In 2005 Oilexco maintained an aggressive UK North Sea exploration and appraisal drilling program which it initiated in 2004 at its 100% owned Brenda Oil Field located in the Outer Moray Firth area of the Central UK North Sea. This made the Company the most active operator of exploration and/or appraisal wells in the UK North Sea in 2005, a distinction it carried over from the year 2004. Oilexco successfully appraised three undeveloped discoveries in 2005: Nicol (70% WI), Black Horse (40% WI), Yeoman (2.5% WI) and one field extension at MacCulloch (50% WI), as well as a horizontal test well at Brenda (100% WI). In addition to the appraisal program, the Company drilled two exploration wells at Muness (45% WI) and Palomino (84.5% per agreement for 50% WI), which were unsuccessful in intersecting commercial volumes of hydrocarbons. Oilexco plans to continue its aggressive 2005 UK North Sea exploration and appraisal drilling program in 2006 by continuing to fully utilize the Transocean Sedco 712 semi-submersible drilling rig which is under long-term contract until March 2008, and the Bredford Dolphin semi-submersible drilling rig which is under a short term three well contract.
In addition to its UK North Sea exploration and appraisal drilling program, the Company also focused its efforts in 2005 on the development of its 100% owned Brenda, and 70% owned Nicol oil fields. To facilitate the development projects, the Company arranged a Pounds Sterling 10 million Bridge Loan Facility with the Royal Bank of Scotland in May to finance the purchase of long lead order equipment. This credit facility was further increased to Pounds Sterling 25.0 million in November 2005. Subsequent to the year-end in January 2006, the Company signed debt facilities with the Royal Bank of Scotland totaling $245.0 million to fully fund the development of the Brenda and Nicol oil fields.
For the third year in a row, Oilexco exited the year in excellent financial condition. The company had high cash balances at year end as a result of three equity financings closed in 2005. The first issue which closed on February 11th raised gross proceeds of approximately $13.1 million (Pounds Sterling 7.0 million), while the second equity issue which closed on June 27th raised gross proceeds of approximately $55.9 million (Pounds Sterling 30.4 million). These issues of common shares were used to finance the Company's 2005 UK North Sea exploration and appraisal drilling program. The Company closed a third issue of common shares on December 22nd, raising gross proceeds of approximately $112.0 million (Pounds Sterling 65.0 million) to fund its 2006 exploration/appraisal program and for general corporate purposes. Capital assets increased from $102.0 million at year end December 31, 2004, to $197.0 million at December 31, 2005. The Company drilled wells in four project areas in 2005, and was drilling a fifth project area at the year end, while drilling activity during 2004 was focused solely at Brenda (having commenced in late December 2003). Current liabilities increased from $18.0 million at December 31, 2004, to $41.9 million at December 31, 2005 representing $24.5 million in accounts payable and accrued liabilities, and $17.4 million of current Bank debt from the Company's Pounds Sterling 10 million Bridge Loan Facility. The Company had no bank debt in comparable periods of 2004, or 2003. In 2006 the Company expects its Bank indebtedness to increase to the maximum limit of its credit facility, currently $245 million. Working capital was significantly higher at December 31, 2005, at approximately $89.1 million versus $2.2 million for 2004. The increase in share capital, shareholder equity and common shares outstanding are also a reflection of the three equity financings closed in 2005. The Company anticipates that no further equity issues will be required for its activities in 2006. The Company's 2006 UK North Sea exploration and appraisal drilling program will be fully funded by its cash reserves. The Brenda/Nicol development is funded by the project facility from the Royal Bank of Scotland. Future exploration, appraisal and development activities in 2007 are anticipated to be funded from internally generated cash flow.
Operating results were significantly higher in 2005 than in the comparative periods of 2004 and 2003. Oil and gas sales for 2005 reflected a full year of production from the Balmoral/Glamis oil production acquisition that was made in September of 2004. Oil prices increased in 2005 relative to comparative periods in 2004. The price received for UK oil production for 2005 was $53.97 per barrel whereas for 2004 it was $42.55 per barrel. Operating costs at the Balmoral facility in 2005 were significantly lower on a per unit basis than in 2004 mainly due to the production enhancements made during the year. The Balmoral facility has high fixed costs relative to the amount of oil that is currently processed. However the fixed component will decline dramatically on a per unit basis when the Brenda/Nicol production comes on stream. General and administrative expenses increased significantly in 2005 versus 2004 and 2003 due to increases in staffing levels, support and activity required for the Brenda/Nicol development and the ongoing aggressive exploration and appraisal drilling program. General and administrative expenses are expected to rise again in 2006; however the increase should flatten late in the year and in 2007. The most significant expense item in 2005 continued to be the stock based compensation. As in 2005 and prior years, the Company continued its compensation policy of combining share options with competitive salaries and benefits packages to attract the best qualified staff. The Company continued to issue share options during the year as its share equity base expanded and as it added new employees. Stock based compensation expense is not expected to grow as rapidly in 2006 as it has in prior years.
The net loss increased in 2005 compared with 2004 and 2003. The increase in net loss is due to general and administrative expenses, stock-based compensation expense, and a write down of $1.6 million reflecting an impairment of the Balmoral full cost asset base due to the drilling of dry holes at Muness and Palomino. This impairment does not apply to the Brenda and Nicol full cost asset base, as they are not yet on production, and therefore are excluded from the UK Full Cost Centre.
Funds flow from operating activities was again slightly negative in 2005, as in both 2004 and 2003. Negative funds flow from operating activities result from intense activity in the North Sea and the commensurate overhead from the activity. Oil production from Brenda and Nicol, anticipated to commence in the fourth quarter of 2006, is expected to reverse this trend in 2006.
Reserve volumes and values increased dramatically during 2005 in all categories of reserves: Proved, Probable and Possible due to the successful appraisal of the Nicol and Blackhorse oil accumulations, a re-evaluation of the reserves at Brenda, and the significant increase in oil prices in 2005. Proved reserves of light oil at December 31, 2005 were 24,575,800 Bbls, an increase of 112% from the 11,623,000 Bbls of light oil reported at December 31, 2004. Proved plus Probable reserves at December 31, 2005 increased 76% to 36,819,300 Bbls of light oil, from 20,942,000 Bbls of light oil reported at December 31, 2004. Proved plus Probable plus Possible light oil reserves were 51,103,200 Bbls at December 31, 2005. Comparative numbers were not reported in 2004, as Possible reserves were not evaluated. The Company's 2005 reserves were independently evaluated by Sproule International Limited. Complete disclosure of the Company's reserves as reported under the guidelines of National Instrument 51-101 can be found in the Company's Annual Information Form dated March 24 2006 as filed on SEDAR at www.sedar.com.
Oilexco's primary focus in 2006 will be the concurrent development of its 100% owned Brenda oil field and its 70% owned Nicol oil field leading to first oil in the 4th quarter. In addition to its Brenda/Nicol development, the Company will continue its UK North Sea exploration/appraisal drilling program in 2006 at its Joy, Disraeli, Halibut, Shelly, and Kildare properties. Oilexco is also evaluating the development options for its Blackhorse property. To complete its 2006 development and exploration/appraisal program the Board of Directors of Oilexco has approved a capital budget of $280 million.
"Oilexco has been able to execute its business plan for the UK North Sea by its ability to access capital through issuance of debt and equity, as well as having foresight to contract an offshore semi-submersible drilling rig for the long term." Oil production from the Brenda and Nicol developments, expected to commence in the 4th quarter 2006 will generate significant cash flow that will fund the Company's business plan in 2007 and beyond" said Arthur Millholland, President and Chief Executive Officer.
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