"In addition the Company has a number of other exploration prospects to drill before the end of the year on Block 16-1, whilst the CNV development on Block 9-2 remains on track to start production in the first half of 2008 and transform SOCO's production profile. This demonstrates the Company's ability to drive projects from discovery to production."
The first half of 2007 was highlighted by what may be the largest discovery in the Company's history; although unforeseen operating challenges due to the size and nature of the discovery have deferred confirmation of the significance of the discovery. SOCO moves toward the development phase on both Blocks in Vietnam and enters the very active conclusion to the exploration drilling phase on Block 16-1. The Company continues to progress its portfolio in the high potential Congo Basin and to build in this core area with the addition of an interest in the Cabinda North Block, onshore Angola. In addition the Kharir field looks set for further reserve upgrades, capping off a successful first half of the year.
The manifestation of recent drilling success in Vietnam has the potential to exceed that at any time in the Company's history and the early indication of success on the Te Giac Den 1X (TGD-1X) well, even without the additional potential, is hugely promising.
The Kharir field in Yemen, which has already had several reserve upgrades, appears to be on the verge of additional growth with the successful completion of three field extension wells in the first half of 2007. Production attributable to the Group's working interest in Yemen was down slightly for the period at 6,341 barrels of oil per day (BOPD) as compared to the equivalent period last year (6,407 BOPD) due to scheduled downtime required to expand the production capability to anticipated record production levels. Even with realized average crude oil prices and production marginally lower, after tax profits for the period increased to $17.0 million from $15.1 million in the first half of 2006.
In summary, SOCO is in the midst of a very active five year drilling campaign of exploration and appraisal wells, across Vietnam, West Africa and Yemen, with two new field developments expected on-stream within the next 36 months, transforming the Company's production profile. This year is shaping up to be another milestone for the Company as it targets significant further reserves expansion and prepares for first production from Vietnam next year.
With average crude oil prices remaining at a consistently high level and production from the Group's Yemen project steady, after tax profits for the period increased to $17.0 million from $15.1 million in the first half of 2006. This translates into basic and diluted earnings per share from continuing operations of 24.1 cents and 21.5 cents, respectively, as compared to 21.5 cents and 19.2 cents in the equivalent period last year.
Despite marginally lower production attributable to the Group's working interest, 6,341 BOPD for the first half of 2007 as compared to 6,407 BOPD for the same period last year, and slightly lower average realized crude oil prices, $62.38 per barrel for the first six months of this year compared to $63.15 per barrel for the first half of last year, Group oil and gas revenues were up. Revenue in the first half of 2007 increased by 30% to $50.4 million from $38.8 million in the first half of 2006. Most of this increase was due to higher entitlement volumes in the first six months of 2007 owing to increased cost recovery primarily arising from capital expenditure associated with development of the Basement reserves in Yemen ($8.9 million) and adjustments of lifting imbalances arising in prior periods ($3.5 million).
Cost of sales during the first half of 2007 were $17.0 million against $11.0 million in the first half of 2006 with the $3.5 million variance on lifting imbalances increasing cost of sales in the current period compared to the first half of 2006. Ignoring lifting imbalances, the underlying increase in cost of sales has arisen mainly due to higher depreciation, depletion and decommissioning costs (DD&A).
On a per barrel basis, excluding lifting imbalances and inventory effects, operating costs attributable to the Group's sole producing asset in Yemen were flat at approximately $6.50 per barrel in the periods to June 30, 2006 and 2007.
DD&A increased by $1.8 million compared to the same period last year due primarily to higher development costs associated with extracting additional Basement reserves and higher entitlement production. On a working interest per barrel basis DD&A increased to approximately $5.00 per barrel during the period to June 30, 2007 from approximately $3.60 per barrel during the equivalent period last year.
Administrative costs for the first six months increased from $3.5 million in 2006 to $4.0 million in 2007. This increase is primarily associated with the weakening of the US dollar versus the GB pound.
Other operating expenses, which comprise pre-license exploration expenses, decreased by $0.2 million in the reporting period compared to the equivalent prior period.
The aforementioned effects led to a 23% increase in operating profit. Operating profit was $29.5 million in the period ending June 30, 2007 rising from $24.0 million in the first six months of 2006.
Following the issue of convertible bonds in May 2006, the Group had a significantly higher average cash and cash equivalents balance during the current six month reporting period, leading to investment income increasing from $2.8 million in the period to June 30, 2006 to $3.9 million in the current reporting period.
The decrease in other gains and losses from $0.3 million in the first half of 2006 to $0.1 million in the first half of 2007 is primarily due to a lower gain in the period on the change in fair value of the financial asset (associated with the subsequent payment amount tied to future oil production from the Group's divested Mongolia interest) mainly due to revision of the risk free interest rate.
Finance costs increased from $2.0 million in the first half of 2006 to $4.6 million for the current reporting period due to interest expense on the liability component of the convertible bonds issued in May 2006 being charged for a full six months in 2007.
The tax charge increased from $10.0 million during the six months to June 30, 2006 to $11.8 million in the current period consistent with the increase in operating profit.
SOCO's cash and cash equivalents decreased from the June 30, 2006 position of $251.5 million, not long after the issue of the convertible bonds in May 2006, to $140.6 million as at June 30, 2007. This decrease is associated with the continuing investment in capital projects.
Capital expenditure of $78.9 million in the first half of 2007 compared to $50.4 million for the first half of 2006 (which included $22.0 million paid by the Group to acquire an additional 2% working interest in Block 16-1 offshore Vietnam) mainly reflects the Group's continued increased drilling activity in Vietnam.
The Group's production was sourced entirely from its interest in the East Shabwa Development Area, Yemen. Production net to the Group's working interest at 6,341 BOPD was marginally lower to production in the equivalent period last year (6,407 BOPD) despite planned curtailment of production for safety and production management reasons.
There is still a lot of work to be done in following up on apparent drilling successes earlier this year, but SOCO is very well placed for continued future growth following operational success during the last year and a very active drilling program going forward on an extremely high potential project portfolio.
However, success brings a new set of challenges. SOCO must evolve from primarily focusing on exploration to grow shareholder value to managing relatively large development projects. As the Company de-risks exploration drilling in Vietnam, it also enters into exploration drilling in the Congo Basin of Africa, which may have a higher risk profile than previous exploration areas but has the potential to be hugely rewarding. Being in the midst of a multi-year, highly active drilling program means that the capital budget will continue to be relatively robust and financial capability a priority.
We believe that the disciplined managerial approach and technical diligence that has been the hallmark of our past successes allows us to be well prepared for the future challenges. Furthermore, we think that SOCO has continued to build a balanced portfolio with assets in all stages of the E&P value chain creating more improved near term opportunities to build for future success.
We appreciate our stakeholders' continued confidence in the SOCO team and look forward to rewarding your future trust in us.
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