25 Nov 2009 07:00
Victoria Oil & Gas Plc
('Victoria' or 'the Company')
(AIM: VOG)
Results for year ended 31 May 2009
Highlights
For further information, please contact:
Victoria Oil & Gas Plc - Tel: +44 (0) 20 7921 8820
George Donne / Kevin Foo
Strand Hanson Limited - Tel: +44 (0) 20 7409 3494
Simon Raggett / Angela Peace
Fox-Davies Capital - Tel: +44 (0) 20 7936 5220
Daniel Fox-Davies / Oliver Stansfield
Conduit PR - Tel: +44 (0) 20 7429 6607
Jonathan Charles / Ed Portman
Chairman's Statement
Dear Shareholder,
It is my pleasure to write to you once again and to discuss potentially the most significant year in Victoria's history and to outline how the next year will be even more eventful.
Review of the Markets
Markets in the last 18 months have been the most volatile and traumatic in memory. Following the near-collapse of the banking system, the equity markets, which are the life-blood of the resources sector, effectively closed for business until confidence returned in the middle of 2009. Such extreme financial conditions proved a true test of both companies and managements, with several high-profile names not lasting to see the third quarter of this year. In my statement in last year's accounts I explained how the Board was focussed on how to capitalise on this situation.
I am proud to report that not only did Victoria survive this period, but we raised over $28 million in new equity since year end and acquired our interest in the highly-desirable Logbaba project in Cameroon. Such achievements are testament to our determination and to the quality of our asset portfolio. We are now well and truly participants in Africa.
Acquisition of Logbaba Project, Cameroon
Our acquisition of Bramlin Limited and its interest in the unique Logbaba gas and condensate project in December 2008 is a good example of our strategy and this project is expected to provide material cash flow in 2010. This cash will also help to unlock the potential of our large West Medvezhye project in Russia.
When referring to the Logbaba project, I do not use the term unique loosely. In my 38 year experience in the resources industry, I have not seen a project so favourably positioned for swift development and monetisation. Since the discovery of the field in the 1950s, Douala, the city where the field is located, has grown into a commercial focal point of the Central African region. Our customers are literally on our doorstep. Cameroon, Equatorial Guinea, Chad and the Central African Republic all channel their foreign trade through the city's port and major international companies such as Guinness, Lafarge and Nestle all have their manufacturing bases here to exploit the region's abundant natural commodities.
It is these industrial customers who will constitute the immediate market for the natural gas production from Logbaba. Their existing processing facilities rely on high-cost liquid fuels such as diesel and fuel-oil and they have already declared their desire to switch to natural gas as soon as it is available. Some have even already purchased the equipment to convert their burners. A study by the marketing arm of the State oil company has estimated the current energy consumption in Douala by the industrial market to be equivalent to approximately 15 million standard cubic feet of gas per day. We have already signed up more than half of this market through contracts and letters of intent and we expect demand to double to 30 million standard cubic feet per day within three years of first sales.
My colleague Radwan Hadi gives a detailed update below on the drilling, but we have confirmed the presence so far of 90 feet of gross sandstone pay at 6,030 feet. However, the path to first revenues will not be easy. We are one of the first gas developers in Cameroon and one of very few companies to target the country's onshore potential. Access to oilfield equipment and services is often difficult and circuitous and therefore expensive. Before we can sell our production, we must install a processing facility to remove the valuable liquid hydrocarbons from the gas and construct our own pipeline to reach the market. Although the trunk pipeline may only be a matter of ten kilometres in length this has never been done before in Cameroon. Our programme currently targets supplying first customers by mid 2010.
Industrial demand, however, is only one of our goals. With production test rates of 25 - 30 million cubic feet per day in the original wells, we expect to have excess capacity to exploit larger potential markets. The huge demand for power in the region is just such an opportunity and Victoria is delighted to be at the forefront of the Government initiative to more than double its power generating capacity. Historically, natural gas has been a neglected resource in Western Africa (for instance Nigeria currently flares around 40% of its gas production), but the administration of Cameroon has identified its huge potential as a cheap and environmentally sound source of energy and all of this is to Victoria's potential benefit.
Exploration of West Medvezhye, Russia
While Logbaba has been grabbing most of the headlines this year, West Medvezhye continues to be the quiet achiever. Since the grant of exploitation rights to the field in 2008, we have seen the approval of first recoverable reserves and resources, official recognition by the Russian Ministry of Natural Resources (MNR) of over 30 potential structures in the licence area, the first successful passive seismic data acquisition, which, combined with the thorough reprocessing of existing 2D seismic data, has led to the identification of two significant structures very close to discovery well 103.
Today, the current approved recoverable reserves and resources for the field, under Russian standards, are 14.4 million barrels of oil equivalent C1+C2 reserves and 170 million barrels of oil equivalent C3 resources. I should emphasise, however, that the reserve numbers are solely for the Well 103 discovery, while the resources have only been estimated for three potential structures out of over 30. Although based on different sets of assumptions, these official numbers and the DeGolyer and MacNaughton 2006 gross prospective resource estimate of over 1.1 billion barrels of oil equivalent both point to a very significant prospect needing to be exploited.
It has also been very pleasing to see that the authorities in Russia have been aware of the difficulties that companies have faced during the last year due to the credit crunch. Very recently, we applied to the MNR for a relaxation of the terms of our first 5-year work programme and they have agreed to amend our obligation to drill two wells by the end of 2012 to drilling two wells by the end of 2013.
Kemerkol, Kazakhstan
As you will see from this year's financials, the Directors have decided to include a provision for $35.5 million against the carrying value of the Kemerkol asset. We continue to fight our corner in the Kazakhstan legal system on this project, but its importance in the day to day business of Victoria has been minimised. We will also seek solutions within economic and legal limits.
Falcon Option
Our option for the acquisition of Falcon Petroleum Limited, a private company with 50% of a Production Sharing Agreement (PSA) in Mali and 90% of a PSA for three very prospective blocks in Ethiopia, expired recently, although we are currently negotiating an extension of this option. The technology that we have at our disposal, particularly passive seismic, is perfectly suited to the quick and economic appraisal of such large-scale exploration projects. With good ground-work and some luck, we could uncover an elephant project in a nascent petroleum region.
Our ambition remains to grow Victoria organically and through acquisition into a major E&P company and as we develop the Logbaba and West Med projects, we will continue to seek out new, exciting opportunities to add further value.
I would like to extend my thanks to all of our employees and my fellow Directors for their application and determination during this most demanding of years and also thank you, our shareholders, for your support. On your behalf, I would also like to pass on our appreciation to two Non Executive Directors, who are leaving us this year. Rashed Al Suwaidi, who left the Company in October, and Mukhtar Tuyakbayev, who will not be standing for re-election at this year's Annual General Meeting, have both decided to pursue other opportunities and we wish them great success in their future ventures.
Kevin Foo
Chairman
Chief Operating Officer's Review
It is my great pleasure to report to you for the first time as the Chief Operating Officer of Victoria in a year which has seen so much activity for our small company and which should pave the way for so much more in the years to come.
Logbaba, Cameroon
As an oil man with more than 30 years' experience in the industry, working on E&P projects across the globe, I believe that the achievement of the Victoria team in Cameroon in spudding the first well, La-105, within nine months of acquiring the licence is nothing short of exceptional. For more than 50 years, the Logbaba gas and condensate project has remained dormant, but starting in January 2009 following the acquisition of Bramlin, Victoria has succeeded in: developing an integrated appraisal/development/production programme; constructing a drilling site and obtaining certificate of compliance from the Ministry of Environment; mobilising a new land rig; sourcing and importing a full suite of equipment and services; and breaking ground on schedule.
As reported earlier in November, we have successfully drilled down to the bottom of the 12½ inch hole section to a depth of approximately 6,200 feet (measured depth), and we have intersected around 90 feet of gross sandstone pay. These sands, of Campanian age, were encountered at around 6,030 feet (measured depth) and appear to have good porosity and permeability and are at pressures of 4,000 psi. This excellent result conforms to the prognosis for Well La-105, prepared using the original data from Well La-103.
When La-103 was drilled by Elf in the late 1950s, these same sands were encountered and flowed on an open-hole drill stem test at a rate of approximately 4.5 million cubic feet of gas per day. Although these test results were appraised by RPS Energy in their reserve report of 2008, they were not included in the calculation of proven reserves and a good test on these sands could see them added to our 1P numbers for the field.
Most of the gas encountered by Well La-103 was seen at depths of around 8,000 feet at pressures of around 8,000 psi and temperatures of up to 320 degrees Fahrenheit. Under test, these gas-bearing horizons flowed at approximately 30 million cubic feet of gas per day per well or the equivalent of 5,400 barrels of oil.
Once La-105 is completed, work will immediately begin on the next well. The rig will be skidded about ten metres to the side of the current hole and another 10,000 foot deviated well (Well La-106) will be drilled to twin La-101. La-101 was originally a blow-out when drilled by Elf, who were looking for oil and so not prepared for the prolific gas zones that they encountered. The blow-out ran for 38 days before being brought under control and is estimated to have produced almost a billion cubic feet of gas in that time.
Activities on the gas processing plant, production facilities and pipeline of the Logbaba integrated development programme continue on-schedule. The detailed engineering will incorporate the data from the new wells and we are targeting first deliveries in mid-2010. The engineering of the downstream is unlikely to be complex in itself, assuming that the gas composition is similar to that which was seen by Elf, but bringing such a project on-stream in a country with such little available infrastructure is the real challenge. However, it is worth keeping the nature of the project in perspective and the intricacies of constructing a pipeline are more than offset by the availability of a fully developed market within a ten kilometre radius of our first well.
Having reviewed the data available on the original wells, recent analogues and the our LWD/MWD new well data, it is my view that the 2P reserves ascribed to the field by RPS Energy of 106 billion cubic feet does not reflect the full potential of the Logbaba block. The 2P reserves were assigned to tested sands, using only the gas-down-to volumes in the respective wells. On the other hand, no gas-water contacts were identified on the well logs in any of the sands in the Logbaba Formation or below it. Furthermore, the currently declared 2P reserves are based on the area that covers the old drilled wells which only represent some 10% of the total Logbaba block area. Yet the Turbidite sands encountered by Elf in the Logbaba wells, and confirmed in La-105, are similar to those seen in the large offshore fields stretching into the Gulf of Guinea from the mainland.
We have looked past the current drilling programme and towards the further development of the field as a whole. All drilling to date has centred on a limited area on a small anticline within the southern section of the block and in November, we commenced a new passive seismic spectroscopy study with GeoDynamics Research. This survey will take about 50 measurements over the entire licence and give us our first new data on the subsurface and allow us to begin selection of the next drilling locations.
West Medvezhye, Russia
The work being undertaken at West Medvezhye is at the other end of the E&P spectrum. West Medvezhye is a very large exploration project in a hugely prospective area, but one in which no discoveries had been made until Victoria's Well 103 which was completed in late 2007. Now that the first discovery has been made and the presence of hydrocarbons confirmed, the aim is to establish the optimum areas for further appraisal to find commercially productive zones.
Following the drilling and seismic work already undertaken, we have a good picture of the area around Well 103, which indicates that it penetrated the flank of a hydrocarbon-bearing structure at around 3,800 metres depth. However, the passive seismic in particular, has indicated that there may be at least one other hydrocarbon-bearing structure in the locality. Our goal now is to delineate as much of the rest of the block as possible before we commence our next drilling campaign. We have been afforded additional time by the MNR precisely for this purpose and we intend to use it.
In the new year, after the worst of the winter has passed, we will undertake a second passive seismic spectroscopy study over a large area of the northern and eastern section of the West Medvezhye licence block. Our studies show that this section of our licence includes an extension of the super-giant Medvezhye field and it is here where we stand the best chance of finding stratigraphic traps with superior reservoir quality. We are also assessing the potential benefit of a geochemical survey over the same area, to be conducted this year before conditions become too severe. With these two technologies, we would gain a better understanding of the hydrocarbon potential of the target area without the immediate need to acquire a very expensive conventional seismic survey. Once the data from the surveys has been processed and interpreted, we will pick areas of possible seismic requirement and, more importantly, our next well location and commence preparations for new exploration drilling. If all goes according to expectation, we could be preparing our next well at West Medvezhye by the end of 2010.
Radwan Hadi
Chief Operating Officer
Consolidated Income Statement
Year ended 31 May 2009
| 2009 | 2008 | |
| $000 | $000 | |
| Continuing operations | ||
| REVENUE | - | 1,726 |
| Cost of sales | - | (1,655) |
|
|
| |
| GROSS PROFIT | - | 71 |
| Other (losses) and gains | (1,402) | 260 |
| Impairment of exploration and evaluation assets | (35,541) | - |
| Administrative expenses | (6,336) | (4,857) |
|
|
| |
| OPERATING LOSS | (43,279) | (4,526) |
| Interest received | 122 | 248 |
| Finance revenue | 1,401 | 11,095 |
| Finance costs | (606) | (7,985) |
|
|
| |
| LOSS BEFORE TAXATION | (42,362) | (1,168) |
| Income tax expense | - | - |
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|
| |
| LOSS AFTER TAXATION FOR THE FINANCIAL YEAR | (42,362) | (1,168) |
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|
| |
| Cents | Cents | |
| Loss per share - basic | (11.91) | (0.70) |
| Loss per share - diluted | (11.91) | (0.70) |
Consolidated Balance Sheet
As at 31 May 2009
| 2009 | 2008 | |
| $000 | $000 | |
| ASSETS: | ||
| NON CURRENT ASSETS | ||
| Intangible assets | 83,149 | 104,365 |
| Property, plant and equipment | 37 | 2,008 |
| Investments | - | 696 |
| Restricted cash | - | 122 |
|
|
| |
| 83,186 | 107,191 | |
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|
| |
| CURRENT ASSETS | ||
| Inventory | - | 3 |
| Receivables | 737 | 1,226 |
| Cash and cash equivalents | 711 | 9,270 |
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|
| |
| 1,448 | 10,499 | |
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|
| |
| TOTAL ASSETS | 84,634 | 117,690 |
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| |
| LIABILITIES: | ||
| CURRENT LIABILITIES | ||
| Trade and other payables | (3,885) | (4,947) |
| Borrowings | (1,000) | - |
|
|
| |
| (4,885) | (4,947) | |
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|
| |
| NET CURRENT (LIABILITIES)/ASSETS | (3,437) | 5,552 |
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|
| |
| NON-CURRENT LIABILITIES | ||
| Borrowings | - | (3,693) |
| Convertible loan - debt portion | (1,055) | (212) |
| Derivative financial instrument | (642) | (1,518) |
| Deferred tax liabilities | (6,599) | - |
| Provisions | (2,882) | (1,393) |
|
|
| |
| (11,178) | (6,816) | |
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|
| |
| NET ASSETS | 68,571 | 105,927 |
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| EQUITY: | ||
| Called-up share capital | 4,289 | 2,621 |
| Share premium | 114,620 | 100,133 |
| ESOP Trust reserve | (124) | (124) |
| Investment revaluation reserve | - | 295 |
| Translation reserve | (10,774) | 110 |
| Other reserve | 2,882 | 2,852 |
| Retained earnings - (deficit)/surplus | (42,322) | 40 |
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| |
| TOTAL EQUITY | 68,571 | 105,927 |
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Consolidated Statement of Changes in Equity
Year ended 31 May 2009
| Called up share capital | Share premium | ESOP Trust reserve | Investments revaluation reserve | Retained earnings / (deficit) | Translation reserve | Other reserve | Total | |
| $000 | $000 | $000 | $000 | $000 | $000 | $000 | $000 | |
| At 31 May 2007 | 1,129 | 71,935 | (74) | - | (953) | - | - | 72,037 |
| Shares issued for cash | 1,063 | 29,205 | (50) | - | - | - | - | 30,218 |
| Shares issue costs | - | (3,353) | - | - | - | - | - | (3,353) |
| Conversion of loan notes | 429 | 4,507 | - | - | - | - | - | 4,936 |
| Transfer concerning issue expenses of loan notes | - | (2,161) | - | - | 2,161 | - | - | - |
| Revaluation to fair value | - | - | - | 295 | - | - | - | 295 |
| Currency translation adjustment | - | - | - | - | - | 110 | - | 110 |
| Settlement of embedded derivative | - | - | - | - | - | - | 2,852 | 2,852 |
| Loss for the year | - | - | - | - | (1,168) | - | - | (1,168) |
| At 31 May 2008 | 2,621 | 100,133 | (124) | 295 | 40 | 110 | 2,852 | 105,927 |
| Shares issued | 451 | 4,832 | - | - | - | - | - | 5,283 |
| Bramlin acquisition | 1,217 | 9,859 | - | - | - | - | - | 11,076 |
| Share issue costs | - | (204) | - | - | - | - | - | (204) |
| Recognition of share based payments | - | - | - | - | - | - | 30 | 30 |
| Reversal of revaluation following acquisition | - | - | - | (295) | - | - | - | (295) |
| Currency translation Adjustment | - | - | - | - | - | (10,884) | - | (10,884) |
| Loss for the year | - | - | - | - | (42,362) | - | - | (42,362) |
| At 31 May 2009 | 4,289 | 114,620 | (124) | - | (42,322) | (10,774) | 2,882 | 68,571 |
Share Premium reserve
The share premium reserve comprises of the excess of monies received in respect of share capital over the nominal value of shares issued, less share and debenture issue costs.
ESOP Trust reserve
The ESOP Trust reserve comprises of shares in the Company held by Victoria Oil & Gas ESOP Trust.
Investments revaluation reserve
The investments revaluation reserve included revaluations of available for sale investments to market value. These available for sale investments consisted of shares in Bramlin Limited. This revaluation was reversed during the year as a result of the acquisition by the Group of Bramlin Limited.
Retained earnings deficit
Retained earnings comprises accumulated losses in the current year and prior years.
Translation reserve
The translation reserve includes movements that relate to the retranslation of non-monetary items whose functional currencies are not US dollars.
Other reserve
The other reserve includes an amount of $2.85m which relates to the settlement of the embedded derivative following the early redemption of the associated convertible loan note in the prior year.
Consolidated Cash Flow Statement
Year ended 31 May 2009
| 2009 | 2008 | |
| $000 | $000 | |
| CASH FLOW FROM OPERATING ACTIVITIES | ||
| Loss for the year | (42,362) | (1,168) |
| Finance costs recognised in income statement | 606 | 7,985 |
| Gain on third party loan assigned to Group company | (3,100) | - |
| Investment revenue recognised in income statement | - | (248) |
| Impairment loss recognised in income statement | 35,541 | - |
| Depreciation and amortisation of non-current assets | 563 | 671 |
| Fair value gain on embedded derivative | (1,401) | (11,095) |
| Net foreign exchange (loss)/gain | 2,514 | (3,695) |
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|
| |
| (7,639) | (7,550) | |
| MOVEMENTS IN WORKING CAPITAL | ||
| Decrease/(increase) in trade and other receivables | 337 | (106) |
| Decrease/(increase) in inventories | 3 | (3) |
| Increase/(decrease) in trade and other payables | 512 | (3,137) |
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| |
| CASH USED IN OPERATIONS | (6,787) | (10,796) |
| Interest paid | - | (867) |
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| |
| NET CASH USED IN OPERATING ACTIVITIES | (6,787) | (11,663) |
| CASH FLOWS FROM INVESTING ACTIVITIES | ||
| Interest received | - | 248 |
| Acquisition costs of subsidiary | (949) | - |
| Cash acquired on acquisition | 63 | - |
| Amounts advanced to third parties | (2,216) | - |
| Payments for intangible fixed assets | (1,069) | (7,236) |
| Payments for tangible fixed assets | (48) | (949) |
| Proceeds from sale of tangible fixed assets | 37 | 12 |
| Proceeds from sale of intangible assets | - | 300 |
| Transfer to fund for asset retirement obligations | - | (122) |
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| |
| NET CASH USED IN INVESTING ACTIVITIES | (4,182) | (7,747) |
| CASH FLOW FROM FINANCING ACTIVITIES | ||
| Proceeds from issue of equity shares | 1,938 | 30,218 |
| Proceeds from issue of convertible loan notes | 1,188 | 2,000 |
| Repayment of convertible loan notes | - | (15,717) |
| Payment of equity issue costs | - | (990) |
| Payment of loan issue costs | (174) | (265) |
| Proceeds from borrowings | 1,000 | 3,410 |
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| |
| NET CASH GENERATED FROM FINANCING ACTIVITIES | 3,952 | 18,656 |
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| |
| NET DECREASE IN CASH AND CASH EQUIVALENTS | (7,017) | (754) |
| CASH AND CASH EQUIVALENTS BEGINNING OF THE YEAR | 9,270 | 9,945 |
| Effects of exchange rate changes on the balance of cash held in | ||
| foreign currencies | (1,542) | 79 |
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| |
| CASH AND CASH EQUIVALENTS END OF THE YEAR | 711 | 9,270 |
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Notes
1. Publication of non statutory accounts
The financial information set out in this preliminary announcement does not constitute statutory accounts.
The balance sheet at 31 May 2009 and income statement, cash flow statement and associated notes for the year then ended have been extracted from the Group's 2009 statutory financial statements upon which the auditors' opinion is unqualified.
2. Annual Report
The Annual Report for the year ended 31 May 2009 has been posted to shareholders. The Annual General Meeting of the Company will be held at 1st floor Meeting Room, Hatfield House, 52-54 Stamford Street, London SE1 9LX, on 18 December 2009 at 11.00 a.m. A full version of the annual accounts will be available on the Company's website at www.victoriaoilandgas.com