FTO.L Regulatory News (FTO)

21 AUGUST 2013

FORTUNE OIL PLC

("Fortune Oil", "the Company" or together with its subsidiaries "the Group")

Half Year Report for the six months ended 30 June 2013

Fortune Oil develops and operates oil and gas supply and infrastructure projects in China. Fortune Oil is quoted on the Main Market of the London Stock Exchange and has its headquarters in Hong Kong.

FINANCIAL HIGHLIGHTS

§ Revenues including share of jointly controlled entities increased by 10 per cent to £372.0 million (H1 2012: £338.8 million) with no revenues being accounted for from the Maoming single point mooring business ("SPM") after expiration of the joint venture agreement in February 2013. 

§ Group profit from operations, excluding gains on disposal, decreased by 10 per cent to £12.8 million (H1 2012: £14.3 million) principally due to an inventory loss in the aviation refuelling business as a result of aviation fuel price movements and the exclusion of any potential profits from the SPM business after the joint venture agreement expired.

§ Earnings per share was 0.32p (H1 2012: 0.55p). Earnings per share, excluding gains on disposal, was 0.32p (H1 2012: 0.31p).

§ Net assets increased to £327.4 million as at 30 June 2013 (31 December 2012: £246.8 million) including a net gain of £74.6 million in fair value in respect of the Company's China Gas Holdings Limited ("CGH") shares.

§ The Annual General Meeting on 19 June 2013 approved a dividend payment of 0.16p per share for 2012 which was paid on 15 August 2013.

§ Proposed special interim dividend of 2.36p per share to be put to shareholders in a General Meeting.

§ Loan from Fortune Dynasty Holdings Limited of US$12 million to the Group to cover working capital needs and certain material near-term capital expenditure as a result of the delay in completion of the sale to China Gas Holdings Limited of Fortune Gas Investment Holdings Limited.

OPERATIONAL HIGHLIGHTS

§ Completed natural gas connections to a further 32,497 new customers (H1 2012: 31,031 new customers), bringing total number of customers to approximately 312,500.

· Total field production from the Fortune Liulin Gas ("FLG") wells has exceeded 70,000 cubic metres per day with the most successful well to date producing 20,000 cubic metres per day, a rate which exceeds all previous wells drilled by FLG and is in line with our projections.

§ Bluesky performed well with an 11 per cent increase in sales volumes to 1.6 million tonnes (H1 2012: 1.4 million tonnes), driven by the continued increase in domestic air travel demand.

§ Final stages of negotiations with Sinopec for replacement structure for Maoming SPM partnership, which is expected to include the development of a new pipeline and buoy, increasing the terminal's capacity.

§ West Zhuhai Products Terminal throughput volume was up by 22 per cent to 1.4 million tonnes (H1 2012 1.1 million tonnes) and profit contribution to the Group increased by 46 per cent due to increased utilisation of the terminal by Petrochina.

Mr Qian Benyuan, Chairman of Fortune Oil, commented:

"Our natural gas business has continued to expand rapidly with demand in China for natural gas outstripping supply. Fortune Oil's exciting development with China Gas Holdings Limited will further enhance our exposure to China's rapidly expanding natural gas industry." 

"The oil business continues to make good progress. The Bluesky aviation fuel business is well positioned to participate in the anticipated continued growth in air travel in China. We expect demand for oil and oil based products in China to continue to remain strong and the Board is excited by the medium term growth prospects for our oil business".

ENQUIRIES:

FORTUNE OIL PLC

("Fortune Oil", "the Company" or together with its subsidiaries "the Group")

Half Year Report for the six months ended 30 June 2013

CHIEF EXECUTIVE'S REVIEW

FINANCIAL HIGHLIGHTS

§ Revenues including share of jointly controlled entities increased by 10 per cent. to £372.0 million (H1 2012: £338.8 million) with no revenues being accounted for from the Maoming single point mooring business ("SPM") after expiration of the joint venture agreement in February 2013.

§ Group profit from operations, excluding gains on disposal, decreased by 10 per cent. to £12.8 million (H1 2012: £14.3 million) principally due to an inventory loss in the aviation refuelling business as a result of aviation fuel price movements and the exclusion of any potential profits from the SPM business after the joint venture agreement expired.

§ Earnings per share was 0.32p (H1 2012: 0.55p). Earnings per share, excluding gains on disposal was 0.32p (H1 2012: 0.31p).

§ Net assets further increased to £327.4million as at 30 June 2013 (31 December 2012: £246.8 million) including a net gain of £74.6 million in fair value in respect of the Company's China Gas Holdings Limited ("CGH") shares.

§ The Annual General Meeting on 19 June 2013 approved a dividend payment of 0.16p per share for 2012 which was paid on 15 August 2013.

§ Proposed special interim dividend of 2.36p per share ("Special Dividend") to be put to shareholders in a general meeting.

§ Loan from Fortune Dynasty Holdings Limited ("FDH") of US$12 million to the Group to cover working capital needs and certain material near-term capital expenditure as a result of the delay in completion of the sale to CGH of Fortune Gas Investment Holdings Limited ("FGIH") (the "FGIH Transaction").

CORPORATE MATTERS

§ The Company announced on 7 August 2013 that it will be putting the following inter-conditional proposals to shareholders in a general meeting:

· The acquisition of Wilmar International Limited's interest in the consideration receivable as a result of the conditional disposal of FGIH. The total consideration is US$60m payable to FDH in Ordinary Shares in Fortune Oil (the "Proposed Acquisition").

· Subject to the waiver from the UK Takeover Panel, amendment of the loan received from FDH of US$12 million, such that it will be repayable in Ordinary Shares in Fortune Oil (the "Loan Settlement")

· Waiver to be sought from the UK Takeover Panel, and of independent shareholders of the Company, of the requirement of Rule 9 of the UK Takeover Code for a general offer to be made for the Company by persons who, by receiving Ordinary Shares through the Loan Settlement and the Proposed Acquisition, would own more than 56.9% of the Company's issued share capital.

§ The Company intends, subject to approval by the UK Takeover Panel, to send a circular to shareholders providing information about, among other things, the Proposed Acquisition, the Loan Settlement and the Special Dividend, convening a general meeting of the Company at which the approval of the Proposed Acquisition, the Rule 9 waiver resolution and the payment of the Special Dividend will be put to a vote of the shareholders of the Company. The date of the general meeting of the Company has not yet been set but it will be held as soon as practicable.

OPERATIONAL HIGHLIGHTS

Natural Gas Business

On 12 August 2013, the Company announced that regulatory approval had been received in respect of the sale of FGIH to CGH, with completion expected during Q3 2013. Consequently the assets and liabilities associated with FGIH continue to be classified as "held for sale" in the accounts.

Natural Gas Supply

§ Operating profits increased by 44 per cent. to £8.9 million (H1 2012: £6.2 million).

§ Sales volumes of natural gas increased by 20 per cent. to 287 million cubic metres compared to H1 2012.

§ Completed natural gas connections to a further 32,497 new customers which brings the total number of customers to approximately 312,500 (H1 2012: 31,031 new customers connected).

§ Construction is under way for the first permanent LNG ship refuelling station on the Yangtze River near Chongqing. Fortune Oil also received the first full approval for a LNG dual fuel ship to enter commercial operations.

Coal Bed Methane ("CBM")

§ Regulatory approval obtained to progress the construction of the gas gathering system and construction is under way funded out of Group resources.

§ Total field production from the Fortune Liulin Gas ("FLG") wells has exceeded 70,000 cubic metres per day. The most successful well to date has produced 20,000 cubic metres per day, a rate which exceeds all previous wells drilled by FLG and is in line with Company projections.

§ Chinese Reserve Certification obtained across the Liulin block for seams 3, 4, 5, 8 and 9. The Chinese certification reported total gas in place of 21.8 billion cubic metres.

§ Initial commercial gas sales expected H2 2013 depending on completion of the gas gathering system.

China Gas Holdings Limited ("CGH")

§ The Anti-Monopoly Bureau of the Ministry of Commerce of the People's Republic of China ("MOFCOM") approved the FGIH Transaction in relation to Fortune Oil's natural gas business. Completion of the FGIH Transaction is expected to occur during Q3 2013.

§ China Gas Group Limited ("CGG"), a joint venture company between the Company and Mr Liu Ming Hui, acquired the 207,968,000 CGH shares previously purchased by Fortune Max, a private company controlled and beneficially owned by Mr Daniel Chiu. As at the date of this report CGG owns 702,446,000 CGH shares, representing 14.66 per cent of CGH's total issued share capital.

Oil Business

§ Bluesky continues to perform well. Fortune Oil's share of net profit was £5.2 million in the first half of 2013 (H1 2012: £6.0 million), with an 11 per cent. increase in sales volumes to 1.6 million tonnes (H1 2012: 1.4 million tonnes), driven by the continued increase in domestic air travel demand. The reduction in profit contribution from Bluesky is a result of inventory stock losses due to the reduction in aviation fuel prices during the period.

§ Fortune Oil and Sinopec are in the final stage of negotiating a replacement structure for the Maoming SPM partnership, for which the existing joint venture period expired in February 2013. This is expected to include the development of a new pipeline and buoy, increasing the capacity of the terminal. Although the SPM continues to operate, the results from the existing venture are presented as discontinued operations during this period.

§ West Zhuhai Products Terminal throughput volume was up 22 per cent. to 1.4 million tonnes (H1 2012 1.1 million tonnes) and profit contribution to the Group increased to £0.6 million (H1 2012 £0.4 million), a 46 per cent. increase due to increased utilisation of the terminal by PetroChina.

§ Fortune Oil has obtained a license allowing it to supply and trade diesel in China, a first for a foreign company.

Resources

§ Basic engineering design, finalisation of transportation costs and customer off-take arrangements for the Armenian Iron Ore development are progressing and the economic viability of the project continues to be assessed.

There were no lost time incidents recorded in any of the Group's operations during the period.

OUTLOOK

Overall, the rate of China's economic growth continued to cool in the first half of 2013, with Q2 GDP decelerating to 7.5 per cent. from 7.7 per cent. in Q1 compared with the government official growth target of 7.5 per cent. for 2013. This will be the slowest rate of growth for more than two decades as China's leaders seek to achieve the long-term goal of rebalancing the economy away from an over-reliance on exports and investment, and focusing instead on increased domestic consumer spending.

In spite of the slowing of the Chinese economy, growth in energy demand remains strong with 7 per cent. growth in Q2, amidst signs in June 2013 that oil and power demand is improving. China's implied gas consumption increased by 13.1 per cent. year on year, to 81.5 billion cubic metres ("bcm") in H1 2013 with gas production increasing 9 per cent. to 58.8 bcm according to the National Development and Reform Commission ("NDRC"). Demand for air travel in China also remained strong. The civil aviation industry in China saw its passenger volume increase 11 per cent. year on year to 170 million in the first half of the year, according to figures from the Civil Aviation Administration of China.

Therefore, it appears likely that even with the economic slowdown, China is expected to continue to provide growth opportunities in both the oil and gas markets from which the Company can benefit.

China's recent gas price reform will also incentivise domestic gas supply. New pricing policy has made the economics of domestic gas production, including coal bed methane, more attractive. During 2013, we have continued to progress the installation of the gas gathering system required to commercialise gas produced from the Liulin CBM block. We have also continued to expand our provision of CNG and LNG in the transportation market alongside expansion in our network of CNG and LNG refuelling stations to support the growing fleets of buses and trucks which use natural gas as a fuel due to it being cheaper than petrol or diesel.

The Armenia iron ore development is still under evaluation and, as with all our projects, we are continuing to assess the project's economic viability. This is particularly important as projections of the long term iron ore price appear to be softening due to the slowdown in economic growth globally, particularly in China.

The Board is excited by the medium term growth prospects. Fortune Oil continues to strengthen its position in the Chinese natural gas industry and will see further expansion of its customer base as natural gas availability increases. The development with CGH will further enhance our exposure to China's rapidly expanding natural gas industry.

TEE Kiam Poon

Chief Executive

21 August 2013

BUSINESS REVIEW

CHINESE ENERGY MARKET

The first half of 2013 has seen a continued deceleration in China's economic growth. China gross domestic product ("GDP") growth for Q2 2013 was 7.5 per cent., the lowest for two decades and down from 7.7 per cent. in Q1 2013. However, China's economic growth rate is still expected to reach 7.5 per cent. in 2013. The country's domestic demand in the first half was sufficient to support 9 per cent. growth whilst weak exports sapped the economy's momentum.

China's central bank has maintained its one-year benchmark lending rate at 6 per cent. since the last reduction in July 2012 but liquidity remains tight as the government seeks to restrict some of the excessive lending which has occurred previously. There are currently no signs that the new leadership will boost demand by spending more on public housing, railways and other infrastructure projects as it did in 2009 following the global economic crisis. Recently, policy makers have announced fresh moves to boost growth, including suspension of value-added tax for small businesses and simplified customs clearance procedures on the exports of small and medium-sized private enterprises.

Despite the slow down in economic growth, energy demand in China has remained strong. Oil demand averaged 10.0 million barrels per day, which was 5.2 per cent. higher compared to the same period in 2012. Industrial output growth in June 2013 further declined to 8.9 per cent. from 9.2 per cent. in May, whilst apparent oil demand surged 11 per cent. in June year on year. This has been the strongest growth in oil demand since early 2011, although this was helped by the weak performance in the previous year. Underpinning the strong demand for refined products, which surged 10.1 per cent. year on year in June, is the growth in vehicle sales. In June 2013, passenger car sales increased 9.3 per cent. as Chinese consumers bought 1.4 million cars. Total refining throughput reached 238.5 million tonnes, which was 5.4 per cent. higher than the same period in 2012.

China's gas demand has been through a decade of rapid growth. Since 2001 gas demand has grown at a compound annual growth rate ("CAGR") of 17 per cent. expanding from 28 bcm in 2001 to 154 bcm in 2012. The government estimates that gas demand will further increase to 230 bcm in 2015 and 400 bcm in 2020. In the first six months of 2013 demand for natural gas rose 13.1 per cent. year on year to 81.5 bcm, according to NDRC. Natural gas imports, comprising LNG and pipeline supply from Central Asia, increased by 24.6 per cent. year on year to 24.7 bcm whilst domestic gas output during the period rose 9 per cent. year on year to 58.8 bcm, in line with projections that Chinese gas demand will grow faster than GDP due to government policies on gas utilisation in the industrial and residential sectors. The central government is encouraging the substitution of coal in industrial sectors due to environmental concerns and substituting LPG in the residential sector especially in the coastal regions, since natural gas is cheaper than LPG. The transportation sector is one of the areas where there is a significant potential for fuel switching, particularly through the use of LNG in heavy duty trucks and the marine sectors. Recent gas price reforms will incentivise domestic gas supply as the new pricing makes the economics of domestic gas production including unconventional gas such as CBM more attractive. The expectation is that the Chinese Government will continue to provide incentives for unconventional gas developers to encourage the investment needed to bring these resources on stream.

NATURAL GAS BUSINESS

The Company has continued to expand rapidly the natural gas business focussing on several of the high margin sectors supplying gas to industrial users and to the natural gas vehicle refuelling market. The fundamental drivers for the natural gas business remain firmly in place, with demand in China for natural gas continuing to outstrip supply. The Company has steadily expanded its upstream and midstream operations as well as its downstream city-gas and refuelling operations and continues to make significant progress on the new natural gas projects announced over the past 18 months.

Revenue of the natural gas business in H1 2013, including the share of jointly controlled entities, increased by 28 per cent. to £49.3 million (H1 2012: £38.4 million) and the gas sales volume increased to 287 million cubic meters (H1 2012: 239 million cubic meters) as operations at the new projects came on stream. The operating profit for the natural gas business increased by 44 per cent to £8.9 million (H1 2012: £6.2 million) driven by increased connections and rising gas sales margins.

A further 32,497 new customers were connected in this period (H1 2012: 31,031 new customers), representing a 5 per cent. increase in the rate of connections, demonstrating the continued growth as new city gas networks are connected to gas supply. This brings the total number of connected customers to approximately 312,500.

The Company continues to make good progress in developing natural gas as a fuel for buses and heavy duty trucks and for ships on the Yangtze River with the capital expenditure requirements for these refuelling stations being funded by the shareholder loan from FDH of US$12 million.

1. LNG and CNG Refuelling Stations

The Company has steadily expanded its network of LNG and CNG refuelling stations. In Xinyang the Company has opened a liquid natural gas based ("LCNG") station which can refuel both LNG and CNG vehicles and is currently refuelling heavy duty LNG trucks. In Sishui the Company has opened up a CNG refuelling station and is currently planning to install a total of five LNG refuelling stations to support fleets of long distance heavy duty coal trucks operating in Quyang region. Other CNG and L-CNG stations are under construction in Sishui and Xinyang. The Company currently has 10 CNG refuelling stations in operation.

The Company is already fuelling long distance buses with LNG in Liaoning province which is the first state wide project of its type. We expect demand for LNG as a fuel for transport in China to continue to grow in the future and accordingly we intend to continue to further increase our exposure in this high margin growth market predominantly through our investment in CGH, following completion of the FGIH Transaction.

2. Yangtze River LNG Ship Refuelling

The Company is developing the infrastructure to supply natural gas as a fuel to ships on the Yangtze River.The sites for the first three permanent LNG ship refuelling stations have been identified. Construction is in progress on the station near Chongqing which will be operational by the end of 2013. Approval has been obtained for the second station at Er Zhou near the Three Gorges Dam and the design work has started on the third location near Nanjing. These are the first of a number of stations the Company is planning to build along the Yangtze River.

The Company holds the intellectual property rights and know-how to the leading Chinese LNG dual fuel technology and has reached agreement to supply dual fuel ships to a number of leading shipping companies. The Company converted LNG dual fuel ships are the first to receive the full regulatory approval to enter commercial operations in China. Fortune Oil is establishing a new technical centre in Wuhan which will be responsible for developing and implementing Fortune Oil's LNG dual fuel technology.

3. CBM

FLG continues to make progress at its Liulin CBM operations and the project is on track for first commercial gas sales in H2 2013 following the completion of the gas gathering system. FLG has obtained the necessary approvals to progress the construction of the gas gathering system and construction of this is under way with the current target for this to be completed in Q3 2013.

Total field production from the FLG horizontal wells has exceeded 70,000 cubic metres per day with the most successful well to-date producing up to 20,000 cubic metres per day, a rate which exceeds all previous wells drilled by FLG. Until the gas gathering system is in place, the bottom hole pressure ("BHP") and gas flow rates are being managed to avoid unnecessary flaring of gas. Including the gas production from the CUCBM wells, the total gas field production from the Liulin block has exceeded 100,000 cubic metres per day.

Chinese Reserve Certification has now been obtained across the Liulin block for all of the main coal seams that contain gas. An additional Chinese reserve certification of 16.3 bcm gas reserves were obtained for seams 3, 4 and 5 in the southern part of the Liulin block and for seams 8 and 9 for the whole Liulin block. The total gas in place for the whole Liulin block (seams 3, 4, 5, 8 and 9) is therefore estimated by the Chinese approval agencies to be 21.8 bcm. The Chinese Reserves Certification is a requirement of the Overall Development Plan ("ODP") approval process.

The documentation for the above ground and subsurface aspects of the ODP has been completed. The ODP is the final approval procedure required for full commercial operations and marks the transition of the field from exploration to development and operation.

4. Strategic Investment in China Gas Holdings Limited ("CGH")

The Company announced on 17 December 2012 that it had reached a conditional agreement (the "FGIH Sale Agreement") for the disposal of its natural gas business, FGIH, owned 85 per cent. by the Company and 15 per cent. by Wilmar International Limited ("Wilmar"), to China Natural Gas Investment Limited ("CGI"), a subsidiary of CGH, for a total consideration of US$400 million, comprising US$200 million upon completion of the FGIH Sale Agreement and a further US$200 million of deferred consideration (the "Deferred Consideration").

On 27 June 2013, due primarily to a delay in receiving approval from the Anti-Monopoly Bureau of the Ministry of Commerce of the People's Republic of China ("MOFCOM"), the Company announced that it, Wilmar and CGI and the other parties to the FGIH Sale Agreement had entered into a supplementary agreement to extend the date by which the conditions of the FGIH Sale Agreement must be satisfied from 30 June 2013 to 30 September 2013.

On 12 August the Company announced that MOFCOM approval had been received in respect to the FGIH Transaction and completion is expected to occur during Q3 2013.

By written notice to CGI between 1 November 2013 and 31 December 2013, the Company (through its subsidiary Fortune Oil PRC Holdings Limited) may elect to receive the Deferred Consideration by way of shares in CGH in accordance with the terms of the FGIH Sale Agreement. The issue of shares in CGH as the Deferred Consideration is subject to approval of the board of directors of CGH and listing permission from the Hong Kong Stock Exchange. Where the Company does not exercise the right, or where the right is exercised but the conditions for the issue of shares in CGH are not satisfied, such cash amount (being the Deferred Consideration plus interest) will be payable within 30 days of either 31 December 2013 or the date on which CGH is aware that one or both of the conditions are not satisfied, respectively.

Wilmar entered into an agreement with First Marvel Investment Limited ("First Marvel"), effective as of 23 July 2013, pursuant to which, for cash consideration of US$60 million, First Marvel agreed to accept all the rights and benefits and to perform and discharge all liabilities and obligations of Wilmar under the FGIH Sale Agreement (to the extent relating to the period after completion of such agreement).

First Marvel a wholly-owned subsidiary of Fortune Dynasty Holdings Limited. FDH is a joint venture company owned 55 per cent. by First Level Holdings Limited, a company controlled by Daniel Chiu, executive vice chairman and a director of the Company, and 45 per cent. by Vitol Energy (Bermuda) Limited, a member of the Vitol Group of companies of which Ian Taylor, a non-executive director of the Company, is president and chief executive officer.

The Company entered into a deed of assignment and novation on 6 August 2013 between the parties to the FGIH Sale Agreement and First Marvel under which the rights and obligations of Wilmar under the FGIH Sale Agreement were assigned and novated to First Marvel effective as from completion of the FGIH Sale Agreement.

On 7 August 2013, the Company entered into a sale and purchase agreement (the "SPA") and an unsecured fixed rate loan note instrument (the "Loan Instrument") with FDH.

Under the SPA, the Company has conditionally agreed to purchase from FDH the entire issued share capital of FDH wholly-owned subsidiary, First Marvel for a consideration of US$60 million (the "Proposed Acquisition"). The consideration payable by the Company for First Marvel will be satisfied by the issue to FDH of 500,266,580 new ordinary shares of 1 penny each in the share capital of the Company at an issue price of 7.81 pence per ordinary share ("Ordinary Shares"). The SPA is conditional upon, among other things, the passing of the Rule 9 waiver resolution pursuant to the UK Takeover Code.

Under the Loan Instrument, FDH has agreed to subscribe in cash at par for US$12 million nominal amount of fixed rate unsecured loan notes issued by the Company (the "Loan Notes"). The Loan Notes have a maturity date of 7 February 2014. Interest is payable on the Loan Notes at a rate of 7 per cent. per annum (with an additional 2 per cent. in respect of default interest), such interest accruing daily and calculated on the basis of a 365-day year. The proceeds of the Loan Notes will be used for near-term capital expenditure and for general working capital purposes. The Loan Notes are repayable in cash.

The Company and FDH propose, subject to the UK Takeover Panel agreeing to waive the requirements of Rule 9 of the UK Takeover Code and the passing of the Rule 9 waiver resolution, to modify the Loan Instrument to provide that the Loan Notes be settled by the issue of Ordinary Shares (the "Loan Settlement"). Upon the passing of the Rule 9 waiver resolution pursuant to the UK Takeover Code, in accordance with the Loan Settlement the Company will be obliged to redeem all the Loan Notes by issuing in exchange for almost the entirety of the principal amount of such redeemed Loan Notes 99,373,000 Ordinary Shares at an issue price of 7.81pence per Ordinary Share (the same issue price as for the Ordinary Shares issued in connection with the Proposed Acquisition described above). All accrued interest plus the remainder of the principal amount not repaid by the issue of the Ordinary Shares on the redeemed Loan Notes at the date of such redemption will be paid in cash to the holders of the Loan Notes. If the Rule 9 waiver resolution is not passed then the Proposed Acquisition will not occur, the Loan Instrument will not be amended and the Company shall redeem the outstanding Loan Notes in cash at par together with accrued interest (including any accrued default interest and, in so far as required, after deduction of tax) in accordance with the terms of the Loan Instrument.

The reason for the entry into the Loan Instrument was the delay in receiving MOFCOM approval, and therefore completion of the sale of FGIH pursuant to the FGIH Sale and Purchase Agreement. The Company is required to continue to fund the working capital needs of FGIH, including certain material near term capital expenditure necessary to progress FGIH with a view to achieving the minimum profits guaranteed by the Company under the FGIH Sale and Purchase Agreement. This will ensure that the Company receives a maximum value for the sale of FGIH, whose growth will be to the benefit of all shareholders of the Company. It is expected that these proposals will ultimately provide additional sources of demand for, and improve the marketability of, the ordinary shares of Fortune Oil.

These developments are in line with our stated strategic objectives for participation in the Chinese natural gas supply market.

OIL BUSINESS

Aviation Refuelling (South China Bluesky Aviation Oil Company)

The Bluesky joint venture achieved jet fuel volume growth of 11 per cent. to 1.6 million tonnes with revenues of £1,100.9 million (H1 2012: £980.1 million), resulting in net profits of £21.3 million in H1 2013 (H1 2012: £24.3 million). The reduction in profit contribution from Bluesky is a result of inventory stock losses due to the reduction in aviation fuel prices during the period. Bluesky is committed to keeping sufficient storage to supply jet fuel at each of its airports for approximately two weeks to ensure that operations remain uninterrupted. We remain confident in achieving a good performance in 2013 due to the continued strong demand for domestic air travel in China.

Maoming Single Point Mooring

We continue to make good progress in finalising the arrangements with Sinopec, our joint venture partner, for a replacement structure for the Maoming SPM partnership, for which the existing joint venture period expired in February 2013. Management remains optimistic of a satisfactory outcome to these discussions, and although under the new structure, the Company will no longer hold a controlling equity stake in the Maoming SPM joint venture, the scope of the joint venture with Sinopec will be expanded. Since the joint venture contract expired in February 2013 the Maoming SPM business has been deconsolidated and the net amount expected to be recovered on dissolution of the joint venture has been recognised as "receivable on dissolution" on the balance sheet as at 30 June 2013.

The SPM facility continues to operate efficiently and with an accident-free and spill-free record. Financial results up until the date of contract expiry are presented as discontinued operations and the Company will not include the financial or operating performance post the joint venture expiration date in its results until the new joint venture agreement is in place. The new joint venture is expected to be an associate to the Group, and equity accounting should be adopted once the joint venture has been set up. 

Products Terminal and Supply

The performance of the West Zhuhai Products Terminal (South China Petroleum Company) improved during 2013 with increased utilisation. Volumes increased by 22 per cent. in the first half of 2013 to 1.4 million tonnes (H1 2012: 1.1 million tonnes). The profit contribution to Fortune Oil increased to £0.6 million compared to £0.4 million in H1 2012.

This terminal continues to play an important role for PetroChina given its strategic position in the downstream business in Southern China. Options to diversify the terminal's customer base continue to be evaluated.

TRADING BUSINESS

The Trading Business continues to focus on oil and petrochemicals products with turnover for the period remaining virtually unchanged at £45.6 million (H1 2012: £45.7 million). Profits from operations amounted to £0.2 million in H1 2013 (H1 2012 £0.5 million).

The trading business continues to explore options for the expansion of the types of products that it trades. The Company obtained one of the first licences issued in China to enable the supply and trading of diesel and other refined products and agreement has been reached with Tianjin Gas Company to supply LNG to the city of Tianjin via the LNG import terminal.

RESOURCES 

Design work has continued on the Hrazdan iron ore mine and ore beneficiation plant. Sinosteel is progressing basic engineering design work with a focus on reducing the capital expenditure requirements of the ore beneficiation plant. SRK Consulting (UK) and Sinosteel are carrying out additional test studies to reduce the land requirements of the tailings and waste rock areas and reduce capital expenditure requirements. Fortune Oil is also evaluating the Abovyan and Svarants iron ore assets and has met fully the requirements of the exploration licenses of both of these assets to ensure that none of the licence area is relinquished through non-performance.

Fortune Oil has met with several key Armenian government officials and the Armenian and Georgian railway companies to discuss the need for cost competitive transportation to ensure that the potential iron ore from the Hrazdan mine can be transported economically to the key target markets in the region. A triparty memorandum of understanding has been signed between Fortune Oil, the Armenian railway company and the Georgian railway company and a joint working team established to achieve this.

Fortune Oil is in discussions with a number of customers in the neighbouring countries for an iron ore off-take from the Hrazdan mine. Transport costs will be reduced significantly if the iron ore concentrate product can be sold to local steel producers avoiding the need to export overseas.

The target is to have completed the basic engineering design in Q4 2013 and to have finalised product off take and transportation agreements to ensure the economic viability of developing the Hrazdan mine under long term iron ore price projections, which have continued to soften as key demand centres, particularly China, slow down.

FINANCIAL REVIEW

Disposal group held for sale and discontinued operations

The assets and associated liabilities of the Group's natural gas business upon completion of the FGIH Transaction, have been classified in the balance sheet as held for sale as at 30 June 2013. As a consequence of this classification and since the Maoming SPM business is undertaking a dissolution procedure following the expiration of the joint venture contract in February 2013, the results of the Group's natural gas business and the Maoming SPM business are presented as discontinued operations in the income statement and cash flow statement for the period ended 30 June 2013, and the results for the period ended 30 June 2012 have been presented on the same basis.

In order to provide a comprehensive review of all of the Group's operations, on a basis comparable with that provided to shareholders in previous periods, the discussion of financial results below relates to continuing operations and discontinued operations combined. The income statement also distinguishes the results of discontinued operations from those of continuing operations.

Revenue and Expenditure

Revenue from all operations including the Group's share of jointly controlled entities increased by 10 per cent. to £372.0 million in H1 2013 from £338.8 million in H1 2012. This was largely driven by the growth in the Group's aviation refuelling and the natural gas businesses, netting off the sharp decrease in the SPM business, due to the fact that no revenue has been included from the time of the expiry of the existing joint venture agreement in February 2013. Group revenue from all operations excluding jointly controlled entities has also increased slightly to £88.4 million in H1 2013 from £87.8 million in H1 2012.

Operating profit from all operations combined, before the gains on disposals, decreased to £12.8 million in H1 2013, compared with £14.3 million in H1 2012, a decrease of 10 per cent. The decrease was mainly due to the combined effect of the inventory loss in aviation refuelling as a result of aviation fuel price movement, exclusion of the result of the Maoming SPM facility from the time of expiry of the joint venture agreement, and partly netting off by the steady growth in the natural gas business.

The net profit from all operations attributable to owners of the parent was £6.1 million in H1 2013, a decrease of 42 per cent compared with £10.5 million in H1 2012. The Group did not realise a gain on disposal in H1 2013 compared to a gain on disposal of £4.6 million in H1 2012 when the Group disposed of its available for sale investments in respect of shares held in China Gas Holdings Limited ("CGH"), a listed company on the Hong Kong Stock Exchange. The shares were held by a wholly owned subsidiary and were sold to China Gas Group Limited ("CGG"), a jointly controlled entity.

The underlying net profit from all operations attributable to owners of the parent before gains on disposals was also £6.1 million in H1 2013, an increase of 5 per cent. compared with £5.9 million in H1 2012. Earnings per share from all operations decreased to 0.32 pence in H1 2013, compared with 0.55 pence in H1 2012 as the prior year included gains on disposals.

Net profit from continuing operations was £1.1 million in H1 2013, a decrease of 83 per cent. compared with £6.5 million in H1 2012. Earnings per share from continuing operations decreased to 0.06 pence in H1 2013, compared with 0.34 pence in H1 2012. This is mainly due to the aforementioned gain on disposal of £4.6 million in H1 2012 and the decrease in profit contribution from the aviation refuelling business.

Other comprehensive income

Other comprehensive income from all operations was £88.1 million in H1 2013, compared with the other comprehensive loss from all operations of £2.6 million in H1 2012. This is mainly due to the net gain of £74.6 million in fair value of available for sale investments in respect of CGH shares held by CGG, together with the effect of exchange differences arising on translation of foreign operations of the Group.

Capital expenditure

During the period, the Group invested £7.5 million as capital expenditure, which mainly consisted of the expansion of gas pipeline networks, construction of LNG/CNG refuelling stations, and additions to exploration and evaluation assets in respect of the iron ore mining licence in Armenia.

Financial Position

The net assets of the Group as at 30 June 2013 were £327.4 million, compared with £246.8 million as at 31 December 2012. Investments in jointly controlled entities of the Group at 30 June 2013 were £252.9 million (including the investments as at 31 December 2012 in jointly controlled entities of £44.1 million in the natural gas business), compared with £175.4 million (including the investments in jointly controlled entities of £39.8 million in the natural gas business). The increase was mainly the result of the revaluation of CGH shares (£74.6 million) disclosed within "other comprehensive income" above.

The net borrowing position as at 30 June 2013 was £69.3 million (after excluding a net cash of £12.0 million in the natural gas business) compared with £61.1 million (after excluding a net cash of £13.1 million in the natural gas business) as at 31 December 2012. However, with a cash balance of £46.8 million (after excluding a cash balance of £22.8 million in the Group's natural gas business) as at 30 June 2013, together with the loan from Fortune Dynasty Holdings Limited of US$12 million (or £7.9 million) and the anticipated cash consideration received from CGH transaction after the period end the Group envisages no difficulties in meeting both current loan repayment obligations and investment commitments.

As a result of repayment of the syndicated loan during the period, the net gearing ratio (after deduction of cash) for the Group was 21 per cent. as at 30 June 2013 and 25 per cent as of 31 December 2012.

Financial Costs and Tax

Finance expenses for the Group from all operations were£2.5 million in H1 2013, compared with £3.3 million in H1 2012, mainly due to the decrease in the weighted average Group borrowing throughout the period.

The Group's total tax charge in H1 2013 from all operations was £2.9 million (H1 2012: £3.0 million) representing an effective tax rate of 27 per cent. compared with 25 per cent. (when excluding the non-taxable capital gains on disposal of £4.4 million) in H1 2012.

Foreign Exchange

The revenues and expenses of the Group are mainly denominated in China's renminbi (RMB). The remaining expenses are denominated either in pound sterling (£) or in Hong Kong dollars (HK$), which is pegged to the US dollar, or in US dollars (US$). On average for the six months ended 30 June 2013, the RMB appreciated against the US$ by 2.2 per cent. and the pound sterling depreciated by 3.2 per cent. against the US$, hence there was an overall 5.3 per cent. depreciation of the pound sterling against the RMB. This currency movement has had the effect of increasing our profits as measured in pound sterling.

The assets and liabilities of the Group are also primarily denominated in RMB, with our Armenian investment being denominated in US$. The remaining balance, which represents a small proportion of the assets and liabilities, are denominated in pound sterling and HK$. Similar to the average rates, the closing pounds sterling depreciated against the RMB and US$ by 7.3 per cent. and 5.9 per cent., respectively.

The Group does not have a policy to hedge currency risk and therefore any changes in the RMB/£ exchange rate are likely to affect the Groups' results which are presented in pounds sterling.

Capital Structure

Most of the Group's investments and expenses take place in the People's Republic of China and are held through Fortune Oil PRC Holdings Limited, a wholly 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 Group's interests in Armenia are held through a separate investment structure. The Group's UK operations consist only of local representation as a direct expense to the Company.

Dividend

It is not generally the Company's policy to pay ordinary interim dividends although as a result of the proposed CGH transaction the Company is requesting that the shareholders approve the payment of a special interim dividend in 2013. A final dividend of 0.16 pence per ordinary share was paid to shareholders on 15 August 2013, in respect of 2012 financial year.

PRINCIPAL RISK AND UNCERTAINTIES

Our business is supplying China with energy and resources, principally oil and natural gas with a recent expansion into iron ore mines in Armenia. There are a number of potential risks and uncertainties which could have a material impact on the Group's performance over the remaining six months of the financial year and could cause actual results to different materially from expected and historical results. These risks have not changed since the date of Annual Report 2012, where the principal risks and uncertainties, their effects and our management strategy are detailed on pages 24 and 25 of that report.

The principal risks and uncertainties facing Fortune Oil's operations include: concentration risks, pricing risks, regulatory and relationships risks, health, safety and environment risks, attraction and retention of key employees, development risks, uninsured risks and investment risks.

GOING CONCERN STATEMENT

The Group's business activities and associated opportunities and risks are set out above in the "Business Review" and "Principal Risks and Uncertainties". The financial position of the Group, its cash flows and liquidity position is described in the Financial Review. In the management of liquidity risk, the Group monitors and maintains a level of cash and cash equivalents deemed adequate by the management to finance the Group's operation and mitigate the effects of fluctuations in cash flows. The Group expects to meet its capital expenditure requirements from medium term loan facilities and the cash consideration from CGH for the transaction in relation to the Group's natural gas business.

The current economic conditions may create uncertainty over:

· The level of demand for the Group's products and services

· International exchange rates that affect commodity prices and hence the Group's revenues in China as denominated in US dollars or pound sterling

· The availability of bank or equity finance in the foreseeable future

· Counterparty credit risk

As at 30 June 2013, the Group had a cash balance of £46.8 million (after excluding a cash balance of £22.8 million in the natural gas business) and a net borrowing position of £69.3 million (after excluding net cash of £12.0 million in the natural gas business). With the loan from Fortune Dynasty Holdings Limited of US$12 million (or £7.9 million) and the anticipated cash consideration received from CGH for the transaction in relation to the Group's natural gas business, the Group's current forecasts and projections, adjusting for reasonably possible changes in trading conditions, show that the Group will be able to repay the interest and principal payments in a timely manner and in accordance with loan agreements and to operate within the required covenants.

The Directors believe that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, Fortune Oil continues to adopt the going concern basis in preparing the half year report and accounts.

FORTUNE OIL PLC

Half Year Financial Statements

Consolidated Income Statement

FORTUNE OIL PLC

Half Year Financial Statements 

 Consolidated Statement of Comprehensive Income

FORTUNE OIL PLC

Half Year Financial Statements

Consolidated Statement of Financial Position

at 30 June 2013

FORTUNE OIL PLC

Half Year Financial Statements

 Consolidated Cash Flow Statement

FORTUNE OIL PLC

Half Year Financial Statements

 Consolidated Statement of Changes in Equity