FTO.L Regulatory News (FTO)

19 November 2013

FORTUNE OIL PLC

("Fortune Oil", the "Company" or the "Group")

Q3 2013 Interim Management Statement

Fortune Oil (LSE: FTO.L) focuses primarily on Chinese oil, natural gas and resource supply operations and investments and is listed on the London Stock Exchange.

Fortune Oil announces its Interim Management Statement for the period 30 June 2013 to date. Unless stated otherwise financial disclosures relate to the third quarter ended 30 September 2013.

Highlights

· Transfer of Fortune Gas International Holdings Limited ("FGIH") to China Gas Holdings Limited ("CGH") completed.

· Following completion of the acquisitions approved by Shareholders at the General Meeting First Level Holdings Ltd. and Vitol Energy (Bermuda) Ltd. hold 56.9 per cent of the Company.

· The Group's shareholding in China Gas Holdings through China Gas Group Limited was 15.26 per cent.

· Special dividend of 2.36p per share paid to shareholders.

· FGIH natural gas sales volumes increased 20.4 per cent to 422.1 million cubic metres for the period to the end Q3 (2012: 350.7 million cubic metres).

· CGH natural gas volume increased 22.7 per cent to 6,824.9 million cubic metres for the year ending 31 March 2013.

· Bluesky jet fuel sales volumes in Q3 2013 increased 13 per cent to 884,000 tonnes (Q3 2013: 780,000 tonnes).

· US$300 million (£188 million) loan facility signed to aid future expansion of the group.

· The Board remains optimistic with regard to Fortune Oil's prospects, with signs that China's economic growth rate is accelerating in the second half of 2013.

OPERATIONAL OVERVIEW

Corporate Matters

The Company has completed the transfer of FGIH to CGH and the two companies' natural gas businesses are in the process of completing the integration.

Shareholders approved the acquisition of Wilmar International Limited's interest in the consideration receivable as a result of the disposal of FGIH. The total consideration was US$60 million payable to Fortune Dynasty Limited ("FDH") in Ordinary Shares in Fortune Oil (the "Acquisition").

Shareholders also approved the amendment to the terms of the loan from FDH to Fortune Oil of US$12 million, such that it was repaid in Ordinary Shares in Fortune Oil (the "Loan Settlement").

Fortune Oil obtained from the UK Takeover Panel and from the independent shareholders of the Company a waiver of the requirement of Rule 9 of the UK Takeover Code for a general offer to be made for the Company by persons who, as a result of receiving Ordinary Shares through the Loan Settlement and completion of the Acquisition, would own more than 56.9 per cent of the Company's issued share capital.

China Gas Group, the joint venture company in which the Company has a 50 per cent interest, owns 732,446,000 CGH shares, representing 15.26 per cent of CGH total issued shares. As at 18 November 2013 the joint venture and its associates held 1,011,550,000 shares in CGH representing 21.07 per cent of CGH total issued shares making the joint venture and its associates the second largest shareholder of CGH (as at 31 October 2013 CGH's total issued shares 4,801,095,098). 

Natural Gas Business

The natural gas business continues to benefit from China's robust economy and thriving natural gas demand. The Company has steadily expanded its upstream and midstream operations as well as its downstream city-gas and refuelling operations. Through our shareholding and strategic partnership with CGH, the Company is one of the largest natural gas companies in China supplying gas to 195 cities with a strong platform for future growth. In FY 2013 CGH supplied over 7 billion cubic metres of natural gas to cities with an urban population of over 65 million people.

· FGIH natural gas sales volumes increased 20.5 per cent to 135 million cubic meters in the third quarter (Q3 2012: 112 million cubic meters). Total Gas sales of 422.1 million cubic metres for the year to date, an increase of 20.4 per cent compared to the same period in 2012 (350.7 million cubic metres).

· FGIH new natural gas supply connections increased by 3 per cent to 52,489 in Q3 (Q3 2013: 51,170). The total number of connected customers is now over 300,000.

· Construction has continued on the first permanent LNG ship refuelling station on the Yangtze River near Chongqing, having achieved a major first in China in obtaining the regulatory approvals for commercial operations. The Company is currently planning to open three LNG refuelling stations to cover the length of the Yangtze River.

· CGH natural gas sales volumes increased 22.67 per cent to 6,824.9 million cubic metres for the financial year ending 31 March 2013. During the same period CGH increased the number of residential customers by 17.4 per cent to 8.4 million, industrial customers increased 32.3 per cent to 2,155, and commercial customers increased 15.2 per cent to 49,895. A further 37 CNG/LNG stations were also added to the CGH network.

The Chinese government continues to encourage the expansion of natural gas supply to meet the 12th Five Year Plan target to increase gas usage in China to 8 per cent of the energy mix from the current level of approximately 5 per cent. On this basis, it is expected that natural gas supply in China will increase by 20 per cent per year to surpass 260 billion cubic metres by 2015. Despite the economic slowdown China natural gas demand in the first half of 2013 rose 13.1 per cent to 81.5 billion cubic metres according to the National Development and Reform Commission.

Upstream Coal Bed Methane ("CBM")

Fortune Oil continues to make progress at its Liulin CBM operations and the project remains on track for first commercial gas sales by the end of the current year.

· The gas gathering system on the northern area is over 95 per cent completed and linked to the CNG wholesale station where the CBM will be dispatched for sale.

· We have completed the Overall Development Plan ("ODP") reports for the subsurface, surface and project economics and these are being reviewed by China United Coalbed Methane Corporation ("CUCBM").

· Two new wells have been drilled during 2013 and work is in progress to prepare the well sites for two directional and two horizontal wells with drilling planned to commence in Q4 2013.

· FLG currently has five inseam wells on line and together with the CUCBM wells will produce the gas for dispatch through the gas gathering system with the aim to commence commercial gas sales next month.

Oil Business

The Oil business continues to be a strong cash generator for the Group underpinned by the continued strong demand for domestic air travel in China.

· Bluesky jet fuel sales in Q3 2013 were 884,000 tonnes, representing an increase of 13 per cent over the same period in 2013 (780,000 tonnes), with total jet fuel sales of 2.45 million tonnes for the year to date, an increase of 12 per cent compared to the same period in 2012 (2.19 million tonnes).

· The main commercial arrangements for the replacement structure for the Maoming Single Point Mooring ("SPM") partnership have been agreed between Fortune Oil and Sinopec and the two parties are awaiting final approvals from the regulatory agencies in the Peoples Republic of China.

· In Q3 2013, West Zhuhai Terminal's volume throughput decreased by 18 per cent to 511,000 tonnes compared to the same period in 2013 (623,000 tonnes) with total throughput of 1.9 million tonnes for the year to date, an increase of 8 per cent compared to the same period in 2012 (1.76 million tonnes).

Trading Business

The trading business supplies and trades oil and petrochemical products

· In the year to date the total quantity of traded base oils and petrochemicals increased by 20 per cent to approximately 146,261 tonnes compared to 121,570 tonnes for the same period in 2012.

Resources Business

As part of its stated strategy Fortune Oil is pursuing overseas investment opportunities to capitalise on China's growing demand for energy and resources. Work on the Armenian iron ore projects continues to determine whether these assets can be developed economically.

· The rail cost continues to be the major issue which is currently undermining the commercial viability of these projects. The current tariffs in Georgia and Armenia need to be reduced significantly to ensure the iron ore concentrate product can be sold cost competitively.

· Sinosteel completed the basic engineering design with the focus on reducing the capital expenditure requirements of the Hrazdan iron ore beneficiation plant, tailings and waste rock areas.

FINANCIAL PERFORMANCE

Financial Position

On 18 October 2013, the Company announced the signing of a loan agreement with various financial institutions arranged by Morgan Stanley. The facility size is US$300 million (£188 million) with a term of three years and a margin of 2.75 per cent over LIBOR. The new facility has been used to repay the existing syndicated loan, and will provide working capital to the Group, and finance new investment.

The Group's balance sheet remains strong and healthy. Fortune Oil monitors and maintains a level of cash and cash equivalents considered adequate by management to finance the Group's operation and repayment of bank loans and investment commitments for the foreseeable future.

As a result of the completion of the FGIH transaction, CGH is treated as an associate to the Group and equity accounting has therefore been adopted.

On 25 September 2013 shareholders approved an ordinary resolution to pay a special interim dividend of 2.36p per share. This dividend was paid to shareholders on 25 October 2013.

MANAGEMENT

The Company announced on 13 November 2013 that Mr. Tee Kiam Poon has resigned as an Executive Director of the Company to be effective from 31 December 2013 and he will cease to hold the office of the Chief Executive of the Company with effect from 1 January 2014. Mr. Tee confirmed that he has no disagreement with the Board and the Company and there is no matter in relation to his resignation that needs to be brought to the attention of the shareholders of the Company.

With the changes in the Group's business structure following the completion of the CGH transaction, the move of certain management to manage and monitor activities at CGH and other changes associated with SPM and Armenia, the Board is considering what changes are necessary in the structure of its management. A further announcement on the constitution and structure of the management team going forward is likely to be made in Q1 2014.

The completion of the CGH transaction has altered the Group's risk profile with a greater part of its assets no longer being controlled by the Group and its income and cash flow having a higher dependence on activities within non-controlled entities. The Group will be considering its risk assessment and monitoring to ensure that they adapt to this new situation.

OUTLOOK

Overall business performance is in line with expectations. The Board remains optimistic with regard to Fortune Oil's prospects, with signs that China's economic growth rate is accelerating in the second half of 2013.

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Background on Fortune Oil

Fortune Oil is a leading independent energy company engaged in the investment and operations of oil and natural gas supply projects in China. With over 20 years of operating history in China, Fortune Oil has acquired a unique portfolio of high quality oil and natural gas projects across the country and has formed a strong partnership with domestic and international market leaders. Fortune Oil recently started an expansion outside China securing resource projects. Fortune Oil is listed on the London Stock Exchange with its operational headquarters in Hong Kong.