Oilexco Announces its 2005 2nd Quarter Results
Oilexco Incorporated (TSX: OIL; AIM:OIL) announces its Financial Results for the 2nd Quarter, and for the 6 month period ending June 30, 2005.
Oilexco has evolved substantially due to its activities in the UK North Sea. High levels of activity in the United Kingdom have continued to cause significant changes in the financial status and trends of the Company over the second quarter of 2005 relative to the same period of 2004. During the second quarter Oilexco strengthened its financial position by concluding an offering of 31,000,000 Common Shares of the Company at Pounds Sterling 0.98 or $2.22 per share. Aggregate gross proceeds of the share issue were Pounds Sterling 30.4 million, or $68.8 million. These funds will be directed towards Oilexco's 2005 UK North Sea drilling program. In addition to the offering of common shares, the Company also strengthened its financial position by concluding a Pounds Sterling 10 million "Bridge facility" loan with its principal Banker, the Royal Bank of Scotland. This loan facility is to be applied to the Company's "Brenda" development in the UK North Sea. The Bridge facility can b! e drawn to permit the ordering of certain equipment that has a long lead time or to accommodate other Brenda development expenditures before the overall Project Facility is put in place. The initial draw on the Bridge facility is expected to occur in the third quarter of 2005.
The Company's principal focus continues to be development of the "Brenda" Field. The initial Draft Brenda Field Development Plan and Environmental Assessment was filed with the UK Department of Trade and Industry ("DTI") by the Company in April. The review process has been ongoing, with the Final Field Development Plan expected to be filed in mid August, with final DTI approval expected later in the month.
Subsequent to the end of the period the Company signed a "Heads of Agreement" with CNR International (UK) Ltd, a subsidiary of Calgary-based Canadian Natural Resources Limited, relating to the construction and tie-in of the "Brenda" Field to the Balmoral Floating Production Facility and for the provision of production and operating services to the Brenda Field. In addition to the Agreement with CNR International, the Company also signed several letters of intent with a view toward awarding contracts to leading sub-sea contractors for the provision of services and sub-sea production equipment for the Brenda development. These agreements have allowed Oilexco to finalize the Brenda Field Development Plan. The Company's contracted drilling rig, the Transocean semi-submersible Sedco 712, is expected to move to the Brenda field area in January of 2006 to begin the drilling of the Brenda horizontal production wells. The target for the first oil production from Brenda continues to be the third quarter of 2006. The drilling and completion program for the productions wells at Brenda is expected to take 5 months to complete.
Oilexco commenced drilling operations at the end of March on the first well of its 2005 UK North Sea drilling program. Well 15/25a-13 was successful, testing 4,194 bbl/d of 39 degrees API sweet crude oil from the Paleocene Balmoral sandstone. This new oil accumulation (called "Nicol") was drilled on a farm-in, whereby the Company paid 100% of the costs of the well for a 70% interest in Block 15/25a. Oilexco has proposed to its partners that a single horizontal production well be used to develop the "Nicol" oil accumulation. Also, Oilexco has proposed that this production well be tied back to the Brenda production manifold, which will be located approximately 10 km to the southeast, and that development at Nicol proceed concurrently with the development at Brenda. Drilling and completion of this production well will be concurrent with the Brenda production wells, with oil production targeted for the third quarter of 2006.
During the second quarter, the Company also worked actively toward finalizing its 2005/2006 UK North Sea drilling program. Currently, Oilexco's activities are focused in the central UK North Sea, the location of its Brenda and Nicol oil accumulations. In the second quarter and subsequent to it, the Company has entered into five farm-in agreements/joint venture agreements or letters of intent for drilling ventures with third parties targeting oil and/or gas condensate prospects in the central UK North Sea. Drilling operations on these projects commenced in July at Yeoman, with well 15/18b-11, followed by the well 15/22-18 at Black Horse, which commenced operations in early August 2005. Wells at Palomino (Block 21/6a) and Tay (Block 21/23a) are expected to be drilled in October and November 2005, respectively. Oilexco is currently evaluating several additional drilling opportunities to carry the Sedco 712 through its contracted period ending in March 2007. To this end, the Com! pany is evaluating a number of additional exploration/appraisal drilling opportunities in the UK North Sea on acreage held by third parties. In addition, Oilexco has bid on Blocks offered in the 23rd UK Offshore Licensing Round, the results of which are expected to be released in September.
In April, Oilexco signed a letter of agreement to extend the contract with Transocean for the semi-submersible offshore drilling rig Sedco 712 from the end of March 2006 to the end of March 2007. This will ensure the development of the Brenda Field by guaranteeing the timing of drilling the production wells at Brenda and Nicol and the delivery of sub-sea production equipment. It also allows Oilexco to appraise its drilling successes in its 2005 UK North Sea exploration/appraisal program. This was a strategic decision made by Oilexco amid a rapidly tightening rig market for the years 2006 and 2007. Currently, all worthy semi-submersible drilling units in the North Sea have been contracted through to the end of 2006, reflecting rapid increases in industry activity levels due to high world crude oil prices.
Economic and industry trends in the oil and gas sector as outlined in the MD&A as at and for the year ended December 31, 2004 remain substantially unchanged.
Oilexco finished the second quarter ending June 30, 2005 in excellent financial condition. The Company maintained high cash balances as in the year ended December 31, 2004, reflecting Oilexco's private placement of equity in February 2005 and the subsequent offering in June 2005. Cash balances are expected to fluctuate in 2005 and 2006 due to the cash consumed by ongoing drilling activity offset by the anticipated project financing facility for Brenda, as well as increases from future equity issues. Current assets increased 187% from December 31, 2004 following the private placement and June offering of common shares and reflecting accounting for contract pre-payments to Transocean for the Sedco 712 drilling contract from March 2005 to March 2006. Current liabilities increased 40% at June 30, 2005 (compared to the year end 2004), reflecting an increase in payables accrued for second-quarter drilling operations in the UK North Sea. The Company expects levels of current liabilities to remain relatively high in subsequent 2005 quarterly periods, reflecting the 2005 UK exploration/appraisal drilling program. The share capital increase of 60 % from the year-end reflects the issuance of 5,385,000 common shares by private placement in February 2005 and the issue of 31,000,000 common shares in June 2005. Oilexco may access equity markets to raise additional capital in 2005.
Increased levels of activity in the UK North Sea during the second quarter ended June 30, 2005 also caused significant changes in comparative year-over-year trends in Oilexco's operating results. Oil and gas revenues increased 338% in the second quarter ended June 30, 2005 compared with the same period of 2004. The increase in oil and gas revenues resulted from substantially higher prices and the acquisition of the Balmoral/Glamis oil production interests in September 2004. Oilexco forecasts a further increase in oil and gas revenues in the second half of 2005 due to production enhancements at Balmoral/Glamis. In addition, the Company expects oil prices to continue to average more than $50 US per barrel. Oil and gas operating costs increased by 2,224% in the second quarter ended June 30, 2005 compared with the same period of 2004 due to the acquisition of the Balmoral/Glamis production interests. The Company expects further increases in operating costs in 2005 due to continu! ed inflationary price increases in oilfield services, onshore and offshore, in the current high-oil-price environment. General and administrative expenses increased by 218% in the second quarter ended June 30, 2005 compared with the same period of 2004 due to the Company's intensified activity in the UK North Sea, which necessitated the opening and staffing of an office in Aberdeen, Scotland. General and administrative expenses should stabilize in the second half of 2005 as employment levels stabilize. Oilexco has not experienced difficulties in attracting well-qualified staff due to the Company's compensation policy of combining share options with competitive salary and benefit packages. Share incentive compensation expense levels increased in comparative periods, as the Company issued share options to its new hires for compensation in times of increased prices for Oilexco's common shares. The Company expects the share incentive compensation expense to remain high throughout 2005, as the Company will continue to issue options to key employees and to new hires in key positions.
The Company had a net loss of $1.2 million during the period under review due to high general and administrative expenses. For the same period of 2004, the Company had net loss of $0.5 million. The Company expects to continue to incur losses until 2006, when oil production at Brenda in the UK North Sea is anticipated to commence. Cash used in operating activities amounted to $2.1 million during the second quarter of 2005 compared with $1.1 million in the same period of 2004 mainly due to higher general and administrative expenses. The Company expects to continue its active capital spending program throughout the remainder of the year and into 2006. Increasing levels of general and administrative expenses are likely to continue; therefore, cash used in operating activities may increase in subsequent periods.
During the period presented, the Company maintained strong positive working capital and relatively large cash balances. Oilexco intends to continue to finance the Company's 2005 UK North Sea exploration/appraisal program from the equity markets, as the Company currently lacks the internal cash flow to finance these activities. Oilexco continues to negotiate a project financing facility with the Royal Bank of Scotland to finance the Brenda Field development program.
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