Melrose Announces 1H Results
Melrose Resources plc, the oil and gas exploration, development and production company with interests in Egypt, Bulgaria, Romania the United States of America, France and Turkey, on Wednesday announced its half-year results for the six month period ended 30 June 2009.
- Average daily first half production 34.6 Mboepd working interest basis (16.1 Mboepd net entitlement)
- Increased 2009 production guidance to 37.5 Mboepd working interest basis (16.3 Mboepd net entitlement)
- Three Egyptian field developments (NE Abu Zahra, S Zarqa and N Dikirnis) brought on stream ahead of schedule
- Successful Bulgarian Kaliakra appraisal well increasing P50 reserves to 57 Bcf
- Two Egyptian exploration discoveries (S Khilala and E Dikirnis)
- Farm-in Agreement signed to enter Pelican and Midia concessions offshore Romania
- Over 130% reserves replacement of forecast full-year production achieved to date
- Revenue $97.6 million (H1 2008 - $234.0 million)
- EBITDAX $75.4 million (H1 2008 - $213.1 million)
- Operating profit $31.1 million (H1 2008 - $151.8 million)
- Profit after tax $1.9 million (H1 2008 - $76.0 million)
- Average commodity sales price $47.99 per bbl (H1 2008 - $106.67), $2.95 per Mcf (H1 2008 - $3.78)
- Equity placing raised GBP11.2 million in July 2009
Robert Adair, Executive Chairman, commented:
"The first half of 2009 saw Melrose deliver some excellent operating results. Production levels from our existing fields and new Egyptian developments have been ahead of expectations allowing us to upgrade the Company's full year production guidance.
"We are also delivering some important business development initiatives which will provide long term value growth for our shareholders and diversify the Company's asset portfolio. We are particularly excited about our new projects in the Western Black Sea which should generate a material uplift in both reserves and production in the short to medium term.
"The volatility in the global economic environment has not left Melrose unaffected however, and the very low commodity prices experienced early in the year have had some impact on our financial results. In the mean time our core assets are performing well and this should lead to improved results in the second half of the year assuming the oil price remains at reasonable levels."
In the first half of 2009 Melrose has continued to deliver strong operating performance and the production levels from our existing and new fields have exceeded expectations. As a result, we are now able to raise our full year production guidance from 34.0 Mboepd to 37.5 Mboepd on a working interest basis (from 15.0 Mboepd to 16.3 Mboepd net entitlement).
Our new field developments in Egypt have been completed ahead of schedule and we have also enjoyed some significant exploration and appraisal drilling successes which will help further build the Company's reserves base. Of particular importance were the 36 Bcf South Khilala gas discovery in Egypt and the results from the recent Kaliakra appraisal in Bulgaria, which have increased our most likely reserves estimate for this field to 57 Bcf (of which only 16 Bcf were booked by the Company at year end 2008). In March, we were also pleased to formally sign the Farm-in Agreement under which we will acquire interests in two licenses offshore Romania. These various exploration and business development initiatives add significant value and should effectively balance the Company's asset portfolio over future years.
During the first half of the year we saw oil prices rise by over 50% compared to the year end 2008 levels. Notwithstanding this recent price improvement, we have continued with our prudent capital investment plans to protect against any short term price volatility and maintain a robust capital structure. Given the low prices experienced early in the year compared to the equivalent period in 2008, we are happy to report first half revenue and EBITDAX figures of $97.6 million and $75.4 million, respectively.
The majority of Melrose's producing oil and gas fields are located in the Egyptian Nile Delta in the El Mansoura, South East El Mansoura and Qantara concessions, and working interest production from this region during the half year averaged 32.9 Mboepd, comprising 145 MMcfpd of gas and 9 Mboepd of oil and condensate. Net entitlement production averaged 14.5 Mboepd.
The Company's two principal fields in the area, the West Khilala gas field and the West Dikirnis oil and gas field, are performing well and the production from these fields is currently supplemented by 11 further smaller fields, three of which were brought on-stream during the first half of this year.
The West Khilala gas field is currently producing on a steady plateau at a gas rate of 104 MMcfpd and continues to exhibit exemplary production performance characteristics with no water or sand production.
West Dikirnis is presently producing 7.2 Mbpd of hydrocarbon liquids and 30 MMcfpd of gas and during the first half of the year we made significant progress with our Phase II development project on the field. To date we have successfully completed two horizontal oil wells in the field to maximize oil recoveries and a third is currently being tied back for production. This is the first application of horizontal well technology in the onshore Nile Delta and the two completed wells have been very successful with a combined net reservoir penetration of 1600 feet and a flow rate of 4.7 Mbpd.
The Phase II development project also includes the installation of an LPG plant to recover high value propane and butane liquids and gas re-injection facilities to maintain the reservoir pressure and thus maximize oil recoveries. In May, an eight day shut-down of the South Batra and West Dikirnis processing facilities was successfully completed to prepare for the LPG plant tie-in and the new facilities have now been installed and are being commissioned. The gas re-injection facilities are also nearing completion and commissioning is expected to commence in October. Pending completion of the new facilities, we are taking a prudent reservoir management approach and the production wells are being rate controlled in order to limit short term gas and water production volumes and hence maximize future hydrocarbon liquids recoveries.
Development activity on the other fields has included the drilling of another horizontal well in the El Tamad oil field in January, which will help access the field's remaining oil reserves of 1.2 MMboe.
During the first half of 2009 we have also continued with the fast track development of our recent gas discoveries in the Nile Delta. The East Abu Khadra field was brought on-stream in December 2008, and this has been followed by three fields, North East Abu Zahra, South Zarqa and North Dikirnis in April 2009, and most recently, the Damas field in July 2009. Each of these fields has been tied back for production using existing infrastructure and the combined development cost was $1.58 per boe. The fields are currently producing at a combined flow rate of 63 MMcfepd which is higher than expectations.
In light of the low oil prices experienced in late 2008 and early 2009, Melrose's capital expenditure program in Egypt during the first half of the year was primarily development focused. Notwithstanding this, the Company drilled two exploration wells during the period in Egypt in the El Mansoura concession, both of which resulted in discoveries.
The East Dikirnis No.1 well was drilled in January to test a Qawasim formation prospect located 11 kilometers east of the West Dikirnis field. The well encountered 38 feet of gas overlying an 11 feet thick oil rim with an average porosity of 23%. The estimated discovery volume is in the range of 10 to 12 Bcfe and the well has now been suspended for potential future use as a producer. A number of other similar prospects have been identified in the area near the discovery and, subject to further technical review, these may be proposed for drilling over the next 24 months.
In May, the Company also announced that it had made a successful discovery with the South Khilala No.1 exploration well. This well was drilled 10 kilometers south of the West Khilala field and encountered 62 feet of net pay in the Qawasim formation. The reserves estimate for the discovery is 36 Bcf and it is being fast tracked for production via the West Khilala facilities and should be on stream by the end of October 2009. The combined West Khilala and South Khilala flow rate should be sustainable at around 115 MMcfepd throughout 2010 on natural flow, hence avoiding the need to install additional compression facilities for West Khilala next year.
We have also continued with the interpretation of the 3D seismic data which Melrose acquired over the South East El Mansoura concession in 2008. The available 3D data cover some 44% of the concession area and we have already identified four firm prospects with combined unrisked reserves of 195 Bcfe and an average chance of success of 36% plus four good oil leads in the relatively unexplored Cretaceous geological interval. These leads require further evaluation to mature into drillable prospects but initial signs are encouraging with a preliminary combined unrisked reserves estimate of 67 MMbbls. The South East El Mansoura targets supplement our inventory of five prospects in the El Mansoura concession which have combined unrisked reserves of 352 Bcfe and an average chance of success of 29%.
In order to continue building the prospect inventory, we plan to acquire a further 500 km2 of 3D seismic data over South East El Mansoura in early 2010 over areas which have been identified as containing the most interesting exploration potential.
The planned shut in of the offshore Galata gas field in Bulgaria was completed on 31 January 2009 in order to start conditioning the field for conversion to a gas storage facility. Approximately 8.5 Bcf of gas reserves have been left in the field to provide cushion gas and some minor, low cost facilities modifications have been completed in preparation for gas injection. These include onshore and offshore pipe work bypasses and metering reconfiguration. The field is now ready to commence gas injection once the required legal agreements and regulatory documentation can be finalized with the Bulgarian authorities. The approvals process has been somewhat delayed by the Bulgarian General Election which took place on 5 July and the Company is now in the process of engaging with the new administration to progress the project.
In parallel with the gas storage project, we are progressing plans to exploit our two recent gas discoveries (Kavarna and Kaliakra) and various exploration prospects which are located on the Galata Block on a geologic trend running east from the Galata field. The two fields will be developed using subsea wells tied-back to the Galata platform with export via the existing offshore pipeline and onshore processing plant. As an integral part of these two developments, provision will be made to facilitate the tie-back of any future discoveries.
The Kavarna field is located approximately seven kilometers to the east of Galata and holds an estimated 24 Bcf of reserves. The field will be produced from a single well, the temporarily suspended Kavarna No.2 well, and the tie-back operations will commence once we have received field development consent from the Bulgarian Government.
Elsewhere on the trend, the Company has recently announced the results of the successful Kaliakra No.2 well, which was drilled to appraise the Kaliakra field located around 15 kilometers east of Galata. This well encountered 67 feet of net gas pay, which is substantially thicker than the net pay of 31 feet found in the original discovery well and the open hole logs and down hole gas samples confirmed that the reservoir has very good properties with an average porosity in excess of 30 percent and high gas productivity. Given the quality of the reservoir, it was not necessary to run flow tests in the well and it has been temporarily suspended for future use as a development well. The results indicate that the Kaliakra field's most likely reserves are 57 Bcf (of which 16 Bcf were included in the Company's 2008 year end reserves booking).
Given the success of the Kaliakra well and likely timing of the Government development approvals, Melrose is now planning to develop the Kavarna and Kaliakra field in tandem in early 2010. This will allow the Company to exploit project synergies and significantly reduce the combined future development costs. It will also reduce the project risks by avoiding pipe laying operations in the bad weather winter months. The planned first gas date for Kavarna and Kaliakra are July and October 2010, respectively, and the initial combined field flow rate is forecast to be 45 MMcfpd.
The Kaliakra well results also have a positive impact on the other exploration prospects on the Galata/Kaliakra geologic trend. In particular, they significantly de-risk the undrilled Kavarna East structure which lies between Kavarna and Kaliakra and contains a most likely reserves estimate of 19 Bcf. In addition, there are two other undrilled exploration prospects on the trend, Kavarna North East and Kaliakra East, which contain unrisked reserves of 55 Bcf. For the future, in early 2010 we plan to acquire a further 500 km2 3D seismic data to the north of the prospect trend in an area where we believe an extension of the same exploration play may be present.
In light of these recent developments, we are very optimistic about Melrose's future prospects in Bulgaria and look forward to re-establishing this country as an important, high value core area for the business.
The Permian Basin infill drilling and waterflood program has continued through the first half of the year. The infill drilling program ran until February, by which time Five Spot and Line Drive well patterns had been established across the whole of the Jalmat field and the central area of the Turner Gregory field. Since February, the Company has focused on water injection well conversions and recompletions in the Jalmat field and to date some 51% of the well patterns have been placed on water injection. All the well patterns are expected to be on injection by October when the total injection rate should approach 14,000 bwpd. Once the activity on Jalmat is complete, we plan to move to Turner Gregory to increase the water injection rates in that field.
During the first half of the year Melrose drilled the Nunan-1 exploration well in East Texas. The well encountered gas shows in the Reklaw formation and open hole logs indicated a significant gas column approaching 300 feet. The reservoir pay section, however, comprised a low permeability sequence of sandstones and siltstones and therefore a fracture stimulation treatment was performed to ascertain whether commercial flow rates could be established from the well. Following the treatment, the stabilized rate was 0.3 MMcfpd of gas with minor amounts of condensate and since this is not commercially viable at current gas market conditions the well has been temporarily suspended.
Melrose has a number of frontier exploration assets in its portfolio which potentially offer our shareholders high rewards albeit with relatively high associated exploration risks. Our management strategy for these types of assets is to minimize our capital commitments and to reduce the exploration risks through the analysis of all the available geological and geophysical data prior to entering into significant capital outlays. Where appropriate, we also form joint ventures to share the capital costs and risks.
In Egypt, our Mesaha exploration concession (Melrose 40% working interest) covers an extensive area in the south of the country near the Sudanese border. Our plan is to acquire 2000 km of 2D seismic on this block in early 2010 with a view to drilling our first exploration well there late in 2010. To help us position the new seismic survey in the optimal location, we have completed the re-processing of old aeromagnetic and regional seismic data and also recently acquired a new 1,570 km ground gravity survey. The initial conclusions from the interpretation of all these data are very encouraging and confirm the presence of a large unexplored sedimentary basin in the western area of the concession. In Turkey, we continue to evaluate the eight exploration blocks in the South Mardin basin on the Syrian border (Melrose 66.7% working interest) and plan to acquire 500 km of 2D seismic in the area in 2010 with a view to drilling in 2011.
In December 2008 we announced that Melrose planned to farm-in to the Pelican XIII and Midia XV Blocks in the Black Sea, offshore Romania. The Blocks contain the undeveloped Ana and Doina gas fields, which we estimate to contain gross combined gas reserves of 288 Bcf and which are expected to be sanctioned for development in 2010. The concessions also contain a number of attractive gas and oil exploration prospects and leads with gross unrisked potential in excess of 1.5 Tcfe.
Subsequently, in March this year a fully termed Farm-in Agreement was signed by Melrose and our farm-in counterparty, Sterling Resources Ltd, and we are currently in the process of obtaining the Romanian Government's approval to complete the transaction. Under the terms of the farm-in, Melrose will earn a 32.5% interest in the concessions and assume operatorship of the development projects in order to leverage the Company's operating experience from the Galata field offshore Bulgaria.
Given the low commodity prices realized early in the year and the planned cessation of production from Galata to condition the field for gas storage, we are pleased to announce strong financial results for the half year. Revenue for the period was $97.6 million and EBITDAX was $75.4 million.
In July we completed an equity placing of 4,485,365 shares issued at a price of 250 pence per share, which raised GBP11.2 million before expenses. The funds were utilized to accelerate the drilling of the Kaliakra No.2 appraisal well and to support the capital work program.
We are also pleased to announce that we have finalized a revision to our existing debt facilities. Under the terms of the revision the Senior Facility has been increased from $440 million to $450 million. In addition, by introducing a structured pricing scale we have incorporated the possibility of bringing an element of probable reserves into future borrowing base calculations. As previously indicated, HSBC has entered the banking syndicate, replacing a smaller bank. The subordinated facility remains unchanged at $70 million. Both the senior and subordinated facilities remain committed until 2014 and the margin remains competitive at 3.3% above US$ LIBOR assuming the loans are fully drawn.
Although the Company's financial performance is strong, we do not propose to pay an interim dividend this year, reverting to our former practice of paying dividends once the results of the year are known. We will therefore review the position at year end, guided by our progressive dividend policy and, as ever, subject to the Company's capital requirements.
The first half of 2009 proved to be a highly volatile period for the E&P industry. We have seen a very rapid increase in the oil price compared to the lows experienced at the end of last year and there has recently been a significant improvement in market sentiment. The credit environment remains tight, however, and I am pleased that we have managed to maintain our capital discipline throughout the year.
Our current strategy is to focus our investments on near term revenue generation projects and a select number of material growth opportunities. This approach has helped to bring our new development projects in Egypt on stream ahead of schedule and to upgrade our production expectations for the year to 37.5 Mboepd on a working interest basis (16.3 Mboepd on a net entitlement basis). We have also added material reserves through some highly focused exploration and appraisal drilling activity at South Khilala and Kaliakra.
We now expect our expenditure in 2009 to be around $165 million which is slightly lower than current market guidance. Our preliminary capital expenditure forecast for 2010 is $195 million, of which 60% will be allocated to development activity (primarily in Bulgaria and Romania) and the remaining 40% to exploration and farm-in activity (mainly in Egypt, Bulgaria and Romania). Some $96 million of the forecast is allocated to our Bulgarian gas storage project and Romania and as such is contingent on formal completion of commercial and financing agreements.
Our production guidance for 2010 is 40.0 Mboepd on a working interest basis (17.0 Mboepd net entitlement assuming a $70/bbl Brent oil price). This reflects a full year of production from our new Egyptian developments and also contributions from the planned Kavarna and Kaliakra developments in Bulgaria. These increases will, in part, be offset by reduced gas production volumes from the West Dikirnis field once the gas re-injection facilities are commissioned later this year.
I look forward to the remainder of 2009 and 2010 with the confidence that Melrose has the right strategy, financing, asset portfolio and team to continue to grow the business and deliver substantial value for our shareholders.
Robert F M Adair Chairman
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