The result for the period was affected by financing costs of $12.0 million of which $7.1 million resulted from the cost of short-term loan facilities to allow the acquisition of Merlon to be closed, the prepayment of existing loan facilities and the writing-off of financing costs carried in relation to the existing bank facilities which were repaid.
The result in the previous period benefited from financing income of $7.9 million, of which $4.1 million arose from the sale of options in a quoted company and $3.6 million on the unrealized gain arising from the revaluation to fair value of the options in the same quoted company, which were held by the Company.
Net daily production in the six months ended June 30, 2006 averaged 69 MMcfepd (11,544 boepd) which compares with 74 MMcfepd (12,277 boepd) during the whole of last year. Production was split 1,561 Mcfpd and 755 bopd in the USA, 12,185 Mcfpd and 196 bcpd in Egypt and 49,811 Mcfpd in Bulgaria. Average net production in the same period in 2005 was 1,096 Mcfpd and 766 bopd in the USA, 17,072 Mcfpd and 166 bcpd in Egypt and 52,453 Mcfpd in Bulgaria. Average prices received during the period were $63.51 per barrel and $3.47 per Mcf compared with $48.65 and $3.06 in 2005.
EBITDAX for the period was $39.3 million (six months ended June 30, 2005, $38.3 million). In addition to the cost of the acquisition of Merlon, capital expenditure during the period amounted to $44.0 million (six months ended June 30, 2005, $32.2 million). Capital expenditures were split between Egypt – $30.9 million, Bulgaria – $5.8 million, USA – $6.8 million and France – $0.5 million.
The acquisition by Melrose of Merlon Petroleum Company was completed on June 29, 2006. The total consideration for the acquisition, including costs, was $288.1 million. On 12 July Melrose completed the issue of 22.7 million new shares at £3.30 per share under a Placing and Open Offer. Net proceeds from the issue of new shares were $134.5 million. The balance sheet as at June 30, 2006 reflects the fact that the acquisition of Merlon had been completed with the use of bank debt prior to the share issue. A pro forma balance sheet showing the effect of the share issue is shown at note 9 to the interim accounts.
Current gross production in Egypt is approximately 50 MMcfepd and this is expected to rise to over 135 MMcfepd during the first half of 2007 and over 200 MMcfepd during the second half of 2007. This will give net production for Melrose in Egypt of around 60 MMcfepd of which over one third is expected to be oil and condensate. Production from the Galata field in the second half of 2006 is expected to be roughly the same as in the first half. In the USA, current production of approximately 1,000 boepd is expected to increase steadily over the next year with further drilling and as the benefits of the waterflood start to be seen.
Drilling activity in Egypt over the next few months will combine further appraisal drilling in the West Khilala, West Dikirnis and El Tamad areas together with some appraisal and development drilling, mainly in the South Batra and South Mansoura areas and with exploration drilling targeting primarily the new Miocene turbidite play and the shallow Sidi Salim oil play. In Bulgaria the exploration program scheduled for the year-end has very exciting potential.
The Merlon acquisition price was underpinned by Melrose's detailed knowledge of the Egyptian assets of Merlon. The purchase price of the Merlon oil and gas assets was less than the NPV10 of the proved and probable reserves of Merlon excluding the exploration potential and was, therefore, a very good deal from Melrose's point of view. In particular, detailed analysis by Melrose's technical team had attributed significant value to the potential of the West Khilala and West Dikirnis discoveries. Both of these fields were discovered in the second half of 2005 and the results of appraisal wells drilled on each field in 2006 have since confirmed the value upside which Melrose had anticipated. I believe that the acquisition of Merlon has raised Melrose's asset base and operating capability to a new level and has already added significant additional value for shareholders.
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