28 Aug 2008 07:00
| FOR IMMEDIATE RELEASE | 28 August 2008 |
MELROSE RESOURCES PLC
("Melrose" or "the Company")
Unaudited Interim Results for the six months to 30 June 2008
Melrose Resources plc (LSE: MRS) the oil and gas exploration, development and production company with interests in Egypt, Bulgaria, the United States of America, France and Turkey, today announces its unaudited interim results for the six months to 30 June 2008.
Operational Highlights
Financial Highlights
Interim dividend of 1.2 pence per share
Commenting on this, Robert Adair, Executive Chairman, stated:
"Melrose's financial and operational results for the first half of the year are excellent. A significant increase in production to an average daily net rate of 21.3 Mboepd has driven a 209% increase in our revenue, resulting in EBITDAX of $213 million for the period.
We have also successfully continued our active exploration and development programme and have already achieved over 150% reserves replacement of our forecast full-year production. We are continuing with the programme and will drill six more exciting exploration prospects by year end. We look forward to the future with confidence."
For further information please contact:
| Melrose Resources plc David Thomas, Chief Executive Robert Adair, Executive Chairman Munro Sutherland, Finance Director | 0131 221 3360 or 07799 061171 07872 930114 0131 221 3360 |
| Buchanan Communications Ben Willey Ben Romney | 0207 466 5000 |
or visit www.melroseresources.com Chairman's statement
In the first half of 2008 Melrose has, as anticipated, achieved a significant increase in production and revenue. This is reflected in exceptional financial performance with EBITDAX increased by 258% to $213.1 million and profits after tax of $76.0 million. At the same time we have enhanced our portfolio of exploration, appraisal and development projects and we are well positioned for continued growth in the future.
Egypt
Increased production from our Egyptian oil and gas fields has now built a platform of revenue and cash flow which will fund our continuing exploration and development activities in the country. The two main fields, the West Dikirnis oil and gas field and the West Khilala gas field, are performing well. They are both fields with excellent reservoir qualities and they will underpin the Company's production profile for a number of years. A number of smaller fields also contributed to our strong production performance in Egypt most notably the El Tamad oil field, which continues to exceed expectations.
Phase I of the West Dikirnis development was completed in January and we are now moving forward with the Phase II development of the field which is designed to maximise the recovery of hydrocarbon liquids. Phase II involves a number of integrated projects including the drilling of horizontal oil production wells, the installation of an LPG plant to recover high-value propane and butane liquids from the produced gas stream and the installation of facilities to re-inject gas into the reservoir to maintain the pressure during the initial oil production phase. The work programmes are well advanced; the first horizontal well is currently being drilled and facilities work should be largely completed by mid-2009.
These projects should extend the field's liquids production plateau rate of around 10 Mboepd through to late-2010 and increase the field's ultimate proven plus probable reserves above the current estimate of 41.5 MMboe. The new facilities will also provide other environmental and strategic benefits since they will eliminate the need for gas flaring at the West Dikirnis facilities and the LPG plant will also be used to treat gas from other Melrose fields.
In parallel with our development activities on West Dikirnis, we have also successfully drilled a sidetrack to the Qantara No.4 production well and concluded that it will be possible to re-establish production from the Qantara field facilities which had previously been shut-in. The well was flow tested at a rate of 7.0 MMcfpd of gas and 1,210 bpd of condensate and the gross reserves are estimated at 3.5 Bcf of gas and 390 Mbbls of liquids. Given the high condensate yield and the high gas price provided for in the Qantara concession agreement (equivalent to approximately $14 per Mcf at an oil price of $100 per bbl) the production facilities are being reactivated and production is expected in October this year.
We are also moving ahead with two new development projects at our South Zarqa and North East Abu Zahra fields, which contain combined gross reserves of 59 Bcf and 1.2 MMbbls of liquids. Government approval has been received for the field development plans and they will be produced via a common 10" pipeline tied back to Melrose's South Batra facilities. First production from the fields is expected in the second quarter of 2009.
In the first half of 2008 we continued with our active exploration drilling programme in Egypt and drilled five wells, two of which were commercial discoveries. More recently, we have drilled two further exploration wells Ghizala No.1 and Ar Rub No.1, both of which failed to encounter commercial hydrocarbons.
The two commercial discoveries were made with the East Abu Khadra No.1 and Damas No.1 wells and these were tested at 13.0 MMcfpd of gas with 182 bpd of condensate and 14.3 MMcfpd of gas with 105 bpd of condensate, respectively. The combined reserves for these discoveries are estimated to be at least 25 Bcfe and both discoveries are being fast tracked to production. East Abu Khadra will be tied back to the South Batra facilities and should come on stream in October 2008 and Damas will be tied back to the South Mansoura facilities with first production in March 2009.
Our programme of seismic acquisition has continued in 2008 with a further 712 km of 2-D data and 109 km2 of 3-D data acquired so far over the South East El Mansoura Concession. Initial interpretation of the data has confirmed the extension into this concession of the exploration trends we have already established in the El Mansoura Concession to the north. In addition, we have already identified a number of leads and prospects in the older Cretaceous and Jurassic formations which have proven to be prolific producing horizons in Egypt's Western Desert.
Based on our available seismic and well data, there appears to be significant remaining exploration potential in the Nile Delta area in a variety of play types and geologic horizons. The analysis of recent well results has indicated, however, some increased drilling risks associated with a particular play type in the Sidi Salim formation which relies on fault seals as a primary trapping mechanism for the prospects. We are therefore focusing our near term drilling programme on structural exploration prospects which do not rely on sealing faults and oil field development and appraisal activity. The 12-month drilling programme contains seven exploration, three development and two appraisal wells and the exploration wells are targeting gross risked reserves of 230 Bcfe. Beyond mid-2009, we expect to be in a position to include additional wells in the programme to start exploring the Cretaceous and Jurassic horizons in South East El Mansoura.
In our Mesaha exploration concession in Upper Egypt we have continued to gather regional geological data and we are now preparing plans for the acquisition of a 2-D survey over part of the concession during late 2008 or early 2009.
Bulgaria
The Galata gas field, offshore Bulgaria, has produced approximately 85% of its estimated ultimate recoverable reserves and is now entering its final year of planned production. In recognition of this we are moving rapidly forward with our plans to convert the field into a gas storage facility, which has the potential to add significant shareholder value.
The storage project has strong support from the Bulgarian Government, who wish to supplement the country's existing gas storage capacity, and a joint feasibility study we conducted with the state-owned gas company, Bulgargaz, has concluded that the Galata field is well suited for conversion to a storage facility due its high-quality reservoir, infrastructure configuration and location.
We envisage developing the project in three phases, building the storage capacity from 0.7 Bm³ to 1.2 Bm³ and finally to 1.7 Bm³. The first phase will cost approximately $30 million to reconfigure the existing field compression facilities, tie-back the suspended Galata East No.2 well and install metering and filtering equipment. Commercial negotiations regarding the appropriate tariff structure and levels are ongoing with the Bulgarian authorities who have indicated their desire to commence first gas injection during 2009.
In December 2007 Melrose was re-awarded the Block Galata exploration concession which lies in the area around the Galata field production concession. We immediately drilled the successful Kaliakra exploration well which targeted a structure analogous to the Galata field. The well encountered a high quality reservoir section and was then suspended for future use as a production well. We are now proceeding with a field development plan under which the well will be completed and tested in late 2008 and tied back to the Galata platform using a 6" flow line in the first half of 2009. Production from the field will be integrated with the planned Galata gas storage project.
Also during the fourth quarter of this year, we plan to drill an exploration well on one of the other three prospects which lie on the Galata-Kaliakra exploration trend. This trend is estimated to contain around 72 Bcf of unrisked reserves in addition to the Kaliakra discovery volumes.
USA
Work on the infill drilling and waterflood programme on our leases in the Permian Basin in New Mexico and West Texas has commenced and is continuing at pace with some positive early results.
The planned drilling programme in the Jalmat field began in February 2008 and by mid-year 13 new wells had been drilled, 4 producers and 9 injectors, and 4 old wells had been converted to injection. Two of the new injectors have temporarily been put on production to take advantage of high initial oil flow rates and these will be converted to injection later. On the Turner Gregory field, we have completed various surface equipment improvements including the replacement of undersized pump units and pump station upgrades. We contracted a second drilling rig to work on this field and the first of 17 planned new wells was spudded in early August. On the Artesia unit, we are preparing for the waterflood with the construction of a new tank battery and water injection facilities and expect to start drilling early in 2009.
In parallel with the operational activity, we have completed a technical review of our Permian Basin leases and as a result have increased our net proved oil and gas reserves by 3.2 MMboe and added new probable and possible reserves of 5.2 MMboe and 15.1 MMboe, respectively. The proven and probable reserves increases are primarily associated with completing the full waterflood programme at a 20 acre well spacing and the possible reserves may be accessed at a reduced 10 acre well spacing.
In East Texas, an active exploration programme is underway. In June we drilled the successful Holmes No. 4 well, which added estimated gross gas reserves of 10.2 Bcf. This well has already been tied back for production and is currently flowing at 9 MMcfpd of gas with 240 bpd of condensate and we are maturing similar prospects in the area for possible drilling next year. Two exciting multi-target exploration wells, Nunan No.1 and Ramsey No.1, are also planned on our Harris County acreage later this year with the first well expected to spud around the end of September. The combined unrisked reserves being tested by these wells is over 140 Bcfe.
The combined effect of the Permian Basin upgrade and Holmes No.1 discovery is to raise the Company's US proven plus probable reserves base to 25.4 MMboe, representing a 66% increase compared with our booked year-end 2007 volumes (before accounting for production).
Turkey
In September 2007, Melrose and our joint-venture partner, GYP, were awarded eight exploration concessions in the South Mardin basin in south-east Turkey on the border with Syria. We are now planning a 2-D seismic acquisition programme over some high graded areas on the blocks and we expect this to be completed early in 2009. We have been encouraged recently by a significant oil discovery on a block to the north of our concessions in a similar geologic setting and Palaeozoic reservoir horizon to the leads on our blocks.
France
Our recent exploration work programme in the Rhône Maritime permit has focused on attempting to establish the presence of an active petroleum system within this frontier basin using sea-bed surveys and hydrocarbon seep analysis techniques. Our most recent survey completed in June has given some encouragement and we are currently in the process of a farm-out exercise with a view to attracting an industry partner to participate in a seismic programme in the area.
Financial Results
The financial results for the half year reflect our strong operating performance with production increased by 47% to an average of 21.3 Mboepd during the period. EBITDAX increased by 258% to $213.1 million and we made a profit after tax of $76.0 million compared with a loss last year.
During the period we improved the Company's credit rating to B/B2 and increased our committed bank facilities to $510 million, with an averaged interest rate of approximately 3.2 per cent above US$ LIBOR. The new increased facilities, coupled with our strong cash generation, provide us with ample financial resources to implement a very active exploration and development work programme.
To reflect our strong financial performance and in line with our progressive dividend policy, we are introducing an interim dividend of 1.2 pence per share which will be paid on 17 October 2008 to shareholders on the register on 19 September 2008. Subject to continued favourable trading results, we expected to propose a final dividend for the year of at least 1.6 pence per share.
Outlook
This year the Company has achieved record production levels and our production forecast for the year on a working interest basis remains unchanged at 38.5 Mboepd. In the first half we also benefitted from unusually high product prices which significantly increased revenue generation in all of our core areas. In Egypt this has allowed us to accelerate the recovery of past costs in the El Mansoura concession and, as a result, in the second half we will receive a lower share of production under the terms of our concession agreements. Accordingly, we are revising our group net entitlement full-year production forecast down by 4% to 19.2 Mboepd but the net effect of the higher oil prices and the reduced production share is positive for Melrose from a financial perspective.
The results of our recent exploration programme have been encouraging and with the significant reserves upgrades in the USA and the additional potential of the Galata gas storage project the long term outlook for the Company is extremely positive. In the short term, we intend to drill six exploration prospects in the USA, Egypt and Bulgaria by year end and these have the potential to add material value to the Company. We have in place the asset portfolio, the financial resources and, most importantly, the people we need to look forward to the future with confidence.
Robert F M Adair
Chairman
27 August 2008
Financial Review
Results for the six months ended 30 June 2008
Revenue in the six months ended 30 June 2008 was $234.0 million (six months ended 30 June 2007 $75.8 million). Operating profit was $151.8 million (six months ended 30 June 2007, loss of $16.6 million). Profit before taxation in the first half was $134.2 million (six months ended 30 June 2007, loss of $34.3 million). Profit after taxation was $76.0 million (six months ended 30 June 2007, loss of $41.3 million). A dividend of 2.1 pence per share in respect of the year ended 31 December 2007 was approved by shareholders at the AGM held on 12 June 2008.
Net daily production statistics and product pricing information during the period were as follows:
| 6 months ended 30 June 2008 | 6 months ended 30 June 2007 | 12 months ended 31 December 2007 | ||||||
| Production | Gas MMcfpd | Oil/liquids/ condensate bpd | Gas MMcfpd | Oil/liquids/ condensate bpd | Gas MMcfpd | Oil/liquids/ condensate bpd | ||
| Bulgaria | 28.0 | - | 29.2 | - | 27.7 | - | ||
| Egypt | 62.0 | 5,008 | 43.0 | 941 | 47.8 | 1,046 | ||
| USA | 3.9 | 681 | 5.4 | 650 | 4.6 | 619 | ||
| Total | 93.9 | 5,689 | 77.6 | 1,591 | 80.1 | 1,665 | ||
| MMcfepd | 128.0 | 87.1 | 90.1 | |||||
| Prices | Gas $/Mcf | Oil/liquids/ condensate $/bbl | Gas $/Mcf | Oil/liquids/ condensate $/bbl | Gas $/Mcf | Oil/liquids/ condensate $/bbl | ||
| Bulgaria | $5.27 | - | $3.78 | - | $4.23 | - | ||
| Egypt | $2.70 | $106.90 | $2.67 | $58.38 | $2.66 | $64.61 | ||
| USA | $10.34 | $105.00 | $7.23 | $54.21 | $7.05 | $64.76 | ||
| Average | $3.78 | $106.67 | $3.40 | $56.67 | $3.46 | $67.18 | ||
EBITDAX for the period was $213.1 million (six months ended 30 June 2007, $59.5 million). Capital expenditures during the period amounted to $92.3 million (six months ended 30 June 2007, $98.7 million). Capital expenditures were split between Egypt - $64.6 million, Bulgaria - $12.1 million, USA - $14.9 million and Other - $0.7 million.
| EBITDAX | 6 months ended 30 June 2008 $000 | 6 months ended 30 June 2007 $000 | 12 months ended 31 December 2007 $000 | ||
| Profit/(loss) before taxation | 134,167 | (34,321) | (54,996) | ||
| Add back: | |||||
| Depletion | 50,606 | 31,993 | 71,124 | ||
| Decommissioning charge | 1,708 | 286 | 1,908 | ||
| Unsuccessful exploration costs | 8,674 | 43,595 | 60,887 | ||
| Depreciation | 364 | 292 | 805 | ||
| Net financing cost | 17,611 | 17,687 | 40,918 | ||
| EBITDAX | 213,130 | 59,532 | 120,646 |
Independent review
Introduction
We have been engaged by the company to review the condensed set of financial statements in the interim financial report for the six months ended 30 June 2008 which comprises the Condensed Consolidated Income Statement, the Condensed Consolidated Balance Sheet, the Condensed Consolidated Cash Flow Statement, Condensed Consolidated Statement of Recognised Income and Expense and the related explanatory notes. We have read the other information contained in the interim financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the Disclosure and Transparency Rules ("the DTR") of the UK's Financial Services Authority ("the UK FSA"). Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached.
Directors' responsibilities
The interim financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim financial report in accordance with the DTR of the UK FSA.
The annual financial statements of the company are prepared in accordance with IFRSs as adopted by the EU. The condensed set of financial statements included in this interim financial report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU.
Our responsibility
Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the interim financial report based on our review.
Scope of review
We conducted our review in accordance with the International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the interim financial report for the six months ended 30 June 2008 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FSA.
KPMG Audit Plc
Chartered Accountants
Edinburgh
27 August 2008
Consolidated income statement
for the six months ended 30 June 2008
| 6 months ended 30 June 2008 $000 | 6 months ended 30 June 2007 $000 | 12 months ended 31 December 2007 $000 | ||||
| Note | ||||||
| Revenue | 2 | 234,034 | 75,841 | 158,195 | ||
| Depletion | (50,606) | (31,993) | (71,124) | |||
| Decommissioning charge | (1,708) | (286) | (1,908) | |||
| Unsuccessful exploration costs | (8,674) | (43,595) | (60,887) | |||
| Other cost of sales | (12,286) | (9,846) | (21,516) | |||
| Total cost of sales | (73,274) | (85,720) | (155,435) | |||
| Gross profit/(loss) | 160,760 | (9,879) | 2,760 | |||
| Administrative expenses | (8,982) | (6,755) | (16,838) | |||
| Profit/(loss) from operations | 151,778 | (16,634) | (14,078) | |||
| Financing income | 878 | 1,080 | 1,463 | |||
| Financing costs | (18,489) | (18,767) | (42,381) | |||
| Profit/(loss) before taxation | 2 | 134,167 | (34,321) | (54,996) | ||
| Income tax expense | 3 | (58,127) | (7,000) | (8,218) | ||
| Profit/(loss) for the period | 76,040 | (41,321) | (63,214) | |||
| Earnings/(loss) per share (cents) | ||||||
| Basic | 4 | 69.1 | (38.6) | (58.2) | ||
| Diluted | 4 | 68.3 | (38.6) | (58.2) |
The profit for the period is 100% attributable to equity shareholders.
Note: All activities are continuing activities.
Condensed consolidated statement of recognised income and expense
for the six months ended 30 June 2008
| 6 months ended 30 June 2008 $000 | 6 months ended 30 June 2007 $000 | 12 months ended 31 December 2007 $000 | |||
| Exchange differences on non-functional currency entities | - | 57 | 49 | ||
| Cash flow hedges: Effective portion of changes in fair value | - | (378) | (358) | ||
| Deferred tax on cash flow hedges | - | 136 | 136 | ||
| Net loss recognised directly in equity | - | (185) | (173) | ||
| Profit/(expense) for the period | 76,040 | (41,321) | (63,214) | ||
| Total recognised income/(expense) for the period | 76,040 | (41,506) | (63,387) |
| Condensed consolidated balance sheet as at 30 June 2008 | As at 30 June 2008 $000 | As at 30 June 2007 $000 | As at 31 December 2007 $000 | |||
| Note | ||||||
| Non-current assets | ||||||
| Goodwill | 66,173 | 66,173 | 66,173 | |||
| Intangible assets | 85,630 | 78,700 | 78,568 | |||
| Property, plant and equipment | 544,842 | 503,413 | 520,754 | |||
| Financial assets | - | 1,883 | - | |||
| Deferred tax asset | 13,307 | 20,537 | 12,144 | |||
| 709,952 | 670,706 | 677,639 | ||||
| Current assets | ||||||
| Inventories | 35,058 | 29,955 | 33,879 | |||
| Trade and other receivables | 129,488 | 44,784 | 56,078 | |||
| Cash and cash equivalents | 67,495 | 13,689 | 22,676 | |||
| 232,041 | 88,428 | 112,633 | ||||
| Total assets | 941,993 | 759,134 | 790,272 | |||
| Current liabilities | ||||||
| Bank loans | 5 | - | - | (87,766) | ||
| Trade and other payables | (39,384) | (52,214) | (30,890) | |||
| Provisions | (4,654) | (1,537) | (4,201) | |||
| (44,038) | (53,751) | (122,857) | ||||
| Non-current liabilities | ||||||
| Bank loans | 5 | (453,886) | (305,442) | (294,057) | ||
| Deferred tax liability | (71,745) | (79,892) | (72,229) | |||
| Provisions | (19,690) | (10,366) | (20,433) | |||
| (545,321) | (395,700) | (386,719) | ||||
| Total liabilities | (589,359) | (449,451) | (509,576) | |||
| Net assets | 352,634 | 309,683 | 280,696 | |||
| Equity attributable to shareholders | ||||||
| Issued capital | 7 | 19,940 | 19,925 | 19,925 | ||
| Share premium | 7 | 192,048 | 191,945 | 191,945 | ||
| Special reserve | 7 | 61,244 | 101,244 | 61,244 | ||
| Retained reserves | 7 | 79,402 | (3,431) | 7,582 | ||
| Total equity | 352,634 | 309,683 | 280,696 |
Condensed consolidated cash flow statement
for the six months ended 30 June 2008
| 6 months ended 30 June 2008 $000 | 6 months ended 30 June 2007 $000 | 12 months ended 31 December 2007 $000 | |||
| Cash flows from operating activities | |||||
| Profit/(loss) for the period | 151,778 | (16,634) | (14,078) | ||
| Adjustments for: | |||||
| Depreciation | 364 | 292 | 805 | ||
| Depletion and decommissioning charge | 52,314 | 32,279 | 73,032 | ||
| Unsuccessful exploration costs | 8,674 | 43,595 | 60,887 | ||
| Equity-settled share-based payment expenses | 1,308 | 438 | 362 | ||
| Income tax charge on Egyptian revenue | (59,051) | (11,734) | (16,526) | ||
| Operating cash flow before changes in working capital | 155,387 | 48,236 | 104,482 | ||
| Increase in inventory | (1,179) | (5,851) | (11,157) | ||
| Increase in trade and other receivables | (74,133) | (17,109) | (29,543) | ||
| (Decrease)/increase in trade and other payables | (5,933) | 19,179 | (4,739) | ||
| Cash generated from operations | 74,142 | 44,455 | 59,043 | ||
| Income taxes (paid)/received | (1,809) | (400) | 3,341 | ||
| Net cash inflow from operating activities | 72,333 | 44,055 | 62,384 | ||
| Cash flows from investing activities | |||||
| Proceeds from sale of property, plant and equipment | 216 | - | - | ||
| Interest received | 707 | 514 | 908 | ||
| Acquisition of property, plant and equipment and intangible assets | (83,982) | (98,740) | (161,478) | ||
| Net cash outflow from investing activities | (83,059) | (98,226) | (160,570) | ||
| Cash flows from financing activities | |||||
| Net proceeds from the issue of share capital | - | 51,168 | 51,168 | ||
| Proceeds from issue of share options | 118 | 571 | 571 | ||
| Net proceeds from the issue of share capital | 118 | 51,739 | 51,739 | ||
| Purchase of own shares | (592) | - | - | ||
| Interest paid | (15,285) | (13,655) | (31,177) | ||
| Loan arrangement fees paid | (3,773) | (1,272) | (5,294) | ||
| Borrowings raised | 206,000 | 17,929 | 154,478 | ||
| Repayment of borrowings | (131,000) | (3,229) | (63,474) | ||
| Dividends paid | - | - | (3,882) | ||
| Net cash inflow from financing activities | 55,468 | 51,512 | 102,390 | ||
| Net increase/(decrease) in cash and cash equivalents | 44,742 | (2,659) | 4,204 | ||
| Cash and cash equivalents at start of period | 22,676 | 17,769 | 17,769 | ||
| Effect on exchange rate fluctuations on cash held | 77 | (1,421) | 703 | ||
| Cash and cash equivalents at end of period | 67,495 | 13,689 | 22,676 |
Notes to the interim accounts
1. Accounting policies - basis of preparation
These Condensed Consolidated Interim Financial Statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU. They do not include all of the information required for full annual financial statements and should be read in conjunction with the Consolidated Financial Statements of the Group as at and for the year ended 31 December 2007. The Condensed Consolidated Interim Financial Statements were approved by the Board of Directors on 27 August 2008.
The comparative figures for the financial year ended 31 December 2007 are not the Company's statutory accounts for that financial year. Those accounts have been reported on by the Company's auditors and delivered to the registrar of companies. The report of the auditors was i) unqualified, ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and iii) did not contain a statement under section 237 (2) or (3) of the Companies Act 1985.
The same accounting policies and methods of computation have been applied in this interim financial report as were applied in the statutory accounts for the year ended 31 December 2007, which are available on the Company's website, www.melroseresources.com
Melrose Resources plc is a company domiciled in the United Kingdom. The Condensed Consolidated Interim Financial Statements of the Company as at and for the six months ended 30 June 2008 comprise the Company and its subsidiaries (together referred to as the "Group").
2. Segmental reporting
The Group has a single class of business which is oil and gas exploration, development and production. All sales are to third parties.
| Geographical area | 6 months ended 30 June 2008 $000 | 6 months ended 30 June 2007 $000 | 12 months ended 31 December 2007 $000 | ||
| Revenue | |||||
| Bulgaria | 26,885 | 19,957 | 42,743 | ||
| Egypt | 186,926 | 42,488 | 89,103 | ||
| USA | 20,223 | 13,396 | 26,349 | ||
| Total | 234,034 | 75,841 | 158,195 | ||
| Profit/(loss) from operations | |||||
| Bulgaria | 13,080 | (32,378) | (36,684) | ||
| Egypt | 136,201 | 18,274 | 27,471 | ||
| USA | 8,253 | 1,598 | 4,674 | ||
| Unallocated corporate expenses | (5,756) | (4,128) | (9,539) | ||
| Group profit/(loss) from operations | 151,778 | (16,634) | (14,078) | ||
Neither France nor Turkey generated any revenue or incurred any significant costs during the period.
3. Income Tax Expense
The tax charge for the period of $58,127,000 gives an effective tax rate of 43.2%. The tax charge is made of a charge of $59,775,000 for current tax and a release of $1,648,000 of deferred tax.
The effective tax rate reflects that a significant proportion of the Group's profits arise in Egypt, where the standard rate of tax is 40.55%. There are also expenses incurred by the Group which do not qualify for tax relief in the relevant countries, increasing the effective rate of the tax charge. Due to uncertainty on recovery against future profits, certain tax losses have not been recognised in deferred tax.
4. Earnings per share
The calculation of basic and diluted earnings per share is based upon the following:
| 6 months ended 30 June 2008 $000 | 6 months ended 30 June 2007 $000 | 12 months ended 31 December 2007 $000 | |||
| Profit/(loss) for the period attributable to ordinary shareholders (basic and diluted) | 76,040 | (41,321) | (63,214) | ||
| Cents | Cents | Cents | |||
| Earnings/(loss) per share | |||||
| Basic | 69.1 | (38.6) | (58.2) | ||
| Diluted | 68.3 | (38.6) | (58.2) |
The weighted average number of ordinary shares used in the calculation of basic and diluted earnings per share for each period was calculated as follows:
| 6 months ended 30 June 2008 No. of shares | 6 months ended 30 June 2007 No. of shares | 12 months ended 31 December 2007 No. of shares | |||
| Issued ordinary shares at start of period | 109,972,891 | 102,623,456 | 102,623,456 | ||
| Shares issued during the period | 75,938 | 7,349,435 | 7,349,435 | ||
| Shares in issue at end of period | 110,048,829 | 109,972,891 | 109,972,891 | ||
| Weighted average number of ordinary shares at end of period | 110,013,363 | 107,162,709 | 108,579,349 | ||
| Effect of share options in issue | 1,015,694 | - | - | ||
| Weighted average number of ordinary share at end of period - for diluted earnings per share | 111,029,057 | 107,162,709 | 108,579,349 |
5. Bank loans and financial instruments
The Group's interest-bearing loans and borrowings are as follows:
| As at 30 June 2008 $000 | As at 30 June 2007 $000 | As at 31 December 2007 $000 | ||||
| Current liabilities | ||||||
| Bank loans | - | - | 87,766 | |||
| Non-current liabilities | ||||||
| Bank loans | 453,886 | 305,442 | 294,057 | |||
| 453,886 | 305,442 | 381,823 | ||||
The following table indicates the effective interest rates of interest-bearing liabilities at the balance sheet date and the period in which they mature or fall due:
| Effective Rate % | Total1 $000 | Repayable within 1 year1 $000 | Repayable 1-2 years1 $000 | Repayable 3-5 years1 $000 | Repayable after 5 years1 $000 | |
| As at 30 June 2008 | ||||||
| Secured bank loans | 5.6 | 463,304 | - | - | 109,304 | 354,000 |
| As at 31 December 2007 | ||||||
| Secured bank loans | 8.7 | 388,304 | 90,000 | - | 278,304 | 20,000 |
| As at 30 June 2007 | ||||||
| Secured bank loans | 9.2 | 312,000 | - | - | 262,000 | 50,000 |
Note 1: Excluding the effect of amortisation of loan arrangement fees
6. Financial instruments
The Group is exposed to currency risk arising from purchases, sales, borrowings, cash and cash equivalents that are denominated in currencies other than US Dollars. It is Group policy that borrowings should match the currency of the cash flows from which it is expected that they will be repaid. This has been the case throughout the interim reporting period.
The Company re-negotiated the terms of the existing Senior Loan Facility, increasing the committed amount from $350 million to $440 million. In addition, a new Subordinate Loan Facility has been obtained with a total committed amount of $70 million. Both facilities have a final repayment date of 31 December 2014. The Company repaid the existing Bridge Facility in full on 26 June 2008.
7. Reserves
| Share capital $000 | Share premium $000 | Special reserve $000 | Retained earnings $000 | ||||
| As at 1 January 2007 | 18,502 | 141,629 | 101,244 | 37,812 | |||
| Share issues | 1,423 | 51,100 | - | - | |||
| Issue costs | - | (784) | - | - | |||
| Total recognised income and expense for the period | - | - | - | (41,506) | |||
| Equity-settled transactions | - | - | - | 263 | |||
| As at 30 June 2007 | 19,925 | 191,945 | 101,244 | (3,431) | |||
| Transfer from Special reserve to Retained earnings | - | - | (40,000) | 40,000 | |||
| Total recognised income and expense for the period | - | - | - | (21,881) | |||
| Equity-settled transactions | - | - | - | (3,224) | |||
| Dividends paid | - | - | - | (3,882) | |||
| As at 31 December 2007 | 19,925 | 191,945 | 61,244 | 7,582 | |||
| Share issues | 15 | 103 | - | - | |||
| Total recognised income and expense for the period | - | - | - | 76,040 | |||
| Equity-settled transactions | - | - | - | 968 | |||
| Investment in own shares | - | - | - | (592) | |||
| Dividends payable | - | - | - | (4,596) | |||
| As at 30 June 2008 | 19,940 | 192,048 | 61,244 | 79,402 |
During the period 75,938 shares were issued at 78 pence per share under employee share options arrangements.
The Special Reserve account represents the balance held by the Group and Company following a court ruling in 2004 allowing the transfer of the share premium account to distributable reserves.
8. Dividends
The following dividends were declared and approved by the Group:
| Pence per share | Total cost £000 | Total cost $000 | |||
| In the six months ended 30 June 2008 | 2.10 p | 2,311 | 4,596 | ||
| In the six months ended 30 June 2007 | 1.75p | 1,925 | 3,882 |
9. Related party transactions
Controlling related party
The directors consider that the immediate and ultimate parent company of Melrose Resources plc is Skye Investments Limited, which is registered in England and Wales, as it owns over 50% of the ordinary share capital. Skye Investments Limited is controlled by the Adair Trusts. Skye Investments Limited is the parent company of the largest group of companies for which group accounts have been drawn up. Copies of the group accounts of Skye Investments Limited are available from No. 1 Portland Place, London W1B 1PN.
Identity of related parties
The Company has a related party relationship with its subsidiaries and its directors.
Related Party Transactions
With the exception noted below, there are no related party transactions during the six months ended 30 June 2008.
Contract of significance
Under the terms of a Net Profit Interest Agreement relating to the Galata gas field and originally entered into in 1998 an amount of $0.4 million is payable in respect of the six months ended 30 June 2008 ($0.8 million in respect of the year ended 31 December 2007 and $0.5 million in respect of the six months ended 30 June 2007) to Orbis Holding Ltd, a company in which David Archer has a 50% beneficial interest.
Principal risks and uncertainties
Melrose is subject to various risks and uncertainties that may impact its business in the remaining six months of the financial year as well as in the more distant future. An evaluation has been undertaken of these principal risks and uncertainties and these are detailed below:
Exploration Risk
Oil and gas exploration involves a high degree of risk which can be mitigated, but not eliminated, through the experience and evaluation techniques of the Company's technical staff and executive management. Many properties that are explored may not ultimately be developed into producing fields. Exploration entails significant capital expenditure to finance data gathering and prospect drilling which may ultimately provide no assurance that hydrocarbons will be discovered or, even if they are, in commercial quantities which are able to be recovered.
Operational Risk
The operations of Melrose may be disrupted by a variety of operational factors which are beyond the control of the Company, including health and safety issues, environmental hazards, technical failures, employment disputes, drilling issues, adverse weather conditions and reliance on service providers. These factors could also potentially result in damage to, or the destruction of, production facilities leading to business interruption, monetary losses and possible legal liability. While Melrose maintains insurance within ranges of coverage consistent with industry practice, no assurance can be given that the Company will be able to obtain coverage which is fully adequate and available to cover any such claims.
Reserve Estimates
Melrose engages independent third party consultants to provide independent reports assessing the quantity and category of the Company's oil and gas reserves. Petroleum engineers' projections of future production from oil and gas reserves are derived from historic production records, well-test data and volumetric estimates. The levels of production actually achieved may differ significantly from these estimates. The current value of such future production is based upon projections of future oil and gas prices and drilling and operating costs and it is possible that such projections may change in the future. Adverse movements in any of these variables may result in lower levels of production that had been estimated by petroleum engineers. Furthermore, whilst the Company will actively seek to locate new reserves that are economically recoverable, there is no guarantee that this will be successful. Should these efforts not be successful, reserves will decline over time which may then impact production levels.
Oil Price
The profitability of the Company's operation is to a certain degree dependent upon the market price of oil which can be volatile. Oil prices are affected by numerous factors beyond Melrose's control, including international economic and political conditions, level of supply and demand, policies of the Organisation of Petroleum Exporting Countries and currency exchange rates.
Political risk
Melrose's stated strategy is to operate in known hydrocarbon regions which are considered to be of low risk from a political perspective. Despite that, it is possible that Melrose could be susceptible to political risks which could potentially result in changes to the local operating environment, including local laws and regulations, fiscal terms and pricing.
Financial risk
Melrose has an ambitious capital expenditure programme which is to be funded through a combination of existing cash flow from operations and firm debt facilities which have been put in place. In the event of cost overruns on this capital expenditure programme or a reduction in cash flow from existing operations the Company may be required to cut back on the capital expenditure programme or seek alternative financing to be able to complete it.
Competition
Melrose competes with numerous other oil and gas exploration and production companies, many of which have greater financial resources. The acquisition of oil and gas exploration and production assets can be extremely competitive in the current industry environment.
Responsibility statement of the directors in respect of the Interim Report
We confirm that to the best of our knowledge:
the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;
the interim management report includes a fair review of the information required by:
(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and
(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.
J Munro M Sutherland
Finance Director
27 August 2008
| Glossary | |
| bbl | barrel of oil or condensate |
| Bcf | billion cubic feet of gas |
| bcpd | barrel of condensate per day |
| bpd | barrels per day |
| boe | barrel of oil equivalent |
| boepd | barrel of oil equivalent per day |
| the Company | Melrose Resources plc |
| Bm³ | billion cubic metres of gas |
| bopd | barrel of oil or condensate per day |
| EBITDAX | earnings before interest, taxation, depletion, depreciation, amortisation and exploration costs |
| the Group | the Company and its subsidiaries |
| Mbbl | thousand barrels of oil or condensate |
| Mboe | thousand barrels of oil equivalent |
| Mboepd | thousand barrels of oil equivalent per day |
| Mcf | thousand cubic feet of gas |
| Melrose | the Company or the Group, as appropriate |
| Mm3 | thousand cubic metres of gas |
| MMbbl | million barrels of oil or condensate |
| MMboe | million barrels of oil equivalent |
| MMcf | million cubic feet of gas |
| MMcfpd | million cubic feet of gas per day |
| MMcfepd | million cubic feet of gas equivalent per day |