Arthur Millholland, President and Chief Executive Officer, commented:
'The success Oilexco has had in the first half of 2007 is a reflection of the Company's ambitious growth strategy over the last couple of years. Oilexco's production profile changed dramatically with the commencement of production from the Brenda/Nicol field, while the exploration success at Huntingdon showed the tremendous upside potential from the Company's extensive development, appraisal and exploration portfolio. During the second half of 2007 Oilexco will continue to pursue its aggressive drilling program, as it moves into the next stage of its growth.'
Q2 2007 HIGHLIGHTS
Exploration, Appraisal and Development Drilling
- In June the Company made a multi-zone light oil discovery at its 40% owned Huntington prospect located in Block 22/14b
-- The total combined maximum rate of the drill stem test across multiple zones was 10,201 bbls/d and associated gas at an estimated rate of 5 MMcf/d
- In July the Company was awarded 100% of an Out of Round Production License on Block 22/3b, located immediately east of it 100% owned Block 22/2b which is the location of its Shelley oil accumulation
- Ocean Guardian semisubmersible drilling unit commenced operations under contract to the Company until June 2009
-- Joins the Company's other contracted semisubmersible, the Sedco 712, which is contracted to March 2010
Financial and Operational
- In June moved to the Main List of the London Stock Exchange and elected to make London the Company's Primary Listing
- Move reflects tremendous recent growths and to facilitate future growth, as well as to expand investor base
- Net Income for the period was $25.7 million (Q2 2006: net loss of $17.8 million)
- Revenue for the period was $40.7 million (Q2 2006: $2.3 million)
-- Anticipated to increase in the next quarter reflecting a full quarter of oil production from the Brenda/Nicol fields
- In April Company closed an Over-Allotment Option related to an underwritten prospectus offering initiated in the first quarter of 2007
-- The total gross proceeds of the Offering, including the Over-Allotment Option, was approximately $114.9 million
- In June the Company entered into engagement letter with Royal Bank of Scotland plc ('RBS') to increase the Borrowing Base Facility from $275 million to $500 million
- Total of 9 exploration, appraisal and development wells, some of which will have multiple sidetracks, to be drilled in H2 2007
-- Appraisal drilling on the Huntington discovery, Kildare discovery and Ptarmigan and Shelley development projects in Q3/Q4 2007
-- Exploration well to be drilled on the Constance prospect in Block 21/23a, along trend with the Company's Sheryl oil accumulation in the same Block
-- Exploration well to be drilled on the Morro and Coronado Prospects located on Block 22/13b, east on the Company's Huntington discovery in the adjoining Block 22/14b
-- Exploration well to be drilled on the Moth prospect in Block 23/21
Q2 2007 Interim Results
Production began from the Company's Brenda/Nicol fields in the UK Central North Sea in June 2007. Oilexco holds a 100% equity interest in the Brenda field, Block 15/25b, and a 70% equity interest in the Nicol field, Block 15/25a. Initial production was through three horizontal production wells at Brenda and a single horizontal production well at Nicol. In July the fourth horizontal production well at Brenda was successfully completed. This well was placed on production at the beginning of August. Production from the Brenda and Nicol fields was suspended for 15 days in July due to shut down of the Balmoral Floating Production Vessel for maintenance. The Company estimates production from the Brenda/Nicol fields five combined horizontal production wells will average approximately 30,000 barrels per day during the first full year of production. It is estimated that annual decline rates for Brenda and Nicol will be approximately 25%, which is typical for these reservoirs in the UK North Sea.
In June the Company made a multi-zone light oil discovery at its 40% owned Huntington prospect located in Block 22/14b. The discovery well 22/14b-5 was drilled to a total depth of 13,325 feet. Oil bearing reservoir sands were encountered in the Paleocene Forties at a depth of 8,960 and in the Upper Jurassic Fulmar at a depth of 12,750 feet. Significant oil columns were intersected in both intervals; 98 and 130 feet of oil bearing reservoir sands were intersected in the Paleocene Forties and the Upper Jurassic Fulmar sands respectively. Both intervals were subsequently drill stem tested.
The drill stem test of the Paleocene Forties sand flowed 41 degrees API oil up to a maximum rate of 5,577 bbls/d, and associated gas at an estimated rate of 3.4MMcf/d through a 72/64 inch choke with a flowing tubing pressure of 395 psi through 50 feet of perforations from 8,975 feet to 9,025 feet. There was no water or sand produced during the test. Flow rates were severely restricted by the test equipment used for the test.
The drill stem test of the Upper Jurassic Fulmar sand flowed 39 degrees API oil up to a maximum rate of 4,624 bbls/d, and associated gas at a rate of 1.6MMcf/d through a 64/64 inch choke with a flowing tubing pressure of 310 psia through 101 feet of perforations across the entire 130 feet of oil bearing Fulmar sand. There was no water or sand produced during the test. Flow rates were restricted by the test equipment used for the test. Further appraisals of the Huntington oil accumulations are planned for the fourth quarter 2007 using one of Oilexco's two semisubmersible drilling units.
The Company made an application during the period to the UK Department of Trade and Industry for an out of round License on Block 22/3a. This Block is located immediately east of the Company's 100% owned Block 22/2b, which is the location of the Shelley Paleocene Forties oil appraisal/development project. At the end of July the Company was offered 100% of an Oil and Gas Production License on Block 22/3a, which it has accepted. The terms of the license require the Company to file a field development plan within two years of the award. The addition of this licensed area will allow the Company to fully define the ultimate extent of the Shelley oil accumulation. Appraisal drilling at Shelley in the fourth quarter of 2006 defined the west boundary of the oil accumulation in Block 22/2b. The Ocean Guardian is currently conducting drilling operations to define the north, south and eastern extent of the accumulation. These areas will be accessed with high angle well bores from a surface location at the boundary between the two blocks. Additional surface locations may be required to reach the ultimate boundaries of the accumulation.
During the period the Company drilled a dry hole at its Laurel Valley exploration prospect located in Blocks 14/28a, 14/29b and 14/23. The well was plugged and abandoned at a total depth of 8,655 feet after failing to intersect hydrocarbons in the prospective horizons. Oilexco paid 75% of the drilling costs to earn a 45% equity interest in the blocks. The nature of the Laurel Valley exploration prospect was one of higher risk given that there were no previous discoveries made on the property. While Oilexco occasionally engages in such higher risk exploration prospects, it maintains its current strategy of primarily drilling on properties that contain undeveloped discoveries, which will comprise the majority of its exploration and appraisal budget for the remainder of 2007.
The Company's second semi-submersible drilling unit commenced operations under contract to the Company in June. The Ocean Guardian had originally been forecasted to come on contract in April but was delayed by operational difficulties experienced by the unit's previous operator. The Ocean Guardian is contracted to the Company until June 2009. It will join the Company's other contracted semi-submersible the Sedco 712, which is contracted to March 2010.
In June the Company entered into an engagement letter with the Royal Bank of Scotland plc ('RBS') to increase the Company's Borrowing Base Facility from $275 million to $500 million. The proposed increase in the Borrowing Base Facility will be used for additional developments of the Company's properties in the UK North Sea. The proposed increase is subject to a number of conditions and requires approval from the Company's syndicate of lending institutions lead by RBS. On July 6, 2007 the Company signed with RBS an Amendment and Restatement Agreement in respect of the Pre-Development Facility. The agreement increases the total facility amount up to Pounds Sterling 100 million (approximately $200.9 million at June 30, 2007) from the previous total of Pounds Sterling 40 million (approximately $80.4 million at June 30, 2007), and extends the maturity date until January 31, 2009 from the previous date of January 31, 2008.
In April Company closed an Over-Allotment Option related to an underwritten prospectus offering initiated in the first quarter of 2007. Oilexco issued an additional 2,250,000 common shares at C$7.82 ($6.75 as at the transaction date) for gross proceeds of approximately $15.2 million. The total gross proceeds of the Offering, including the Over-Allotment Option, was approximately $114.9 million from a total of 17,250,000 common shares issued at C$7.82 per share. The funds from this offering will be used for the Company's appraisal, evaluation and exploration program in the North Sea and for general working capital purposes. The Company anticipates it will fund future exploration, appraisal and development activities, as well as general and administrative expenses, from a combination of internally generated cash flow and debt facilities. However, the Company may elect to issue additional shares to raise funds should opportunities arise that require equity funds.
On the 29th of June the Company's common shares commenced trading on the main market of the LSE, and ceased trading on the AIM market of the LSE on the same date. The common shares of the Company trade on the LSE as a primary listing. The Company elected to pursue a primary listing in the United Kingdom ('UK') through the facilities of the LSE as a reflection of its shareholder base, the majority of which is located in the UK, as well recognizing the Company's UK North Sea Operating focus. The company continues to maintain a primary listing of its common shares on the TSX.
Oilexco finished the second quarter in excellent financial condition which is reflected in the Company's balance sheet. Total assets at the end period were $890.0 million, up from $611.3 million from the year ending December 31, 2006. Current assets increased at the end of the period to $176.3 million compared to $95.5 million as at December 31, 2006. Property, plant and equipment also increased at the end of the period to $653.6 million compared to $467.7 million as at December 31, 2006. The increase was due to expenditures related to the development of the Brenda/Nicol field, and expenditures on exploration and appraisal drilling conducted on the Company's other properties. Property, plant and equipment will continue to increase in future periods as the Company now has two semi-submersible drilling units working full time under long term contract in addition to development projects at Ptarmigan and Shelley.
Total liabilities for the Company increased to $427.4 million at the end of the period, up from $322.7 million as at December 31, 2006. Current liabilities at the end of the period increased to $137.9 million, up from $114.4 million as at December 31, 2006. The increase in current liabilities are due to an increase in accounts payables which are primarily related to increased expenditures for offshore drilling reflecting an increase in the day rate at the end of March on the Sedco 712 to $225,000 per day from $140,000 per day and the commencement of the contract for the Ocean Guardian, and an increase in the current portion of long term bank debt. Long term debt increased at the end of the period to $266.9 million from $193 million at December 31, 2006 reflecting the completion of the Brenda/Nicol field developments Shareholders' equity at the end of the period increased to $462.5 million from $288.5 million as at December 31, 2006. The reasons for the increase relate to an underwritten prospectus offering in which a total of 17.25 million shares were issued for gross proceeds of approximately $108 million, and gains on translation of consolidated financial statements into reporting currency.
The Company experienced net income of $25.7 million for the period compared to a net loss of $17.8 million for the same period one year ago. Basic net income per share for the period was $0.12 and diluted net income per share was $0.11 compared to a loss per share of $0.09 basic net income and a loss per share of $0.09 diluted net income for the same period a year ago. The primary reason for the increase in net income was the increase in oil and gas sales as a result of the commencement of production from the Brenda/Nicol fields. Revenue for the period was $40.7 million compared to $2.3 million for the same period a year ago. Revenues for the Company are anticipated to increase the next quarter reflecting a full quarter of oil production from the Brenda/Nicol fields. Expenses were $16.0 million for the period compared to $20.2 million for the same period a year ago.
General and administrative expenses for the period were $6.8 million compared to $2.2 million for the same period a year ago. This increase was due to costs associated with the listing of the Company's shares on the main market of the LSE and increased staff levels in the Aberdeen and Calgary offices in addition to the opening and staffing of a London corporate office. It is anticipated that general and administrative costs will continue to increase as additional staff is added to facilitate the Company's growth plans. Operating costs were $6.0 million for the period compared to $1.1 million for the same period a year ago. The increase is a result of the apportionment of costs to Oilexco related to increased production from the Brenda/Nicol fields that is processed at the Balmoral Floating Production Vessel. It is anticipated the total operating costs will increase as total production increases in the next quarter. Depletion, depreciation and accretion costs were $12.3 million for the period compared to $1.5 million for the same period in 2006 because of the production from the Brenda/Nicol fields. Depletion costs are expected to increase next quarter because of the anticipated increase in total production for the next quarter. Interest and bank charges for the period were $5.2 million compared to nil for the same time period in 2006, due to increased charges associated with the Company's credit facilities.
The Company experienced a net decrease in cash of $36.2 million for the period compared to a net decrease in cash of $39.6 million for same period a year ago. The decrease in cash was due to an increase in cash used for investing activities, which were comprised primarily of the completion costs associated with the Brenda/Nicol development, drilling activities on the Company's other properties and prepayments for equipment being manufactured for future developments.
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