Venture: Good First Half 2006 Results
The first half of 2006 saw Venture deliver the full benefits of its North Sea development program, which commenced in 2004, leading to record operational and financial performance. All three of our production hubs performed strongly and, in aggregate, delivered production slightly ahead of our expectations.
We have seen the continued benefits of the strong growth and diversification of our portfolio over recent years. Following the acquisition of CH4 Energy Limited ('CH4'), Venture now has interests in a total of 16 producing oil and gas fields, of which we operate 13. In the current market of scarce resources, we are seeing tangible benefits from our operatorship led strategy. Our early recognition of the tightening market conditions lead us to develop strategic partnerships with key contractors, which have not only ensured Venture's ability to deliver a substantial and complex development program, but have also enabled us to respond quickly and effectively to the inevitable unplanned operational issues that arise in offshore operations. These partnerships, plus the strengthening and deepening of the senior management team, have also allowed us to create and seize new business development opportunities.
Average daily production for the first half of the year increased by 80% to 43,572 boepd (2005 - 24,255 boepd). Revenue increased by 230% to £185.4 million (2005 - £56.1 million) due to increased production volumes and higher realized commodity prices. Financial performance and costs were in line with expectations and resulted in a pre-tax profit of £97.7 million (2005 - a loss of £5.9 million) and profit after tax of £55.9 million (2005 - a loss of £2.8 million).
We have also seen a transformation in the cashflow generation of Venture's business during 2006. During the first half of the year, operating cashflow totalled £155.5 million, (2005 - £3.9 million). The operating cashflow generated in the first six months of 2006 is 79% greater than for the whole of 2005.
At 30 June 2006, Venture had interests in a total of 31 oil and gas fields. Of these, 11 were in production, four were under near term development and 16 were medium term development candidates. These fields are located in the three discrete production hubs, 'A' Fields, 'Trees' and the Greater Kittiwake Area ('GKA').
In addition, as a result of the recently completed CH4 acquisition, Venture has acquired interests in a further three producing gas fields and one gas field under development. The CH4 acquisition has also added a fourth production hub to Venture's business, the Greater Markham Area ('GMA'), and makes Venture one of the largest UK independent gas producers.
Average net daily production for the first six months of 2006 was 43,572 boepd, an increase of 80% over the comparable period last year. This was a result of new field developments coming on stream, combined with good reservoir performance supported by high levels of production facilities uptime.
During the first half of 2006, Venture continued its development program across the business. The Company drilled and completed five wells and Field Development Plan ('FDP') approval was received for two new fields, Goosander (which came on stream in August 2006) and Mimas (which is expected to be brought on stream before the year end).
Strong production performance has continued from Venture's southern North Sea ('SNS') 'A' Fields gas production hub. During the first half of 2006 the 'A' Fields produced at an average rate of 27,556 boepd, or 63% of the Group total (2005 - 12,546 boepd and 52%). This increase in production was principally the result of contributions for a full period from Annabel (Venture - 100% owned) and the Saturn Unit (Venture - 22%), both of which came on stream during 2005.
In the first half of 2006 we successfully completed drilling an in-fill well on the Ann field (Venture - 100%), which was brought into production in April. In the ConocoPhillips operated Saturn Unit (Venture - 22%) the third production well was successfully drilled and brought on stream in June. Additionally, a well has been successfully drilled into the Rhea structure in the southern portion of the Saturn Unit area. The well has been completed and tested at a gross flow rate in excess of 100 MMcfpd and is expected to be brought on stream shortly. In May, FDP approval was received for development of the Mimas field (Venture - 15%) as a satellite to Saturn. Mimas is being developed utilising a single production well drilled from a minimum facilities platform, which was installed in early July. The Mimas field is expected to come on stream in late 2006.
Operated SNS drilling activities are expected to re-commence in late September with the arrival of the Noble Julie Robertson ('NJR') jack-up drilling rig on a two year contract to Venture. The first well to be drilled using the NJR is anticipated to be an appraisal well on the Ensign field (Venture - 100%), a large undeveloped gas discovery acquired during 2005.
Greater Kittiwake Area ('GKA')
The GKA production hub (Venture operated - 50%) contributed 5,387 boepd, or 12.5% of the Group total during the period (2005 - 3,612 boepd or 15%). This increase was driven by the contribution of Gadwall for a full period, the impact of the new Mallard water injection well drilled in the second half of 2005 and the subsequent start-up of the Mallard producer in April 2006. Strong production performance from GKA during the first half of 2006 was partially offset by an anchor dragging incident involving the Gadwall/Mallard pipeline in February, which led to both fields being shut-in for a period of six weeks. Calling upon our strategic partnerships with contractors enabled a rapid restoration of production and a permanent solution to the problem completed in early July. Both fields have now been restored to full production potential.
The first half of 2006 has also been a period of intense development activity on GKA. During February, the Gadwall water injection well was completed and, in July, drilling of a second water injection well on the Mallard field commenced. This latest GKA well has been successfully drilled and is currently being completed. In January, FDP approval for the Goosander field was received. The Goosander production well was completed and tested in April, the sub-sea flowline bundle installed in June and the field brought on stream in early August. Successful completion of the Goosander project represents an important development milestone for Venture and was brought on stream, within budget and almost four weeks ahead of schedule.
During the period, we have seen operational benefits from the replacement of the Kittiwake loading buoy ('KLB') with a new single anchor loading ('SAL') system in 2005. During the first half of the year, work has continued in evaluating long term export options to replace the GKA storage and export tanker, which will reach the end of its life during 2007.
During the first half of 2006, the Trees production hub (Venture - 100%) produced at an average rate of 10,629 boepd or 24.5% of total Group production (6,914 boepd or 28% during 2005). Overall, this increase in production is primarily driven by a full period's contribution during 2006 and the contribution from the south Sycamore production well. The central Sycamore water injection well, SW-2, was completed in November 2005 and brought on stream in January. Production from the south Sycamore production well, which was drilled in late 2005, was steady during the period and reservoir data from the initial period will be used to determine whether water injection support is required. While water injection into SW-2 has been continuing since the start of the year, we have not yet sufficiently repressurised the reservoir around the production well (SP-2) to allow this well to be brought back on stream. Resumption of production is expected later in the year. A second central Sycamore water injection well, SW-1, was drilled early this year and encountered disappointing quality reservoir. This well has been suspended pending further evaluation.
An exploration well to test the Ash prospect (Venture - 100%) in the south of the Trees block 16/12a is to be drilled as an extended reach well from the Tiffany platform. This well is expected to commence around the end of the third quarter, with results anticipated around year end.
Other Central North Sea
Development activity continued on the Chestnut field (Venture operated - 69.875%) during the first half of the year. The Chestnut water injection well was successfully drilled and completed in May and construction has commenced on the Sevan Marine SSP 300 floating production unit at the shipyard in China. The project is on track for first oil production during the second half of 2007.
On the Pilot heavy oil field (Venture operated - 70.37%), subject to regulatory approval, Venture is planning to drill an appraisal well utilising a geotechnical survey drillship rather than a conventional mobile drilling unit. Delays in availability of this drillship from other users mean that it will not be possible to drill this well during the 2006 weather window and it is now anticipated that it will be drilled in Spring 2007. During the period Venture increased its interest with the acquisition of an additional stake in the field from one of its partners. In addition, dependant on the results of the Pilot appraisal well, a second well will be drilled to appraise the 28/2-1 discovery in the adjoining block 28/2 (Venture - 100%), acreage that was awarded to Venture in the 23rd UKCS Licensing Round in 2005.
On Block 28/5a (Venture - 13.04%), BG has farmed-in to drill an exploration well later in the year. The well will target a medium risk prospect with potential gross reserves of up to 25 MMboe. During the first half of 2006, Venture agreed to farm-in to 'Moonraker' exploration prospects located in Block 14/28b by paying a higher share of well costs to earn a 20% interest in the prospect. The well was drilled in August at a net cost of £2.0 million, but the reservoir encountered was water bearing and the well has subsequently been abandoned.
Corporate and Business Development
During 2006, we have taken significant steps to build Venture's long term sustainable growth prospects. Against a background of buoyant commodity prices, the competitive market for acquisitions continued during the first six months of 2006, with acquisitions of producing North Sea assets commanding record prices. Venture's proven ability to bring undeveloped 'stranded' discoveries into production gives it the flexibility to acquire assets across a wide range of development maturities.
During the first half of 2006 Venture continued to develop the project inventory that was acquired in 2004 and 2005. In addition, we worked on several transactions designed to increase working interests in and around ongoing developments. To date in 2006 four such asset acquisitions have been made.
In early April, Venture announced the acquisition of an additional interest in Blocks 21/27a (including the Pilot heavy oil discovery) and 21/27b for a nominal cash consideration. Following exercise of pre-emption rights by existing field partners, this acquisition took Venture's stake in the Pilot field from 47.5% to 70.4% ahead of the planned drilling of a further appraisal well to confirm the recoverable reserves of this Venture operated field.
In August 2006, Venture reached agreement for the acquisition of further interests in blocks 21/20a (excluding the Cook field area), containing the undeveloped Bligh gas condensate discovery, and 21/20b, containing the undeveloped Christian oil discovery. These undeveloped discoveries are located immediately to the east of GKA and are both candidates for tie back to the Kittiwake platform, with Christian likely to be prioritized for development into production by 2010. Under the terms of an 'area of mutual interest' agreement put in place at the time of the original GKA acquisition, Venture has subsequently sold down 50% of its total acquired Christian and Bligh interests to its GKA partner, Dana Petroleum, and upon legal completion, anticipated early in the fourth quarter, Venture will have working interests of 20.67% in block 21 /20a (Bligh) and 50% and operatorship of block 21/20b (Christian). The net cash inflow to Venture arising from these transactions will amount to approximately £0.5 million.
Also in August 2006, Venture agreed to farm in to block 22/22c to operate the drilling of an appraisal well into the Millburn oil discovery adjacent to the Selkirk discovery (Venture - 31.5%). The well will be designed for completion as a future producer and Venture will fund 100% of the well cost to earn a 70% interest in the Millburn block.
In addition, at a more strategic level, Venture has created an innovative new partnership targeting southern North Sea gas assets. In mid-April, we announced the formation of North Sea Gas Partners Limited ('NSGP'), a joint venture company between Venture and three financial institutions to pursue jointly large scale southern North Sea acquisition and development opportunities. Venture will provide 33.3% of the total $300 million commitments to the company and will typically also have a direct interest of between 25% and 45% in any assets in which the partnership invests. This will result in an effective economic interest in NSGP assets of between 50% and 65% net to Venture. Venture has recently announced the acquisition by NSGP of interests in two gas discoveries (Ensign and Amanda) and the Agatha exploration prospect from Venture. These transactions will reduce our net interests in Ensign to 50.0% and in Amanda and Agatha to 66.67% ahead of drilling on all three during late 2006 and 2007.
Venture has also continued to take steps to ensure its ability to deliver future business in a very tight market for oilfield and equipment services. In June, we announced we had entered into two long term drilling contracts with Noble Corporation ('Noble'). Firstly, Venture extended its existing contract on the Noble Ton van Langeveld ('NTvL') semi-submersible drilling unit for a further 12 months, jointly with BG, from the second quarter of 2008. Venture also entered into an agreement with Noble for the delivery of a new-build heavy-duty harsh environment ('HDHE') jack-up drilling rig which will be designed to operate across the vast majority of Venture's asset portfolio, in both the southern and central North Sea. The new rig is expected to come into service during the first half of 2009 for an initial two year commitment. These contracts will give Venture access to high quality drilling capacity to support its development program into 2011.
In August, Venture announced the acquisition of CH4, a privately owned UK E&P company focusing on gas in the SNS, for a total of €224 million (£153 million). This represents the largest acquisition in Venture's history and will add a second SNS gas production hub to our business. CH4's operations are focused around the median line between the Dutch and UK sectors of the North Sea and its principal assets consist of a 37.5% operated unitised interest in the Markham gas field and a 95% operated interest in the Chiswick gas field, which is due on stream during the first quarter of 2007. The acquisition of CH4 will add 30.7 MMboe of proven and probable reserves, an increase of 19% on year end 2005 reserves, and CH4 is anticipated to add a similar percentage production increment to 2007 annual production once Chiswick is on stream. Since acquisition, progress on the two principal projects in CH4's portfolio, the Markham compression tower ('CT') and Chiswick field development, has progressed according to plan. Both platforms have been successfully installed and the jack-up rig to drill the first Chiswick production well is scheduled to arrive later in the year. The acquisition of CH4 represents an excellent fit with Venture's business and will establish Venture as one of the largest independent UK natural gas production companies.
The consideration for the acquisition, which included €16.5 million of working capital, was satisfied by €123.5 million in cash and the issue of 9.05 million new ordinary shares (representing 7% of the total enlarged share capital of Venture). We welcome CH4's former shareholders, consisting of 3i Group plc, Trust Company of the West and management, as significant new investors in Venture.
In 2006, we have been delighted to welcome two new non-executive directors to Venture's Board, Tom Ehret and Tom Blades. Tom Ehret is Chief Executive Officer of Acergy, a leading offshore contractor to the oil and gas industry. Tom Blades is Chief Executive Officer of Choren Industries, a German technology company which is a world leader in the conversion of biomass to synthetic liquid fuels. Messrs Blades and Ehret will both bring invaluable experience from their hands-on management of rapid growth in differing corporate situations. David Morrison, who was a Board member since 1999, decided not to stand for re-election and stepped down from the Board in April. The Board would like to express its thanks to David for his important contribution to the growth of the Company during the time he has been a member of the Board.
Revenue for the period was £185.4 million (2005 - £56.1 million), an increase of 230% over the comparable period in 2005. This was a result of the increase in sales volumes of 17,010 boepd and substantially higher effective realized prices. Natural gas accounted for 67% of total sales volume with an effective realized price of £24.96/boe. The effective realized price of oil was £29.47/ bbl. Across all sales, this resulted in an average effective realized price of £26.33/boe - an increase of 87% over 2005. This increase has been driven by higher global commodity prices and a substantially higher proportion of oil production that is sold at market prices. For the first half of the year, 30% of oil production was hedged, the majority of which was attributable to the below market value hedges put in place in the 2003/4 period, resulting in an average hedged price of $25.46/bbl. In the second half of the year the impact of these below market value hedges reduces considerably to affect less than 10% of production and, price wise, is offset by higher value hedges giving an average second half hedged price of $39.23/bbl.
Key Statistics First Half 2006 First Half 2005 £/boe £/boe Effective realized price 26.33 14.09 Lifting costs 4.20 6.10 Depreciation, depletion and amortisation 5.36 3.67 Administrative expenses 1.00 1.02
Operating profit for the period was £101.2 million, a nine fold increase over 2005, (2005 - £10.7 million). This reflects the increase in production leading to economies of scale on an operational basis. On a unit basis, the lifting costs for the first half have reduced by 31%, however these remain subject to continuing cost pressure.
As anticipated, on a unit basis, the charge for depreciation, depletion and amortisation ('DD&A') has increased by 46% from the first half of 2005 to £5.36/ boe. This increase reflects the transfer of development costs to the depreciable pool as a number of major development projects were brought on stream. Additionally, as a result of the review of our DD&A calculations and decommissioning provision estimates completed in the first half of the year, the DD&A rates applied to high producing fields have increased. This has added to the overall increase in the DD&A charge for the first half of 2006. Following the review of estimates, the decommissioning provision has been increased by £0.7 million. DD&A calculations are now based on budgeted capital expenditure and proven and probable reserves, which is more consistent with industry practice.
Administrative expenses have increased on a gross basis as a result of IFRS 2 charges (share based payments) relating to new schemes, an associated increase in National Insurance contribution ('NIC') accrual due to share price movements and underlying business growth. On a unit basis they have declined by 2%, despite the higher staff costs. A non-cash loss on foreign exchange is recorded as a result of the movement in GBP/USD exchange rates on opening and closing dollar debtors and overlift balances. Interest charges were in line with expectations at £4.7 million (2005 - £4.7 million).
Profit before taxation for the first half of the year was £97.7 million with a taxation charge of 43%. The increase in Supplementary Charge rate of 10% has not been applied to the half year numbers as the legislation was not fully enacted.
However, the full year results will be taxed at a Corporation Tax rate of 30% and Supplementary Charge rate of 20%. It should be noted that the tax charge for the period is entirely deferred and Venture does not anticipate paying Corporation Tax until 2007.
Profit after taxation for the first six months of 2006 was £55.9 million (2005 - loss £2.8 million), £58.7 million higher than that for the same period last year. This resulted in fully diluted earnings per share of 41.8p compared with a loss of 2.3p/share in 2005. No account has been taken of the acquisition of CH4 in the first half of 2006, as the transaction occurred after the end of the reporting period.
The net cash generated from operating activities was £149.4 million (2005 £1.6 million). This was utilized by acquisition and capital expenditure of £65.2 million (2005 £82.3 million). In addition, during the first half of 2006 the Company purchased its own shares to be held in treasury at a cost of £11.2 million, paid £5.1 million to the employee benefit trust ('EBT') and repaid bank debt of £30.5 million, leaving a net increase in cash balances of £37.6 million. The Company's share acquisition program has been implemented to meet obligations under the staff incentive schemes.
The Group had fixed tangible assets of £469.5 million (2005 - £335.9 million) reflecting continuing field development activity over this period.
The deferred tax liability has increased from £47.0 million at 31 December 2005 to £94.8 million in 2006 mainly due to the profits made in the period. The balance sheet now reflects a net current asset position of £48.4 million (31 December 2005 £5.7 million net current liabilities). This is due to the Company's cash position and the unwinding of the IAS 39 fair value of derivative financial instruments from £42.9 million at 31 December 2005 to £10.5 million at 30 June 2006. The provision reduces as the volumes hedged and the proportion of production hedged at below market prices diminish.
Outlook and Summary
Current production levels after the summer shutdowns and new field tie-ins have been restored to approximately 50,000 boepd and remain in line with expectations. As a result, our average production guidance for the full year has been raised to 41,500 - 43,500 boepd, including the contribution from the newly acquired CH4 assets, representing a 39 to 46% increase over 2005.
Overall, the first half of 2006 represents a period of record operating and
financial performance. Due to the rolling off of Venture's below current market
oil price hedges, we anticipate further increases in average realized commodity
prices at current market levels during the remainder of 2006 and for 2007. 2006
has also seen substantial growth for Venture, which is expected to continue
through the remainder of the year and beyond. With a broad and diversified asset
base, an exciting development program and favorable commodity price
environment, we remain confident of the outlook for Venture's business.
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