Hardy Announces Prelim 2006 Results
Hardy Oil and Gas plc, which has interests in India and Nigeria, has announced its Preliminary Results for the year ended 31 December 2006. (All financial figures represented in US dollars unless otherwise stated.)
--PY-3; Hardy operated, core area STOIIP upgraded to 155MMbbl from 113MMbbl based on interpretation and analysis of new 3D seismic data and better production performance --PY-3; Oil production from the PY-3 field averaged 5,811bbld in 2006 compared with 5,541bbld in 2005 while water injection averaged to 6,678bwpd in 2006 compared with 5,800bwpd in 2005 --CY-OS/2; Drilled 2 exploration wells in CY-OS/2 block and declared discovery in the second well --GS-01; Drilled one exploratory well in GS-OSN-2000/1 block. Recorded significant hydrocarbon carbon shows during drilling. The well was logged but not tested. The PSC Phase-I was extended by 22 months to July 2008 --D9; 3D seismic interpreted and 6 possible well locations identified on the D9 block, of which one is expected to be drilled in 2007 --D3; Received all 2D & 3D seismic data from previous operator, in the D3 block - 6 prospects have been high-graded based on existing data
--Turnover of $21.3m (2005: $17.6m) --Profit before tax $10.3m (2005: $8.5m) --Operating cash flow $23.9m (2005: $11.0m) --Capital expenditure $54.4m (2005: $7.2m) --Net funds $27.3m (2005: $31.2m)
--Participation in a minimum of two exploration wells offshore India --Submit appraisal program to Directorate General of Hydrocarbons ("DGH") for CY-OS/2 to establish commerciality of the block --Further appraisal of Fan-A discovery (CY-OS/2) --Development of operations in Nigeria
Commenting on the results, Paul Mortimer, Chairman of Hardy said:
"2006 was another successful year for Hardy. The Company was firmly focused on executing the drilling operations for the Hardy operated CY-OS/2 block. The announcement of the discovery of hydrocarbons is encouraging and further appraisal work will continue to hold the Company's focus into 2007. Looking forward, 2007 promises to be an important year in the development of Hardy as we continue to execute the drilling phase of our exploration program."
I am delighted to report on another active year for Hardy, marked by record financial performance and the drilling of three offshore exploration wells. The results are a testament to the continued commitment and dedication of Hardy's management team to execute the Company's exploration program. The Company's announcement of a discovery on its Fan A prospect in the CY-OS/2 block marked an encouraging start to 2007.
Overall financial performance was strong due to continued robust oil prices and consistent production from the PY-3 field. Increased revenue from operations offset higher than expected exploration expenditure. Capital expenditure was over $50m for the year, of which, the two exploration wells drilled on CY-OS/2 comprised the majority of this expenditure.
Progress in Nigeria has been slower than expected, with current instability in the Niger delta compounding the shortage of equipment and personnel. Progress in reaching working agreements with local communities, of the Oza block, has been encouraging but we have decided to defer production testing until the second half of 2007, after the completion of Nigeria's Federal elections.
The Company continued to work closely with Reliance Industries Limited ("RIL"), the operator of three of Hardy's exploration blocks in India. RIL plans to drill at least one well on the D9 block in the second half of this year. The recent commencement of drilling of the second GS-01 well is also an encouraging start to an active 2007 program.
Total entitlement production for 2006 of 0.38million barrels ("MMbbls") of oil was slightly higher than 2005 (0.36MMbbls). The increase is due to total uptime improving to 99.78% compared with 91.64% in 2005.
The Company has again realized record operating profits and operating cash flow of $8.2m and $23.9m respectively (2005: $8.0m and $11.0m). These results were significantly strengthened due to higher oil prices and sustained production. The volume weighted average for the Company's crude sales for the year was $64.82 per barrel compared with a price of $52.82 per barrel for 2005.
Hardy recorded profit before tax of $10.3m on turnover of $21.3m compared with a profit before tax of $8.5m on turnover of $17.6m for 2005.
The Board has agreed to the following changes of senior management responsibilities from 1 April 2007:
Yogeshwar Sharma, whilst remaining a main board director of Hardy Oil and Gas plc, with responsibility of finance, also assumes responsibility for Group operations as President and CEO of Hardy Exploration & Production (India) Inc ("HEPI") and will be spending more time at the office in Chennai, India.
Sastry Karra steps down as President and CEO of HEPI but continues in his position as CEO of Hardy Oil and Gas plc and will be based in London, UK.
Current Trading and Outlook
Looking forward to 2007, Hardy will remain focused on managing the Company's portfolio of offshore exploration acreage in India and its development acreage in Nigeria.
As announced on 05 March 2007, the second (non-operated) exploration well on the GS-OSN-2000/1 ("GS-01") block in the Saurashtra Basin has now commenced drilling. Hardy has a 10% participating interest and RIL is the operator. Results from this well are not expected before May 2007.
Hardy's first well in the prospective Krishna-Godavari ("KG") Basin is expected to spud in the third quarter of 2007. The D9 well will be operated by RIL, an experienced and successful operator in the KG Basin. All stakeholders will be closely monitoring the progress of this program.
Assessment of the D3 block will continue with the shooting of additional 3-D seismic over the block. The acquisition phase began in March 2007. Acquisition and processing is expected to continue through the year with drilling operations not expected to commence until 2008.
Hardy's operated assets (PY-3 & CY-OS/2) will demand management's full focus during 2007. Further analysis and interpretation of the Fan A-1 discovery, through an appraisal program comprising further drilling and seismic reprocessing, will be required to determine the commerciality of the discovery. Execution of the PY-3 drilling program will face challenges of securing long lead items and equipment. Cash flow from PY-3 is expected to be lower in 2007 due to higher profit oil to the Government of India ("GOI") (2006: 25%, 2007: 40%). Until Phase III is completed, the field's production will continue to follow its natural decline.
The key challenges for the Company in 2007 are escalating exploration and development costs, the continued shortage of offshore drilling equipment, and retention and recruitment of experienced operational and technical personnel. The Board believes that Hardy is well positioned to meet these challenges. We look forward to an exciting year ahead and the continued support of our shareholders.
Hardy concentrates its activities principally in India and Nigeria. The Company's growth strategy is to focus on increasing production, continuing exploration of its existing asset portfolio, along with acquisition of new assets.
Principal License Interests;
India Ref Field Interest Operator CY-OS-90/1 PY-3 Cauvery Offshore 18% Hardy CY-OS/2 CY-OS/2 Cauvery Offshore 75% Hardy GS-OSN-2000/1 GS-01 Saurashtra Offshore 10% Reliance KG-DWN- 2001/1 D9 Krishna Godavari 10% Reliance KG-DWN-2003/1 D3 Krishna Godavari 10% Reliance Nigeria OZA Onshore field 40% Millenium Atala Onshore field 20% Bayelsa
CAUVERY BASIN - Eastern India
DEVELOPMENT & PRODUCTION
The PY-3 field is located off the east coast of India approximately 80km south of Pondicherry in the Cauvery Basin. The basin developed in the late Jurassic / early Cretaceous period and straddles the present-day east coast of India. In water depths of 40 to 200m the Production Sharing Contract ("PSC") license covers 81km2, and is the deepest producing offshore field in India, producing high quality light crude (49 degrees API).
Hardy is the Operator of the PY-3 field, and is party to a PSC together with Oil and Natural Gas Corporation ("ONGC"), TATA Petrodyne Limited ("TPL") and Hindustan Oil Exploration Company Limited ("HOEC"). Operations employ a floating production unit ("FPO") called the Tahara, a Floating Storage and Offloading Unit ("FSO") called the Endeavour, and four sub-sea wellheads, comprising three producing wells, two vertical and one lateral, and a water injection well. Operation of the facilities is contracted out to Aban Offshore Limited ("Aban"). The operating contract is due to expire in the second quarter of 2007. Negotiations for an extension of this agreement are ongoing.
PY-3 field production averaged 5,811bbld in 2006 compared with 5,541bbld in 2005, primarily due to higher production facilities uptime performance of 99.78% compared with 91.64% in 2005. The water injection averaged 6,678bwpd for the current year compared with 5,800bwpd in 2005. Higher injection rates were achieved in 2006 by modifying the water injection pump to achieve higher injection pressure. PY-3 field production during 2007 was 2.12MMbbls compared with 2.02MMbbls in 2006, Hardy is the operator and holds an 18.0% participating interest.
The Company is planning for a third phase development ("Phase III") on the PY-3 field based on the interpretation of the acquired 3D seismic data. Phase III comprises of the drilling of two wells (one producer and one water injection), various subsea gathering lines, and additional water injection facilities. The PY-3 participating interest holders are favorable to this proposal and have tentatively approved a budget of $97m for Phase III.
The CY-OS/2 block is located in the Cauvery basin and encompasses an area of 880km2. The block is currently in the third exploration phase. Hardy was granted an extension for the CY-OS/2 block on 24 May 2005 for a further period of 22 months up to 23 March 2007. As operator, Hardy holds a 75% participating interest in the Block in partnership with Gail (India) Limited ("GAIL") holding the remaining 25% interest. In the event that a discovery is declared commercial, ONGC has an option to assume a 30% interest in the block.
During the year, Hardy completed its committed work program by drilling two exploration wells (Fan E-1 & Fan A-1) on the block. As of 31 December 2006, Hardy had invested $47.75m for its share of the drilling and testing of the two wells.
Fan E-1 well
This well was targeted at an Eocene Fan play located just to the south of the PY-1 gas field. The well encounter oil shows over an approximately 15m thick weathered and fractured zone within the basement. However, this zone did not flow on test and it was concluded that the oil had migrated through this locality due to the lack of a trapping mechanism.
Fan A-1 and A-1 (ST) wells
The Fan A-1 well was drilled to test two potential targets within the Cretaceous. These targets had been identified as high amplitude packages on the recently acquired 3D seismic. The well encountered over 50m of net sand in the shallower target 1 (2,888m) and log data indicated the presence of hydrocarbons and a gas sample was recovered by the modular dynamic test ("MDT") tool. A further study is required to determine whether the saturation levels seen in this interval are potentially commercial.
Whilst drilling the section between the two prognosed targets the well took a significant kick requiring the mud weight to be increased from 10.5ppg to 13.2ppg in order to stabilize the well. The reason for this kick was the presence of a thin highly overpressured gas bearing sand that has been subsequently tested giving an initial flow-rate of 10.2mmscfd. This has subsequently been certified as a discovery by DGH.
Target 2 was encountered at a depth of 3,759m and comprised roughly 35m of net sand (subdivided into 2 distinct units) both of which displayed oil shows along with significant associated gas during drilling. The logs indicated that this zone is oil bearing and as a result, a full drill-stem-test ("DST") was carried out. The flow during this test was of fresh water with continuous gas. It was recognized, however, that the cement bond around the hole was inadequate, resulting in the perforated horizon not being isolated from the surrounding formations. It was also recognized that the hole had been subject to the presence of heavy mud over an extended time period leading to severe formation damage.
Due to the poor condition of the hole for testing of target 2, the decision was taken to initiate an appraisal sidetrack operation.
Fan A-1 (ST)
The sidetrack well kicked-off at a depth of 2,760m from the original hole on an azimuth of 3260 intercepting the target 2 pay zone at a distance of 350m from the original hole.
The sidetrack well drilled through the target 1 package again proving a similar although slightly thicker package than in the original hole. The well also encountered the thin sand that gave the kick in the original well. The main target 2 pay zone was found at a slightly structurally elevated position but more significantly was now found to be comprised of one continuous sand of around 45m in thickness. Again this interval displayed oil shows in the drilling cuttings together with high levels of associated gas. Cased hole logs together with the logging while drilling ("LWD") log suite were sufficient to confirm the presence of hydrocarbons.
Target 2 was tested but as in the comparative test in the original well the flow was dominated by fresh water and gas. Hardy believes that the source of the fresh water is the overpressurized shales overlying the reservoir. The Company is undertaking further studies to investigate this phenomenon.
The Board is encouraged by the positive results of the recent drilling as it has established the presence of a hydrocarbon source, trap, and reservoir, which warrant further appraisal and drilling to establish commerciality. In light of this discovery, the Company has submitted an appraisal program to DGH for approval.
GUJARAT- SAURASHTRA BASIN - Western India
The GS-OSN-2000/1 ("GS-01") block is located off the west coast of India in the Gujarat-Saurashtra basin. In water depths varying between 80 and 150m the block encompasses an area of 8,841km2. Hardy holds a 10% participating interest and the operator is RIL. The PSC was awarded in 2001 under the India NELP II terms. Five exploration wells are committed to phase one of the PSC.
In 2006 the A-1 well was drilled to a depth of 4,300m and encountered hydrocarbons while drilling in the lowermost section of the well. The well was logged but could not be fully tested due to a combination of higher than expected pressures and temperatures, and other operational issues.
In March 2007 the Company announced that RIL had commenced drilling the second well on the GS-01 block. The exploratory well GS01-B1 is being drilled in a water depth of 79m with the semi-submersible Rig "Actinia". Drilling is expected to continue in to the second quarter. The well is targeted to drill to approximately 3,700m to explore carbonates of Middle and Lower Miocene, Upper Oligocene, and the Eocene Bassein and Panna formations. The total depth ("TD") may be revised based on the actual data. The well is located 80km north west of the giant Bombay High oil field.
KRISHNA GODAVARI (KG) BASIN - Eastern India
The Company has a 10% participating interest in two blocks in the prospective KG basin named KG-DWN-2001/1 ("D9"), and KG-DWN-2003/1 ("D3"). Located in the Bay of Bengal the KG basin has been host to a number of world class oil and gas discoveries over the past three years. Most notably the Dhirubai gas field discovery, directly adjacent to D9, is scheduled to start gas production in 2009.
The D9 block encompasses 11,850km2, and is in water depths of 2,300 to 3,100m. RIL is the operator for the block and Hardy holds a 10% participating interest in these blocks. The block is in the first exploration phase which has a commitment to drill four exploration wells.
3440km2 of 3D seismic data has been acquired over the block, which has now been processed and interpreted, and four prospects have been identified for drilling. At least one exploration well is planned for the third quarter of 2007.
There are two substantial asymmetric anticlinal structural trends, with axes running south-west to north-east across the north-western corner of the block. These structures appear to form closures, at all levels from the Eocene to the Pliocene, so the possibility exists that they could contain multiple stacked reservoirs.
The D3 block encompasses an area of 3,288km2, in water depths of 400 to 2,000m. On 18 September 2006 Hardy entered into a PSC with the GOI for the block KG-DWN-2003/1, wherein Hardy holds 10% and RIL holds 90%. This block has approximately 300km2 of 3D seismic data, which is being reprocessed. In addition RIL has initiated operations to acquire further 3,000km2 of 3D seismic data, covering the entire block. Acquisition of data has commenced and will take most of the first half of 2007 to complete.
Several leads on the block have been identified from the current 3D data and we expect RIL to continue assessment and development of additional prospects with the 2007 acquisition program. As yet, no drilling locations have been proposed for D3 in 2007.
NIGER DELTA - Nigeria
The Company holds working interests in two development blocks in Nigeria, through its subsidiary Hardy Oil Nigeria Limited ("HON") and is working as technical partner with the local operators. Located within the Niger Delta, the OZA block is onshore and the Atala block in mangrove swamp. These blocks were parts of the Nigerian Government's marginal field initiative.
The Oza block comprises 20km2 and has three existing wells, and is operated by Millenium Oil and Gas Company Ltd ("MOGCL"). Hardy holds a 40% interest in the block. The field has produced approximately 1MMbbl to date.
As technical partner, Hardy has designed and procured an early production facility for conducting production tests of the existing wells, facilitated the design of a proposed pipeline to a nearby Shell Petroleum Development Company of Nigeria Limited ("SPDC") flow station, and collaborated with MOGCL on government and community presentations.
The Atala block is located in the creeks of the Niger Delta, encompassing approximately 34km2, and has one existing well. The block is operated by Bayelsa Oil Company Limited ("BOCL"). Hardy as technical partner holds a 20% interest in the block.
The planned appraisal program will require the re-entry of the existing well and the drilling of a further well, which will require the use of a swamp barge drilling rig. The operator BOCL has been working with a consortium of other swamp marginal field operators in securing a rig. Future activity will be contingent on securing an appropriate rig for this prospective area.
On 01 June 2006 Hardy announced that the London Court of International Arbitration ("LCIA") did not uphold its defense of pre-emption rights relating to the Hindustan Oil Exploration Company Limited ("HOEC") shares as Hardy was deemed not to be a party to the shareholder agreement. The result has not had a direct impact on Hardy, and the Company maintains its 8.5% interest. HOEC's primary assets are a 21% participating interest in PY-3 and 100% participating interest in PY-1 (a gas discovery adjacent to PY-3 and ring fenced by the CY-OS/ 2 exploration license).
In October 2006 HOEC raised approximately $33m (Rs.1,490m) via a public rights issue in which Hardy took up its pro-rata entitlement, at a cost of $2.81m (Rs.127m). As of 30 March 2007 the quoted market value of Hardy's holdings was $10.6m.
Hardy's 2P reserves for the PY-3 field, on an entitlement basis, were 2,950Mbbls as of 31 December 2006. This represents a reduction of 308Mbbls from 2005. The table below shows reserves information at the end of 2006 on an entitlement and direct participating interest basis.
Hardy has had a successful year achieving many new milestones. Strong oil prices and production within expectations has resulted in increases across all key performance metrics including turnover, operating profitability, cash flow, net profit and earnings per share.
Profit and loss
Turnover: Hardy's participating interest share of production for 2006 was 0.38MMbbls compared with 0.36MMbbls in 2005. On an entitlement basis, after adjusting the profit oil to the GOI, the net production was 0.31MMbbls in 2006 compared with 0.29MMbbls in 2005.
Turnover for the period was $21.32m compared with $17.57m for the previous year. The average price realized per barrel during the year was $64.82 per bbl (2005: $52.82 per bbl). The increase in price realized and a slight increase in production accounted for a further $2.70m increase. Technical services and overhead recovery accounted for a $1.05m increase in turnover. An insurance claim of $1.00m was received for business interruption caused by an operational accident in the year 2002. This was accounted for as other operating income.
Gross profit: The Group's gross profit for the year was $12.94m (2005:$12.71m). The cost of sales including depletion per barrel was $22.01 for the year 2006 (2005: $13.37/bbl). The increase in cost was mainly attributable to an increase in depletion. The Groups depletion charge, on a net entitlement basis, was $17.46/bbl comparing with $5.61/bbl for 2005. This increase in depletion is mainly due to the capitalization of unsuccessful exploration wells in the India cost pool.
Profit oil paid to the GOI for PY-3 field increased from $3.98m for 2005 to $4.71m in 2006. The increase is attributable to the increase in oil sales revenue.
Profit for the year: Administrative expenses for the year were $5.70m compared to $4.69m in 2005. The increase is mainly due to the additional legal cost associated with pursuing a claim under the shareholders agreement with HOEC, wherein Hardy holds 8.5% of the company's issued share capital. An additional charge of $0.60m was recognized under the adoption of FRS20 (towards share based payments to directors and employees).
Profit for the year was $7.99m (2005: $5.44m) and is derived after crediting $1.00m as other operating income on account of business interruption claim received during the year for an accident occurred in 2002. The deferred tax charge for the year was $2.72m (2005: $2.78m) and no provision was made for current tax charges.
The exploratory expenditure for the year was $51.03m primarily attributable to drilling operations in the block CY-OS/2, GS-OSN-2000/1. During the year $0.15m was capitalized as development expenditure and other fixed assets accounted for $0.43m.
The Group also revised upwards the cost estimate for abandonment of the producing asset PY-3. Consequently, the Group increased its decommissioning provision to $4.50m (2005: $1.86m), representing an increase of $2.64m. The Group's net assets, as of 31 December 2006, were $83.16m with no outstanding long term loan obligations.
The Operating cashflow of the Group was $23.94m, which includes a reduction in working capital of $13.57m and an advance tax payment of $0.14m. Interest income during the year was $2.22m compared with $0.49m in 2005.
Capital expenditure: Cash outflow for the capital expenditure during the year was $54.39m, which includes $51.04m towards exploration expenditure. There was an expenditure of $2.78m on the acquisition of 1,664,423 additional equity shares in HOEC by subscribing to the company's rights issue.
Net Funds: In 2006, the Group has a net cash-outflow of $31.27m before financing
compared to cash inflow of $3.24m in 2005. The Group raised an additional sum of
$24.53m in February 2006 by the placing an additional 5.20m additional equity
shares to meet its on going exploration expenditure. At the end of the year the
Group had no outstanding debt and the net funds were $27.28m.
Operates 30 Offshore Rigs
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