Centurion Energy Reports 3Q05 Results
Centurion Energy International Inc. (TSX: CUX; AIM: CUX.L) reported its 2005 third quarter financial results. The unaudited interim consolidated financial statements and management discussion and analysis included in this report have been prepared by management and approved by Centurion's Audit Committee on behalf of the Board of Directors.
- Corporate cash flow totaled $15.6 million ($0.17 per share diluted) for Q3, 2005 compared to $12.9 million ($0.15 per share diluted) in Q3, 2004.
- Corporate earnings totaled $7.6 million ($0.08 per share diluted) for Q3, 2005 compared to $3.9 million ($0.05 per share diluted) in Q3, 2004.
- Production is currently at 27,000 boepd with production capability of 35,000 boepd. Centurion plans to continue ramping up production to reach a year-end exit production rate of 43,000 to 45,000 boepd, which would double the prior year's rate for a fourth year in a row.
- The mid-year reserve update completed by Ryder Scott Company, Petroleum Consultants at June 30, 2005 added 43.2 million barrels of oil equivalent, an increase of 95% over reserves reported for December 31, 2004.
- The offshore Amira-1 exploration well in Tunisia spudded on October 16, 2005.
- Tested El Wastani-5 during the quarter in the Abu Madi zone, at a rate of 21 mmscfd of gas and 440 of associated liquids. Spudded El Wastani-7 prior to quarter end.
- Drilled 2 successful Gelgel wells during the quarter, Gelgel-6 and Gelgel-11, which tested for a combined rate of 13 mmscfd.
- The Abu Monkar-3 exploration well, a deep test in the South Manzala area, is expected to spud on November 12, 2005.
- The West Manzala and West Qantara 3D seismic program, approximately 2,000 square kilometers, is 63% complete. The first exploration well, Hamra-1, is expected to spud in early January 2006.
Non GAAP Measurements
Throughout this quarterly report, Centurion discloses certain financial information (cash flow, cash flow per share and cash flow from operations) that do not have any standardized meaning as prescribed by Canadian GAAP and are therefore considered non GAAP measures. These measures may not be comparable to similar measures presented by other public issuers.
Natural gas has been converted into barrels of oil equivalent at 6:1. Boe's disclosed in this report and MD&A may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf :1 boe is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
Facility expansion and continued development drilling were the focus in the El Wastani concession during the third quarter raising current production rates to 22,100 boepd from the concession.
Subsequent to the end of the third quarter, El Wastani-5 tested gas at 21 mmscf per day plus 440 bopd of associated liquids and was completed as a lower Abu Madi producer. El Wastani-7 has reached total depth of 3,050 meters and logs indicate productive zones in the Abu Madi and Qawasim reservoirs. Testing is expected to be completed in the next two weeks. El Wastani East-3 has reached total depth of 3,068 meters. Logs indicate approximately 20 meters of net pay in the Abu Madi reservoirs. Testing is expected to commence shortly. The remaining development wells to be drilled before year-end (El Wastani-10 and El Wastani-11) will be tied into gathering systems as soon as they are completed.
In mid-October the company commissioned a Joule-Thomson (J-T) plant at the El Wastani facilities site. This represents the first of three steps in expanding gas processing and liquid sales from the development lease.
The J-T plant is designed to recover raw condensate at El Wastani and to deliver high-btu content gas directly into the National Gas Grid. The plant was commissioned in late October and production is being ramped up. The plant is currently delivering 100 mmscfd of sales gas. The raw condensate will continue to be sent to the third-party Abu Madi gas plant along with gas production that is above the processing limit of the J-T plant. Current deliveries to the Abu Madi plant are 15 mmscfd for a total of 115 mmscfd production for the El Wastani field.
Centurion is also progressing with the construction of a 100%-owned Mechanical Refrigeration Plant that will replace the J-T plant in El Wastani at the start of the second quarter in 2006. The refrigeration plant will recover a greater amount of condensate from the raw gas stream. The final phase of the plant upgrades will be the addition of a Turbo Expander unit in the fourth quarter of 2006, allowing for the recovery of condensate and LPG's and the direct sale of gas and liquids from the field.
The El Wastani field produced an average of 75.3 mmscf/d of sales gas and 4,023 bpd of condensate and LPG's during Q3 2005 compared to 17.7 mmscf/d and 893 bpd of condensate and LPG's during Q3 2004 (increases of 325% and 351% respectively). For the nine months ended September 30, 2005 the El Wastani field produced an average 55.6 mmscf/d and 2,852 bpd of condensate and LPG's compared to 12.8 mmscf/d and 719 bpd for 2004 (increases of 334% and 297% respectively).
The proved plus probable reserves (before deduction of royalties, production taxes or their equivalent) for the El Wastani Development Lease updated at June 30, 2005 are 80.0 mmboe.
South Manzala Development Lease
(Centurion 100% WI)
Gelgel-11 is expected to be tied-in shortly and is expected to increase production to approximately 30 mmscfd from the South Manzala Development Lease. During the quarter it was noted that certain Gelgel wells were producing less than expected and as a result, remedial work is being carried out to recomplete the affected wells in different pay zones in order to mitigate the decline in field production. The current production from the South Manzala Development Lease is approximately 25 mmscfd.
Three wells were drilled at South Manzala during the quarter resulting in two gas producers and one dry hole. Gelgel-6 and 7 were drilled and completed in the El Wastani formation while Gelgel-8 delineated the northern extension of the Gelgel gas field and will be used as a water disposal well.
The contract for the ZD-50 rig, that has been drilling Gelgel wells during 2005, has been terminated in accordance with the original contract term. A new rig capable of drilling operations in these shallow wells, Valve and Tools Rig #1 (V&T-1), is currently being rigged up and inspected prior to carrying out recompletions in the existing Gelgel wells and will replace the ZD-50 rig for future drilling.
The South Manzala facility upgrades were completed in early October including the twinning of the gas sales pipeline to El Hourany. The increase in pipeline capacity from South Manzala will allow Centurion to transport future gas discoveries from the area to market.
The South Manzala field produced an average of 42.2 mmscfd of sales gas during Q3 2005 compared to an average of 34.7 mmscfd during Q3 2004 (an increase of 22%). For the nine months ended September 30, 2005, the South Manzala field produced an average of 50.1 mmscfd compared to 34.2 mmscfd for 2004 (an increase of 46%).
The proved plus probable reserves (before deduction of royalties, production taxes or their equivalent) for the South Manzala Development Lease updated as of June 30, 2005 are 7.7 mmboe.
Abu Monkar-3 Exploration Well
(Centurion 100% WI)
The ECDC-6 rig is currently on location at Abu Monkar-3 and is expected to commence drilling November 12, 2005. Abu Monkar-3 will be drilled 75 meters to the southwest of Abu Monkar-2 targeting the same Sidi Salem sands. Abu Monkar-2 was drilled in March 2005 and encountered strong gas shows upon entering the Sidi Salem formation, however mechanical difficulties and the loss of circulation down-hole prevented testing of the formation. Drilling to the planned total depth of 2,700 meters is anticipated to take 45 days. If successful, Abu Monkar-3 would be the first liquid rich gas discovery in the South Manzala Development Lease.
West Manzala and West Qantara
Exploration Blocks in Egypt
(Centurion 75% WI)
Site preparation work is underway for the first exploration well in the West Manzala concession. Al Hamra-1 will be drilled on a structure between Centurion's El Wastani concession and the multi-TCF Abu Madi field to the west. The Al Hamra-1 prospect was identified using the 3D seismic amplitude analysis technique proven successful in the El Wastani field and is targeting the same Abu Madi, Qawasim and Sidi Salem formations. Spudding of Al Hamrah-1 is expected in early January 2006.
Seismic acquisition on the West Manzala concession is nearing completion with 1,250 square kilometers having been acquired. The seismic crew will now be temporarily released to another operator and will return to complete the approximate 750 square kilometer program in the West Qantara Concession in mid-2006. Seismic processing of the acquired data has been ongoing since Q2 2005 and Centurion has recently added additional geotechnical staff to increase our focus on these new exploration concessions. To date, 10 separate multi-target structures have been identified on the West Manzala concession and 15 wells have been budgeted for 2006.
West Gharib Concession
(Centurion 30% WI)
In the third quarter the Hoshia-3 development well was completed and is currently producing from the Rudeis reservoir. Following discoveries at Fadl-1 & 2, an early production plan for the Fadl field was submitted to the Government and was recently approved. The plan of development for the West Hoshia field was also approved and the West Hoshia-3 development well is currently drilling.
The operator continues to drill exploration and development wells in the Concession and has spudded the Arta-1 exploration well targeting the Rudeis and Matulla reservoirs. The operator anticipates drilling an additional four wells during Q4 2005.
Total production from the West Gharib Concession averaged 2,267 bopd (672 bopd net) during Q3 2005 compared to 1,690 bopd (507 bopd net) during Q3 2004 (an increase 34%). For the nine months ended September 30, 2005 the West Gharib Concession produced an average of 1,842 bopd (553 bopd net) compared to 1,683 bopd (505 bopd net) during 2004 (an increase 9%).
Kom Ombo Concession
(Centurion 100% WI)
The reprocessing of 1,500 kilometers of 2D seismic and surface geology mapping has been completed in the Kom Ombo Concession. A seismic crew has been mobilized to acquire 500 kilometers of new 2D seismic with acquisition expected to start in Q4.
PetroCanada, as operator of the Mellita Permit, spudded the Amira-1 offshore well in the Gulf of Gabes on October 16, 2005. Amira-1 is targeting the Zebagg and Meloussi formations which are the main producing zones in Robanna, El Bibane and Ezzaouia.
Joint Development Zone
Negotiations to finalize the Production Sharing Contract (PSC) and the Joint Operating Agreement (JOA) are progressing. Signature of the PSC and JOA is expected during 2006.
Block 4 is an extension of the prolific Nigeria deep water play where a number of significant oil discoveries have been made. Interpretation and mapping of the 3D seismic indicates the presence of several large potentially oil bearing structures. The Centurion and Hercules Petroleum consortium were awarded a 10% interest in Block 4 of the Nigeria-Sao Tome and Principe JDZ. Centurion holds a 7.5% equity interest in Block 4 with an option to increase to a 10% working interest.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the unaudited consolidated financial statements of Centurion for the periods ended September 30, 2005 and 2004. The unaudited interim consolidated financial statements included in this report have been prepared by management and approved by Centurion's Audit Committee on behalf of the Board of Directors. This Management's Discussion and Analysis is dated November 11, 2005.
Trends Observed During the Quarter
Centurion's gas price is capped at $US 2.65 per mmbtu giving an average price of $US 2.75 per mscf of gas during the quarter. Continuing favorable commodity prices have seen Centurion realize $US 59.55 per bbl of condensate and $US 42.66 per bbl of oil for the third quarter of 2005.
Foreign Exchange Fluctuations
Centurion operates in a US dollar based environment. All of our revenues and the majority of our costs (both capital and operating) are paid in US dollars. However, being a Canadian company trading primarily on a Canadian exchange, Centurion reports its financial results in Canadian funds. Accordingly, all US dollar amounts presented in Centurion's statements of earnings and cashflows are converted to Canadian funds for reporting purposes based on the average Canadian to US dollar exchange rates prevailing during the reporting period.
During Q3, 2005, the average Canadian to US dollar exchange rate was $0.83 compared to $0.76 in Q3, 2004. For the nine month period ended September 30, 2005, the average exchange rate was $0.82 compared to $0.75 in 2004. The strengthening Canadian dollar in Q3 and year to date 2005 had the effect of reducing all US dollar translated amounts by 9% compared to Q3 and year to date 2004. The effect of this reduction on each of earnings and cashflow was approximately $0.01 and $0.02 per share for the quarter and $0.02 and $0.04 per share for the nine month period.
In January, 2005, Centurion issued 3.0 million common shares for proceeds of $37.0 million net of issue costs. The proceeds from the share offering continue to finance Centurion's 2005 drilling and development programs in Egypt. As a result of the share offering, a dilution impact is noted on per share results until the benefit of the expenditures made from funds raised translates into new production, cashflow and earnings. The dilution associated with this stock issue resulted in a decrease in cash flow and earnings for the three months ended September 30, 2005 of $0.01 per share and for the nine months ended September 30, 2005 of $0.01 and $0.02 per share, respectively.
Continuing Operations - Egypt
Sales, net of royalties for Q3 2005 were $28.8 million compared to $15.0 million for Q3 2004, and were $72.9 million for the nine months ended September 30, 2005 compared to $37.8 million for the comparable period in 2004, an increase of 92% and 93%, respectively. This increase in sales is a combination of a 132% increase in production from El Wastani and South Manzala offset by foreign currency effects and an 11.5% reduction in Centurion's share of Egyptian production from 47.5% in 2004 to approximately 36% year to date in 2005.
Under the terms of Centurion's Production Sharing Contract ("PSC"), Centurion receives both a cost recovery portion and profit portion of any hydrocarbons produced. The "cost recovery portion" is limited to the lesser of i) 30% of gross sales and ii) 20% of non-recovered capital costs plus 100% of current operating costs. The remaining production is deemed the "profit portion" which Centurion and the Egyptian Government share at 25% and 75% respectively.
In prior years, Centurion's production was such that it received the full 30% of the cost recovery portion of production plus its share of the profit portion. This resulted in 47.5% of total production being allocated to Centurion. As a result of increased commodity prices coupled with lower than anticipated capital spending in the year, the percentage of gross production Centurion has received in 2005 has decreased to approximately 36% from the previous year level of 47.5%. The production volumes taken by the Egyptian Government are in lieu of any further taxes and royalties and the 36% allocation Centurion received had no further financial encumbrances upon it. In future periods, Centurion's substantial growth in production and sales are expected to result in cost recovery being limited to 20% of capital plus 100% of operating costs.
Centurion accounts for the Egyptian State share of production volumes as royalty and tax expense. For the three and nine months ended September 30, 2005, the royalty expense approximated $36.5 million and $79.9 million, respectively (56% and 52% of gross sales) compared to $8.5 million and $23.4 million (36% and 38% of gross sales) for the comparable periods in 2004. The increase in royalty rate is commensurate with the increased production allocation to the Egyptian State discussed above while the income tax portion remains at 43.5%.
Total operating expense for Q3, 2005 amounted to $5.1 million ($2.29 per boe) compared to $1.5 million ($1.64 per boe) for Q3, 2004. For the nine months ended September 30, 2005, operating expense totaled $12.0 million ($2.09 per boe) compared to $4.4 million ($1.79 per boe) for the comparable period in 2004. The increase in per boe operating expenses is attributable to the increased value of the LPG's produced from El Wastani that the Abu Madi plant operator keeps in lieu of payment for third party gas processing. These costs amounted to $6.0 million ($1.04 per boe) year to date Q3 2005 compared to $1.1 million ($0.45 per boe) for the same period in 2004. The value of the LPG's produced is recorded as sales with a corresponding amount charged to operating expense.
Field operating costs decreased to $0.98 per boe for the nine months ended September 30, 2005 compared to $1.29 per boe for the comparable period in 2004. The decrease in field costs is a result of having minimal variable costs associated with incremental gas production, while the larger portion of fixed operating costs gets allocated over increased production volumes achieved in 2005 compared to 2004.
General and Administrative Expense
General and administrative expenses for Q3, 2005 were $0.6 million compared to $0.8 million for Q3 2004. Centurion's cost per boe produced is $0.28 for Q3 2005 compared to $0.86 for Q3, 2004. For the nine months ended September 30, 2005, general and administrative expenses for were $2.1 million compared to $2.2 million for 2004. On a per boe basis, the costs were $0.37 for year to date 2005 compared to $0.91 for the comparable period in 2004.
Interest and Finance Costs
Interest and finance costs for Q3, 2005 were consistent with Q3, 2004 at $0.3 million. For the nine months ended September 30, 2005, interest and finance costs totaled $0.9 million compared to $0.7 million for the comparable period in 2004. The 2005 costs represent interest on both the bank indebtedness and the capital lease.
Depreciation, Depletion and Amortization
The depletion provision for Q3, 2005 amounted to $6.9 million ($3.07 per boe) compared to $4.2 million ($4.47 per boe) for Q3, 2004. For the nine months ended September 30, 2005, the provision totaled $21.4 million ($3.72 per boe) compared to $12.4 million ($5.02 per boe) in 2004. The increase in proved reserve volumes at June 30, 2005 resulted in a decrease in the per boe depletion rate. Other depreciation relates to non oil and gas assets.
Sale of Tunisian Producing Assets
On April 26, 2005, Centurion completed the sale of its Tunisian assets to Candax Energy Inc. The transaction resulted in final proceeds of approximately $43.7 million inclusive of all working capital adjustments.
As a result of this transaction, Centurion has presented all of the revenues and expenses associated with the operations included in the sale as discontinued operations for financial reporting purposes. The carrying amount of assets and liabilities associated with the discontinued operations sold are no longer included the balance sheet and are netted against proceeds received on the sale. This resulted in income from discontinued operations of approximately $2.5 million being recorded in the nine months ended September 30, 2005. Note 11 to the interim financial statements provides further detail related to the sale of these assets.
Management's Discussion and Analysis has been segregated between continuing operations (primarily Centurion's Egyptian operations) and discontinued operations (Tunisia), as a result of the sale of the Tunisian producing assets. Any prior year comparative figures have been restated to give a meaningful comparison for the current year's activities.
Although the sale of the Tunisian properties was effective January 1, 2005, GAAP requires that the vendor continue recording financial activity of the discontinued operations until the transaction actually closes. Accordingly, production volumes, revenues, operating costs and tax expense associated with the discontinued operations have been reported for the period of January 1, 2005 to the closing date of April 26, 2005 by Centurion.
Sales, net of royalties for the nine months ending September 30, 2005 were $9.0 million compared to $14.5 million for the same period in 2004. The decrease is a result of operations in 2005 reported through April 26, 2005 as compared to nine months ended 2004.
Earnings from discontinued operations for the nine months ending September 30, 2005 were $2.5 million compared to $3.2 million for the comparable period in 2004. As the sale of the operations closed on April 26, 2005, there were no discontinued operation earnings to report for the third quarter of 2005, compared with $2.0 million of earnings in 2004. Prior to the closing of the sale, the 2005 earnings were positively affected by increased netbacks received per barrel produced due to current oil prices and the sale of 40,000 barrels of oil held in inventory at year end. Additional increases in discontinued earnings in 2005 related to no depletion being charged on the assets held for sale since December 31, 2004. In 2004, depletion of $3.1 million was charged against these assets for the nine months ended September 30, 2004 and reduced earnings accordingly.
Liquidity, Capital Resources and Capital Expenditures
Capital expenditures for the nine months ended September 30, 2005 totaled $110.3 million including $109.7 million spent in Egypt, $0.1 million spent in Canada and $0.4 million spent in Tunisia. The expenditures in Egypt consisted of 2005 drilling program costs, facility installation costs, 3D seismic acquisition and general geological and geophysical programs.
Cash on hand at September 30, 2005, was $43.3 million compared to $37.4 million at December 31, 2004. Centurion had working capital of $49.4 million at September 30, 2005, compared to working capital of $49.3 million at December 31, 2004.
Subsequent to quarter end, Centurion signed a letter of intent with the
Standard Bank PLC to enter into to a revised credit facility. This
facility has a credit limit of $150 million USD, with $100 million USD
available immediately and an option of an additional $50 million USD
subject to certain bank restrictions. This new facility will replace the
existing $40 million USD facility under which $10 million USD is
currently drawn. This revised facility in addition to forecast 2006
cashflow from operations is expected to meet the anticipated 2006
capital program requirements and allow for continued exploration and
development growth in focus areas.