25 Mar 2009 07:00
| FOR IMMEDIATE RELEASE | 25 March 2009 |
MELROSE RESOURCES PLC
Annual results for the year ended 31 December 2008
Melrose Resources plc (LSE: MRS) ("Melrose", "the Company" or "the Group") the oil and gas exploration, development and production company with interests in Egypt, Bulgaria, Romania the United States of America, France and Turkey, today announces its annual results for the year ended 31 December 2008.
Overview of the year
Melrose delivered strong operating results and financial growth throughout 2008 and achieved record levels of production, turnover and profit. During the year Melrose successfully executed a number of important development and exploration projects in Egypt, Bulgaria and the USA and replaced some 290% of the annual production volumes with new reserves. In addition, Melrose was pleased to announce the planned farm-in to two high quality concessions, offshore Romania, which contain near term gas field developments and significant exploration upside. The Group also signed new bank facilities which put it on a robust financial footing moving forward.
Financial highlights
136% increase in turnover to US$373.3million (2007: US$158.2 million)
174% increase in EBITDAX to US$330.3 million (2007: US$120.6 million)
Profit from operations US$174.8 million (2007: loss US$14.0 million)
Profit after tax for the year US$68.3 million (2007: loss US$63.2 million)
Proposed final dividend 1.6 pence per share. Total dividend increased by 33% to 2.8p/sh (2007: 2.1p/sh)
New $510 million corporate loan facility signed in June 2008
Operational highlights
23% increase in average daily net production to 18,506 boepd (2007: 15,015 boepd)
290% reserves replacement ratio achieved with net entitlement reserves at year end of 66.6 MMboe (2007: 53.7 MMboe)
Four new Egyptian developments initiated
US Permian Basin infill drilling and waterflood progressed (58 wells drilled)
Bulgarian gas storage project progressed with first injection expected in 2009
Planned acquisition of new development and exploration assets offshore Romania
Five exploration discoveries (3 Egypt, 1 Bulgaria, l USA)
Robert Adair, Executive Chairman, commented:
"2008 was an excellent year for Melrose with the Company generating record production, revenue and profit. Forward production for 2009 and beyond will provide strong cash generation and our newly secured debt facilities of $510 million and the fact that we operate all our assets enables the Group to have the financial security to develop new opportunities for reserve and production growth over future years. Melrose has diverse revenue streams from its portfolio, which includes both oil and gas, the latter being for the most part tied to fixed gas prices which provides visibility and stability to our top line. With the gas storage project in Bulgaria, a further annuity type long term revenue stream will be developed for the Group.
The Board is also excited by our recent announcement regarding the planned farm-in to two offshore concessions in Romania. Whilst balancing our portfolio geographically, the development and exploration potential can add over 15 MMboe of near term reserves and 6,000 boepd of production to the Company once the final approval and development process has been completed.
In summary, Melrose is exceptionally well placed for the future and we look forward to progressing our active work plans in each of our cores areas. I would also like to take this opportunity to thank our shareholders for their continued support over the past year which has been marked by a significant degree of market turbulence."
For further information please contact:
| Melrose Resources plc David Thomas, Chief Executive Robert Adair, Executive Chairman Diane Fraser, Finance Director | 0131 221 3360 / 07799 061171 |
| Buchanan Communications Ben Willey Ben Romney | 0207 466 5000 |
or visit www.melroseresources.com
Chairman's Statement
Melrose has continued to deliver strong operating results and financial growth throughout 2008 and achieved record levels of production, turnover and profit. During the year, the company successfully executed a number of important development and exploration projects in Egypt, Bulgaria and the USA and replaced some 290% of the annual production volumes with new reserves. In addition, in December we were pleased to announce the planned farm-in to two high quality concessions, offshore Romania, which contain near term gas field developments and significant exploration upside. These new assets represent an excellent strategic fit with our existing asset base and the combined portfolio will drive the Company's continued growth.
In light of current economic conditions, we were also pleased to secure in June revised corporate lending facilities of $510 million with a syndicate of nine international banks. These facilities are committed until 2014 with no capital repayments before 2012 and operate with a maximum margin of 3.1% over US$ LIBOR. This makes it a low cost financing arrangement for Melrose in the current market.
The recent fall in the oil price from the highs of 2008 has been well documented in the media and it has clearly had a significant impact on oil and gas exploration and production companies. Notwithstanding this, we believe that Melrose is strongly placed and will continue to prosper in the current low oil price environment. Our long term debt facilities provide financial security and a significant proportion of our revenues are derived from fixed price Egyptian gas sales contracts which are not affected by oil price fluctuations. Also, and perhaps most importantly, Melrose has a clear strategy to operate and hold material interests in all its assets which means that we are in full control of the quantum and timing of all our capital expenditure. We are in a position to rapidly decrease or indeed increase our capital expenditures in response to market conditions.
Production and developments
The Company's production averaged 35,554 boepd during 2008 on a working interest basis. This is equivalent to 18,506 boepd on a net entitlement basis, an increase of 23% over 2007. Approximately 74% of the production was gas and the remaining 26% was oil and condensate. The increase in production was largely due to the West Dikirnis oil field in Egypt which came on stream in November 2007.
In Egypt, all our fields have performed well and, in particular, the West Khilala gas field has demonstrated itself to be a high quality asset and is producing on a steady plateau. On the West Dikirnis oil and gas field, we are taking a very prudent approach to the reservoir management by restricting the short term well rates to maintain reservoir pressure until our Phase II development plans complete early in the third quarter 2009. These plans involve the drilling of a number of horizontal wells and the installation of a LPG plant and gas reinjection facilities to maximise the hydrocarbon liquids recovery from the field.
One additional new field, East Abu Khadra, was brought on stream during the year and we also re-established production from the Qantara field. Beyond this, we progressed the development of four other new developments, three of which will be on stream before the end of the second quarter 2009 and the fourth will follow shortly thereafter. These new fields will provide significant incremental production and revenue streams in the short to medium term.
In Bulgaria, the Galata gas field produced throughout 2008 and then shut-in early in 2009 to commence the infrastructure modifications required to convert the field to a gas storage facility. The storage scheme is of strategic importance to the Bulgarian Government as it will guarantee secure and well modulated gas supplies to the country and we are making good progress finalising the contractual and commercial framework for the project. First gas injection is scheduled to occur in mid 2009. In parallel with the gas storage project we are moving forward with our plans to bring two nearby discoveries, Kavarna and Kaliakra, on stream over the next two years and these will help replace the Galata production volumes.
In the United States, production from our mature fields was steady and benefitted from the exceptionally high commodity prices in the first half of the year. Early in the year we initiated a major infill drilling and waterflood campaign in the Permian basin, focusing initially on the Jalmat and Turner-Gregory fields, and drilled 58 new wells through to the end of February 2009. The drilling activity has now been paused to allow us to take advantage of the lower drilling costs expected later this year and to evaluate the new waterflood performance.
Melrose has a reputation for delivering low cost, fast tracked developments and we attribute this to our committed and experienced project teams and excellent working relationships with both Government and Industry. We will continue to rely on these skills as we progress forward with the next phase of the Company's development projects.
Exploration and appraisal
Melrose views its exploration programme as a very important value driver for the Company and we were pleased to record positive drilling successes during 2008.
In Egypt we made three exploration discoveries at East Abu Khadra, Damas and North Dikirnis and all of these are being fast tracked to production using low cost tie-backs to existing infrastructure (indeed East Abu Khadra is already on stream). Our exploration programme in Bulgaria also produced a very positive result during the year with the Kavarna gas discovery announced in October. This well follows on from the Kaliakra discovery in December 2007 and is highly significant since it has proved up a low risk exploration trend running east from the Galata field which holds unrisked reserves potential approaching 200 Bcf. The well results further support our strategy of focussing on the shallow water areas of the Black Sea rather than the deeper water environment. In the USA we also had some success with the East Texas Holmes-4 gas discovery which, similar to our Egyptian wells, was fast-tracked to production and came on stream in August, two months after discovery.
Part of Melrose's business strategy is to maintain a balanced portfolio with a variety of diverse exploration plays with differing risk and reward profiles. As such, to complement the low to moderate risk exploration around our existing assets, we continued to work on longer term frontier exploration initiatives in 2008. These include the sizeable Mesaha concession in Upper Egypt, where initial surveys indicate the existence of an undrilled sedimentary basin of significant proportions, and the South Mardin blocks in Southern Turkey, where we were encouraged to learn of an oil discovery on a neighbouring block during 2008. Both of these areas present exciting exploration opportunities which have low initial capital commitments and we are looking forward to progressing them over future years.
New business development
In December 2008, we announced that Melrose was planning to acquire a 32.5% interest in the Midia and Pelican Blocks in the Black Sea, offshore Romania, from Sterling Resources and the requisite commercial agreements were signed earlier this month. The Blocks contain the undeveloped Ana and Doina gas fields, which we estimate hold gross reserves of 288 Bcf and which are expected to be sanctioned for development in early 2010. The Blocks also contain a significant number of exploration prospects and leads and the acreage has net unrisked reserves potential estimated in excess of 300 Bcf and 20 MMbbl.
We are very excited about this opportunity which has an acquisition cost of less than $6/boe and will be highly value accretive. The two developments will add net reserves of approximately 15.6 MMboe and some 6,000 boepd of net production in 2012 and beyond. The farm-in also presents a number of opportunities for the company to add further value to the assets including reducing the project costs (by using Melrose's project experience and by taking advantage of the declining industry cost trends), successful pursuit of the exploration programme and potentially capturing third party transportation and processing business across the infrastructure.
The farm-in is also consistent with Melrose's strategy to operate its core assets since the Company will formally take over operatorship of the developments when the transaction completes and operate the exploration activities at the end of 2011. As such, we are looking forward to progressing the Romanian work programme over the next several years and to working closely with the Government and Partners to make the developments a success.
The transaction is expected to complete in mid 2009 and remains subject to Government, Partner and Bank approvals.
Reserves
Our net proved and probable reserves at the year end totalled 66.6 MMboe on a net entitlement basis, which compares with 53.7 MMboe as at 31 December 2007. This represents a reserves replacement ratio of 290%, equivalent to an absolute increase of 24%, which is extremely positive for the Group. The increase is primarily due to exploration discoveries (7 MMboe) and existing field reserves additions (12.7 MMboe), partially offset by production (6.8 MMboe). These figures exclude any reserve additions which may result from the Romanian transaction which would be bookable at year end 2009.
Board and staff
In late 2008 our Finance Director, Munro Sutherland, announced that he intended to step down in order to pursue other business interests. Munro had been with Melrose almost since its inception and on behalf of the Board I would like to thank him for the significant contribution he made to the company over the years. To replace Munro, we appointed Diane Fraser, previously our Group Financial Controller, as our new Finance Director on 1 January 2009 and she is already well established in her new role.
We also welcomed two new independent non-executive Directors to the Board during the year, Dr Ahmed Kebaili and Dr Alan Parsley. Both Ahmed and Alan bring many years of technical, commercial and operational experience following distinguished careers in the oil and gas industry and they will be of great value to our business. In light of their appointments and reflecting the increased independent directorship representation on the Board, Jimmy Hay has decided not to offer himself for re-election at the forthcoming AGM in June. Jimmy has been a stalwart of the Board since 1999 and I would like to express my deep gratitude to him for his contribution and wise counsel during his time with the Company.
Melrose continues to build a strong team of experienced and committed professionals throughout the Group. Consequently, we have developed a strong reputation for our expertise and pragmatism across all the technical, commercial and financial facets of our business and I would like to thank all our staff for the hard work and dedication they have shown over the past year.
Financial results
The profit after tax for the year was $68.3 million which reflected a year of record production and commodity prices and compares to a loss in 2007. We also achieved an EBITDAX of $330.3 million which represents a substantial increase of 174 % over 2007.
To reflect our favourable trading results, I am pleased to announce that we are proposing that the total dividend for this year will be 2.8 pence per share (an increase of 33% compared to 2007). An interim dividend of 1.2 pence per share was paid in October 2008, with a final dividend of 1.6 pence per share. If approved at the forthcoming AGM, the final dividend will be paid on 26 June 2009 to those shareholders on the register as at 12 June 2009. For the future, we shall maintain the principle of a progressive dividend policy that grows over time in line with the Company's business, but subject always to the Company's capital requirements for existing and new business opportunities.
Outlook
The global economic downturn has affected all industries including the oil and gas sector where companies are battling to deal with low oil prices, a significant tightening in the credit markets and a lack of stability in the equity markets. Whilst Melrose is not immune, the company's robust financial position and operating strategy mean that it is well placed to weather the storm and emerge in a very strong position.
Our production in 2009 is expected to be around 34,000 boepd on a working interest basis (15,000 boepd on a net entitlement basis) which is slightly lower than last year due to the cessation of production from the Galata field to allow it to be converted to a gas storage facility. However, our production levels will pick up again in 2010 and beyond when our new field developments come on stream.
In 2009, we intend to adopt a prudent approach to capital management focusing our investments on near term revenue generating projects and material growth opportunities. We may also defer the execution of some projects where we perceive that the cost of both services and equipment may fall in the short term. As such we expect to be reducing our 2009 capital expenditures to around $170 million, a 20% decrease relative to 2008.
Notwithstanding the above, we still have an exciting exploration and development work programme to pursue this year including five exploration and appraisal wells, four new developments to bring on stream in Egypt and Bulgaria, the Galata gas storage project in Bulgaria and our new venture in Romania.
I am confident we have the people, assets and financing in place to ensure that Melrose is on a robust footing through 2009 and beyond.
Robert F M Adair
Chairman
24 March 2009
OPERATIONAL REVIEW
EGYPT
In 2008 Melrose conducted a very active work programme on its core operated assets in the El Mansoura, South East El Mansoura and Qantara concessions, all of which are onshore in the Nile Delta. New production records were achieved, several new developments were progressed and the Company also made three exploration discoveries which are being tied back to existing facilities for early production. In addition, progress was made in evaluating the giant Mesaha Exploration Concession in Southern Egypt which was awarded to Melrose as operator in late 2007.
During the year, the Company expanded its strong production position in Egypt and flowed at an average daily rate of 30,663 boepd on a working interest basis (13,584 boepd on a net entitlement basis). The flow rates were underpinned by the first full year of production from Melrose's two main fields in the El Mansoura Concession, namely, West Khilala and West Dikirnis. Production from these fields was supplemented by a number of smaller fields in the El Mansoura and South East El Mansoura concessions and also from the Qantara concession where production was successfully re-established after a 4 year shut-down.
Development activity focused on the West Dikirnis field, where Phase II of the development plan is being progressed to maximise oil, condensate and LPG recoveries from the field prior to producing the gas reserves. In addition, four new field developments were initiated during the year, namely, East Abu Khadra, South Zarqa, North East Abu Zahra and Damas. The first of these fields was brought on production in December 2008 and the others will all come on stream by August 2009.
The Company also continues to pursue an exploration strategy designed to maintain a strong and diverse prospect portfolio for drilling in 2010 and beyond. The recent exploration drilling programme has been focused on the El Mansoura Concession and, in parallel, new 2-D and 3-D seismic data has been acquired on the adjacent and under explored South East Mansoura Concession. This new data is currently under interpretation and is already yielding new prospects and leads to add to the inventory.
Production
Average production on a working interest basis in 2008 in Egypt was 128.4 MMcfpd of gas and 9,225 bpd of oil and condensate. Net entitlement production averaged 57.0 MMcfpd and 4,089 bpd. Total production for the year of 30,663 boepd represents an increase of 62% compared with 2007 on a working interest basis.
The majority of the increase in production was derived from the West Dikirnis field which came on production in November 2007. Melrose currently has nine producing fields in Egypt. Eight of these are in the El Mansoura Concession: West Khilala, West Dikirnis, El Tamad, Tummay, South Mansoura, Salaka, South Batra and East Abu Khadra. One producing field, Al Rawda, is within the South East El Mansoura Concession. A further field, Qantara, which is situated within the Qantara Concession, recommenced production in 2008 following a successful sidetracking of a previously drilled well and upgrading of the processing facilities.
El Mansoura Concession
West Khilala field
This field was discovered in the Abu Madi formation in October 2005 and appraisal drilling continued through 2006 in parallel with implementation of the field development plan. First production was achieved in February 2007 and the offtake was gradually increased to reach the target plateau rate of 100 MMcfpd in January 2008.
The field is currently being produced by six wells and the performance to date has been excellent, with no water or sand production. Field evaluation and reservoir modelling work indicate that with some compression facilities the field should be capable of maintaining its plateau until the end of Q3 2010, following which there will be a gradual decline over the remaining field life to around 2018. The field's ultimate gross proved plus probable reserves were confirmed at year end 2008 to be 295 Bcfe.
West Dikirnis field
The West Dikirnis field was discovered in the Qawasim formation in December 2005 and brought on stream in November 2007. The field comprises a 70 foot thick oil reservoir which is overlain by a gas cap and the development plan initially involved the production of the oil accumulation prior to producing the gas cap late in the field life. The field is currently producing from five wells and during 2008 flowed at an average rate of 7,793 bpd of oil and condensate and 12.1 MMcfpd of gas.
In 2008, a Phase II investment programme was initiated in the field in order to maximise the recovery of hydrocarbon liquids prior to producing the gas cap. The programme includes the drilling of up to five horizontal wells, the first of which was successfully brought on stream in late 2008 at a rate of around 3,300 bopd. In this well a 1,100 foot horizontal section was drilled within the reservoir interval and some 820 feet of reservoir was perforated and opened to flow. The second horizontal well has just been drilled with a 2,100 horizontal wellbore and has tested, prior to being brought onstream, at 2,700 bopd.
The Phase II programme also includes the installation of a Liquid Petroleum Gas ("LPG") plant to extract Propane and Butane in liquid form from any gas which is produced in association with the oil. The gas will then be re-injected into the gas cap to maintain reservoir pressure and hence maximise oil recoveries and minimise gas flaring. Construction of the new facilities is ongoing and they are expected to be commissioned in mid 2009. This development programme has further emphasized the strong working relationship Melrose enjoys with the Egyptian Authorities and with its joint venture operating company, Mansoura Petroleum.
Pending completion of the new facilities, Melrose has been actively managing the individual well withdrawal rates in the field to minimise premature gas production and liquids rates are expected to increase to over 10,000 bpd during the second half of 2009. The field's ultimate gross proved plus probable reserves are estimated at 20 MMbbl of hydrocarbon liquids and 129 Bcf of gas and further upside potential exists with a possible reserves estimate of 5 MMbbl.
El Tamad field
Production from the El Tamad oil field at the end of 2008 was at a steady rate of 1,095 bpd of oil and 1.5 MMcfpd of gas from three wells. The field performance has been encouraging and the ultimate gross proved plus probable reserves were upgraded by 3.5 MMboe at year end 2008. To access these reserves, in early 2009, the first horizontal well was successfully drilled in the field and has been flow tested at 1,380 bopd and 0.54 MMcfpd. The well is currently being brought on production.
South Mansoura, Salaka and South Batra fields
There are two active producing wells in the South Mansoura area, South Mansoura No.1 and Salaka No.1. South Mansoura No.1 currently produces 2.6 MMcfpd and Salaka No.1, which was tied back for production to the South Mansoura production facilities in April 2007, produces 2.8 MMcfpd of gas and 30 bpd of condensate. The South Batra field production averaged 2.1 MMcfpd of gas and 14 bpd of condensate during the year.
East Abu Khadra field
The East Abu Khadra field was discovered in early 2008 following an exploration well to test an Abu Madi prospect to the south east of the West Khilala field. The field was fast-tracked for development via the South Batra facilities and came on production in December 2008. The ultimate gross proved plus probable reserves are estimated at 8.0 Bcfe and the field is flowing at 7.9 MMcfpd of gas and 125 bpd of condensate.
South East El Mansoura Concession
Al Rawda field
Al Rawda No.1 was the first exploration well drilled by Melrose in the South East El Mansoura Concession and was a gas and condensate discovery in the Sidi Salim horizon. The well was put on production in August 2007 through a dedicated pipeline to the South Mansoura plant and is currently producing steadily at a rate of 3.9 MMcfpd of gas and 38 bpd of condensate.
Qantara Concession
Qantara field
In July 2008, Melrose completed the Qantara-4 sidetrack well which was drilled to determine whether production could be re-established from the Qantara field which had been shut in since 2004. The well was successful and following the refurbishment of the infield flow lines and processing facilities production was recommenced in October 2008. The well is currently flowing at 2.4 MMcfpd of gas and 330 bpd of condensate and is being rate restricted in order to minimise the chances of premature water breakthrough and hence maximise the field reserves. Production from Qantara is highly profitable since the gas sales price for this concession is linked to oil price rather than the fixed domestic gas price.
In summary, the average daily production rates for 2008 of the fields in Egypt are as follows:
| Field | Production - daily rate for year, 2008 | ||
| Gas (MMcfpd) | Liquids (bpd) | Total (boepd) | |
| West Khilala | 101.3 | 155 | 17,032 |
| West Dikirnis | 12.1 | 7,793 | 9,813 |
| El Tamad | 1.5 | 1,095 | 1,342 |
| South Mansoura, South Batra | 9.0 | 59 | 1,574 |
| East Abu Khadra | 0.1 | - | 16 |
| Al Rawdah | 3.9 | 38 | 688 |
| Qantara | 0.5 | 85 | 168 |
| Total | 128.4 | 9,225 | 30,663 |
New field developments
During 2008, the Company also progressed a number of new, low cost field developments which will come on stream during 2009 and provide valuable incremental production and revenues.
Two of these fields, South Zarqa and North East Abu Zahra, are being developed using a common 35 kilometre, 10 inch flow line to tie them back to the South Batra processing facilities and are due on stream by the end of May 2009. These fields contain combined gross proved plus probable reserves of 58 Bcf of gas and 1.6 MMbbl of condensate.
The North Dikirnis discovery well has been tied back to the West Dikirnis production well manifold using a 4 inch flowline and will be put onstream shortly, as soon as the gas sales agreement has been signed. This field has gross proved plus probable reserves of 2 Bcfe.
The Damas field is being tied back to the South Mansoura facilities using a 19 kilometre, 6 inch flow line with first gas expected in early Q3 2009. The gross proved plus probable reserves are estimated at 5 Bcfe.
Exploration
Melrose has maintained a balanced exploration portfolio in Egypt comprising a variety of diverse exploration plays with differing levels of risks and potential rewards. In the Nile Delta, the El Mansoura concession is relatively well explored but it still presents a number of low to moderate risk prospects in a young Tertiary deltaic sequence. The South East El Mansoura Concession is relatively under-explored and contains both Tertiary deltaic prospects in its northern area and moderate risk Cretaceous and Jurassic prospectivity in the central and southern areas of the block. The Mesaha block in Upper Egypt is a virtually unexplored sedimentary basin which may be prospective in the Cretaceous, Jurassic, Ordovican and older formations and represents a high risk but potentially very high reward opportunity.
Following the initial exploration discoveries on Melrose's Nile Delta concessions an extensive programme of 2-D and 3-D seismic acquisition has been implemented, focusing initially on El Mansoura and only more recently in 2008 on South East Mansoura. As a result of the seismic phasing the drilling programme over recent years has been primarily focused on El Mansoura and the northern edge of the South East Mansoura concession, although targets are now starting to be matured in the rest of the South East Mansoura area for drilling in 2010 and beyond.
In 2008, Melrose drilled 9 exploration wells and 1 appraisal well on the El Mansoura, South East El Mansoura and Qantara concessions. Of the exploration wells, 3 yielded commercial discoveries yielding an estimated gross reserve addition of 14.2 Bcfe and a success rate of 33%. The year end 2008 reserves bookings for the discoveries have been conservatively estimated pending the receipt of production well performance and reservoir pressure data.
Melrose's 2009 exploration drilling programme in Egypt will be somewhat reduced compared to 2008 to allow time to mature the drilling inventory for South East Mansoura and to allow the Company to focus the majority of its near term investments on low risk near term revenue generating projects. The programme includes the East Dikirnis well, which has already been announced as a discovery, and two further wells, South Khilala and Al Hamul, which are targeting prospects of 56 Bcf and 63 Bcf, respectively.
Mansoura Concession
During 2008 a total of 5 exploration wells were drilled on the Mansoura concession.
The East Abu Khadra No.1 well was drilled to test an Abu Madi prospect in the northern area of the El Mansoura Concession. The well encountered 38 feet of net pay and was flow tested at 13.0 MMcfpd of gas and 182 bpd of condensate. The well has been subsequently tied back for production to the South Batra processing facilities.
The North Dikirnis No.1 exploration well was drilled approximately 3 kilometres north of the West Dikirnis field to test a Qawasim prospect. The well encountered 29 feet of net pay and flowed at a rate of 7.7 MMcfpd of gas and 244 bpd of condensate during testing and the discovery will be tied back to the South Batra facilities for production in the second quarter 2009.
More recently in 2009, the East Dikirnis No.1 exploration well was drilled approximately 11 kilometres east of the West Dikirnis field to test a Qawasim prospect. The well encountered 38 feet of gas overlying an 11 feet thick oil rim. The estimated discovery volume is in the range of 10 to 12 Bcfe and the well has been temporarily suspended for future possible sidetracking and use as a horizontal production well. The well has established that the area of the Mansoura Concession in the vicinity of the well may be oil prone and a number of similar prospects are apparent on the seismic data which are being evaluated for potential inclusion in the drilling programme.
Elsewhere in the concession, the South Aga No.1 and South Tarif exploration wells were drilled to test Abu Madi and Qawasim prospects, respectively, but did not encounter commercial hydrocarbon shows. Also, the West Zahayra No.2 well was drilled to appraise a 35 foot thick Qawasim gas discovery located to the north east of the West Dikirnis field and test a deeper Sidi Salim structure. The well did not penetrate a gas bearing interval and further work is now ongoing to assess the economic viability of developing the original discovery.
South East El Mansoura Concession
In 2008, Melrose embarked upon a significant 3-D seismic acquisition project in the South East El Mansoura Concession. Approximately 925 km² of 3-D seismic data was acquired over the north western part of the Concession and 793 km of 2-D seismic data over the central and eastern parts of the concession. The processing and interpretation of this data is ongoing and Melrose aims to drill the first exploration prospects generated from this data in the first half of 2010.
During the year, the Damas No.1 exploration well was drilled on a Sidi Salim prospect in the northern area of the South East El Mansoura Concession. The well found three hydrocarbon bearing intervals with a combined gross gas column of 124 feet and a net pay interval of 61 feet. The well was flow tested at a rate of 14.3 MMcfpd of gas with 105 bpd of condensate and a development programme is underway to bring the well on production during 2009.
Three Sidi Salim prospects, Ar Rub, East Sindy and Ghazalah, were also drilled on the northern edge of the Concession during the year but without success. The data from these wells has increased the perception of risk associated with drilling Sidi Salim prospects which are dependent on sealing faults to trap hydrocarbons. This exploration play type is being de-emphasised within the prospect portfolio.
In line with the terms of the concession agreement, Melrose relinquished 25% of the South East El Mansoura concession area on the 25 January 2009. The relinquished area was selected based on the results of the 2-D seismic and local geographic survey data acquired during the year and comprised low prospectivity or inaccessible acreage
Qantara Concession
As previously mentioned, the Qantara-4 well was successfully sidetracked during 2008 and has been placed on production. The well encountered 11 feet of net gas and condensate pay in a new sand interval which had not previously been produced in the field. The well results suggest that similar opportunities may exist elsewhere in the development lease and technical studies are ongoing to re-examine the areas potential.
USA
Melrose owns and operates two distinct groups of assets in the USA. The first consists of mature oil fields in the Permian Basin of west Texas and east New Mexico, where there are three main fields, namely, Jalmat, Turner-Gregory and Artesia. Each of these is characterised by having very long projected field lives and significant upside development potential. The second group of assets are located in East Texas and comprises mature gas fields with relatively modest current production levels but further exploration and appraisal potential.
Permian Basin
The Permian Basin fields contain significant remaining oil reserves and in order to fully develop the assets, Melrose embarked on a major investment programme in early 2008. The programme will ultimately include the drilling of up to 120 new infill wells, the conversion of over 60 wells to water injection and the installation of new water injection facilities and flow lines. When complete, each field will have a fully developed pattern waterflood with a well spacing of approximately 20 acres.
Activity in 2008 was focused on initiating the waterflood in the Jalmat and Turner-Gregory fields and infrastructure development in the Artesia. One drilling rig worked continuously from February 2008 to February 2009 in Jalmat and another from August 2008 through to year end in Turner-Gregory. The total cost of the programme in 2008 was $36 million and a further $10 million is expected to be spent in 2009.
It is anticipated that the fields will take 2 to 3 years to fully respond to the investment programme and by this time the production rate is expected to have increased to around 2,500 bopd. This compares to the average daily production from the fields in 2008 of 685 bpd of oil and 0.6 MMcfpd of gas.
As a result of the increased level of investment and a technical review of the assets, the Company has increased its net proved reserves in the Permian Basin by 9.8 MMboe, bringing the 2008 year end total to 23.2 MMboe. In addition, the possible reserves are now estimated to be 5.0 MMboe. The proved reserves increases are primarily associated with completing the full waterflood pattern in all fields with a 20 acre well spacing and the possible reserves may be accessed at a reduced 10 acre spacing.
The drilling activity levels in 2009 will be reduced compared to 2008 in order to take advantage of an expected reduction in drilling rig, equipment and services costs later in the year and to provide time to evaluate the results of the field activity to date. Near term investments will be focused on completing and converting new water injection wells. Once the drilling rigs are remobilised, potentially in early 2010, work will focus on completing the infill drilling programme on Turner-Gregory and Artesia.
Jalmat field
The Jalmat field is located in Lea County in New Mexico. In 2007, the field facilities were upgraded in advance of the infill drilling and waterflood project and this included improvements to water pumps and water distribution infrastructure. Before the infill drilling programme began there were 125 active producers and 26 injectors on the Jalmat Field with an incomplete waterflood pattern. By February 2009, 7 new producing wells and 30 new injector wells had been drilled completing a 20 acre "five spot" pattern over the entire field.
Turner-Gregory field
The Turner-Gregory Unit is located in Mitchell County, Texas. The planned waterflood in the Turner Gregory is a "line drive" system as opposed to the Jalmat "five spot" design. The field development work completed in 2008 consisted of replacing 10 undersized pumping units, drilling 9 new producing wells, 12 new injection wells and converting two existing wells to injection. This has effectively installed a multiple "line drive" pattern across the central part of the field which will be expanded north and south once the infill drilling programme is recommenced.
Artesia field
Construction of a new tank battery and injection pump station began in the southern portion of the field in December 2007 and was completed during 2008 and brought into service. The focus for 2009 will be to consolidate two existing tank batteries in the north portion of the field and build another injection station to service that portion of the field.
East Texas
Average net daily production from the Group's interests in East Texas during 2008 amounted to 3.8 MMcfpd of gas and 59 bpd of liquid.
The two main producing fields are the Rankin and North Raywood fields, located in Harris and Liberty Counties, Texas, respectively. In 2008, Melrose continued with the geological and geophysical evaluation of both properties and upside potential has been identified through appraisal drilling in the existing field areas and through exploration drilling in deeper reservoir horizons.
The Rankin Field, located about 20 miles northeast of Houston, Texas, currently has 6 active wells. The successful Johnson No.1 appraisal well was drilled on the perimeter of the field in December 2007 and was placed on production during the first quarter of 2008. A second appraisal well, Seiffert No.1 (previously known as Holmes No.4), was drilled during the second quarter of 2008 and this came on stream in August. The total proved plus probable reserves attributed to the well are 10.2 Bcf and a second well location has been identified to fully exploit the reserves. Two additional appraisal locations have been identified in the northern portion of the field and work is continuing to secure the land leases required to drill the wells.
Evaluation of the deeper exploration potential in the area continued in 2008 and drilling operations commenced on the first deep test well, Nunan No.1, in the last week of December. This well has multiple targets and is currently being completed in the deep Reklaw formation for production testing.
The North Raywood Field, which is located about 40 miles north east of Houston, has 3 active gas producing wells. No capital expenditures were incurred on this property in 2008.
Other interests
Melrose's minor interests in the USA include operated gas production in the Fort Worth Basin, a minor overriding royalty interest in the Barnett Shale underlying certain areas of the Fort Worth Basin and a small working interest in the offshore block Main Pass 139. Average daily production from these interests in 2008 totalled 0.4 MMcfpd of gas. There were no significant capital expenditures on these properties in 2008.
BULGARIA
Melrose continued to make significant progress in Bulgaria throughout 2008 following the Company's strategic decision to refocus its activities in shallow water exploration and leverage the value of the Galata field production facilities. Following the award of the Galata exploration block to the Company in December 2007, two successful exploration wells, Kaliakra and Kavarna, have been drilled on the same geologic trend that contains the Galata field. These will be tied back for early production across the Galata platform. In addition, significant progress has been made towards converting the depleting Galata gas field into a gas storage facility in close cooperation with Bulgargaz, the Bulgarian state owned gas utility company.
Production
Production from the Galata gas field in 2008 was in line with expectations and contracted gas volumes of 7.4 Bcf were delivered at an average daily rate of 20.2 MMcfpd. Galata supplied approximately 8% of Bulgaria's gas requirements during the year.
The Galata gas field is relatively mature and production ceased on 31 January 2009 in order to start preparing the field for conversion to gas storage. This was one month later than originally planned due to a need for Bulgaria to receive additional gas at short notice following the suspension of Russian gas supplies through Ukraine. The field's ultimate proved plus probable reserves are estimated at 74 Bcf of which approximately 8.8 Bcf have been left unproduced to provide cushion gas for the gas storage project.
Galata gas storage
In late 2007 Melrose signed a Memorandum of Understanding with Bulgargaz, under which the two companies conducted a joint feasibility study to evaluate the conversion of the Galata field into a gas storage facility. In mid-2008 the study concluded that the field is very well suited to conversion due to its reservoir properties, infrastructure configuration and location close to the main Bulgarian gas transmission lines and future regional gas pipeline routes (including the South Stream pipeline project).
Based on the positive outcome of the feasibility studies, plans are being brought forward to convert the field to gas storage with first injection commencing early in the third quarter of 2009. The project is likely to be developed in three phases over a 3 to 4 year period, building the capacity from 0.7 Bcm to 1.2 Bcm and finally to 1.8 Bcm. 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. Subsequent phases are also expected to cost around $30 million each.
The gas storage project continues to receive strong support from the Bulgarian Government, which wishes to supplement Bulgaria's existing storage capacity in order to ensure secure and well modulated gas supplies and the recent winter gas shortages have acted to underline the importance of the project. The Galata scheme is recognised as being the only material, low cost storage facility which can be developed in Bulgaria in the short to medium term.
Melrose and Bulgargaz now plan to enter into a second agreement under which Bulgargaz has an option to become an equity partner in the project and acquire up to a 40% working interest by contributing its proportionate share of the capital costs and cushion gas requirements. Meanwhile, negotiations regarding the contractual framework for the storage concession and the appropriate tariff levels and structure continue with the relevant Government agencies.
Exploration
Melrose had some considerable exploration success in 2008 in Bulgaria with two successive exploration wells drilled on the same geologic trend as the Galata field resulting in gas discoveries. These discoveries are expected to be tied back for production across in the Galata platform in 2009 and 2010 and, importantly, the well results significantly de-risk further exploration activities in the region.
In December 2007, Melrose drilled the Kaliakra No.1 well approximately 15 kilometres east of the Galata platform to test a structural feature similar to the Galata field. The well was a discovery and has been suspended for future use as a producer with a planned tie back date in the second half of 2010. The reserves range for the discovery is estimated to lie in the range 7 Bcf to 97 Bcf (with a most likely case of 47 Bcf) and an appraisal/development well is planned to be drilled on the structure in the third quarter 2009.
In October and December 2008, the Kavarna No.1 and No.2 wells were drilled to test a prospect located approximately 7 kilometres to the east of the Galata field, halfway towards Kaliakra. The two wells confirmed a gas discovery with 125 feet of net gas pay and an average porosity of 27% which is the thickest reservoir interval found in the area to date. The reserves are estimated at 24 Bcf. In light of Kavarna's close proximity to the Galata field, the Kavarna No.2 well has been completed with a sub-sea tree to enable it to be tied back to the Galata field facilities for production in the third quarter 2009.
A conservative approach was taken on both these fields with respect to reserves bookings at year end 2008 and a combined total of 35.8 Bcf of proved and probable reserves were included pending the receipt of further field data.
Beyond the two recent discoveries, the Galata trend has three further good quality prospects which represent good drilling candidates, with the precise timing of drilling to be decided once the infrastructure requirements for the existing discoveries and gas storage project have been optimised. The Galata trend is thought to contain unrisked reserves potential of 195 Bcf, excluding the Galata field.
ROMANIA
In December 2008, Melrose announced that it had signed a Heads of Agreement with Sterling Resources Ltd ("Sterling") under which it will farm-in to a 32.5% interest in the Pelican XIII and Midia XV Blocks (the "Blocks") in the Black Sea, offshore Romania. Subsequently, in mid March 2009, the two companies entered into a fully termed Farm-in Agreement to proceed with the transaction completion subject to Government, Partner and Bank approvals.
The Blocks hold the undeveloped Ana and Doina gas fields, which the Company estimates contain gross probable reserves of 288 Bcf and which are expected to be sanctioned for development in early 2010. The field development plans for these discoveries have not yet been optimised but they will involve the installation of two minimum facilities offshore platforms which will be connected to an onshore processing plant via a 110 kilometre pipeline. The facilities will be relatively simple and the fields are expected to be on stream by early 2012.
These two new developments will increase Melrose's net reserves by 15.6 MMboe, representing approximately 23% of the Company's 2008 year end reserves, and they should produce around 6,000 boepd net when they come on stream.
The Blocks also contain a significant number of exploration prospects and leads which are candidates for drilling and the acreage has net unrisked reserves potential estimated in excess of 300 Bcf and 20 MMbbls. These prospects are contained in four main exploration plays and four of the prospects are considered to be candidates for drilling in the short to medium term. On Midia these include two Lower Pliocene prospects (Clara and North Bianca) on the same geologic trend which contains the Ana and Doina discoveries and one Miocene prospect (SE Midia) to the south east of Doina. On Pelican there is an interesting Palaeocene oil prospect (Gasca) which lies adjacent to an old oil discovery called Olympiskiyi.
Under the terms of the transaction, Melrose will initially provide funds of $12 million to Sterling and then carry between $63 million and $78 million of their development costs, depending on the gas sales price achieved for the developments. This gives an attractive acquisition cost in the range of $4.81/boe to $5.77/boe.
The farm-in is highly value accretive and presents a number of opportunities for the Company to add further value to the assets including reducing the project costs (by using Melrose's project experience and by taking advantage of the declining industry cost trends), successful pursuit of the exploration programme and potentially capturing third party transportation and processing business across the infrastructure.
The farm-in is also consistent with Melrose's strategy to operate its core assets since the company will assume operatorship of the developments when the transaction completes and operate the exploration activities at the end of 2011.
FRONTIER EXPLORATION
In order to maintain a balanced exploration portfolio, Melrose has acquired some frontier exploration acreage in Egypt, Turkey and France. These are long term exploration initiatives which may be categorised as high risk but also potentially high impact and they complement the Company's low to moderate risk exploration opportunities in the vicinity of its producing assets. The company's strategy with frontier exploration initiatives is to minimise capital commitments and reduce the exploration risks through the detailed analysis of geological and geophysical data prior to embarking on any drilling programmes. The company would normally seek strategic joint venture partners to share in frontier block investments.
Egypt, Mesaha
The Mesaha Exploration Concession is located in the South Western desert of Upper Egypt and covers a large area of approximately 57,000 km². Melrose holds a 40% operated interest in the block which was awarded in October 2007 with a four year initial exploration term with a 2-D seismic survey and one well commitment.
The work programme commenced in early 2008 with a reconnaissance visit trip to the block to understand the challenges associated with working in such a remote region. An Environmental and Social Screening Study is now underway with a view to developing an effective Health, Safety & Environmental and Social Management Plan before the start of field operations.
Gathering and synthesising existing data has continued throughout the year and the re-processing of two existing aeromagnetic surveys has been completed. These initial studies have confirmed the presence of a large unexplored sedimentary basin on the western side of the block. Melrose is currently formulating a detailed plan for the acquisition of ground gravity and regional 2D seismic surveys to help define the extent and depth of this basin. The preliminary indications from the aeromagnetic data are, however, encouraging and suggest that the basin could be 4.5 kilometres deep and as such could be potentially hydrocarbon generative.
Turkey, South Mardin
In September 2007, Melrose was awarded eight exploration concessions with a combined area of 3,910 km2 in the South Mardin basin in south-east Turkey, near the Syrian border. The initial exploration term for the concessions is 4 years and the work programme commitment is a 2-D seismic survey and one well. Melrose operates the concessions and holds a 66.67% working interest.
The concessions cover a large Palaeozoic sub-basin on the northern margin of the Arabian Plate. Although the area is under-explored, the limited well data available in the region indicates the presence of potential source rocks and reservoirs within the Palaeozoic sequence. Interpretation of the available regional 2D seismic data also indicates the presence of potentially large structural closures. During 2008, Melrose has commenced exploration activities through the purchase of all the historic seismic and geological data in the area which will be thoroughly analysed with a view to acquiring a targeted infill seismic acquisition programme prior to selecting a potential well location for drilling in 2010 or 2011.
The Palaeozoic play is one of emergent interest within the south east Turkey area with the first significant discovery within the play area having been made approximately 50 kilometres north-east of the Melrose concessions. Data from this well is being analysed to determine its ramifications for the Melrose acreage.
France, Rhône Maritime
The Rhône Maritime Exploration Concession was renewed in November 2005 for a period of 5 years with a minimal work programme commitment. The Concession, which covers an area of 12,500 km2, is located in the deep-water area of the Rhône Delta, offshore France in the Mediterranean Sea.
Technical studies of the available geological and geophysical database have resulted in the compilation of a portfolio of potentially large prospects and leads at various target levels within the concession area. In parallel, Melrose has been conducting technical studies designed to reduce the key perceived exploration risk by demonstrating the presence of a working hydrocarbon system in the area. This has involved analysing satellite images of repeatable oil slicks on the sea surface and the attempted identification of natural hydrocarbon seepages on the sea floor responsible for the surface slicks by the acquisition of bathymetric surveys.
The analysis of the survey data has proved inconclusive and ultimately it is anticipated that a well would be required to test the block potential. With this in mind, Melrose is in discussions with the French Government Research Institute for Exploitation of the Sea and various other scientific agencies to ascertain whether a well might be drilled in the area as part of an ongoing international marine research programme.
Consolidated income statement
for the year ended 31 December 2008
| Year ended 31.12.08 | Year ended 31.12.07 | |||||
| Note | $000 | $000 | ||||
| Revenue | 373,349 | 158,195 | ||||
| Depletion and depreciation | (112,325) | (71,124) | ||||
| Decommissioning charge | (1,713) | (1,908) | ||||
| Unsuccessful exploration costs | (32,711) | (60,887) | ||||
| Impairment of goodwill | (8,012) | - | ||||
| Other cost of sales | (27,803) | (21,516) | ||||
| Total cost of sales | (182,564) | (155,435) | ||||
| Gross profit | 190,785 | 2,760 | ||||
| Administrative expenses | (15,973) | (16,838) | ||||
| Profit/(loss) from operations | 174,812 | (14,078) | ||||
| Financing income | 5 | 925 | 1,463 | |||
| Financing costs | 5 | (32,459) | (42,381) | |||
| Profit/(loss) before tax | 143,278 | (54,996) | ||||
| Income tax expense | 6 | (74,974) | (8,218) | |||
| Profit/(loss) for the year | 68,304 | (63,214) | ||||
| Earnings/(loss) per share (cents) | ||||||
| Basic | 7 | 62.1 | (58.2) | |||
| Diluted | 7 | 61.8 | (58.2) | |||
The profit/(loss) for the year is 100% attributable to equity shareholders of the parent company.
Note: All operations were continuing operations.
The results for the year ended 31 December 2008 and 2007 have been extracted from the financial statements for those periods. These financial statements have been reported on by the Company's auditors.
Consolidated statement of recognised income and expense
for the year ended 31 December 2008
| Year ended 31.12.08 | Year ended 31.12.07 | |||
| $000 | $000 | |||
| Exchange differences on non-functional currency entities | - | 49 | ||
| Net change in cash flow hedges | - | (358) | ||
| Deferred tax on cash flow hedges | - | 136 | ||
| Net expense recognised directly in equity | - | (173) | ||
| Profit/(loss) for the year | 68,304 | (63,214) | ||
| Total income/(expense) for the year attributable to equity | ||||
| holders of the parent company | 68,304 | (63,387) | ||
Consolidated balance sheet
as at 31 December 2008
| Note | At 31.12.08 | At 31.12.07 | |||
| $000 | $000 | ||||
| Non-current assets | |||||
| Goodwill | 58,161 | 66,173 | |||
| Intangible assets | 83,251 | 78,568 | |||
| Property, plant and equipment | 576,681 | 520,754 | |||
| Deferred tax asset | 17,620 | 12,144 | |||
| 735,713 | 677,639 | ||||
| Current assets | |||||
| Inventories | 33,255 | 33,879 | |||
| Trade and other receivables | 119,206 | 56,078 | |||
| Cash and cash equivalents | 14,990 | 22,676 | |||
| 167,451 | 112,633 | ||||
| Total assets | 903,164 | 790,272 | |||
| Current liabilities | |||||
| Bank loans | - | (87,766) | |||
| Trade and other payables | (48,624) | (30,890) | |||
| Provisions | (1,437) | (4,201) | |||
| (50,061) | (122,857) | ||||
| Non-current liabilities | |||||
| Bank loans | (440,905) | (294,057) | |||
| Deferred tax liability | (58,642) | (72,229) | |||
| Provisions | (14,561) | (20,433) | |||
| (514,108) | (386,719) | ||||
| Total liabilities | (564,169) | (509,576) | |||
| Net assets | 338,995 | 280,696 | |||
| Equity attributable to shareholders of the parent | |||||
| Issued capital | 9 | 19,946 | 19,925 | ||
| Share premium | 8 | 192,087 | 191,945 | ||
| Special reserve | 8 | 31,244 | 61,244 | ||
| Retained earnings | 8 | 95,718 | 7,582 | ||
| Total Equity | 338,995 | 280,696 | |||
The financial position at 31 December 2008 and 2007 has been extracted from the financial statements for those periods. These financial statements have been reported on by the Company's auditors.
Consolidated cash flow statement
for the year ended 31 December 2008
| Year ended 31.12.08 $000 | Year ended 31.12.07 $000 | |||
| Cashflow from operating activities | ||||
| Profit/(loss) from operations | 174,812 | (14,078) | ||
| Adjustments for: | ||||
| Depreciation of other assets | 750 | 805 | ||
| Depletion, depreciation and decommissioning charge | 114,038 | 73,032 | ||
| Unsuccessful exploration costs | 32,711 | 60,887 | ||
| Impairment of goodwill | 8,012 | - | ||
| Excess cost of decommissioning | (4,178) | - | ||
| Non-cash (release)/expense relating to share-based payment | (1,465) | 362 | ||
| Income tax charge on Egyptian revenue | (88,244) | (16,526) | ||
| Operating cash flow before changes in working capital | 236,436 | 104,482 | ||
| Decrease/(increase) in inventory | 624 | (11,157) | ||
| Increase in trade and other receivables | (60,979) | (29,543) | ||
| Decrease in trade and other payables | (7,744) | (4,739) | ||
| Cash generated from operations | 168,337 | 59,043 | ||
| Income taxes (paid)/received | (2,963) | 3,341 | ||
| Net cash inflow from operating activities | 165,374 | 62,384 | ||
| Cash flows from investing activities | ||||
| Proceeds from sale of property, plant and equipment | 329 | - | ||
| Interest received | 710 | 908 | ||
| Acquisition of property, plant and equipment and intangible assets | (192,963) | (161,478) | ||
| Net cash outflow from investing activities | (191,924) | (160,570) | ||
| Cash flows from financing activities | ||||
| Proceeds from the issue of share capital | - | 51,952 | ||
| Proceeds from issue of share options | 163 | 571 | ||
| Costs of issue | - | (784) | ||
| Purchase of own shares | (1,549) | - | ||
| Net (outflow)/inflow from share capital | (1,386) | 51,739 | ||
| Interest paid | (27,867) | (31,177) | ||
| Loan arrangement fees | (5,132) | (5,294) | ||
| Borrowings raised | 235,976 | 154,478 | ||
| Repayment of borrowings | (175,000) | (63,474) | ||
| Dividends paid | (6,873) | (3,882) | ||
| Net cash inflow from financing activities | 19,718 | 102,390 | ||
| Net (decrease)/increase in cash and cash equivalents | (6,832) | 4,204 | ||
| Cash and cash equivalents at start of year | 22,676 | 17,769 | ||
| Effect of exchange rate fluctuation on cash held | (854) | 703 | ||
| Cash and cash equivalents at end of year | 14,990 | 22,676 | ||
Notes to the financial statements
for the year ended 31 December 2008
1. Financial information
This press release contains the financial information of Melrose Resources plc (the "Company") and its subsidiaries (together referred to as the "Group") for the year ended 31 December 2008.
The financial information set out in this announcement for the tear ended 31 December 2008 and 2007 does not constitute the Group's statutory accounts for these periods within the meaning of Section 240 of the Companies Act 1985. The statutory accounts for 2007 have been delivered to the Registrar of Companies and those for 2008 will be delivered in due course. Both sets of accounts have been prepared under International Financial Reporting Standards as adopted by the EU ("adopted IFRS"). The auditors have reported on those financial statements; their reports were (i) unqualified; (ii) did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their reports; and (iii) did not contain statements under section 237(2) or (3) of the Companies Act 1985. This preliminary announcement was authorised by the Board on 24 march 2009.
A copy of this press release is available on the Company's website at www.melroseresources.com
2. Basis of preparation
The financial information set out in this announcement has been prepared on the historical cost convention and in accordance with International Financial Reporting Standards and its interpretations as adopted by the European Union ("adopted IFRS"). The accounting policies adopted by the Group in this financial information are consistent with those used in the financial statements for the year ended 31 December 2007. The financial information is presented in US dollars rounded to the nearest thousand.
3. Basis of consolidation of the Group
The financial information consolidates the results of and net assets of Melrose resources plc and its subsidiaries. The results of subsidiary undertakings acquired or sold are consolidated from the date that control commences until the date control ceases using the purchase method of accounting.
4. Segment reporting
The primary format, geographical segments, is based on the Group's management and internal reporting structure. The Group has a single class of business - oil and gas exploration, development and production.
Segment results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate expenses, including administrative expenses and facilities costs
Business and geographical segments
The Group has a single class of business which is oil and gas exploration, development and production.
| Geographical area | Bulgaria | Egypt | USA | Other Europe | Total | |||
| 2008 | 2008 | 2008 | 2008 | 2008 | ||||
| $000 | $000 | $000 | $000 | $000 | ||||
| Revenue | 39,643 | 290,818 | 42,888 | - | 373,349 | |||
| Depletion and depreciation | (11,563) | (76,291) | (24,471) | - | (112,325) | |||
| Decommissioning charge | - | (184) | (1,529) | - | (1,713) | |||
| Unsuccessful exploration costs | (93) | (23,741) | (1,542) | (7,335) | (32,711) | |||
| Impairment of Goodwill | - | (5,629) | (2,383) | - | (8,012) | |||
| Other cost of sales | (4,332) | (9,016) | (14,455) | - | (27,803) | |||
| Administrative expenses | (1,557) | (5,076) | (3,484) | - | (10,117) | |||
| Segment result | 22,098 | 170,881 | (4,976) | (7,335) | 180,668 | |||
| Unallocated corporate expenses | (5,856) | |||||||
| Profit from operations | 174,812 | |||||||
| Financing income | 925 | |||||||
| Financing cost | (32,459) | |||||||
| Profit before income tax | 143,278 | |||||||
| Income tax expense | (74,974) | |||||||
| Profit for the year | 68,304 | |||||||
Other Europe relates to operations in France and Turkey. Turkey did not generate any revenue or incur any significant costs in the year.
| Geographical area | Bulgaria | Egypt | USA | Total | |||||
| 2007 | 2007 | 2007 | 2007 | ||||||
| $000 | $000 | $000 | $000 | ||||||
| Revenue | 42,743 | 89,103 | 26,349 | 158,195 | |||||
| Depletion | (20,571) | (43,115) | (7,438) | (71,124) | |||||
| Decommissioning charge | (659) | (1,066) | (183) | (1,908) | |||||
| Unsuccessful exploration costs | (52,522) | (8,365) | - | (60,887) | |||||
| Other cost of sales | (4,433) | (5,777) | (11,306) | (21,516) | |||||
| Administrative expenses | (1,242) | (3,309) | (2,748) | (7,299) | |||||
| Segment result | (36,684) | 27,471 | 4,674 | (4,539) | |||||
| Unallocated corporate expenses | (9,539) | ||||||||
| Loss from operations | (14,078) | ||||||||
| Financing income | 1,463 | ||||||||
| Financing cost | (42,381) | ||||||||
| Loss before income tax | (54,996) | ||||||||
| Income tax expense | (8,218) | ||||||||
| Loss for the year | (63,214) | ||||||||
All sales are to third parties.
| As at 31 December 2008 | Bulgaria $000 | Egypt $000 | USA $000 | Other Europe $000 | Corporate Expenses Unallocated $000 | Total $000 | |||||
| Segment assets | 87,640 | 675,360 | 136,516 | 290 | 3,358 | 903,164 | |||||
| Segment liabilities | (160,959) | (74,448) | (215,767) | - | (112,995) | (564,169) | |||||
| For the year ended 31 December 2008 | |||||||||||
| Capital Expenditure | 28,184 | 137,051 | 46,292 | 1,329 | 444 | 213,300 | |||||
| Depreciation of other assets | 161 | - | 13 | - | 576 | 750 | |||||
| Loan fee amortisation | 608 | - | 770 | - | 419 | 1,797 | |||||
| As at 31 December 2007 | Bulgaria $000 | Egypt $000 | USA $000 | France $000 | Corporate Expenses Unallocated $000 | Total $000 | |||||
| Segment assets | 71,523 | 583,386 | 121,116 | 6,266 | 7,981 | 790,272 | |||||
| Segment liabilities | (70,616) | (111,450) | (210,999) | - | (116,511) | (509,576) | |||||
| For the year ended 31 December 2007 | |||||||||||
| Capital Expenditure | 60,224 | 88,186 | 11,951 | 616 | 502 | 161,479 | |||||
| Depreciation of other assets | 250 | - | 2 | - | 553 | 805 | |||||
| Loan fee amortisation | 267 | 205 | 958 | - | 294 | 1,724 |
All net assets relate to oil and gas exploration, development and production and to continuing activities.
5. Net financing income/(cost)
| 2008 $000 | 2007 $000 | ||
| Bank interest receivable | 710 | 908 | |
| Exchange gains | 215 | 555 | |
| Total financing income | 925 | 1,463 | |
| Bank interest payable | (26,770) | (30,888) | |
| Other interest payable | - | (289) | |
| Other financing charges | (2,846) | (4,362) | |
| Amortisation of loan fees | (1,797) | (1,724) | |
| Unwinding of discount on decommissioning provision | (456) | (105) | |
| Exchange losses | (590) | - | |
| Net loss on disposal of other investments | - | (2) | |
| Net loss on remeasurement of other investments | - | (5,011) | |
| Total financing cost | (32,459) | (42,381) | |
| Net financing cost | (31,534) | (40,918) |
6. Income tax expense
Recognised in the income statement
| 2008 $000 | 2007 $000 | ||
| Current tax expense: | |||
| Current year | 94,037 | 16,469 | |
| Deferred tax expense | |||
| Origination and reversal of temporary differences | (10,765) | (7,668) | |
| Benefit of tax losses recognised | (7,329) | (5,691) | |
| Adjustments for prior years | (969) | 5,108 | |
| Total tax charge in income statement | 74,974 | 8,218 |
Reconciliation of effective tax rate
| 2008 $000 | 2007 $000 | ||
| Profit/(loss) before tax | 143,278 | (54,996) | |
| Tax using the UK corporation tax rate of 28% (2007: 28%) | 40,118 | (15,399) | |
| Non-deductible expenses | 11,185 | 13,297 | |
| Effect of tax rate in foreign jurisdictions | 20,958 | 6,823 | |
| Deferred tax not recognised in relation to tax losses | 4,821 | 4,950 | |
| (Over)/under provided in prior years | (969) | 3,962 | |
| Reversal of deferred tax on fair value | (6,478) | (5,774) | |
| Other | 5,339 | 359 | |
| Total tax charge in income statement | 74,974 | 8,218 |
Deferred tax recognised directly in equity
| Group 2008 | Group 2007 | Company 2008 | Company 2007 | ||||
| $000 | $000 | $000 | $000 | ||||
| Relating to: | |||||||
| Equity-settled transactions | - | (3,562) | - | (3,562) |
7. Earnings/(loss) per share
The calculation of the basic and diluted earnings per share is based upon the following data:
| Year ended 31.12.08 $000 | Year ended 31.12.07 $000 | ||
| Profit/(loss) for the year attributable to ordinary shareholders | 68,304 | (63,214) | |
| Basic earnings/(loss) per share (cents) | 62.1 | (58.2) | |
| Diluted earnings(loss) per share (cents) | 61.8 | (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:
| Year ended 31.12.08 No. of shares | Year ended 31.12.07 No. of shares | ||
| Issued ordinary shares at start of year | 109,972,891 | 102,623,456 | |
| Shares issued during the year | 113,997 | 7,349,435 | |
| Shares in issue at end of year | 110,086,888 | 109,972,891 | |
| Weighted average number of ordinary shares at end of year | 110,034,937 | 108,579,349 | |
| Effect of share options in issue | 486,684 | - | |
| Weighted average number of ordinary shares at end of year - for diluted earnings per share | 110,521,621 | 108,579,349 |
8. Reserves
| Share capital | Share premium | Special reserve | Retained earnings | ||||
| Group | $000 | $000 | $000 | $000 | |||
| At 1 January 2007 | 18,502 | 141,629 | 101,244 | 37,812 | |||
| Share issues | 1,423 | 51,100 | - | - | |||
| Issue costs | - | (784) | - | - | |||
| Transfer from Special reserve to Retained earnings | - | - | (40,000) | 40,000 | |||
| Total recognised income and expense for the year | - | - | - | (63,387) | |||
| Equity settled transactions | - | - | - | (2,961) | |||
| Dividends paid | - | - | - | (3,882) | |||
| At 31 December 2007 | 19,925 | 191,945 | 61,244 | 7,582 | |||
| At 1 January 2008 | 19,925 | 191,945 | 61,244 | 7,582 | |||
| Share issues | 21 | 142 | - | - | |||
| Purchase of own shares | - | - | - | (1,549) | |||
| Transfer from Special reserve to Retained earnings | - | - | (30,000) | 30,000 | |||
| Total recognised income and expense for the year | - | - | - | 68,304 | |||
| Equity settled transactions | - | - | - | (1,746) | |||
| Dividends paid | - | - | - | (6,873) | |||
| At 31 December 2008 | 19,946 | 192,087 | 31,244 | 95,718 |
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.
During the year, the Company purchased 300,000 shares (2007 - nil) for a consideration of $1.5 million (2007 - $ nil) to be held in trust for the benefit of employee share schemes. At 31 December 2008, the trust held 300,000 shares (2007 - nil) which had a market value of $0.8 million. The total cost of the repurchase, including expenses, was $1.5 million which has been charged against retained earnings.
9. Dividends
The Board proposes to pay a final dividend in 2009 of 1.6 pence per ordinary share, equating to a total dividend of 2.8 pence per ordinary share (2008: 2.1 pence per ordinary share) amounting to approximately $4.8 million (2008: $4.6 million) which, if approved at the AGM, will be paid on 26 June 2009 to shareholders on the register at the close of business on 12 June 2009. This proposed dividend has not been provided for in the financial statements in accordance with IAS 10, but following approval at the AGM will be deducted from retained reserves.
| Glossary | |
| the Adair Trusts | certain trusts, the beneficiaries of which are R F M Adair and members of his immediate family |
| bbl | barrel of oil, condensate or natural gas liquids |
| Bcf | billion cubic feet of gas |
| Bcfe | billion cubic feet of gas equivalent |
| bcpd | barrel of condensate per day |
| the Board | the Board of directors of the Company |
| boe | barrel of oil equivalent |
| boepd | barrel of oil equivalent per day |
| BOP | blow-out preventer |
| bopd | barrel of oil, condensate or natural gas liquids per day |
| bpd | barrels per day |
| the Combined Code | the Principles of Good Governance and Code of Best Practice as appended to the Listing Rules of the Financial Services Authority |
| the Company | Melrose Resources plc |
| EBITDAX | earnings before interest, taxation, depletion, depreciation and amortisation |
| GIIP | gas initially in place |
| the Group | the Company and its subsidiaries |
| Mbbl | thousand barrels of oil, condensate or natural gas liquids |
| IFRS | International Financial Reporting Standard(s) |
| Mboe | thousand barrels of oil equivalent |
| Mcf | thousand cubic feet of gas |
| Mcfe | thousand cubic feet of gas equivalent |
| Mcfpd | thousand cubic feet of gas per day |
| Melrose | the Company or the Group, as appropriate |
| Merlon | Merlon Petroleum Company |
| MMbbl | million barrels of oil, condensate or natural gas liquids |
| MMboe | million barrels of oil equivalent |
| MMcf | million cubic feet of gas |
| MMcfe | million cubic feet of gas equivalent |
| MMcfpd | million cubic feet of gas per day |
| MMcfepd | million cubic feet of gas equivalent per day |
| NPV10 | net present value discounted at 10% per annum |
| PDP | proved developed producing |
| Petreco | Melrose Resources S.à r.l. and/or Petreco Bulgaria EOOD, (as appropriate) |
| psi | pounds per square inch |
| PSP | Performance Share Plan |
| PUD | proved undeveloped |
| Tcf | trillion cubic feet of gas |