aviation continues to perform strongly, increasing sales by 39 per cent. and net profit by 48 per cent. * Significant progress in developing the natural gas distribution business. Bruce McGowan, Executive Vice Chairman of Fortune Oil, commented: "We expect energy demand in China to continue to show strong growth. Our supplyoperations in the oil sector will remain solid earnings generators while wefocus on developing our gas business. As one of the few international companiesoperating in both the oil and gas supply industries onshore China, Fortune Oilis well positioned to benefit from the future growth opportunities." ENQUIRIES: Fortune Oil PLC Tel: 020 7589 2233 (UK)Bruce McGowan - Executive Vice Chairman Tel: 00 852 2583 3113 (Hong Kong)John Pexton - Deputy Chief Executive ICIS Limited Tel: 020 7651 8688Archie Berens or 07802 442 486 FORTUNE OIL PLC ("Fortune Oil" or "the Company") Announcement of Preliminary Results for Year Ended 31 December 2004 CHAIRMAN'S STATEMENT Introduction We are pleased to inform shareholders that Fortune Oil's net profit doubled in2004. The surging demand for energy in China resulted in higher 2004 revenuesfor each of our major joint ventures and the Company is well positioned forfuture growth. The largest contribution to profit growth came from the Bluesky aviationrefuelling joint venture. Our emerging natural gas business also met its targetsfor the first year of operation with the Company acquiring controlling stakes infour new gas distribution joint ventures as well as developing a significantpresence in Compressed Natural Gas (CNG) supply in Beijing. Results In 2004 Group revenues rose 19 per cent to £118.1 million (US$216.4 million)from £99.0 million (US$162.6 million) in 2003. The Group's net profit increased100% to £2.6 million (US$4.7 million) from £1.3 million (US$2.1 million) in theprevious year. Earnings per share increased 78% to 0.16 pence in 2004. Eachbusiness segment performed better than expected in 2004. No dividend wasdeclared at the interim and the Directors do not recommend a final dividend for2004. The Bluesky business was a focus of attention for the Company's management andshareholders in 2004. Performance at Bluesky exceeded expectations with a 48%increase in 2004 net profit due to higher demand for aviation fuel and thesuccessful opening of the new Guangzhou Baiyun International Airport. In early2004 we had provisionally agreed to sell our 24.5% stake in Bluesky to ChinaAviation Oil (Singapore) Corporation Limited (CAO), as advised in our Circularto shareholders dated 2nd April 2004. The process of obtaining the necessary PRCgovernment approvals was still ongoing in November when the Company withdrewfrom the transaction. The operations at Bluesky were not affected either by thisproposed transaction or by the subsequent financial problems at CAO and thebusiness continues to perform strongly. In May 2004 the unsecured Convertible Loan Stock 2004 held by First LevelHoldings Limited and Vitol S.A. was converted into new ordinary shares of theCompany. A second capital increase took place in December by the placing ofshares and options via Deutsche Bank. Our balance sheet is now stronger with netassets increasing 66% and a net cash position as at 31 December 2004. The newcapital has been invested in our natural gas business which the Directorsbelieve will benefit all the Company's shareholders. The Company is now a constituent of the FTSE Small-Cap and All-Share Indices. Weare grateful for the support and commitment shown over the years by all ourshareholders, in particular the decision by the major shareholders to convertthe loan stock into ordinary shares. Operations As an investor in energy infrastructure the revenues of the Group are dependenton the volume throughput in the various joint ventures and hence the demand forenergy in China. In 2004 China's apparent demand for major refined productsincreased by 20% even though GDP only grew by 9.5%, as reported by the NationalBureau of Statistics. This surge in energy demand was coupled with largeincreases in the price of imported crude oil and refined products. The pace and scale of these demand increases are unprecedented in the oil andgas industry. While the surge in demand in 2004 may represent an exceptionalcase we expect the demand for energy in China to continue its strong upwardtrend, with increasing emphasis on cleaner fuels such as natural gas. Theprofitability of our joint ventures will continue to be linked more to the localdemand for the specific commodity being supplied rather than changes in thecommodity price. In 2004 all our joint ventures benefited from the higher demand for energy. TheMaoming Single Point Mooring again increased throughput to satisfy the SinopecMaoming refinery's needs for crude oil; last December we were pleased tocelebrate ten years of safe and reliable operation for this subsidiary and the2004 delivery of 10.3 million tonnes is another record. Bluesky's sales ofaviation fuel to airlines increased by 39%, principally due to the new Guangzhouairport and we are proud to have partnered BP and CAOSC in the development ofthis project. At the West Zhuhai products terminal the rising sales of diesel byour partner PetroChina resulted in a 31% increase in throughput. Last year wasalso a landmark year for the Fu Duo LPG business, which finally turned a profitmainly because of the alliance with Sinopec Maoming refinery. The Company aims to become a leading distributor of natural gas in China, asector in which consumption is expected to double within the next 5 years. Wehave gained significant experience over the past year through Fu Hua, ournatural gas subsidiary in joint venture with a PetroChina affiliate. There were a number of notable achievements for the gas business in 2004. Webecame the first foreign company to deliver LNG (Liquefied Natural Gas) to usersin China, using trucks to supply our new city gas company in Qufu. In Beijing weare becoming one of the major suppliers of CNG, which is delivered by truck torefuel Beijing's buses and to supply suburbs such as Huairou, where Fu Hua alsoacquired control of the city reticulation system. The Company is now well positioned to grow its gas business. Our focus willcontinue to be acquiring control of early-stage gas businesses rather thanmature city gas companies, targeting larger volume gas sales in areas ofreliable gas supply and sustainable margins. This will include investments inspur pipelines, city reticulation systems, CNG stations and the supply by truckof CNG and LNG. Board of Directors We are pleased to announce that Mr John Pexton, Mr Gong Min and Mr Li Anxi willbe nominated for election to the Board at the Annual General Meeting on 22 June2005 and the resolutions for appointing Directors will be contained in the AGMNotice. Mr Fang Guangxin has decided to step down as Non-executive Director witheffect from the forthcoming AGM and, on behalf of the Board, I would like toexpress my gratitude and appreciation for his contribution over the past twoyears. Outlook The past year has been exceptional in many regards. The events concerningBluesky and CAO were quite unprecedented, while the Company's joint venturesoperated in an environment of extraordinary demand growth and supply pressures.We expect the China environment in 2005 and 2006 to be a little more settled asoverall growth slows and more infrastructure is developed. However, we expect energy demand to continue to grow faster than GDP and we willcontinue to profit from this demand growth. Our supply operations in the oilsector, notably the Maoming SPM, Bluesky and West Zhuhai joint ventures, willremain solid earnings generators while we focus on developing our gas business.China is developing a more market-based economy largely in response to its owninternal needs, and, under the WTO agreements, the wholesale markets should beliberalised at the end of 2006. We are already seeing signs of deregulation insectors such as aviation refuelling. Fortune Oil is well positioned at the heartof the China oil and gas industry to find and exploit opportunity in thesechallenges. We are one of the few international companies operating in both the oil and gassupply industries onshore China. In contrast to the major international oilcompanies, we are partners rather than competitors with the domestic oilcompanies. The Company now has over ten years of experience in operating suchpartnerships and in 2004 your management admirably proved its ability to handlethe challenges and to deliver value to the shareholders. Thank you for your continued support. Qian BenyuanChairman FORTUNE OIL PLC Announcement of Preliminary Results for Year Ended 31 December 2004 CHIEF EXECUTIVE'S REVIEW CHINA REVIEW Phenomenal Growth In retrospect, 2004 will be seen as the watershed year for China as a globaleconomic force, as the nation became the world's second largest oil consumer andits import demands reshaped the global commodity markets. Total reportedconsumption of crude oil rose 15% to 292 million tonnes with imports rising to123 million tonnes, 35% higher than in 2003. The increase in consumption alone is similar to the entire annual consumption of Australia. At first, outside observers could not believe the statistics as no other countryin history has witnessed such a large increase in oil demand. Those of us insideChina could testify to the insatiable demand for energy and the impressiveability of the system to cope with such large shifts in energy consumption. Thegrowth in energy demand has slowed to date in 2005 but still remainsextraordinary by any other country's standards. Infrastructure will continue to be the main limit for energy supply and hencegrowth in the Chinese economy. Bottlenecks in the rail network limit themovements of coal, gaps in the power grid limit the supply of electricity andthe shortage of pipelines limits the distribution of oil & gas. Theinfrastructure backbones will continue to be developed by state-controlledcompanies, such as the West-East Pipeline and Shaanxi-Beijing pipelines whichsupply most of the natural gas to north and east China. However, private sectorcompanies, both foreign and domestic, are playing an increasingly important rolein bringing fuels to the end-customer and in filling the gaps in theinfrastructure network. Oil Sector In the oil sector the state-oil companies still control the supply andcross-border trade of gasoline, diesel and jet fuel and their oil refineries nowrun above design capacities to produce these transportation fuels. However, thefuel oil market was liberalised in late 2003, causing fuel oil imports to leap28% to 31 million tonnes in 2004 and making China a leading importer of fueloil. This fuel oil is either consumed in power stations or processed in theincreasing number of mini-refineries established by entrepreneurs outside themain product markets. While the state-controlled domestic companies continue toface only limited competition in their principal markets, intense competitionhas developed in liberalised sectors such as fuel oil and LPG retail marketswhere barriers to entry are low. The major international oil companies have not yet played any significant rolein the development of the onshore oil and gas markets. International oilcompanies are primarily focusing on the sale of LNG (Liquefied Natural Gas) forimport to China and the formation of retail station joint ventures; a few havedeveloped offshore oil and gas fields and fewer still have invested in LPG orfuel oil import terminals. Fortune Oil remains virtually the only internationaloil company with investments in crude oil and diesel import facilities in China. Gas Sector Compared with the oil sector, the natural gas supply market has very fewrestrictions on private sector investment. However, Fortune Oil is againvirtually the only investor-operator in this industry listed outside GreaterChina and other international energy companies have struggled to find afoothold. Growth in this sector is limited primarily by availability of naturalgas, which is currently supplied by state companies. Developing upstreamfacilities at the same pace as demand growth has proved difficult, this became acritical factor in December 2004 when the winter demand for gas exceeded thesupply in Beijing and demand management measures had to be imposed. This supplybottleneck will be removed in July 2005 when the second Shaanxi-Beijing pipelinestarts up with an annual design capacity of 12 billion cubic metres (bcm). China's natural gas consumption is expected to reach 50 bcm in 2005; domesticreserves have been sufficiently developed to satisfy expected demand for themedium term, assuming the pipeline infrastructure is in place. In addition Chinahas one of the world's largest reserves of coal bed methane (natural gasassociated with coal seams) but this has not been properly exploited. Domesticgas production will soon be supplemented by imports of LNG by sea and ultimatelyby imports of gas via cross-border pipelines. The first overseas LNG will arrive at the Guangdong LNG terminal in April 2006followed in late 2007 by the start-up of the Fujian LNG terminal. Fortunatelyfor China, the LNG take-or-pay contracts were signed at a time when the globalLNG price was at a historic low, so these regions will benefit from a stablelong term gas price that is significantly below that in most OECD countries. Gasfrom either domestic fields or LNG imports should be available from trunkpipelines at prices in the range of 1.2 to 1.5 RMB/m3 (4 to 5 US$/MMBTU). Bycomparison, the average city gate gas price in USA in 2004 was 6.6 US$/MMBTU. Natural gas is used by households, restaurants and factories for heating and topower buses and trucks. Whilst for heating purposes the natural gas substitutesLPG or diesel because of lower cost and greater convenience, or substitutes coalgas because of environmental incentives, most of the natural gas sales add tooverall energy consumption rather than substitute. In many of the Company's franchise areas all new apartment developments arerequired to include connections for piped gas supply and the potential user paysa connection fee of RMB 2,000-3,000 (£130-200) to the local gas company as partof the cost of the apartment. These government-set connection fees encouragefurther investment in the local gas networks, although a gas sales margin of atleast 0.5 RMB/m3, or 25% gross margin, is also normally required to ensuresufficient cashflow to develop a city gas network. Such a margin is normallyattainable while still keeping the sales price below the cost of competingfuels. Most new city gas networks are being developed by private sector companies withthe local government as minority partner. Competition is increasing for theacquisition of new gas franchises but most cities and factories still do nothave access to trunk pipelines, so there will be many more opportunities todeliver gas to users in the form of CNG or LNG. OIL SECTOR OPERATIONS Maoming King Ming Petroleum Company (SPM) There was a further 10% increase in throughput at the Maoming Single PointMooring facility in 2004: 46 tankers were safely discharged at the SPM (43 in2003) and a record 10.3 million tonnes of crude oil were supplied to the SinopecMaoming refinery (9.4 million tonnes in 2003). The throughput of the SPM is four times higher than contemplated by Sinopec whenthe original terms were agreed over ten years ago, and in 2003 Fortune Oilagreed to reduce the throughput fee because of the increasing volumes. As aresult the tariff was reduced to US$2.05 per tonne from US$2.35 per tonne in2003. However the net profit still increased in RMB and US$ terms. Profit aftertax in sterling was £5.7 million (US$10.4 million) compared with £6.1 million(US$10.0 million) in 2003 but this decrease was due to depreciation of the USdollar. In April 2005 a new buoy was successfully installed as scheduled. Downtimetotalled 24 days but the Maoming refinery continued to run as normal, primarilydrawing down from inventory. The old buoy has served us well over the past eightyears; it will be kept in reserve and could be refitted for future expansion ofthe SPM system. The new buoy, fabricated in China, will allow a more efficientoperation and lower maintenance costs. South China Bluesky Aviation Oil Company Bluesky was a centre of attention for the Company in 2004. Performance wasexcellent with sales volumes to airlines increasing 33% to 1.08 million tonnes,compared with 0.81 million tonnes in 2003. Most of this growth was at Guangzhou,where operations were successfully transferred to the new Baiyun InternationalAirport in August 2004. Higher volume sales and jet fuel prices resulted inBluesky's turnover in 2004 increasing 39% to £281 million (US$514 million) from£202 million in 2003. Net profit in 2004 rose 48% to £5.7 million (US$10.5million) from £3.85 million (US$6.3 million) in 2003. Cost management continuesto be a focus and unit costs have fallen 20% since 1998. In early 2004 the Company agreed to sell the 24.5% shareholding in Bluesky toChina Aviation Oil (Singapore) Corporation Limited (CAO). Under the terms of thedisposal the Company would receive cash plus new shares and options in CAO oncompletion of the transaction. This would have given Fortune Oil the opportunityto become the second largest shareholder in CAO, which has a 33% interest in theShanghai Pudong airport refuelling joint venture and which is responsible forimports of all aviation fuel into China. The shareholders approved thetransaction at an Extraordinary General Meeting on 19 April 2004. The issue of new shares to the Company by CAO needed formal approval from theState Owned Assets Supervision and Administration Commission of China, the bodyresponsible for supervising China's main state-controlled listed companies. Theprocess of procuring these approvals was still ongoing when CAO announced thatit had incurred significant losses from its positions on jet fuel derivativesand the transaction did not proceed. The Company would like to reiterate thatneither the potential disposal nor CAO's financial problems affected theoperations or profitability of Bluesky, and at all times we retained completecontrol of our shareholding. The most significant contributor to this growth has been the new GuangzhouBaiyun International Airport, which now accounts for 58% of Bluesky's sales.This replaced the old downtown airport and Bluesky's new facilities wereconstructed and commissioned with no lost time accidents and no disruption toairport operations. Guangzhou Baiyun has the most modern airport facilities inChina, including the automated supply of fuel via hydrants. Guangzhou airportnow ranks number three for aviation fuel sales in mainland China after Beijingand Shanghai Pudong airports. Future growth will be in both passenger and cargotraffic. For example, China Southern Airlines, Bluesky's largest customer, hasalready announced plans to significantly expand its fleet while Federal Expressis in negotiations to establish a new terminal at Guangzhou. The design capacity of the Phase I facilities at Guangzhou Baiyun is 25 millionpassengers per year but at current rates 24 million passengers are expected touse the airport in 2005. Hence plans are already being developed for a Phase IIexpansion. Growth also continues at the regional airports. For example, theBluesky facilities at Zhengzhou (Henan Province) will be expanded later thisyear, to be funded from cashflow. In 2004 discussions commenced concerning restructuring of the aviationrefuelling industry. This will involve Sinopec and CNPC becoming shareholders inCAOHC which controls 51% of the Bluesky joint venture; this should improveBluesky's logistics costs as the domestic refineries currently supply 80% of itsaviation fuel purchases. As a sign of deregulation in China's oil markets, thegovernment will allow competition for aviation refuelling at new airports. Inaddition, the government is planning a price reform for aviation refuelling tobetter reflect the true logistics costs, but the details of these reforms arenot yet known. We remain very positive concerning Bluesky' prospects because ofthe company's strong market position and reputation in China. Zhanjiang Fu Duo Gas Company The Fu Duo LPG business finally turned a small profit in 2004, principally as aresult of a sales alliance forged with the Sinopec Maoming refinery. Under thisagreement Fu Duo's customers were supplied using LPG from Maoming refineryrather than imported LPG, and an annual fee of £426,000 (US$780,000) was alsopaid by the refinery to Fu Duo. Both the wholesale and retail businesses were scaled down, resulting in totalvolume sales falling 46% to 57,000 tonnes. Demand for LPG was adversely affectedby a 30% increase in LPG prices over the year, broadly in line withinternational price movements. We do not expect the market to improve in themedium term as the expansion of local refineries will create over-supply of LPGin the region and natural gas will become a competing fuel. South China Petroleum Company (West Zhuhai Terminal) Throughput at the West Zhuhai oil products terminal increased 31% to 2.2 milliontonnes in 2004, compared with 1.7 million tonnes in 2003. This was principallydue to increased sales of diesel by PetroChina in southern China. Net profit forthe joint venture doubled to £2.2 million (US$4.0 million), compared with £1.1million (US$1.8 million) in 2003. A number of new initiatives are under way to utilise the terminal and itsjetties for other products. One such market is petrochemicals intermediates,which has already been liberalised and is exhibiting strong growth in theregion. Trading Our trading business includes back-to-back domestic trading of oil products, ourinterest in two gasoline retail stations in Beijing and rental income from minorassets in Shantou and Ningxia. Total turnover was £15.8 million (US$28.9million) but trading, apart from the gasoline stations, remains a break-evenbusiness given the very thin margins available in back-to-back transactions. We anticipate that the trading environment will improve as the wholesale andcross-border markets gradually open under WTO. We believe that the Company'sunique investments in terminal facilities and experience in the domestic marketswill position us ahead of other international oil companies to capture thehigher margin opportunities. NATURAL GAS OPERATIONS The Company's investments in natural gas are through Fortune Gas DevelopmentLimited ("Fortune Gas", a 100% owned subsidiary), and Beijing Fortune HuiyuanGas Company Limited ("Fu Hua", which is owned 80% by Fortune Gas). Fu Hua'sjoint venture partner is a PetroChina affiliate involved in the operation of theShaanxi-Beijing trunk pipeline, which is the source of most gas for Fu Hua'sbusiness. In Shaanxi Province these investments include control of the Shuozhoucity gas reticulation system and the Pinglu and Jinshatan spur pipelines; inBeijing and Tianjin these investments are principally in the production anddistribution of Compressed Natural Gas (CNG). Total gas sales were 24 million cubic metres (m3) with total revenues of £3.1million (US$5.6 million). Gas sales included 15 million m3 CNG in Beijing and 6million m3 in Shuozhou and connection fee income in Shuozhou was £0.5 million(US$0.8 million). Sales of gas through the Shaanxi spur pipelines were not ashigh as expected as the connected factories did not increase their manufacturingoutput as planned. Overall revenues however were above expectations and expensesbelow budget. The overhead costs in the first year of operation resulted in anet operating loss of £0.5 million (US$0.9 million), a better result thanforecast. In 2004 the Company acquired control of the city gas distribution business inQufu new city and Qufu old city (Shandong Province), a UNESCO World HeritageCity. We converted the reticulation network in Qufu old city from an air/LPG mixto natural gas. In the interim we are purchasing the gas in the form of LNGdelivered by truck from a small gas liquefaction plant in nearby Hebei Province.We also established a joint venture with Xinao to construct a pipeline andreticulation system at Luquan (Hebei Province). The investments in Qufu andLuquan are initially limited and strategic, designed to capture gas supplyopportunities after trunk pipelines are completed in late 2005. Subsequently, we acquired a controlling stake in the city gas business inHuairou, bringing our total number of gas joint ventures to nine. Huairou is acity of 110,000 residents north of Beijing with a growing industrial base and16,000 gas consumers already connected to the reticulation system. For theforeseeable future the city gas will continue to be supplied as CNG by truckfrom Beijing. The Huairou acquisition complements Fu Hua's recent investments in CNGproduction stations in Tongzhou (east of Beijing) and Dagang (near Tianjin). TheTongzhou CNG station is one of the largest CNG stations in Beijing with anannual capacity of 90 million m3 (at 24 hours operation) once the compressorshave been commissioned in May 2005. The facility commenced production of mediumpressure CNG earlier than scheduled at the request of the Beijing authoritiesdue to gas shortages in December 2004. Sales in Beijing by all gas companieshave been severely restricted in early 2005 because winter demand exceededsupply capacity. After the second Shaanxi-Beijing pipeline is commissioned laterthis year the supply will exceed demand, which should allow significantexpansion of our CNG business. Total investment by the Company in the natural gas business to date has been£8.3 million (US$16 million). We now operate 340 km of pipeline with 53,800connected customers and we also operate a fleet of CNG delivery trucks for salesto large consumers. While modest in size at present our gas business is nowfirmly established with significant capacity for future sales growth. The supplyinfrastructure will continue to limit the availability of natural gas butFortune Oil has now developed experience in delivering gas to end-users by allpracticable means, whether as pipeline gas, CNG or LNG. FINANCIAL REVIEW Financial Performance Group turnover increased 19 per cent to £118.1 million (US$216.4 million) in2004 from £99.0 million (US$162.6 million) in 2003, with all operations exceptFu Duo contributing to this increase. Total operating profit increased to £7.4million (US$13.6 million) from £5.9 million (US$9.6 million) in 2003, mainly dueto an increase in contributions from Bluesky (£0.5 million increase), recoveryof old debts (£0.4 million) and write-backs (£0.4 million). The Group's net profit doubled to £2.6 million (US$4.8 million) from £1.3million (US$2.1 million) in 2003. This gain resulted from an across-the-boardimprovement in performance of Group's businesses. Earnings per share increasedby 78% from 0.09 pence to 0.16 pence. Capital expenditure and acquisitions together totalled £2.8 million (US$5.4million), principally in the natural gas sector. Our balance sheet has beenconsiderably strengthened by the conversion of the £10.6 million ConvertibleLoan Stock 2004 and a share placement of £4.3 million in December 2004. Netassets of the Group rose 66% to £42.5 million (US$ 81.6 million) compared to£25.7 million in 2003. The 2004 debtors balance includes £2.7 million (US$5.1 million) secured by ahotel in Beijing. Repayments totalled £1.3 million (US$2.6 million) in 2004. Interest expense for the Group fell 60% to £312,000 (US$572,000) compared with£787,000 (US$1.3 million) in 2003. Our share of joint venture interest expensewas £305,000 (US$560,000), similar to the 2003 share of £296,000 (US$486,000).Loans to the Group now total £8.7 million (US$16.6 million) of which £3.9million (US$7.5 million) are due to First Level Holdings Limited. The Group hada net cash position of £7.4 million (US$ 14.2 million) as at 31 December 2004. The revenues and expenses of the Group are primarily denominated in Chineserenminbi (RMB) and Hong Kong dollars (HK$). The HK$ and RMB are pegged to the USdollar (US$). Over the course of 2004 the pound sterling (£) appreciated by 7.3%against the US dollar. The 33% appreciation of sterling against the US dollarover the past three calendar years results in a significant under-statement ofthe actual performance improvement of the Company over this period when reportedin pounds sterling. The Company does not proactively hedge currency risk and anyrevaluation of the RMB or further depreciation of the US dollar in 2005 islikely to affect the Group's results as denominated in sterling. Most of the Group's investments and expenses take place in the People's Republicof China (PRC) and are held through Fortune Oil PRC Holdings Limited, a100%-owned subsidiary of the Company in Hong Kong. The Group sources both RMBfor operating expenses in PRC and US$ for equity investments in new jointventures. A major element of the Group's foreign exchange needs currently comesfrom the dividend payments by the Maoming SPM and Bluesky joint ventures andrepayment of shareholder loans by the West Zhuhai joint ventures. The MaomingSPM and Bluesky joint ventures have usually paid out all net profit as dividendafter contributions to employee welfare funds. Capital Increases In May 2004 the unsecured Convertible Loan Stock 2004 of £10.6 million was allconverted at 3 pence per share into 354,166,666 new ordinary shares of theCompany. These loans were provided in 1999 by the two major shareholders, FirstLevel Holdings Ltd and Vitol S.A. The actions of these shareholders demonstratestrong commitment and confidence in Fortune Oil. In December 2004 the Company placed 47,713,467 new ordinary shares at a price of9.2 pence through Deutsche Bank AG London, which was also granted an option toacquire 23,856,733 new ordinary shares. This option is exercisable at a price of9.0 pence until 16 December 2005. This placement reflects the renewed strengthof the Company and our improving prospects in the China oil and gas industry. Li ChingChief Executive FORTUNE OIL PLC Announcement of Preliminary Results for Year Ended 31 December 2004 Consolidated Profit & Loss Account for the Year Ended 31 December 2004 Total Continuing Discontinued Total Continuing operations operations operationsAmount in £'000 Note 2004 2003 2003 2003------------------------ ------ --------- -------- --------- -------- Turnover: group andshare of joint 3 118,088 98,447 503 98,950venturesLess: share of jointventures' (73,319) (52,426) - (52,426)turnover --------- -------- --------- -------------------------------- Turnover 44,769 46,021 503 46,524 Cost of sales (36,775) (38,111) (496) (38,607)------------------------ --------- -------- --------- -------- Gross profit 7,994 7,910 7 7,917------------------------ --------- -------- --------- --------Exceptionaladministrative 801 (295) - (295)expensesOther administrative (3,861) (3,341) (182) (3,523)expenses --------- -------- --------- --------------------------------Total administrative (3,060) (3,636) (182) (3,818)expenses --------- -------- --------- -------------------------------- Group operating profit / 3 4,934 4,274 (175) 4,099(loss)Share of operatingprofit in joint 2,500 1,752 - 1,752ventures --------- -------- --------- -------------------------------- Total operating profit / 7,434 6,026 (175) 5,851(loss)Gain on termination of - - 74 74operation --------- -------- --------- -------------------------------- Profit / (loss) before 7,434 6,026 (101) 5,925interestNet interest payableGroup (312) (787)Share of joint ventures 3 (305) (296)------------------------ ------ --------- -------- --------- -------- Profit on ordinaryactivities 6,817 4,842before taxationTax on profit onordinary activitiesGroup (423) (238)Share of joint ventures 4 (225) (119)------------------------ ------ --------- -------- --------- -------- Profit on ordinaryactivities 6,169 4,485after taxation Equity minority (3,590) (3,200)interests --------- -------- --------- -------------------------------- Retained profit for the 2,579 1,285year --------- -------- --------- -------------------------------- Basic earnings per share 6 0.16p 0.09p------------------------ ------ --------- -------- --------- -------- Diluted earnings per 6 0.16p 0.09pshare ------ --------- -------- --------- -------------------------------- FORTUNE OIL PLC Announcement of Preliminary Results for Year Ended 31 December 2004 Consolidated Balance Sheet as at 31 December 2004 Restated RestatedAmount in £'000 2004 2004 2003 2003--------------------------- ------- ------- ------- ------- ----- Fixed assetsIntangible assets 916 1,035Tangible assets 19,090 19,754Investments in joint venturesShare of gross assets 36,668 34,788Share of gross liabilities (19,740) (17,986)(Advance from) / loans to joint (20) 16,908 406 17,208ventures ------- -------Other investments 121 138--------------------------- ------- ------- ------- ----- 37,035 38,135--------------------------- ------- ------- ------- ----- Current assetsStocks 1,523 1,022Debtors: Amounts falling dueafter more than 2,279 3,219one yearDebtors: Amounts falling due 5,035 3,829within one yearCash at bank and in hand 16,086 11,548--------------------------- ------- ------- ------- ---- 24,923 19,618Creditors: Amounts falling due (13,040) (30,363) *within one year ------- ------- ------- -------------------------------Net current assets / 11,883 (10,745)(liabilities)Total assets less current 48,918 27,390liabilities ------- ------- ------- -------------------------------Creditors: Amounts falling dueafter more than (6,021) (1,279)one yearProvision for liabilities and (354) (456)charges--------------------------- ------- ------- ------- ----Net Assets 42,543 25,655--------------------------- ------- ------- ------- ----Capital and reservesCalled up share capital 18,336 14,272Investment in own shares (725) (690)Share premium account 37,318 26,498Exchange reserves (6,554) (4,572)Profit and loss account (16,320) (18,899)--------------------------- ------- ------- ------- ----Equity shareholders' funds 32,055 16,609Equity minority interests 10,488 9,046--------------------------- ------- ------- ------- ---- 42,543 25,655---------------------------- ------- ------- ------- ----* Includes convertible loan stock FORTUNE OIL PLC Announcement of Preliminary Results for Year Ended 31 December 2004 Consolidated Cash Flow Statement for the Year Ended 31 December 2004 Amount in £'000 2004 2003----------------------------- ---------- ---------- Net cash inflow from operating activities 6,123 4,890----------------------------- ---------- ----------Dividend received from joint venture 1,042 2,372Returns on investment and servicing of financeInterest received 109 97Interest paid (421) (884)Dividend paid to minority shareholders (1,535) (3,566)----------------------------- ---------- ---------- (1,847) (4,353)Taxation paid (514) (505)Capital expenditure and financial investmentPayments for tangible fixed assets (1,308) (1,411)Receipt from disposal of fixed assets 99 -Investment in a joint venture (370) -Repayment from other investments - 7Repayment from joint ventures 399 64----------------------------- ---------- ---------- (1,180) (1,340)Acquisitions and disposalsAcquisition of businesses / subsidiaries (1,531) (1,753)Net cash acquired with subsidiaries - 639Net cash disposed of with subsidiaries - (14)----------------------------- ---------- ---------- (1,531) (1,128)Cash inflow / (outflow) before financing 2,091 (64)FinancingReceipt from issue of share capital 4,514 -Expenses incurred in conversion of convertible note (255) -(Decrease) / increase in loans (1,041) 1,574----------------------------- ---------- ---------- 3,218 1,574Increase in cash 5,311 1,510----------------------------- ---------- ---------- FORTUNE OIL PLC Notes to financial statements in respect of year ended 31 December 2004: 1. This preliminary statement, which has been agreed with the auditors, was approved by the Board on 27 April, 2004. It is not the Company's statutory accounts. The statutory accounts for the year ended 31 December 2003 have been delivered to the Registrar of Companies and received an audit report which was unqualified and did not contain statements under S 237(2) or (3) of the Companies Act 1985. The statutory accounts for the year ended 31December 2004 have not yet been approved, audited or filed. 2. This statement has been prepared using accounting policies that are consistent with those used in the audited accounts for the year ended 31 December 2003. 3. Segmental analysis a) Class of business Continuing Amount in Natural gas Oil trading & Single point Aviation Others* Central£'000 storage mooring ---------- ---------- administration facility --------- --------- ----------- ----------- ------------ 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003TurnoverTotal 3,064 728 30,635 33,531 11,874 12,447 68,775 49,391 3,740 2,350 - -Less: share ofjointventures'turnover - - (823) (694) - - (68,775) (49,391) (3,721) (2,341) - --------- ------ ------ ------- ------- ------- ------- ------- ------- ------- ------- ------ ---- 3,064 728 29,812 32,837 11,874 12,447 - - 19 9 - - ------ ------ ------- ------- ------- ------- ------- ------- ------- ------- ------ ---- Groupoperatingprofit /(loss) (368) (155) (428) (1,248) 6,069 6,229 (16) (36) 374 (5) (697) (511)Share ofoperatingprofit injoint ventures - - 447 301 - - 1,839 1,319 214 132 - --------- ------ ------ ------- ------- ------- ------- ------- ------- ------- ------- ------ ---- Totaloperatingprofit /(loss) (368) (155) 19 (947) 6,069 6,229 1,823 1,283 588 127 (697) (511)Gain on - - - - - - - - - - - -termination of ------ ------ ------- ------- ------- ------- ------- ------- ------- ------- ------ ----- operation---------Profit /(loss) beforeinterest (368) (155) 19 (947) 6,069 6,229 1,823 1,283 588 127 (697) (511)and tax--------- ------ ------ ------- ------- ------- ------- ------- ------- ------- ------- ------ ----- Net assets: byclass ofbusinessGroup 9,328 3,553 2,201 (9,432) 14,190 14,518 (15) - 24 2 (93) (194)Joint ventures 381 - 2,625 2,809 - - 13,800 14,202 102 197 - - ------ ------ ------- ------- ------- ------- ------- ------- ------- ------- ------ ----- 9,709 3,553 4,826 (6,623) 14,190 14,518 13,785 14,202 126 199 (93) (194) ------ ------ ------- ------- ------- ------- ------- ------- ------- ------- ------ ----- DiscontinuedAmount in £'000 Total Others* Total---------------- -------------------------------------------------- 2004 2003 2004 2003 2004 2003TurnoverTotal 118,088 98,447 - 503 118,088 98,950Less: share of jointventures' turnover (73,319) (52,426) - - (73,319) (52,426)--------------- -------- ------- ------- ------ -------- ------- 44,769 46,021 - 503 44,769 46,524--------------- -------- ------- ------- ------ -------- ------- Group operating profit 4,934 4,274 - (175) 4,934 4,099Share of operating profitin joint ventures 2,500 1,752 - - 2,500 1,752-------------- -------- ------- ------- ------ -------- -------Total operating profit 7,434 6,026 - (175) 7,434 5,851Gain on termination ofoperation - - 74 74-------------- -------- ------- ------- ------ -------- -------Profit before interestand 7,434 6,026 - (101) 7,434 5,925tax -------- ------- ------- ------ -------- ---------------------Net assets: by class ofbusinessGroup 25,635 8,447 - - 25,635 8,447Joint ventures 16,908 17,208 - - 16,908 17,208 -------- ------- ------- ------ -------- ------- 42,543 25,655 - - 42,543 25,655 -------- ------- ------- ------ -------- ------- * Others includes distribution. b) Geographical operations With the exception of operating loss of £636,000 (2003: £416,000) in respect ofcentral administration in the United Kingdom, all of the Group's activities arecarried out in China and Hong Kong. 4. Taxation charge for the yearThe taxation charge for the year is analysed below: Amount in £'000 2004 2003------------------------------- --------- ---------Current taxGroup current tax 498 588Share of joint ventures' tax 225 119------------------------------- --------- ---------Total current tax 723 707------------------------------- --------- ---------Deferred taxNet reversal of timing differences (75) (350)------------------------------- --------- ---------Total deferred tax (75) (350)------------------------------- --------- ---------Tax on profit on ordinary activities 648 357------------------------------- --------- --------- The tax charge for the year differs from the standard rate of corporation taxand is explained below: RestatedAmount in £'000 2004 2003------------------------------------ -------- --------Profit on ordinary activities before taxation 6,817 4,842------------------------------------ -------- --------Theoretical tax at principal tax 33% 2,250 1,598Effects of:- nil or lower tax in PRC (1,874) (1,691)- tax losses carried forward 360 549- adjustments in respect of prior years (3) (14)- other expenditure that is not tax deductible 107 27- other timing differences (117) 238------------------------------------ -------- --------Total tax charge for the year 723 707------------------------------------ -------- -------- The above reconciliation uses a 33% standard rate of tax, being the standardrate of tax payable in the PRC, where the majority of the Group's activitiestake place.Factors affecting future tax changesThe bulk of the Group's income arises from joint ventures in China and Hong Kongwhere tax rates are low or where no tax liability arises. Maoming King MingPetroleum Company Limited (MKM) and Zhuhai Special Economic Zone South ChinaPetroleum Company Limited (West Zhuhai) are exempt from PRC income tax for fiveyears commencing on their first profitable year and enjoy a 50 per cent.reduction of the applicable income tax rate during their sixth to tenthprofitable years. 2003 was West Zhuhai's third profitable year, and MKM'sseventh profitable year. South China Bluesky Aviation Oil Company Limited was exempt from PRC income taxfor two years commencing on its first profitable year and enjoys a 50 per centreduction of the applicable income tax rate during its third to fifth profitableyears. 2004 was its fourth profitable year. The Group had available losses of £81,000 as at December 2004 (2003: £115,000)and capital losses of £762,000 at 31 December 2004 and 2003. No provision has been made for taxation which would arise on the distribution ofprofit retained by overseas subsidiary undertakings or joint ventures, on thebasis that no remittance of profit retained at 31 December 2004 is required insuch a way that incremental tax will arise. 5. Dividends were not paid in any of the periods reported upon and no dividend is proposed. 6. Earnings per share have been calculated on the earnings on ordinary activities after taxation and minority interests. 2004 2004 2003 2003 No. No. '000 £'000 '000 £'000Basic 1,583,164 2,579 1,367,206 1,285Convertible loan adjustment - - 354,167 301Share option adjustment 9,296 - - ------------------ -------- ------- -------- -------Diluted 1,592,460 2,579 1,721,373 1,586----------------- -------- ------- -------- ------- 7. Copies of this report are available from the Group's Registered Office, 4/F Bowater House East, 68 Knightsbridge, London SW1X 7LJ, U.K. This information is provided by RNS The company news service from the London Stock Exchange