8 Nov 2010 07:00
Victoria Oil & Gas Plc
('Victoria' or 'the Company')
(AIM: VOG)
Results for year ended 31 May 2010
Chairman's Statement
Dear Shareholder,
It is my pleasure to once again review Victoria's achievements for the year. We are close to achieving first gas sales in Logbaba, Cameroon, which will transform Victoria into a revenue generating exploration, gas production and distribution company. This has been a year like no other at Victoria, not without its challenges, but overall 2010 has been a truly transformational year.
Review of the Markets
Financial distress in the global economy, which began in the second half of 2008, continued throughout the year. This led to unprecedented efforts from governments around the world to provide fiscal stimulus programmes, designed to bring stability and liquidity to the market and to restore economic activity. Despite some encouraging signs, the uncertainty has continued and it looks likely to remain for the foreseeable future.
For some independents the lack of liquidity, allied to the fragility of the banking markets, proved too great, resulting in a number of failures and distressed sales. For companies able to raise funds, the cost of borrowing has increased substantially, even for the highest credit rated companies.
In this context, it is noteworthy that Victoria was able to raise US$51million this financial year to finance the Logbaba drilling programme.
Logbaba, Cameroon
Progress at Logbaba from the second half of 2009 to date has been exceptional. Last year I said that I had not seen a project so favourably positioned for swift development and monetisation. Despite some obstacles, our achievements this year have reinforced this view.
The Company has drilled and completed two successful production wells, concluded all engineering studies for bringing gas to market and secured key gas sales contracts. We are now within sight of having a gas treatment plant and pipeline to distribute gas from the field.
My colleague, Radwan Hadi, provides more detail on our drilling campaign in his Review of Operations but I wish to make a few comments. Firstly, delivering two out of two successful high pressure, high temperature production wells, La-105 and La-106, in an area largely devoid of oil and gas infrastructure is a great achievement. Both wells have been completed as producers, and tested at rates of up to 55 million standard cubic feet per day (MMscf/d) and up to 22 MMscf/d for La-105 and La-106 respectively.
Production from the wells will be capable of meeting anticipated market requirements until the next drilling programme. Recently, we were able to announce a five fold increase in Proved reserves to 49 Bcf, while Proved and Probable reserves more than doubled to 212 Bcf. These reserve upgrades represent the potential of an area covering only 10% to 20% of the licence block. Having defined new leads in other areas of the block, we were also able to announce prospective resources in excess of 1 Tcf. We are the first Company to drill onshore in Cameroon for over fifty years. Although we experienced some drilling difficulties that led to significant cost overruns, I remain confident that during our next anticipated drilling campaign in 2012, we will capitalise on our experiences and deliver even greater success.
All other aspects involved with bringing Logbaba gas to market have exceeded our expectations.
In July this year, we announced a reduction in capital expenditure saving in excess of $20 million with regard to facilities, pipeline costs and civil expenditure to achieve first gas sales. This was achieved by a restructuring of the project into three distinct phases, where all non-critical expenditure was deferred. Furthermore, our proposal to employ high density polyethylene pipe as a replacement to steel pipe complies with all necessary project safety and technical standards while saving considerable capital. Finally, we have deferred full purchase of the treatment facilities for a minimum of two years from first gas sales.
Concerning sales, our gas marketing team has signed key industrial customers, including some multinational firms, for gas delivery in 2011. This is an ongoing process and the Company expects many more customers to be signed up during the rest of this quarter and into 2011. Discussions with Douala industrial customers have been extremely positive and indicate the potential for significant market growth. The Company anticipates achieving daily gas sales of approximately 8 MMscf/d by the end of 2011 with potential to increase to 100 MMscf/d within five years.
Victoria has established first mover advantage in the Cameroon and Central African gas market and we shall own and control our own pipeline. Industry in Douala is handicapped by high energy costs and unreliable delivery. For some industries, each outage can cost tens of thousands of dollars in material wastage and lost time. Consequently, many of our customers are interested in utilising Logbaba gas supply as their prime energy source via gas powered generators on site. Our contracts allow customers to lock into fixed prices for five years at substantially lower rates than currently paid. Importantly for Victoria, this also means we are not exposed to the fluctuations in gas prices in other markets and in this regard, we could be seen as a utility company.
From a macro perspective, power supply in Cameroon is inadequate, hampering the prospect of foreign investment and expansion from existing industries. The government plans to increase power supply from an estimated current working capacity of 600 MW to 2,000 MW by the year 2020. Victoria is well placed to provide gas to thermal power projects currently being planned in Douala.
Finally, the Company awaits the issue of the Exploitation Authorisation and Domestic Transport Authorisation licences. A project delay is anticipated whilst the State Hydrocarbons Corporation (SNH), the Ministry of Mines and Technology and the Presidential Office undertake various levels of due diligence before these permits can be issued. It must be remembered that this will be the first such licence issued in Cameroon. However, we remain confident that these permits are imminent and that Victoria has fully complied with and satisfied all requests to date. We now expect to deliver first gas in Q1 2011.
West Medvezhye, Russia
West Medvezhye (West Med), strategically located in the Nenets region of Siberia with a licence area covering 1224km2, represents an asset with major hydrocarbon potential. It lies just west of the super giant Medvezhye field where over 70 Tcf of dry gas has been produced. Further to our discovery well 103 drilled in 2006, the exploitation licence area has C1 and C2 (Russian classification) recoverable reserves of 14.4 million barrels of oil equivalent and C3 resources of 170 million barrels of oil equivalent approved by the Russian Ministry of Natural Resources. In addition, independent reserve auditors DeGolyer and MacNaughton have calculated best estimate gross prospective recoverable resources of approximately 1.1 billion barrels for the entire West Med Licence block.
During the past twelve months, Victoria completed a winter road and carried out passive seismic and geochemical studies to further delineate the field and to allow us to target more prospects for drilling. We are now integrating the new passive seismic and geochemical studies with existing data sets. Initial indications are highly encouraging with three further prospects identified. The Company plans to drill two more wells by 2012.
Victoria is actively evaluating all of its options concerning the future development of West Med.
Kemerkol, Kazakhstan
In the 2009 Annual Report and Accounts, the Directors made a provision of $35.5 million against the carrying value of the Kemerkol asset subsequent to our licence being revoked by the Economic Court of the Atyrau Oblast of Kazakhstan. We continue to fight our corner within the constraints of the Kazakhstani legal system and still remain hopeful of a positive outcome but Kemerkol's long-term economic importance within Victoria's overall portfolio of assets has been minimised.
Other Projects
Victoria extended its option in November 2009 to acquire Falcon Petroleum Limited (Falcon), a private company with 50% of a Production Sharing Agreement (PSA) covering one block in Mali and 90% of a PSA covering three blocks in Ethiopia. Total acreage in the two PSAs covers approximately 46,000 km2. While these areas are relatively unexplored, both are highly prospective regions of Africa. Block Ab1 in Ethiopia has oil seeps, confirming an active petroleum system. Further subsurface exploration will greatly enhance our understanding of Falcon's potential and identify target locations for exploration drilling. The Company has an agreement with Falcon to extend the option for a further year and is planning to run a passive seismic surveying programme in Ethiopia before the year end.
In addition, Victoria has also applied for five blocks in Liberia's third offshore bid round and we hope to know the results of this bid by the end of the year.
Victoria's strategy remains to grow organically and via acquisition into a profitable company. The Company now has total recoverable Proved and Probable reserves of 35.6 MMboe and significant potential, with prospective resources of over 1.3 billion barrels of oil equivalent. We will endeavour to maximise shareholder value through further development and appraisal work on our existing assets. Furthermore, the Company will continue to appraise new opportunities and commercial transactions, where our technical expertise and experience gained to date, particularly in Africa, can be used to an advantage.
In conclusion, thank you to all employees and advisers of the Company and my fellow Directors for their hard work this year. Most of all, I thank Victoria's shareholders for your continued support. I shall continue to update you on progress via our quarterly letters and as news breaks.
Kevin FooChairman
Chief Operating Officer's Review
It is my great pleasure to review the technical operations at Victoria for the year. With our Logbaba gas and condensate field in Cameroon soon to commence production and the ongoing appraisal of more than 5 Tcf of prospective gas resources in our West Med asset in Siberia in 2010, Victoria is emerging as a significant player in natural gas production, with a balanced portfolio of exploration and production assets.
Logbaba, Cameroon
On 1 January 2010, well La-105, the first well drilled by Victoria at Logbaba, was completed to a depth of 8,920 feet. Multiple pay zones were tested over a period of two weeks at depths between 7,018 - 8,566 feet. Over the testing period, various zones of La-105 flowed at rates between 11 - 56 MMscf/d of natural gas and 210 - 1,000 barrels per day of condensate. Flowing wellhead pressures varied between 2,750 - 4,552 psi. The gas is sweet with a high calorific value and the condensate has an API gravity of 47 degrees.
The testing programme was designed to open up the gas-bearing horizons in turn from the deepest to the shallowest until we were comfortable that a minimum production level of 8 MMscf/d of gas could be sustained. We only needed to test horizons of the Lower Logbaba formation, which had not been tested before, and the Upper Logbaba D sands to gain this comfort. This meant that the Upper Logbaba A through C sands, which the well logs indicated to be the best quality hydrocarbon-bearing sands encountered during drilling, were not perforated. The Upper Logbaba A through C sands will be perforated and added to the completion interval when required for production.
Victoria's second well, La-106, successfully reached a total measured depth of 10,509 feet on 17 April 2010. Its target had been revised following the passive seismic survey results and the well was eventually drilled deeper than planned because of the presence of sands at lower levels.
La-106 was initially perforated in the bottom intervals of the Lower Logbaba Sands at the end of June and was open to flow gas for a few weeks as part of well clean-up operations, before the remaining intervals were successfully perforated. The well was re-opened to flow in August and flowed at rates up to 22 MMscf/d, (ca. 3,600 boepd,) at different choke sizes up to 36/64 inch and wellhead flowing pressures up to 3,078 psi.
Further to the drilling programme, the Company's reserves and resources estimates at Logbaba were updated by Blackwatch Petroleum Services Limited, (Blackwatch), which acts as consultants to the Company. The Proved and Probable (2P) gas reserves in the Logbaba field are contained in Campanian and Santonian age sands of the Logbaba Formation. New structure maps were constructed based on correlations of the Logbaba sands, incorporating new and old well data as well as existing seismic data. In addition, remotely sensed imagery was acquired and analysed to provide a structural framework for Logbaba.
All six of the wells drilled to date in the Logbaba block have encountered significant gas intervals and all of the five wells that were tested flowed gas to surface. To date, only the Logbaba Formation gas sands have been tested. The deepest well on the block, La-104, encountered good gas shows, not only in the Logbaba Formation but also in the deeper Turonian age gas-bearing sands, where the well reached a target depth of 13,688feet.
The updated gross reserves potential for the Logbaba Field is highlighted in the table below. The Company holds a 60% working interest and is operator in the Logbaba block.
Logbaba Reserves, 100% basis (Bcf)
Category | July 2008 | October 2010 |
Logbaba Field (10 to 20% of Block Area) | ||
Upper Logbaba Proved Reserves (1P) | 10 | 49 |
Proved + Probable Reserves (2P) | 104 | 212 |
Proved + Probable + Possible (3P) | 202 | 350 |
Entire Logbaba Block | ||
Prospective Resources | n/a | >1 Tcf |
The 2P reserves highlighted in the table are located in an area that covers some 10% - 20% of the total Logbaba block area, hence there is considerable potential in the remaining areas which share the same geology. This potential was confirmed by the results of the passive seismic survey that was conducted last year. The passive seismic survey provided the first new geophysical information to be acquired over Logbaba since the discovery was made in the 1950s. The survey findings are in line with the geological understanding of the Logbaba reservoir sands and correlate well with data from the four old wells and the newly drilled wells La-105 and La-106. We are particularly interested in the indications from the analysis of the passive seismic survey of a major potential hydrocarbon accumulation around two kilometres from the new wells' surface location. The accumulation, which lies entirely within Victoria's licence block, appears to be substantially larger than the existing discovery and has not been seen in any previous subsurface studies, due to the lack of geophysical data.
Conceptual Studies for the production facilities and pipeline were carried out in spring 2010, and front end engineering was completed during the summer. The gas processing plant contract was awarded to Expro International Group. All contracts for the trenching, laying, jointing and commissioning of the pipeline and all other mechanical, electrical and civil work for the production facilities have either been awarded, or are out to tender, and work is in progress.
Approximately 80% of our customers are within a 10km radius of central Douala. In 2011, the pipeline will be extended to the South East and South West regions of the city and the pipeline has been sized to handle the substantial anticipated future demand. Further, the pipeline route has been carefully chosen to avoid all private land, therefore minimising the impact on local landowners.
West Medvezhye, Russia
West Med is a large 1224km2 area located in the Yamal Peninsula in the Nenets region of Siberia. The block, which has been independently assessed by DeGolyer and MacNaughten (D&M) to have resources of approximately 1.1 billion barrels of oil equivalent, is located in one of the most prolific areas of the world next to Gazprom's giant Medvezhye field that has already produced over 70 Tcf of gas.
We have been busy progressing technical studies at West Med and I am pleased to confirm the successful completion of our 2010 appraisal and delineation programme. Passive seismic and gas tomography surveys were run over part of the eastern section of the licence, where the main Medvezhye structure continues into the West Med licence. The surveys also covered other prospective parts of the block that were previously covered by conventional seismic. Data processing was completed and initial interpretation reports have just been issued by the contractors and are under review. The results of the passive seismic survey confirmed hydrocarbon presence in the area of three seismically defined structures mapped by D&M. The results of the gas tomography survey by CJSC "Catari-Seismo" indicate two new structures similar to the well 103 discovery.
In summary, the results of both 2010 surveys confirm our current expectation of the huge hydrocarbon potential in West Med. In the coming months, work will continue integrating the new data with the existing seismic and drilling data to firm up the appraisal, development and further exploration of West Med.
Radwan HadiChief Operating Officer
Consolidated Income Statement
Year ended 31 May 2010
2010 | 2009 | |
$ 000 | $ 000 | |
Impairment of exploration and evaluation assets | - | (35,541) |
Administrative expenses | (5,796) | (6,336) |
Other (losses) and gains | (133) | (1,402) |
OPERATING LOSS | (5,929) | (43,279) |
Interest received | 71 | 122 |
Finance revenue | 617 | 1,401 |
Finance costs | (866) | (606) |
LOSS BEFORE TAXATION | (6,107) | (42,362) |
Income tax expense | - | - |
LOSS AFTER TAXATION FOR THE FINANCIAL YEAR | (6,107) | (42,362) |
Cents | Cents | |
Loss per share - basic | (0.63) | (11.91) |
Loss per share - diluted | (0.63) | (11.91) |
Consolidated Statement of Comprehensive Income
Year ended 31 May 2010
2010 | 2009 | |
$ 000 | $000 | |
Loss for the year | (6,107) | (42,362) |
Exchange differences on translation of foreign operations | 70 | (10,884) |
TOTAL COMPREHENSIVE INCOME FOR THE YEAR | (6,037) | (53,246) |
Consolidated Balance Sheet
As at 31 May 2010
2010 | 2009 | |
$ 000 | $ 000 | |
ASSETS: | ||
NON CURRENT ASSETS | ||
Intangible assets | 115,917 | 83,149 |
Property, plant and equipment | 221 | 37 |
Receivables | 19,916 | - |
136,054 | 83,186 | |
CURRENT ASSETS | ||
Receivables | 1,776 | 737 |
Cash and cash equivalents | 6,034 | 711 |
7,810 | 1,448 | |
Held for sale assets | 1,829 | - |
9,639 | 1,448 | |
TOTAL ASSETS | 145,693 | 84,634 |
LIABILITIES: | ||
CURRENT LIABILITIES | ||
Trade and other payables | (17,595) | (3,885) |
Borrowings | (1,854) | (1,000) |
(19,449) | (4,885) | |
NET CURRENT LIABILITIES | (9,810) | (3,437) |
NON CURRENT LIABILITIES | ||
Convertible loan - debt portion | (529) | (1,055) |
Derivative financial instruments | (24) | (642) |
Deferred tax liabilities | (6,599) | (6,599) |
Provisions | (7,406) | (2,882) |
(14,558) | (11,178) | |
NET ASSETS | 111,686 | 68,571 |
EQUITY: | ||
Called-up share capital | 11,648 | 4,289 |
Share premium | 155,636 | 114,620 |
ESOP Trust reserve | (293) | (124) |
Translation reserve | (10,704) | (10,774) |
Other reserve | 3,828 | 2,882 |
Retained earnings - deficit | (48,429) | (42,322) |
TOTAL EQUITY | 111,686 | 68,571 |
Consolidated Statement of Changes in Equity
Year ended 31 May 2010
Called up share capital $000 | Sharepremium $000 | ESOP Trustreserve $000 | Investment revaluation reserve $000 | Retained earnings / (deficit) $000 | Translation reserve $000 | Otherreserve $000 | Total $000 | ||
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 | ) |
Total comprehensive income for the year | - | - | - | - | (42,362) | (10,884) | - | (53,246 | ) |
At 31 May 2009 | 4,289 | 114,620 | (124) | - | (42,322) | (10,774) | 2,882 | 68,571 | |
Shares issued | 7,359 | 44,930 | (169) | - | - | - | (655) | 51,465 | |
Share issue costs | - | (3,914) | - | - | - | - | - | (3,914) | |
Recognition of share based payments | - | - | - | - | - | - | 1,601 | 1,601 | |
Total comprehensive income for the year | - | - | - | - | (6,107) | 70 | - | (6,037 | ) |
At 31 May 2010 | 11,648 | 155,636 | (293) | - | (48,429) | (10,704) | 3,828 | 111,686 |
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 issue costs.
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.
Retained deficit
Retained deficit comprises accumulated losses in the current year and prior years.
Other reserves
The other reserve includes the share based payment reserve, warrants exercised during the year of $0.7m and 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 a prior year.
Consolidated Cash Flow Statement
Year ended 31 May 2010
2010 | 2009 | ||
$000 | $000 | ||
CASH FLOW FROM OPERATING ACTIVITIES | |||
Loss for the year | (6,107) | (42,362) | |
Finance costs recognised in income statement | 866 | 606 | |
Gain on third party loan assigned to Group company | - | (3,100) | |
Impairment provision recognised in income statement | - | 35,541 | |
Release of share based payment reserve | (655) | - | |
Depreciation and amortisation of non current assets | 207 | 563 | |
Fair value gain on embedded derivatives | (617) | (1,401) | |
Net foreign exchange (gain)/loss | (568) | 2,514 | |
(6,874) | (7,639) | ||
MOVEMENTS IN WORKING CAPITAL | |||
(Increase)/decrease in trade and other receivables | (17,365) | 337 | |
(Increase)/decrease in available for sale assets and inventories | (1,829) | 3 | |
Increase in trade and other payables and provisions | 17,523 | 512 | |
NET CASH USED IN OPERATING ACTIVITIES | (8,545) | (6,787) | |
CASH FLOWS FROM INVESTING ACTIVITIES | |||
Acquisition costs of subsidiary | - | (949) | |
Cash acquired on acquisition | - | 63 | |
Amounts advanced to third parties | - | (2,216) | |
Payments for intangible fixed assets | (35,212) | (1,069) | |
Payments for property, plant and equipment | (310) | (48) | |
Proceeds from sale of property, plant and equipment | - | 37 | |
NET CASH USED IN INVESTING ACTIVITIES | (35,522) | (4,182) | |
CASH FLOW FROM FINANCING ACTIVITIES | |||
Proceeds from issue of equity shares | 51,624 | 1,938 | |
Proceeds from issue of convertible loan notes | - | 1,188 | |
Payment of equity issue costs | (2,193) | - | |
Payment of loan issue costs | - | (174) | |
Proceeds from borrowings | - | 1,000 | |
NET CASH GENERATED FROM FINANCING ACTIVITIES | 49,431 | 3,952 | |
NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS | 5,364 | (7,017) | |
CASH AND CASH EQUIVALENTS BEGINNING OF THE YEAR | 711 | 9,270 | |
Effects of exchange rate changes on the balance of cash held in foreign currencies | (41) | (1,542) | |
CASH AND CASH EQUIVALENTS END OF THE YEAR | 6,034 | 711 | |
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 2010 and income statement, cash flow statement and associated notes for the year then ended have been extracted from the Group's 2010 statutory financial statements upon which the auditors' opinion is unqualified.
2. Annual Report
The Annual Report for the year ended 31 May 2010 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 30 November 2010 at 11.00 a.m. A full version of the annual accounts will be available on the Company's website at www.victoriaoilandgas.com
For further information, please contact:
Victoria Oil & Gas Plc
Tel: +44 (0) 20 7921 8820
Jonathan Scott-Barrett / Kevin Foo
Strand Hanson Limited
Tel: +44 (0) 20 7409 3494
Simon Raggett / Angela Peace
Fox-Davies Capital
Tel: +44 (0) 20 7936 5236
Phil Davies / David Porter
Conduit PR
Tel: +44 (0) 20 7429 6611
Jonathan Charles / Ed Portman