Lundin's Profit Down for 2006
In a letter to shareholders Wednesday, Lundin Petroleum AB's President and CEO, C. Ashley Heppenstall, stated the following:
After four continuous years of exceptional growth driven by increases in reserves and production, Lundin Petroleum in 2006 was impacted by production shortfalls and delays to our exploration drilling program. Nevertheless there were many positives for us in 2006 with the successful start-up of production from the Oudna field, offshore Tunisia, the acquisition of Valkyries Petroleum Corporation (Valkyries) creating a new core area in Russia, further asset acquisitions in the North Sea and Indonesia and new exploration deals completed in the United Kingdom, Vietnam, Ethiopia and Congo (Brazzaville).
We achieved our year end production target of 40,000 boepd following the start-up of production from the Oudna field, offshore Tunisia and our active development program particularly at the Alvheim field, offshore Norway will increase our production levels to 50,000 boepd by the end of 2007. I firmly believe that 2006 was a short term aberration in what will be Lundin Petroleum's continued long term growth story which has and will continue to deliver increases in shareholder value.
A summary year-end report for 2006 follows:
1 Jan 2006- 1 Oct 2006- 1 Jan 2005- 1 Oct 2005- 31 Dec 2006 31 Dec 2006 31 Dec 2005 31 Dec 2005 12 months 3 months 12 months 3 months ___________________________________________________________________________________________ Production in mboepd 29.7 34.5 33.2 30.9 Operating income in MSEK 4,414.5 1,138.7 4,190.2 1,025.3 Net profit in MSEK 794.4 195.9 994.0 108.1 Earnings/share in SEK 2.83 0.62 3.89 0.42 Diluted earnings/share in SEK 2.81 0.62 3.87 0.42 EBITDA in MSEK 2,731.5 558.9 2,782.6 660.9 Operating cash flow in MSEK 2,271.0 618.1 2,627.4 616.4
Lundin Petroleum generated a net profit after taxes of MSEK 794 (MUSD 108) for the year ended 31 December 2006. Operating cash flow for the period was MSEK 2,271 (MUSD 308) and earnings before interest, tax and depreciation (EBITDA) was MSEK 2,732 (MUSD 371).
We continue to believe in strong oil prices and as such our ability to increase reserves and production will be the key to our success. In 2006 we increased our reserves by 29 percent to 176.4 million barrels of oil equivalent. This increase came from both acquisition activity and the organic replacement of reserves from our existing asset base. We produced a reserve replacement ratio of 122 percent from organic growth with our operations in France and Norway the primary contributors from development drilling activity, exploration success and new field development plans.
Our 2006 production was always forecast to have limited growth compared to 2005. However our 2006 production of 29,400 boepd was below forecast due to United Kingdom facility related shortfalls, delays to United Kingdom development drilling and the conversion of our Venezuelan asset to an equity investment.
The loss of water injection capacity on the Heather platform in the United Kingdom had a major impact on Broom field production during the year and whilst having no impact on reserves it highlights the importance of facilities performance on older platforms. I am pleased that the Broom field production has in late 2006 and into 2007 exceeded expectations with good performance from the water injection facilities.
The highlight of 2006 was the successful start-up of production from the Oudna field, offshore Tunisia. Following commissioning of the artificial lift and water injection facilities in December 2006, gross production from the field has averaged well in excess of 20,000 bopd. The successful development of the Oudna field clearly highlights how previously uneconomic fields can be developed profitably in a higher oil price environment using focused subsurface and facilities personnel. We will seek to use this model to develop other existing discoveries in our portfolio which have previously remained undeveloped.
Lundin Petroleum is forecasting average production for 2007 at 41,000 boepd assuming production startup of the Alvheim field at mid–year. I am pleased that 2007 production has commenced on a positive note with January production levels in excess of 42,000 boepd driven by out-performance of the Oudna and Broom fields.
We continue to proactively invest in our asset base to generate production growth. Despite an increasing cost environment in our industry due particularly to equipment and personnel shortages we believe that in today's higher oil price environment there are many profitable investment opportunities within our portfolio.
The Alvheim field development which is one of the largest ongoing oil developments in Norway today is progressing very well and we are on track to achieve first oil in the second quarter 2007. The ongoing development drilling program on Alvheim has already delivered reserve increases and I am confident that the greater Alvheim area will yield further reserves from existing fields as well as from the excellent exploration potential in the area. The Volund field development plan has now been approved by the Norwegian Government and is projected to be onstream through the Alvheim facilities in 2009.
In the United Kingdom we are also investing heavily in our aging platform infrastructure. We believe that with proactive subsurface focus and using modern seismic imaging techniques the ultimate reserve recoverability of old fields such as Thistle and Heather can be increased. However to produce these late life incremental barrels we need to take a long term investment view believing in sustained high oil prices and making capital investments on our infrastructure to ensure that our facilities are able to handle these additional barrels. We have committed to a redevelopment of the Thistle platform last year and will in 2007 acquire new 3-D seismic data as well as bring the Thistle platform rig back into service to enable a 2008 drilling campaign.
In France we continue to invest in existing producing fields and in 2007 will complete a four well horizontal infill drilling program on the Villeperdue field using underbalanced drilling techniques.
Our recently acquired acreage in Congo (Brazzaville) already contains existing discovered undeveloped fields left behind by the majors and we will seek to use the same proactive development planning approach which was successful with the Oudna field to try to commercialize such discoveries.
Lundin Petroleum remains firmly committed to creating shareholder value through exploration. In 2006 the East Kameleon well in the Alvheim area of Norway was successful. However the delays to our high impact drilling program in Sudan, Norway and Russia was disappointing and are symptomatic of a tight rig and equipment market. In addition the operating environment in Sudan and Russia is challenging from a logistical perspective where we are seeking to drill wells in swamp and shallow water environments and this also had an impact on our schedule.
2007 will be a record year in terms of exploration activity for Lundin Petroleum. We will be drilling 19 exploration wells at a cost of USD 230 million targeting unrisked exploration potential of 1.4 billion barrels. We are drilling eight wells in the North Sea where rig capacity is secured for all wells. We are working very hard to progress our high potential exploration programs in Russia and Sudan where drilling is planned to commence in 2007. These are both world class exploration projects with the potential to have a major positive impact on the value of Lundin Petroleum.
We were also active on the New Ventures front in 2006 signing new areas in Vietnam, Ethiopia and Congo (Brazzaville). The business cycle in our industry is long through exploration, appraisal, development and production and as such we are constantly seeking to generate new areas for exploration which will be the fuel for further organic growth in future years.
The acquisition market remains tight and extremely competitive. Buyers continue to place significant value on soft assets as a means of securing deals. Lundin Petroleum believes it has the technical capability to generate such soft value internally and as such has competed in few competitive auction processes.
Nevertheless, 2006 was still quite active on the acquisition front. We were successful in completing the acquisition of Valkyries which has created a new core area for Lundin Petroleum in Russia. We acquired a portfolio of producing, development and exploration assets which will be a platform for future growth in the country.
We also acquired during 2006 a 40% interest in the Peik undeveloped gas/condensate field in the greater Alvheim area straddling the United Kingdom/Norway border. In today's higher commodity price environment such fields which have remained undeveloped by larger companies represent an opportunity for smaller companies with the requisite technical and financial capacity. These projects are sufficiently material to Lundin Petroleum for us to devote the required management time to make them succeed.
We will continue to look at acquisitions as a mechanism to supplement our organic growth. We will focus on deals where we believe we have a competitive advantage whether through local knowledge or other specific skills. Conversely if we believe it is the best way to create shareholder value we will also consider strategic options. For example, we are currently looking at strategic options in relation to our UK and Norwegian assets, which we believe could unlock shareholder value.
World oil prices have weakened from record highs during 2006. However, little has fundamentally changed in respect of the long term supply and demand position and therefore we believe oil prices will remain high. World oil demand continues to grow fuelled by growth in the developing world. OPEC will also now support oil prices in excess of $50/bbl but we believe this will not be necessary as prices will be driven by the underlying supply and demand. Our view is that there is a higher probability of price increases today than decreases. We live in a world of ever increasing demand, questionable supply where production continues to exceed new discoveries and where geopolitical events have the potential to further impact this imbalance.
The world is waking up to the important challenge of addressing climate change, the need for energy conservation and investment in renewable and nuclear energy. At Lundin Petroleum we seek to reduce our CO2 emissions and use sound technologies to have a minimal impact on the environment. However, given that 70 percent of oil demand today is for transportation, until substantial progress is made in developing alternative energy sources and a viable substitute is found for gasoline, the world will continue to be reliant and dependent on oil for the foreseeable future.
Cost increases within the oil industry are a real issue. Shortages of rigs, equipment, services and
personnel have resulted in material double digit inflation. This cost inflation is impacting on project
economics despite high oil price assumptions. Over time these imbalances will stabilize pricing as new
investments are made in the service sector but this will take time. However, we remain firmly committed
to a proactive investment strategy as ultimately we believe increases to reserves and production will
generate increased shareholder value.
Heppenstall closed the letter to shareholders by paying tribute to Lundin's founder and Honorary Chairman, Adolf Lunding, who died in late 2006.
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