Melrose Resources has issued its Interim Management Statement to cover the period July 1, 2008 to September 30, 2008 ("the Third Quarter") and up to date. This information is provisional and unaudited and may be subject to further review.
In October Melrose announced the success of the Kavarna No.1 exploration well, which was drilled approximately 7 km to the east of the Melrose-operated Galata gas field, offshore Bulgaria. The well was drilled to total depth of 2,899 feet and encountered the top of the Paleocene reservoir target at a depth of 2,628 feet. The mud log obtained while drilling established that the reservoir formation was well developed and gas-bearing and the initial reserves estimate for the discovery is 24 Bcf.
The new discovery is located between the Galata field and the Kaliakra discovery which was announced earlier this year and which is estimated to contain reserves of up to 47 Bcf. Three future prospects exist on the same geologic trend and are candidates for drilling in 2009 and 2010.
Prior to completing the well, a strong gas influx occurred in the Kavarna No.1 well and for safety reasons it was necessary to plug the well which will now be redrilled. Subsequently an appraisal well will be drilled on the Kaliakra discovery to test for the significant reserves upside in the structure. First production is expected from the two discoveries in the second half of 2009 and 2010, respectively.
Melrose is continuing with its active development program in Egypt. The West Dikirnis Phase II development project is progressing well with all initial design work complete and all major procurement contracts placed. The project is on schedule for the delivery of first LPG and gas reinjection in mid 2009. Also in Egypt, production was re-instigated from the Qantara field in October and the development projects at East Abu Khadra, North East Abu Zahra, South Zarqa and Damas are ongoing with planned first production on dates between December 2008 and September 2009.
In the USA, Melrose has continued with the development project on its fields in the Permian Basin in West Texas and New Mexico. A total of 42 new wells have been drilled to date and injection of water as part of the secondary recovery project in the Jalmat field has commenced.
In Bulgaria, the project to convert the Galata gas field to a gas storage facility is moving forward and discussions are continuing with the Bulgarian authorities to define commercial terms. First injection in the facility is expected in mid 2009.
Production and Product Prices
Melrose's net entitlement production in the Third Quarter totalled 6.0 Bcf of gas and 357 Mbbls of oil and condensate, representing an increase of 6% compared with the same period in 2007. Average daily net entitlement production in the quarter was 14.8 Mboepd (88.9 MMcfepd). On a working interest basis average daily production in the quarter was 34.6 Mboepd.
Total capital expenditure in the Third Quarter amounted to $55.4 million, of which $41.7 million was spent on development and $13.7 million on exploration activities. In the period January 1, 2008 to September 30,2008 capital expenditure amounted to $147.4 million, of which $94.4 million was spent on development and $53.0 million on exploration activities.
Melrose remains in a well funded and sound financial position and there have been no major changes in its balance sheet since the publication of the 2008 Interim Results. Group net debt at 30 September was $407.0 million. Increased bank facilities were put in place in June 2008 with the IFC and a syndicate of eight commercial banks. The senior facility has a facility amount of $440 million and the subordinated facility has a facility amount of $70 million. Both facilities remain fixed until 2012 and then amortize with final repayment due in December 2014. Availability under the borrowing base calculation for the senior facility currently exceeds the facility size and Melrose would be in a position to consider increasing the size of the senior facility in the future if required.
The existing loan facilities, coupled with good levels of cash generation from the business, will ensure that the Company is able to finance its planned investment programme going forward. The fall in the oil price has resulted in a decrease in revenue in the Third Quarter compared with the second quarter of the year. Melrose benefits from a number of advantages in the current lower oil price environment. Firstly, approximately 74% of Melrose's net production in the Third Quarter was gas which was sold at fixed contracted prices. Secondly, under the terms of Melrose's production sharing concessions in Egypt Melrose has a higher entitlement to production at lower oil prices. Thirdly, and most importantly, Melrose is the operator of its major properties. This gives Melrose the ability to determine the amount and timing of its capital expenditures in the light of available resources.
During the Third Quarter, the Company announced a maiden interim dividend to shareholders of 1.2 pence per share which was paid on October 17, 2008.
In Bulgaria, pending receipt of the final approval from the Bulgarian authorities for the conversion of the Galata gas field as a gas storage facility, the Company has reduced the Galata production rate to around 11 MMcfpd and expects to cease production from the field at the end of this year to ensure sufficient gas is left in the reservoir to implement the project.
Because of this and some minor operational delays in Egypt, the Company previously announced last month that it believes it is prudent to reduce its 2008 net entitlement production guidance from 19.2 Mboepd to 18.3 Mboepd. The revised 2008 production guidance equates to 36.3 Mboepd on a working interest basis.
The result of the exploration programme in Bulgaria and reserve additions in the USA put Melrose on track for a strong performance in reserves replacement in 2008. The development projects which comprise the majority of Melrose's capital expenditures are on schedule which is positive for production expectations in 2009 and beyond.
In the coming few months Melrose has an active drilling program. In Egypt the North Dikirnis No.1 exploration well is currently drilling and an exploration well at East Dikirnis (also known as North Tariff) is planned before year-end. In Bulgaria the re-drill of the Kavarna No.1 will be followed by an appraisal well on the Kaliakra structure. In East Texas, the Nunan No.1 well, which has multiple pay targets, is expected to spud later this month and will be followed by the Ramsey No.1 well which is twinning a well drilled by the previous operator and which discovered the target formation.
Commenting on this report, David Thomas, Chief Executive, said, "Melrose continues to make good progress in all three of our principal areas of operation. In the current environment we are seeing the benefit of our solid production base and of the established development upside in our properties. Drilling success has again demonstrated our ability to add value for the Company through exploration and with our current resources and asset portfolio we are well positioned to provide value growth for our shareholders."
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