Burren Reports 13% Jump in Earnings for 2006
Burren Energy on Monday issued its preliminary results for the year ended December 31, 2006. The London-based company also announced its US$155-million acquisition of an additiona 5.5% interest in the M'Boundi oil field in the Republic of Congo.
--US$155 million acquisition in March 2007 of an additional 5.5% stake in the M'Boundi oil field and a 2% interest in the Kouilou exploration license --Opportunity to increase share in world class oil field on attractive terms --Increases total Group production by 9% (2006 pro-forma) --Boosts Proven & Probable reserves by 15 million bbls (7%), at a cost of US$10.0/bbl --License award in Yemen (Block 17) increasing Middle East/North Africa portfolio to six
Financial : sixth successive year of record results
--Net profit up 13% to US$249 million (2005 net profit: US$221 million) --Underlift position of over 490,000 bbls, representing US$28.4 million of deferred revenue and US$21.2 million of deferred gross profit (assuming sold at December 2006 average realized prices) --Earnings per share increased 11% to USc 177 (2005 : USc 159) --Operating cash flow after tax up 17% to US$324 million (2005 : US$278 million) --Year end cash balances increased by US$77 million to US$202 million --17% increase in full year dividend to 14.0p from 12.0p
Operational : sixth successive year of production growth
--Average production of 34,240 bopd, up by 9% on 2005 --15 million bbls of reserves added in Turkmenistan, more than replacing 2006 Group production --Water-injection initiated in Turkmenistan and Congo --Independent verification of Turkmen gas gave contingent probable reserves of 395bcf --Discovery of shallow Loufika field in Congo --Record 51 wells drilled, of which 20 exploration wells. 5 of these exploration wells now on production
Atul Gupta, Chief Executive Officer, commented:
"The Group achieved its sixth successive year of growth in 2006. This is a testament to our technical and financial discipline and our strategy of investing in proven oil and gas plays. Our acquisition of an additional 5.5% stake in the M'Boundi field gives us an increased position in a world class asset on attractive terms and reflects our confidence in the potential growth of the field under ENI's operatorship.
"With a solid production base, active development and exploration program and a number of potential investment opportunities in existing regions we have all the fundamentals in place for continued growth in the years ahead."
REVIEW OF OPERATIONS
In 2006 the Group drilled a record number of wells: 51 compared with 45 in 2005. Exploration represented a greater proportion of drilling activity than ever before : 21 wells compared with 7 in 2005 (all well numbers exclude HOEC). The exploration resulted in three discoveries: the Balkan (formerly Nebit Dag Deep) and Uzboy fields in Turkmenistan and the Loufika field in Congo. The Turkmen discoveries added a total of 15.1 million barrels of P+P reserves, and are close to existing Burren-owned infrastructure. The size of the Loufika discovery is still being appraised.
2006 also saw the initiation of water injection programs in both Turkmenistan and Congo, with the aim of sustaining reservoir productivity and improving field recovery factors. By year end the Burun field program was showing promising early results; injection only began on the M'Boundi field in late January 2007 and it is still too early to make any assessment.
Group working interest production averaged 34,240 bopd for the year, an increase of 9% on 2005, contributed as to 16,300 bopd by Turkmenistan and 17,940 bopd by Congo. Entitlement production was 19,170 bopd, down from the previous year's 22,440 bopd as the state share of production increased owing to the rise in oil prices and the achievement of full recovery of costs on both the Burun and the M'Boundi fields.
Two exploration drilling programs were conducted in 2006 : a deep program targeting the potential extension of the deeper Burun field reservoirs immediately to the east of that field and a shallow program on a series of prospects in the eastern half of the Nebit Dag PSA area. A total of 15 wells were drilled of which four found hydrocarbons, resulting in the discovery of the deep Balkan field and the much smaller shallow Uzboy field.
A new Balkan development area, covering an area of 47 km(2), has been approved by the Turkmen authorities. The Uzboy field is producing 115 bopd from one well.
The Balkan discovery and appraisal drilling within the Burun field itself (north and south flank) resulted in a total addition to proven and probable working interest reserves of 15.1 million bbls as at 2006 year-end.
The total cost of the 15 exploration wells, of which seven were shallow wells drilled using a workover rig, was US$43.1 million. Under the terms of the PSA this cost is fully recoverable against future production from the new development areas. This represents a finding cost (P+P basis) of US$2.7 / bbl.
As per the terms of the PSA, all exploration areas were relinquished as of 1 February 2007 leaving four development areas covering 200 km(2).
2006 gross production averaged 19,940 bopd compared with 19,200 bopd in 2005. Working interest production, after deduction of the state's 'Initial Oil' entitlement, was 16,300 bopd, and entitlement production was 9,780 bopd (2005: 12,430 bopd)
Owing to the focus last year being on exploration in advance of the license expiry date, only seven development wells were drilled compared with 14 the previous year. Capital expenditure was focused on water injection and facility upgrades, the latter aimed at increasing throughput capacity by 2009 to the 30,000 bopd level required to handle future production increases and to bring fully in-house the processing activities currently undertaken by Turkmenneft.
Last year saw the start of the water injection program on the Burun field : some 8,500 bwpd is now being injected via a total of nine injector wells. Initial results are encouraging : material increases in production rates have been observed in two shallow producer wells and one deep producer as a result of this injection. Plans for 2007 are to recomplete a further 12 wells as injectors and to increase high pressure injection capacity to 30,000 bwpd.
The first of the two new deep rigs purchased from China began operations in January 2007. The second rig is expected to be in operation towards the middle of the year, and we intend to release the two existing contracted rigs as soon as practicable. The two new rigs will bring to a total of seven the number of workover and drilling rigs owned and manned by Burren in Turkmenistan, and will allow us to complete the development of the three fields without being dependent on third party rig operators.
In 2007 we plan to drill around 20 development and appraisal wells on the Burun and Balkan fields. We intend to recomplete 12 existing wells as injectors and to start expanding the water injection capacity to 30,000 bwpd. Gross production reached a record 22,250 bopd in February 2006.
In 2006 three exploration wells were drilled, one within the Kouakouala permit (Boubissi-1) and two on the Loufika prospect to the south-east of the M'Boundi field, the first of which resulted in a discovery in the shallow horizons at a depth of some 500 m.
Since year end two step-out appraisal wells have been drilled on Loufika, the first of which confirmed the oil reservoir and the oil-water content but was of low permeability and so non-commercial. The second appraisal well was drilled outside the structure and did not encounter hydrocarbons. The remaining four wells in the six well appraisal program will be drilled over the next few months. In addition an unsuccessful exploration well was drilled in Q1 2007 on the Tioni prospect and has been plugged and abandoned.
On the Noumbi license some 560 km of the planned 812 km 2D seismic has been acquired and is being processed.
Gross production on M'Boundi for the full year was 56,100 bopd, compared with 44,000 bopd in 2005. A total of 23 wells were drilled, broadly the same as the previous year, of which 19 were put on production, the remainder being around the perimeter of the field and therefore sub-commercial. Between four and five rigs were in operation throughout the year. Our 2006 working interest production in Congo, including our share of the Kouakouala field, was 17,940 bopd, up 12% over 2005.
Burren's share of M'Boundi production reduced from 35% to 31.5% with effect from 1 January 2006 (as a result of the farm-in by SNPC). We increased our holding in the Kouakouala field by 8.3% to 33.3% by exercising our pre-emption rights upon sale by Heritage Oil Corporation in order to preserve our position in relation to the export pipeline to the Djeno terminal, which is owned by the Kouakouala partners.
After a short delay owing to the late delivery of certain items of equipment, the water injection program commenced in January 2007 with injection into two wells.
Four further shallow appraisal wells on Loufika are planned to be drilled during the first half of the year, following which it is intended to drill an exploration well on two further Loufika-type prospects to the north-west along the basin margin.
In the deep program, four further Vandji exploration prospects are planned to be drilled during 2007: three on the Kouilou license (Nanga, Zingila and Tchivouba), and one on the La Noumbi license (Dongou). Further 2D seismic will be acquired on Noumbi in the second half of the year.
It is intended to drill and/or convert 18 wells to injector wells in 2007, and to increase the injection capacity of the facilities from 20,000 bwpd to 60,000 bwpd during the year and again to 120,000 bwpd in 2008. As a result of the drilling of injector wells, there will be fewer development wells drilled on M'Boundi this year: 11 net new producers are planned compared to 23 in 2006.
Gross production on M'Boundi in February 2007 was 55,400 bopd.
All three wells drilled on the East Kanayis license to target the Cretaceous potential were found to be dry. 550 km(2) of 3D seismic data was acquired during the year to evaluate deeper Jurassic targets and several prospects have been delineated at Cretaceous levels along trend from existing fields and at the Jurassic level.
On the North Hurghada Marine a high resolution aeromagnetic survey was carried out to give an overview of the basin. Reprocessing of existing seismic is under way and a contract has been awarded to acquire 200 km(2) of new 3D seismic commencing in Q2.
The PSA for Block 6 became effective during the year after parliamentary ratification, and a tender for the acquisition of 500 km of 2D seismic is in progress. We hope to commence acquisition around mid-year. Exploration drilling is not expected to be until early 2008.
In December Burren was awarded a license for Block 17, an onshore/offshore block with an area of 19,400 km(2), and negotiations for a PSA will commence shortly.
In August Burren received government approval to its farm-in into 40% of Block 50, an offshore block of some 16,700 km(2) in water depths of up to 100 meters operated by Hunt Oil. 2,775 km of 2D seismic was acquired, the processing of which is nearly complete. A decision on drilling will be made in later in the year.
We plan to drill three wells on the East Kanayis block in Egypt, to test both Cretaceous and Jurassic prospects, whilst on the remaining acreage, efforts in 2007 will be primarily focused on seismic and mapping of prospects, in preparation for drilling in 2008.
India (HOEC : Burren 27%)
A horizontal well on the PY-1 gas field in the offshore Cauvery basin tested successfully confirming reservoir productivity sufficient to meet contractual requirements. The associated gas sales agreement has been initiated with execution expected in the near future. The project will now, subject to acceptable development costs, proceed to full field development which will involve the construction of a production platform, a subsea pipeline, an onshore terminal and the drilling of two further development wells.
Two exploration wells drilled by HOEC on the nearby Block CY-OSN-97/1 were dry.
HOEC raised US$33million via a rights issue in October, in which Burren was allotted slightly more than its pro-rata amount thus taking the Group's stake to 27%. A further equity raising to finance the PY-1 development is being planned.
The shipping business made a small profit in 2006. Revenues were lower than anticipated owing to the delay of a month in the opening of the summer navigation season in the southern Russian river system owing to extreme low temperatures, and operating costs were higher than anticipated. This business was partially divested early in the year and it is Burren's ultimate intention to dispose of the remainder.
Revenue grew by 7% to US$416.0 million due entirely to higher realised prices : the average sales price rose by 24% to US$59.2/bbl (2005 : US$47.8 / bbl) in line with the underlying rise in Brent prices. Sales volumes were 14% lower than in 2005 at 6.8 million barrels (equivalent to an average 18,540 bopd) reflecting the 15% decline in entitlement production to 19,170 bopd (2005 : 22,440 bopd). The underlift position at year-end increased to 494,000 barrels (2005 : 321,000 barrels) owing to sales volumes being lower than entitlement production. Were this underlift to have been converted into sales at the end of 2006 it would have added US$28.4 million to revenues and US$21.2 million to gross profit.
Working interest production increased in 2006 by 9% to 34,240 bopd but Burren's entitlement share of this production fell to 56% compared with 72% in 2005, as the state's share of production increased in both Turkmenistan and Congo following the achievement of full recovery of historic costs on the Burun and M'Boundi fields. The sale of a 3.5% participating interest in the M'Boundi field to SNPC, the Congolese state oil company, became effective as of the beginning of 2006: but for this Burren's working interest production would have been 36,100 bopd, a like-for-like increase of 15%.
The average sales price discount to Brent improved to US$5.2 / bbl (2005 : US$7.2 / bbl) primarily as a result of a change in blending arrangements for our Congo crude at the beginning of the year, which significantly improved the pricing structure. The average discount for Congo crude last year was US$1.6 / bbl (2005 : US$6.9 / bbl) compared with US$8.5 / bbl (2005 : US$7.5 / bbl) for our Turkmen crude. The export discount currently applicable to our Turkmen crude is US$8.0 / bbl.
Cost of sales fell from US$118.4 million to US$111.4 million owing to the non-recurrence of US$13.8 million of oil price hedging losses expensed in 2005, which resulted in a gross profit for the year of US$ 304.6 million (2005 : US$271.9 million). Excluding the prior year hedging losses, the underlying increase in gross profit was 7%.
Within cost of sales, depreciation comprised US$69.8 million, modestly up on 2005 (US$ 66.1 million), as the higher unit charge of US$10.0 / bbl (2005 : US$8.1 / bbl) was offset by its application to lower entitlement production. The increased unit depreciation charge arises from an increase in estimated future costs to produce our reserves. The remaining costs of sales, comprising production costs and potential of shipping operations, amounted to US$41.6 million (2005 : US$38.6million), an increase of 8%. Excluding costs attributable to the shipping business, Burren's production cost per working interest barrel, adjusted for movements in underlift and overlift, was unchanged from the previous year at US$2.5/bbl.
Administrative expenses, including charges relating to employee incentive schemes, decreased 10% to US$13.9 million (2005: US$15.4 million). Incentive scheme charges, at US$5.3 million, were US$2.1 million less than in 2005 primarily because of lower accruals for NIC liabilities on deferred share awards, which are linked to Burren's share price performance over the year. Other administrative expenses rose by US$0.6 million.
Other operating expenses of US$19.3 million (2005 : US$1.4 million) comprised the write off of certain pre-license expenses related to potential new ventures in the FSU (US$8.8 million), unsuccessful exploration in Egypt (US$6.0 million) and a provision of US$4.5 million for the settlement of a dispute concerning certain insurance arrangements in Turkmenistan, which Burren is appealing .The contribution from our associate HOEC increased from US$1.6 million to US$3.4 million, and a loss of US$0.6 million was incurred on the part disposal of our shipping business.
As a result of the above operating profit increased by 7% to US$274.2 million (2005: US$256.7 million).
Net Profit and Earnings Per Share
Interest income, net of finance charges, was US$8.3 million as a result of increased average cash deposits and rising interest rates. In 2005 there were net finance costs of US$2.1 million which included the arrangement fees on a new medium term loan facility.
The taxation charge was unchanged at US$33.6 million, all but US$0.7 million of which relates to Turkmenistan. In Congo no tax charge was incurred since under the terms of PSAs the state's share of oil satisfies all tax liabilities. US$11.3 million of the tax charge was deferred tax.
Profit after tax increased by 13% to US$248.9 million (2005 : US$220.9 million). The increase in earnings per share was slightly less at 11% to US cents 177.2 (2005 : US cents 159.0), as a result of the increase in share capital arising from issue of shares under share scheme awards.
A final dividend of 10.0 pence per share has been proposed, making a total in respect of the 2006 financial year of 14.0 pence, a 17% increase on the 12.0 pence dividend in respect of 2005 and representing a payout ratio of 15.4% of net profits based on the average US$/£ exchange rate for the year. This final dividend will be recorded for accounting purposes in 2007.
Burren's policy is to raise dividends at least in line with profits so as to pass on the benefits of higher oil prices to shareholders.
Cash flow and Capital Expenditure
Net cash from operations, after payment of US$26.2 million of tax and a working capital increase of US $2.3 million, was US$324.0 million, an increase of 17% over 2005 (US$277.8 million).
Investment expenditure totalled US$218.8 million (2005 : US$176.5 million). Of this total capital expenditure on E&P assets accounted for US$210.6 million (2005: US$142.0 million) cash pledged as collateral to guarantee minimum work obligations under new licenses in Middle East / North Africa accounted for US$3.1 million, and the balance represented the cost of participating in HOEC's US$33 million rights issue (US$9.9 million) net of dividends received from HOEC and the proceeds of the part disposal of our shipping business (together US$4.8 million).
The US$210.6 million investment in E&P assets comprised US$68.0 million of exploration expenditure (2005 : US$18.6 million), US$5.6 million of license acquisition costs, and US$16.9 million stage payments for the purchase of two drilling rigs for use in Turkmenistan, with the balance being development expenditure. Of the total approximately US$105 million related to Turkmenistan and approximately US$90 million to Congo, with the balance being primarily in the Middle East/North Africa. Of the US$68 million exploration expenditure, US$27.0 million was accounted for as additions to intangible fixed assets pending determination of commerciality and the balance being expenditure in fields already at the development/production phase, was accounted for as additions to property plant and equipment. These figures exclude the US$6.0 million cost of unsuccessful wells in Egypt, which was charged to the income statement during the year.
Interest received, net of interest and finance charges paid, was US$6.8 million. US$35.7 million was paid in dividends. Share capital movements were Insignificant.
The above elements resulted in a net increase in cash balances during 2006 of US$76.8 million.
At year-end 2006 Burren had cash of US$202.2 million and no outstanding debt. Cash surplus to immediate requirements is placed on deposit with banks with credit ratings of no less than A or in money market funds of equivalent rating. The Group's policy is not to place deposits for periods of longer than 6 months and the average maturity of cash investments at year end was below three months.
In 2005 Burren put in place a US$150 million standby loan facility secured on our two principal assets in Turkmenistan and Congo, which is currently undrawn. The available amount of this facility is currently US$70 million and it matures in 2009.
Burren is currently financed entirely from shareholders' equity and retained
earnings, with no debt. If we were to incur debt to finance asset acquisitions
or other investments the Group's policy is to ensure that our capacity to
service that debt, having regard to any oil price or interest rate hedges taken
out, could withstand a range of adverse scenarios relating to oil prices,
production shortfalls and cost increases.
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