Commenting upon the results, Paul Griffiths, Island's Chief Executive, said:
The past year has seen a major transformation in Island Oil & Gas plc from an oil and gas exploration company with a number of interests offshore Ireland, to a successful operator with two Celtic Sea gas wells in 2006, an expanded portfolio of license interests, and an active exploration and near-production drilling program going forward in 2007. This transformation has been based firstly on the success of our stated strategy of implementing and executing a sustained 2006 drilling campaign, and secondly on executing a further contract for the provision of the Petrolia Rig in 2007.
During the year, the Company executed an agreement with Platinum Petroleum Limited, an international energy investment group and a major shareholder in Island, whereby we will gain access to international opportunities, in addition to those being pursued by the Company, necessary for the future expansion of our portfolio.
The year under review commenced with the expansion of the Company's Atlantic Margin portfolio with the award in August 2005 of Frontier Exploration License 3 /05 (FEL 3/05) in the Northeast Rockall Basin. Island and Shell E & P Ireland were the two successful applicants in the Northeast Rockall Licensing Round. FEL 3/05 contains the Killala Prospect which lies some 35 kilometers north of the Corrib gas field and in the same basin as Shell's Dooish hydrocarbon discovery. This was a timely and significant addition to our exploration portfolio and one that established Island as an important stakeholder on the Atlantic Margin fairway, west of Ireland. Subsequently, ExxonMobil farmed into an existing license in the Porcupine Basin, thereby establishing the Atlantic Margin as a focus of renewed interest for multi-national oil companies.
In February 2006 we concluded a Sub-Area Equity Interest Assignment Agreement with our strategic partner in the Celtic Sea, Marathon International Petroleum Hibernia Limited, through which Island would increase its interest to 55.75% in an un-appraised part of the Seven Heads gas field by drilling and paying for the cost of an appraisal well (the West Seven Heads Sub-structure). In the same month Island also extended Licensing Options 03/5 (Seven Heads Oil) and 03/6 (Roscarberry) until 31 December 2006 pending the results of our 2006 drilling program.
During March 2006, Island undertook to further establish its position in the Atlantic Margin through its application to the Department of Communications, Marine and Natural Resources for six blocks in the Slyne-Erris-Donegal Bid Round. Shortly after the financial year end, in August 2006, the Company was awarded FEL 4/06 in the Southern Slyne Trough. Island, as operator, and Lundin Petroleum AB will each hold a 50% interest in the newly named Inishmore License, which increases its stake in prospects analogous to the proven Corrib gas play. The Company was also awarded FEL 3/06 in the South Donegal Basin. Island, as operator, and Lundin Petroleum AB will each hold a 40% interest, and Endeavour Energy UK Limited a 20% interest in the newly named Inishowen License, which allows the Company to evaluate an underexplored frontier exploration basin potentially prospective for Triassic gas plays.
In April 2006, Island set itself apart in a competitive market by not only securing a contract for the Petrolia Rig for its 2006 drilling program, but also executing a further contract with Petrolia Drilling Limited for the same rig for its 2007 drilling program.
In May 2006, Island announced that Platinum had agreed a strategic investment in Island of up to Stg£10 million by way of two convertible loans. Both these loans were subsequently drawn down in full and converted by August 8, 2006. Platinum can invest up to an additional Stg£11 million in Island by way of exercising up to 10 million warrants at Stg£1.10 per share at any time in the 12 month period ending June 9, 2007. We also entered into a Memorandum of Understanding with Platinum which gives us the opportunity to further our longer term ambitions to increase our international acreage portfolio through opportunities generated and presented by Platinum.
A landmark achievement for the Company was our success in the Celtic Sea, with our first well as operator, well 48/23-3. The well tested gas at a combined rate of 13.2 mmscf per day. The well was suspended as a potential gas producer pending a further detailed assessment. Our success was recognized by a statement from Noel Dempsey, T.D., Minister for Communications, Marine and Natural Resources, congratulating Island upon the success of the well and Island's technical competence as an independent operator, in Ireland.
Island announced in July 2006 that the Old Head of Kinsale 49/23-1 well had encountered a gross gas column of 100 feet in Lower Cretaceous reservoirs. The well was suspended for further evaluation. Gas in place was announced as being in the range 90 to 120 bcf. This marked the first successful gas exploration well in the Celtic Sea for 16 years. The results validated Island's stated low risk strategy of exploring for and appraising gas prospects around existing infrastructure which, if successful, could fast track subsea tie-backs aimed at generating early cash flow. This success has been achieved by lowering technical risk through a significant improvement in seismic data quality following reprocessing and a better understanding of reservoir risk. The 2007 work program will focus on the further appraisal and development of our gas assets.
Post financial year end, in August 2006, Island announced that the Inishbeg exploration well in the Donegal Basin had been plugged and abandoned. Although this was disappointing, the South Donegal Basin still remains largely unexplored, and the acreage that the Company was awarded in the Slyne-Erris-Donegal Licensing Round remains prospective for Triassic gas.
During the year, the full benefit of the acquisition in 2005 of a 12.5% participating interest in the Seven Heads gas field and a 12.5% debt-free interest in the Seven Heads infrastructure was realized with a significant increase in gas sales. Revenues for Q4 2006 and full year 2007 are set to increase further as Seven Heads goes to compression, which will allow an increase in the production rate to at least 12 mmscf per day.
Outside Ireland, we still await the result of our application for an offshore exploration permit, the Arcachon Permit, in the Aquitaine Basin in southwest France. The Company is also pursuing near-production projects in the Netherlands and hopes to make an announcement shortly.
The Company continues to actively recruit more personnel as our exploration and administration requirements increase, following the successful 2006 drilling campaign and ongoing plans for the development of our portfolio.
The funds required to implement and execute the 2006 drilling program were raised in two tranches in 2005 and 2006 respectively. December 2005 saw Island successfully complete a private placing at Stg£0.70 per share, raising Stg£8.31 million to partly fund the 2006 drilling program. Warrants attached to the issue of these shares were fully taken up by May 2006 raising a further Stg£4.156 million in drilling funds.
May 2006 saw Island's major shareholder, Platinum, conclude an agreement with the Company whereby it could make a strategic investment of up to Stg£10 million in Island by way of two convertible loans. Both these loans were subsequently drawn down in full and converted by 8 August 2006. Platinum can invest up to an additional Stg£11 million in Island by way of exercising up to 10 million warrants at Stg£1.10 per share, at any time in the 12 month period ending 9 June 2007. These placings both expanded our shareholder base and strengthened the strategic investment made by Platinum in Island.
The Group recorded a loss on ordinary activities before tax of Stg£411,000, compared to Stg£127,000 in the year ended July 31, 2005. Gross revenue from our interest in the Seven Heads gas field resulted in improved turnover of Stg£1.151 million compared to Stg£0.484 million in the previous year, reflecting increased production together with higher realized gas prices due to winter profiling. Administration costs for the year were Stg£1.267 million compared to Stg£0.728 million in the previous year. This increase reflects the Company's growth during the period, which saw the establishment of a Dublin Headquarters and related management systems.
Cash balances at the year end amounted to Stg£6.071 million. These balances take no account of the cash received as a result of the second convertible loan being executed in August amounting to Stg£5.5 million, which occurred after year end. A further Stg£2 million was received in October 2006 as part of the exclusive option granted to EnCore.
Post financial year end, Jack McKinney stepped down from an active role in the Company, where he held positions as Commercial Director and Acting Finance Director. The Board would like to thank Jack for his significant contribution in the establishment and early growth of the Company.
In October 2006, the Company appointed Carl Kindinger as a Non-executive Director to oversee the financial management of the Company including the further development of the Company's portfolio of oil and gas assets. Carl has considerable experience in financial planning, project cost control, feasibility studies, cross border mergers and acquisitions and international tax planning. He has successfully raised project-related finance and working capital from international banks, and has initiated a number of IPO's.
During the year Terry Jones resigned as Finance Director.
Karl Prenderville, former Finance Director of Enterprise Energy Ireland Ltd, has been appointed consultant Financial & Commercial Manager. Karl has worked in the oil industry for over 25 years in the UK, Indonesia, Cambodia, Vietnam & Seychelles. He brings valuable experience from working on the Camar Oil Field development in Indonesia and the Corrib Gas development in Ireland, both for Enterprise Oil. His experience further strengthens Island's financial team.
The Company will seek to appoint additional executive and Non-executive Directors to support its increasing level of activity.
The year under review has seen Island successfully pursue our stated strategy of implementing and executing a multi-well drilling program. This has resulted in Island establishing itself as an accomplished operator, having drilled two successful gas wells. The Company has already secured a rig contract for 2007 to continue this appraisal and development program. This also allows Island to control the growth of its business by seeking out strategic alliances from a position of strength.
Island has a balanced portfolio of low risk, near-production assets (the Celtic Sea gas assets and Connemara oil field) and higher risk exploration acreage with exposure to large prospects (Slyne and Rockall) on the Atlantic Margin. The Company is making good progress in its re-evaluation of the Connemara oil field as a potential near-production candidate for 2008/2009. The work completed to date has generated significant interest, which is substantiated by the exclusive farm-in option already granted to EnCore Oil. Similarly, we anticipate strong interest from potential farminees having established a portfolio of high-impact exploration prospects along the Atlantic Margin.
The strength of gas prices during the year has increased our production revenue from the Seven Heads gas field and demonstrates the potential value of the Celtic Sea infrastructure.
Island is well positioned to attract investment for its near-production projects in the Celtic Sea, on the Atlantic Margin and, potentially, in the Netherlands. We will seek finance through joint venture partnerships and the investment community.
Establishing Island as a leading operator offshore Ireland and having drilled the first gas discovery in the Celtic Sea for 16 years, is an outstanding achievement.
Finally, we would like to thank our shareholders as we look forward to your continuing support in the development of your Company.
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