BG 2Q Earnings Double on Commodity Prices, Output
BG Group reported its second quarter and half year results for 2011.
Second Quarter Key Points
- Earnings up 27%; cash generated by operations up 11%
- Interim dividend of 10.8 cents per share, up 10%
- Reserves and resources doubled in Brazil since 2010; upside potential now 8 billion boe net
- Brazil reservoir performance significantly reduces unit costs; unit resource value increased
- Lifted first one million barrels of equity oil from Lula field
- Assumed operatorship offshore Tanzania; agreements to operate offshore Kenya
BG Group's Chief Executive, Sir Frank Chapman said, "We made good progress in both our E&P and LNG businesses. In Brazil, we saw major increases in our reserves and resources; with the new resources delivering a higher unit value as their production is expected to require no additional surface facilities. We have invested $4.4B in organic growth in the first half and made good progress across our major growth projects in Australia, Brazil and the USA; progress that continues to de-risk the delivery of our growth program."
Revenue and other operating income increased by 26% to $5.115 billion, reflecting the benefit of higher commodity prices and a 3% increase in E&P production, with solid operational performance across the Group's assets.
As a result of the above and a lower exploration charge in the quarter, total operating profit increased by 43% to $2.152 billion.
Cash generated by operations increased by 11% to $2.581 billion as a result of higher profits and, as anticipated, the partial reversal of prior period margin calls on the Group's hedged LNG contracts.
As of 30 June 2011, the Group's net debt was $9.468 billion with an average maturity of around 8 years, and the gearing ratio was 24%. During the quarter, BG Group signed a cooperation agreement with Bank of China that allows for up to $1.5 billion of new funding alternatives to support the Group's major growth programme. The Group's undrawn committed facilities have been increased to $5.5 billion with maturities from 2012 to 2016.
Net finance costs amounted to $59 million for the quarter, against $25 million income in 2010, including foreign exchange gains of $7 million (2010 $71 million gain).
Capital investment (including acquisitions of $113 million) in the quarter was $2.537 billion and comprised investment in E&P ($1 918 million), LNG ($537 million) and T&D ($82 million). This investment focused primarily on the Group's major growth projects in Australia, Brazil and the USA and represents a 58% increase in underlying organic capital investment compared with second quarter 2010. More details on project developments are provided in the relevant segmental business highlights.
Revenue and other operating income of $9 918 million was 16% higher than in the same period in 2010, reflecting 48% and 14% increases in realised oil and gas prices, respectively. This revenue performance, combined with a lower exploration charge, was the main contributor to the 19% increase in total operating profit from $3.456 billion to $4.117 billion.
Cash generated by operations of $4.380 billion was 9% lower than last year, principally as a result of changes in working capital associated with margin calls on the Group's hedged LNG contracts. As already observed, the cash outflow associated with margin calls has reversed in the second quarter, a trend that is expected to continue in future periods when the underlying LNG contracts settle.
The $153 million increase in net finance costs was driven primarily by changes in foreign exchange (2011 foreign exchange losses of $15 million compared with a $122 million gain in 2010).
The Group's effective tax rate (including BG Group's share of joint venture and associates' tax but excluding prior period taxation) for the full year is expected to be 45% (2010 38.5%). The increase is primarily as a result of the change in UK North Sea taxation announced in March 2011. This led to an additional charge of $324 million consisting of a $121 million charge for the half year in addition to a one-off tax charge of $203 million in respect of the revision of opening deferred tax balances. The one-off charge was partially offset by an $8 million credit as a result of a reduction in the UK taxation rate applicable outside the UK North Sea (net $195 million). The Group's effective tax rate in future years is expected to be 43% to 44% in the near term and trend downwards thereafter as more of the Group's profits are generated from outside of the UK North Sea.
As previously announced, the Group is undertaking an extensive investment programme to deliver its growth. Capital investment in the half year (including acquisitions of $432 million) was $4 833 million and comprised investment in E&P ($3.744 billion), LNG ($936 million) and T&D ($153 million). This investment focused primarily on the Group's major growth projects in Australia, Brazil and the USA and represents a 28% increase in underlying organic capital investment compared with 2010. This expenditure is in line with the Group's previous guidance of $10 billion for the full year at reference conditions.
In line with the Group's financial performance, the Board has approved the payment of an interim dividend of 10.80 cents per share. This is half of the 2010 total dividend, in accordance with the Board's established policy. The interim dividend has been converted to Sterling at the average of the closing exchange rate for the three business days preceding this announcement and will be paid on 8 September 2011 as 6.63 pence per share to shareholders on the register as at August 5, 2011.
Disposals, re-measurements and impairments - continuing operations
A post-tax gain of $123 million for the quarter (2010 $443 million charge) was recorded in respect of disposals, re-measurements and impairments. This comprised a post-tax gain of $121 million (2010 $302 million charge) in relation to mark-to-market movements on long-term commodity contracts and economic hedges, a $24 million post-tax gain in respect of disposals of non-current assets and impairments (2010 $135 million charge) and a $22 million post-tax charge (2010 $6 million charge) in respect of re-measurements of treasury financial instruments.
A post-tax charge of $100 million for the half year (2010 $377 million charge) was recorded in respect of disposals, re-measurements and impairments.
Exploration and Production (E&P)
Revenue and other operating income increased by 35% to $2 787 million, reflecting the benefit of higher realized prices and a 3% increase in production volumes. Total operating profit of $1.420 billion was 90% higher as a result of the increase in revenue and other operating income and a lower exploration charge.
Higher production volumes in the quarter reflected continuing production build-up in the USA, Brazil and at Hasdrubal in Tunisia. In the UK North Sea, the Everest, Lomond and Erskine fields progressively returned to production following the shutdown in the first quarter. BG Group expects Buzzard to return to full capacity in the third quarter following a period of restricted production. Whilst there continued to be sporadic disruption from social unrest in Egypt and Tunisia, this had a relatively small impact on production in the second quarter.
BG Group continues to expect modest production growth in 2011, ahead of the strong ramp-up in production volumes which begins in 2012 and continues through the decade.
International gas price realizations were 17% higher at 39.02 cents per produced therm, reflecting changes in the production mix and the effects of higher oil prices. The average realized gas price in the UK increased by 48% to 44.43 pence per produced therm, as a result of higher contract and market prices.
The exploration charge of $120 million is $246 million lower than 2010 as a result of lower well write-off costs.
Unit operating expenditure increased to $8.93 per barrel of oil equivalent, reflecting the impact of higher commodity prices, adverse foreign exchange movements and changes in the production mix, including higher than portfolio average costs associated with the production start-up activities in Brazil. BG Group continues to expect unit operating costs to be between $8.50 and $9.00 per barrel of oil equivalent at an oil price of around $100 per barrel for the full year.
Capital investment of $1 918 million in the quarter comprised investment in the Americas ($673 million, including $113 million on acquisitions), Australia ($496 million), Europe and Central Asia ($443 million) and Africa, Middle East and Asia ($306 million).
Revenue and other operating income increased by 22% to $5.297 billion, principally as a result of higher realized prices. Total operating profit increased by 38% to $2.678 billion, reflecting the increase in revenue and other operating income and a lower exploration charge.
The Group's average realized gas price per produced therm increased by 14% to 41.12 cents, reflecting generally higher market prices and changes in the production mix.
Unit operating expenditure increased to $8.46 per barrel of oil equivalent, reflecting the impact of the UK North Sea shutdown during the first quarter, higher commodity prices and changes in the production mix.
Capital investment of $3 744 million in the half year comprised investment in the Americas ($1.450 billion, including $376 million on acquisitions), Australia ($899 million), Europe and Central Asia ($798 million, including $56 million on acquisitions) and Africa, Middle East and Asia ($597 million).
Second quarter business highlights
In July, BG Group sanctioned Phase II of the Margarita project. This follows on from the sanction of Phase I in 2010, where construction is underway and early production facilities are onstream. Production from the two phases and the early production facilities is expected to reach over 40 thousand barrels of oil equivalent per day net to BG Group by 2014. Net investment in Phase I is estimated at $164 million and Phase II at $250 million.
In June 2011, BG Group issued a material reserves and resources upgrade for its interests in the pre-salt Santos Basin, offshore Brazil. Mean total reserves and resources are now estimated to amount to some 6 billion barrels of oil equivalent (boe) net to BG Group, with an upside potential of 8 billion boe net.
The mean total reserves and resources represents a doubling of BG Group's previous best estimate of 3 billion boe prevailing at the time of the Group's February 2010 Strategy Presentation. The aggregate range of total reserves and resources net to BG Group is from 4 billion boe (P90) to 8 billion boe (P10).
The Lula, Guará, Cernambi, Iara and Carioca fields account for 95% of BG Group's total reserves and resources in the Santos Basin.
The recent increase in BG Group's estimate of its reserves and resources in Brazil was based upon a wealth of drilling, appraisal and other new data. Importantly, this includes dynamic data showing much higher well deliverability and greater connectivity within the reservoirs allowing increased recovery per well.
In addition to improved reservoir characteristics and resource estimates, there has been significant progress on the cost front. Experience with tendering, construction progress and operations experience with FPSOs has given confidence in the cost and schedule for surface facilities. Meanwhile a substantial improvement in drilling performance in the first half of 2011 has provided greater confidence that anticipated drilling cost reductions will be achieved over future phases.
In summary, as a consequence of the above BG Group now expects:
- Higher flow rates and recovery per well;
- Earlier achievement of plateau production from fewer wells;
- Lower unit costs and higher unit value.
Significantly, BG Group expects that virtually all of the additional resources announced in June, contained within the Lula, Guará, Cernambi, Iara and Carioca fields, will be recovered from the same surface facilities envisaged in BG Group's field development plan prior to the resources upgrade. The incremental volumes are thus of a substantially higher value and result in significant unit cost reductions and higher unit value for the now increased total resources base.
Finally, during the quarter, BG Group took delivery of the oil tanker Windsor Knutsen which will be used to transport
BG Group's equity oil from Brazil. The Windsor Knutsen was converted from a conventional Suezmax tanker into the world's largest shuttle tanker, with the capacity to hold 1.1 million barrels of crude oil. First crude oil from the Lula FPSO has been lifted and is in transit to be delivered in August. BG Group has also committed to charter four further Suezmax shuttle tankers which are expected to be delivered in the period 2013 to 2014.
In May, BG Group and its partner sanctioned Phase 8b, the next phase of investment in the West Delta Deep Marine Concession (WDDM) offshore the Nile Delta. This is one of a series of investments to maintain production from this concession that supplies gas for domestic and export needs. Phase 8b will bring seven additional wells onstream, allowing BG Group to meet its contracted gas commitments.
In 2011, BG Group, with its partners, also invested in WDDM development Phases 7 and 8a. The Phase 7 third pipeline came onstream in January with the compression project due onstream later this year. Phase 8a will bring onstream nine additional sub-sea wells. The first stage of drilling for Phase 8a has been completed with first gas expected in late 2011.
In June 2011, a fourth liquid stabilization train at the Karachaganak Processing Complex was successfully put into operation. The start-up of the new oil processing facility raises the stabilization and export capacity of the plant to 10.3 million tonnes of condensate per year.
In May, BG Group announced it had signed Production Sharing Contracts with the Government of Kenya for two offshore exploration blocks - L10A and L10B. BG Group will be the operator of both blocks and will hold a 40% equity interest in block L10A and a 45% interest in block L10B. These blocks together cover an area of more than 10 400 square kilometres in the southern portion of the Lamu Basin. The initial work program consists of a commitment to acquire seismic data during an initial two-year exploration period.
In June, the plan for development and operation of the Knarr field (previously known as Jordbær) was approved by the Norwegian Parliament. Production is scheduled to start in 2014. Knarr is an oil field in a water depth of 410 meters, situated in the Tampen North area in the Norwegian North Sea. Also in June, the lease and operate contract for the FPSO for the Knarr field was signed.
BG Group received approval from the Government of Tanzania to assume the role of Operator of Blocks 1, 3 and 4, offshore Tanzania, effective from 1 July 2011. To date, three successful exploration wells have been drilled. As part of the operatorship transition arrangements, BG Group has led a number of project activities over recent months in preparation for the next stage of the exploration and appraisal program, scheduled to commence in late 2011.
Progress in BG Group's shale gas operations continued to gather pace with production continuing to build-up and the 200th EXCO-operated Haynesville horizontal well being brought into production. During the quarter, 38 wells were spudded and 22 rigs were operating in the Haynesville, while 8 wells were drilled in the Marcellus shale.
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