Arthur Millholland, President and Chief Executive Officer, commented:
"The third quarter was a landmark period for Oilexco as the Company achieved record financial results due to the first full quarter of production from the Brenda / Nicol fields. The Company also enjoyed appraisal-drilling success on the Huntingdon discovery and made a strategic acquisition in the form of the Balmoral FPV.
"Over the next quarter Oilexco will continue to benefit from increased production and strong commodity prices, and will progress its aggressive development, appraisal and exploration programs across its portfolio."
Q3 2007 Results:
The third quarter was Oilexco's first full quarter of production from the Brenda / Nicol fields, which started producing on June 11, 2007. To date the reservoir has met or exceeded expectations with production levels reaching peak rates of over 30,000 Bbl per day. Production from Brenda/Nicol flowed through restricted chokes while artificial lift issues relating to the pumps were attempted to be solved. Production averaged 26,722 Bbl per day for those days when production was not shut down or restricted and totaled 1,767,082 Bbl for the third quarter of 2007. During the quarter the Company experienced some technical difficulties associated with the commencement of an operation of this scale, in July, production from the Brenda/Nicol fields was halted for approximately 17 days for annual maintenance turnaround on the Balmoral FPV, and in August, the Forties Pipeline system was down for annual scheduled maintenance. Additionally, the portion of the Forties Pipeline system servicing the Balmoral FPV experienced throughput restrictions due to maintenance and equipment failure. As a result, Brenda/Nicol production was curtailed for several days to accommodate pro rata restrictions imposed by the pipeline operator. During this time, and as part of good reservoir management practices, the Company adopted an extended evaluation plan in order to assess field and sub-sea system performance and to make adjustments to gradually increase production to targeted levels. Aggregate daily production from all fields for the third quarter was 21,605 BOE per calendar day.
In August, Oilexco signed a Sale and Purchase Agreement ('SPA') with CNR International (U.K.) Limited ('CNR') for the acquisition of CNR's entire interests in the Balmoral Floating Production Vessel ('FPV'); and the Balmoral, Glamis and Stirling fields; and for certain exploration acreage, all located in Block 16/21 in the UK Central North Sea. The purchase price is $50 million and will be subject to closing adjustments for the period between January 1, 2007 and the closing date. Upon closing, the Company will also provide a $63 million letter of credit as part of the decommissioning security agreement for the properties. Closing of the transaction is expected to occur in the fourth quarter 2007, and to be financed through existing Royal Bank of Scotland plc ('RBS') credit facilities. Upon closing, Oilexco's total equity interests in the Balmoral assets will be as follows: Balmoral FPV-78.1%; Balmoral field-78.1%; Glamis field-85.0%; Stirling field-68.7%; Exploration Acreage-85.0%.
The purchase of these assets is part of Oilexco's strategy to foster growth in the area near the Brenda/Nicol fields. The Balmoral FPV processes all the oil from the Company's 100% owned Brenda field and 70% owned Nicol field, and the increased ownership provides Oilexco as Operator, the opportunity to utilize the Balmoral FPV as a 'Processing Hub' for other sources of potential production in the immediate area. In the near term the Company will pursue these opportunities to maintain or incrementally increase its production from the area through the 'Balmoral Processing Hub', in the long term these opportunities will reduce its overall decline rate from the area. The increased ownership in the FPV combined with operatorship will also allow the Company to reduce its area operating costs by maximizing its operational efficiency by increasing production and vessel throughput.
At Shelley (100% WI), the Company has drilled a total of 14 sidetrack well bores to date in this round of appraisal drilling which commenced in July utilizing the Ocean Guardian. The Company at Shelley to date has drilled a total of 22 well bores. This extensive appraisal-drilling program at Shelley to define the limits of the oil accumulation is due to the unreliability of seismic data because of the presence of a large shallow gas accumulation. The interference of this gas accumulation has made seismic interpretations unreliable. Appraisal of the Shelley oil accumulation will be completed after production simulation testing of the fourteenth (14th) well bore of this appraisal phase, which is currently under way. The Company is targeting first oil from Shelley in the 3rd quarter of 2008 utilizing its contracted FPSO the Sevan Voyageur, which is currently in transit from the Yanti Raffles Shipyard in China to Rotterdam for topsides installation.
In the third quarter appraisal drilling was conducted at the Ptarmigan (Block 15/29b), Shelley (Blocks 22/2b and 22/3a) and Huntington (Block 22/14) oil discoveries. At Ptarmigan (60% WI) the company drilled a five-legged appraisal well into an un-appraised Paleocene oil discovery. These well bores were drilled to map the limits of the oil accumulation geologically and to calibrate the seismic data to the interpretation. The Company is currently engineering a field development scheme for Ptarmigan centered on a production well tie back to the Balmoral FPV. This development will occur concurrently with a gas conservation scheme at Balmoral, which will eliminate gas flaring. When Ptarmigan is included, gas production is expected to be significantly higher than from current production streams due to higher gas oil ratios at Ptarmigan.
At the Company's 40% owned Huntington oil find located in Block 22/14b which was discovered in June this year, appraisal drilling of the Paleocene 'Forties' oil accumulation commenced at the end of August utilizing the Sedco 712. Eight appraisal wells have been drilled to date in this first phase of appraisal drilling which was designed to map the limits of the northwestern half of the 'Forties' oil accumulation and to calibrate the seismic data to the interpretation. After production simulation testing of the eighth (8th) appraisal well, appraisal drilling of the Jurassic 'Fulmar' oil accumulation will commence. This new well bore will attempt to target the oil/water contact on the flank of the structure well below the elevation tested by the discovery well drilled in the second quarter. This well is expected to be completed by the end of December.
During the quarter the Company conducted exploration drilling on the Oddjob (Block 13/30b) and Constance (Block 21/23a) prospects. The wells were drilled and abandoned as no commercial quantities of hydrocarbons were encountered in either well.
Oilexco finished the third quarter in excellent financial condition, benefiting from its first full quarter production from the Brenda / Nicol fields, which is reflected in the Company's balance sheet. Revenue for the third quarter 2007 was $149.1 million compared to $2.2 million for the same period a year ago. EBITDA rose to $118.7 million compared to $(1.3) million for the same period in 2006. EBITDA per share for the third quarter 2007 was $0.55 compared to a negative EBITDA per share of $0.01 for the same period a year ago. Net income for the period also increased to $54.6 million compared to $4.7 million for the same period one year ago. Basic net income per share for the third quarter 2007 was $0.25, and diluted net income per share was $0.24 compared to basic net income per share of $0.02 and diluted net income per share of $0.02 for the same period a year ago.
Total assets at the end of the third quarter were $1,049.6 million, an increase from $611.3 million from the year ending December 31, 2006. Current assets as at September 30, 2007 increased to $242.3 million compared to $95.5 million as at December 31, 2006. Property, plant and equipment also increased at the end of the third quarter to $777.2 million compared to $467.7 million as at December 31, 2006. The increase was due to expenditures on exploration and appraisal drilling by two semi-submersible drilling rigs under long term contract, the second of which started in June 2007. As at September 30, 2007, the Company had cash of approximately $59.7 million and net working capital of approximately $149.2 million.
Total liabilities for the Company increased to $486.2 million at the end of the third quarter compared to $322.7 million as at December 31, 2006. Current liabilities at the end of the third quarter decreased to $93.1 million compared to $114.4 million as at December 31, 2006. This decrease is due to a reduction in the current portion of the long-term bank loans as at September 30, 2007. Long-term debt increased at the end of the third quarter to $372.9 million from $193.3 million at December 31, 2006 due to the completion of the Brenda/Nicol field developments and additional investments in equipment for future developments. Shareholders' equity at the end of the period increased to $563.4 million from $288.5 million as at December 31, 2006, as a result of an underwritten prospectus offering earlier in the year in which a total of 17.25 million shares were issued for gross proceeds of approximately $115 million; an increase in retained earnings compared to a deficit as at December 31, 2006; and an unrealized gain upon translation of consolidated financial statements into the reporting currency.
Revenue for the third quarter 2007 was $149.1 million compared to $2.2 million for the same period a year ago. The increase in revenue is due to increased production as a result of the Brenda/Nicol fields beginning production in June 2007. General and administrative expenses for the third quarter 2007 were $7.2 million compared to $1.4 million for the same period a year ago. This increase was due to costs associated with increased staff levels in the Aberdeen and Calgary offices, and the opening and staffing of a London office. Operating costs were $22.3 million for the period compared to $1.0 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 FPV. Depletion, depreciation and accretion costs were $44.2 million for the period compared to $0.3 million for the same period in 2006 because of the production from the Brenda/Nicol fields. Interest and bank charges for the third quarter 2007 were $5.7 million compared to $3.5 million for the same period in 2006 due to an increase in the Company's total debt compared to the same period in 2006.
The Company's EBITDA for the three months ended September 30, 2007 is $118.7 million compared to $(1.3) million for the same period in 2006. EBITDA per share for the third quarter 2007 was $0.55 compared to a negative $0.01 per share for the same period a year ago. The increase in EBITDA is due to the revenues from the Brenda/Nicol fields and the resulting net income. Net income was $54.6 million for the third quarter 2007 compared to $4.7 million for the same period one year ago. Basic net income per share for the third quarter 2007 was $0.25, and diluted net income per share was $0.24 compared to basic net income per share of $0.02 and diluted net income per share of $0.02 for the same period a year ago.
The Company experienced a net decrease in cash of $2.8 million for the third quarter 2007 compared to a net decrease in cash of $14.1 million for same period a year ago. The decrease in cash was due to increased investing activities from drilling conducted by the two leased semi-submersible drilling rigs, marking the first time the Company has had two rigs operating for an entire quarter.
In September, the Company achieved 'Project Completion' status under its debt facilities with the Royal Bank of Scotland for its Brenda/Nicol fields. The key criterion for receiving this designation from the Royal Bank of Scotland was surpassing total combined net production of 1.56 million barrels of oil from the fields, which began production in June 2007. Achieving this status allowed Oilexco greater flexibility with its production revenue and provided enhanced terms for its credit facilities. Subsequent to the end of the quarter, the Company signed an agreement with the Royal Bank of Scotland and its banking syndicate to increase its Senior Credit Facility from US $275 million to US $500 million, which will allow the Company the financial capacity to develop additional fields including Shelley, Huntington and Ptarmigan.
In August the world's financial markets experienced a reduction in confidence in short term credit markets. Oilexco has had, and continues to have, no exposure to these markets. The majority of the Company funds are on deposit at the Royal Bank of Scotland in US dollar and Sterling denominated interest bearing Current Accounts.
Over the next quarter the Company is set to benefit from increased production and strong commodity prices. The acquisition of the Balmoral FPV increases both the longevity of the Brenda/Nicol fields and gives Oilexco control in exploiting the prospectivity of the surrounding acreage while managing operating costs.
Exploration and appraisal activity will continue aggressively. For the balance of the year drilling is planned for the Morro/Coronado prospect (72.7% WI) located in Block 22/13b, west of the Company's Huntington discovery; at Mallory located in Block 22/14a, northeast of the Company's Huntington discovery; and at Bugle located in Block 15/23d. At Morro/Coronado, the drilling of a two-legged exploratory well targeting oil in the Paleocene Forties sand, in structures analogous to the Huntington discovery, will commence immediately after the Ocean Guardian completes operations at Shelley. At Mallory, Oilexco is participating through a farm-in on a 13,500-foot Fulmar exploratory well to evaluate the structure, which is analogous to and on trend with the Company's Huntington discovery. Upon completion of the drilling Oilexco will earn a 16.5% interest in productive zones below the Chalk, which includes the Fulmar sands. This well is expected to commence operations in late November early December. Appraisal drilling at Bugle targeting the location of the oil/water contact will commence after the Ocean Guardian completes operations at Morro/Coronado.
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