Oilexco Reports 3Q05 Results
Oilexco Incorporated (TSX: OIL; AIM: OIL) reports its Financial Results for the 3rd Quarter, and for the 9 month period ending September 30, 2005.
Oilexco's principal focus continues to be development of its 100% owned "Brenda" Field and the concurrent development of its 70% owned Nicol Field. The initial draft Brenda Field Development Plan and Environmental Assessment was filed with the UK Department of Trade and Industry ("DTI") by the Company in April. The review process has been ongoing, with the final Field Development Plan ("FDP") filed in late September. Final DTI approval of the Brenda FDP was received on November 10th. Issues related to new UK Government policies on future decommissioning, as well as gas flaring, delayed the Plan's submission and approval. Subsequent to the end of the period, the Company presented a draft Field Development Plan for the Nicol Field to its partners and to the DTI. The final Nicol Field Development Plan is expected to be submitted to the DTI late in the fourth quarter.
In July Oilexco signed a "Heads of Agreement" with CNR International (UK) Ltd, a subsidiary of Calgary-based Canadian Natural Resources Limited, relating to the construction and tie-in of the "Brenda" Field to the Balmoral Floating Production Facility and to the provision of production and operating services to the Brenda Field. In addition to the Agreement with CNR International, the Company also signed several contracts with leading sub-sea contractors for the provision of services and sub-sea production equipment for the Brenda development. Technip Offshore (UK) Limited has been contracted as the primary contractor for sub-sea installation and pipe lay and for the provision of line pipe and risers that will connect Brenda to the Balmoral Platform. Meanwhile, Dunfermline, Scotland-based FMC Technologies Ltd has been contracted to provide four sub-sea Xmas trees for the development. Fabrication is well underway, with delivery of the sub-sea trees scheduled throughout February 2006. Oilexco has also contracted the Norwegian company FRAMO Engineering AS for the supply of a MultiManifold, which consists of a Multiphase Subsea Pump, a Multiphase a Flow Meter, Multiport Selector Manifold, a Control System, and a Skid. FRAMO will also supply the 8.5 km umbilical to the Balmoral Facility as well as topside Power and Control Modules. The FRAMO MultiManifold will be the integral component of Oilexco's subsea infrastructure hub at Brenda, facilitating additional commercial development in the area. The manifold has been designed to accommodate up to eight wells or flow lines, with a design flow capacity through the Multiphase Pump of 51,000 bbls of fluid per day. This capacity will allow for the tie-in of additional oil prospects in the region. The Company's contracted drilling rig, the Transocean semi-submersible Sedco 712, is expected to move to the Brenda field area in early February of 2006 to begin drilling of the Brenda horizontal production wells. The target for the first oil production from Brenda continues to be late in the third quarter to early in the fourth quarter of 2006. The drilling and completion program for the production wells at Brenda is expected to take five months to complete.
In May, Oilexco announced the successful appraisal of a new oil accumulation called Nicol, located 10 km northwest of the Brenda Field. Oilexco has proposed to its partners that one to two horizontal production well(s) be used to develop the "Nicol" oil accumulation. Also, Oilexco has proposed that these production well(s) be tied back to the Brenda production manifold, which will be located approximately 10 km to the southeast, and that development at Nicol proceed concurrently with the development at Brenda. Drilling and completion of the production well(s) will be consecutive to the Brenda production wells, with oil production targeted for late in the third quarter to early in the fourth quarter of 2006. Oil production at Nicol will flow through a 10 km subsea tie-back to the Brenda FRAMO MultiManifold. Oilexco's primary contactors for Brenda (Technip, FRAMO and FMC) will also provide services and sub-sea equipment for the Nicol development.
During the third quarter, the Company also worked actively toward finalising its 2005/2006 UK North Sea drilling program. Oilexco's activities are focused in the central UK North Sea, the location of its Brenda and Nicol oil accumulations. In the second and third quarters, the Company entered into five farm-in agreements/joint venture agreements or letters of intent for drilling ventures with third parties targeting oil and/or gas condensate prospects in the central UK North Sea. Drilling operations on these projects commenced in July at Yeoman, with well 15/18b-11, followed by the well 15/22-18 at Black Horse, which commenced drilling operations on August 5th. Wells at Muness (Block 21/4b) targeting gas condensate, Palomino (Block 21/6a) targeting oil, and Tay (Block 21/23a) targeting oil, will be drilled consecutively after operations are concluded at Black Horse in mid November. If drilling operations on these projects are extended due to weather or other delays, the drilling of the well at Tay (Block 21/23a) will be deferred until after the drilling of the production wells at Brenda and Nicol, which are due to commence operations in early February.
On September 6th Oilexco North Sea Limited was awarded two Blocks in the UK 23rd Offshore Oil and Gas Licensing Round. The first award, Block 22/2b, was awarded to Oilexco at 100% interest. It is located 35 km southeast of Oilexco's Brenda development. The Company has identified two prospects on the Block, which includes a Paleocene oil prospect analogous to Brenda. This prospect is well defined, with 3D seismic and an oil show of 2,416 bbl/d from well 22/2-2, which was drilled by another operator in 1984. This prospect will be drilled in the late third quarter to early fourth quarter of 2006 to fulfil the firm well commitment to the DTI made by Oilexco in its successful bid. In addition to the Paleocene "Brenda look-alike" oil prospect, Oilexco has also identified a deep multi-zone gas-condensate prospect on the Block. This prospect is a large structural closure prospective for gas-condensate in Lower Cretaceous sands, as well as in Jurassic sands in High Pressure and High Temperature conditions (HPHT). Given the nature of this structure, accompanied with the HPHT conditions, Oilexco's offer of a contingent well commitment to evaluate this prospect was accepted by the DTI. This drilling commitment is contingent on Oilexco completing additional seismic work to further evaluate the prospectivity of the structure. The Company is at least two years away from drilling this deep prospect.
Oilexco was also awarded 50% of Block 15/26b in the 23rd Round, along with an equal interest to Nexen. This Block is located 30 km southwest of Oilexco's Black Horse project in which it is also partnered with Nexen. A firm well commitment was accepted by the DTI on this successful 23rd Round bid, targeting an oil prospect in Jurassic Ettrick and Tweedsmuir Sands. This prospect is well defined with 3D seismic and by a hydrocarbon show of 2,650 bbl oil per day with 3.5 Mmcf of gas per day, tested from Jurassic Ettrick sands in well 15/26/b-5 drilled by another operator in 1988. Drilling of this prospect is scheduled for the fourth quarter of 2006.
In April, Oilexco signed a letter of agreement to extend the contract with Transocean for the Sedco 712 semi-submersible offshore drilling rig from the end of March 2006 to the end of March 2007. On November 8, 2005 the Company extended this contract further to the end of March 2008. The day rate for this period of extension has increased to $225,000 per day, from $140,000 per day in the March 2006 to March 2007 period. Having the Sedco 712 under contract for this extended period allows Oilexco to appraise and develop its drilling successes from its 2005-2006 UK North Sea exploration/appraisal program. This was a strategic decision made by Oilexco amid a rapidly tightening rig market for the years 2006 and 2007. Currently, all worthy semi-submersible drilling units in the North Sea have been contracted through to mid 2007, reflecting rapid increases in industry activity levels due to continued high world crude oil prices. Oilexco is currently evaluating several additional appraisal and exploration drilling opportunities to carry the Sedco 712 through its contracted period ending in March 2008.
Oilexco has initiated the process to become a Non-Operator Licensee in Norway. This is the first step for entry into the Norwegian sector of the North Sea. The formal process with the Norwegian authorities is expected to begin in January 2006.
Economic and industry trends in the oil and gas sector as outlined in the MD&A as at and for the year ended December 31, 2004 remain substantially unchanged. World prices for oil and natural gas continue to be high. Oil services and equipment costs are increasing as demand remains robust in the high commodity price environment.
Oilexco finished the third quarter ended September 30, 2005 in excellent financial condition. The Company maintained a strong cash position as in the year ended December 31, 2004, reflecting Oilexco's private placement of equity in February 2005 and the subsequent offering in June 2005. Equity funds will continue to be used for drilling activity in 2005 and 2006, and the anticipated Royal Bank of Scotland project financing facility will be used for the Brenda and Nicol developments. Current assets increased 86% from December 31, 2004, and working capital remained strong at $11.9 million. Current liabilities increased 55% at September 30, 2005 (compared to year-end 2004), reflecting an increase in payables accrued for third-quarter drilling operations in the UK North Sea. The Company expects levels of current liabilities to remain relatively high for the remainder of 2005 and into 2006, reflecting the UK exploration/appraisal drilling program. The share capital increase of 61% from the year end reflects the issuance of 5,385,000 common shares by private placement in February 2005 and the issuance of 31,000,000 common shares in June 2005. Oilexco may access equity markets to raise additional capital for the remainder of 2005 and into 2006.
Increased levels of activity in the UK North Sea during the third quarter ended September 30, 2005 also caused significant changes in comparative year-over-year trends in Oilexco's operating results. Oil and gas revenues increased 395% in the third quarter ended September 30, 2005 compared with the same period of 2004. Nine-month oil and gas revenues were up 351% compared with the same period of 2004. The increase in oil and gas revenues resulted from the acquisition of the Balmoral/Glamis oil production interests in September 2004. The Company expects oil prices to continue to be strong and to average more than US$50 per barrel. Oil and gas operating costs increased by 143% in the third quarter ended September 30, 2005 compared with the same period of 2004. Nine-month operating costs increased by 588%. The acquisition of the Balmoral/Glamis interests brought a relatively large fixed component of operating costs; however, when production from Brenda and Nicol commences, per-unit costs will fall dramatically due to increased volume of produced oil. The Company expects further increases in operating costs in 2005 due to continued inflationary pressures on oilfield services in the current high-oil-price environment.
General and administrative expenses increased by 152% in the third quarter ended September 30, 2005 compared with the same period of 2004. The Company's intense activity in the UK North Sea combined with its evolution into a producing company necessitates greater staffing requirements in both the Calgary and Aberdeen offices. Similarly, nine-month general and administrative expenses increased 205% compared with the same period of 2004. Overhead expenses are expected to continue to increase into 2006 and should plateau as first production from Brenda and Nicol commences. Oilexco has been successful in attracting well-qualified professionals to its staff due to the Company's business philosophy and its policy of rewarding employees with both share options and competitive salaries and benefit packages. Share incentive compensation expense levels increased for both the three month period and the nine month period because the Company continues to issue options in an environment of increasing share prices and increasing numbers of employees underpinned by an increasing share capital base.
The Company had a net loss of $12.5 million during the three months under review, 90% of which was due to stock-based compensation expense. For nine months, the loss was $15.7 million, 78% of which was due to stock-based compensation expense. During the same periods of 2004, the losses were $8.5 million and $8.5 million, respectively. The Company expects to continue to incur losses until late 2006, when oil production from Brenda and Nicol commences. Cash used in operating activities amounted to $0.7 million in the third quarter of 2005 compared with $0.2 million in the same period of 2004. For the nine month period, cash used in operating activities was $5.3 million in 2005 versus a small increase in cash from operating activities of less than $0.1 million for the same period of 2004.
During the period presented, the Company maintained a strong working capital position and a healthy cash balance. The Company has a strong payment record with suppliers and has preferred company status with several of its contractors. Negotiations are underway with the Royal Bank of Scotland for a project-financing facility to finance Brenda Field development and Nicol Field development.
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