Roc Oil Reports 2007 Half Year Results
ROC releases its half-year financial report and appendix 4D for the period ended 30 June 2007. In the accompanying Financial Statements, ROC is required to compare its 1H2007 results with the equivalent figures for the corresponding period last year. However, the rapid organic and acquisitive growth of the Company in the last twelve months generated several near record results during 1H2007 that render comparisons between the two periods largely meaningless.
The key points pertaining to the 1H2007 results include:
- Production of 1.6 MMBOE from five fields, compared to 0.3 MMBOE from two fields in 1H2006.
- Net Sales Revenue of $100.8 million, up $83.2 million on $17.6 million in 1H2006.
- Tading Profit of $45.0 million, up $40.9 million on $4.1 million profit in 1H2006.
- Cash Flow from operating activities $58.9 million, up $61.8 million, a significant improvement on a negative $2.9 million cash flow in 1H2006.
- Net Loss after income tax of $8.8 million, a $13.4 million improvement on the loss of $22.2 million in 1H2006.
- EBITDAX of $67.3 million, up $63.7 million on $3.6 million in 1H2006.
- Per barrel production costs of $10.19/BOE ($16.0 million), a $1.29/BOE (11%) improvement on $11.48/BOE in 1H2006.
- Amortization of $27.76/BOE ($43.6 million) in 1H2007 compared to $22.89/ BOE in 1H2006.
- Exploration and appraisal expenditure of $52.3 million was incurred mainly in relation to drilling four exploration wells, the pre-drill preparatory work, including rig mobilization, for the Angolan drilling and seismic programs and the acquisition of potentially high impact exploration acreage in offshore Madagascar. Exploration drilling resulted in four discoveries from four wells, three of which, are considered to have commercial potential: Frankland and Dunsborough, offshore Australia and Massambala, onshore Angola.
- All of the $52.3 million in exploration costs has been expensed in accordance with ROC's "successful efforts" accounting policy because the three discoveries require appraisal work and therefore cannot presently be demonstrated to be commercial on a stand alone basis.
- Development expenditure of $37.0 million incurred, reflecting the completion and commissioning of the Enoch Oil and Gas Field and progress towards completion of the Blane Oil Field, both in the North Sea, as well as the commencement of work on the Incremental Development Plan for the Zhao Dong C & D Oil Fields, Bohai Bay, Offshore China.
- A cash flow gain of $5.0 million was realized as a result of hedge contracts being settled. However, during 1H2007 ROC ceased hedge accounting on the majority of its hedge book in order to maintain compliance with the technical requirements of the Australian accounting standards. This resulted in a reported hedge-related loss of $18 million being expensed due to the movement in the mark to market value of the hedges that do not qualify for hedge accounting, partly offset by a gain of $1.5 million for the remaining swap contracts that do qualify for hedge accounting.
- During the period the Chinese Government announced that it would reduce the income tax rate from 33% to 25% effective from 1 January 2008, which resulted in a non-cash deferred tax benefit of $26.5 million in the Income Statement.
- Net debt position at 30 June 2007 of $126.8 million compared to $113.1 million at 31 December 2006, which was in the form of a 12-month Bridge Facility that was refinanced with a four-year US$200 million facility on 20 August 2007.
Commenting on the 2007 Half Year financial results, ROC's Chief Executive Officer, John Doran stated that:
"Compared to the corresponding period last year, ROC's 1H2007 results represent a big step up. This achievement, however, should not be over emphasized because it says more about where the Company was last year than where it is today. During the interim period, ROC has become a significant Australian oil producing company and further enhanced its exploration track record. As always, ROC is looking to the future where challenges lie, not to the past where achievements reside.
The half yearly accounts highlight some interesting aspects as to how ROC's reporting and regulatory framework can provide a perspective, which differs from the underlying economic and commercial reality of running the business. There are three keys areas which give rise to these circumstances:
- Firstly, exploration expenditure is accounted for under a "successful efforts" accounting policy. This means that ROC is required to expense the four exploration wells it drilled during 1H2007, all of which discovered hydrocarbons, including the three, which are regarded as being potentially commercial. Quite frankly, there are relatively few recent regional examples of Australian oil companies drilling discovery wells that would meet the "successful efforts" definition as applied by ROC. On this basis, shareholders should expect that ROC's exploration drilling costs will continue to be expensed rather than capitalized, unless a field is found that is considered to be probably commercial, more or less immediately after the discovery well has been drilled.
This conservative accounting practice has not been universally adopted by ROC's peer group, but it is the policy that governs the Company's financial reporting and, therefore, it is important that shareholders understand its conservative nature and the impact it has on the Company's published accounts.
- Secondly, because of accounting standards beyond its control, ROC's oil price hedge accounting treatment changed during the period, driven by the volatility in the differential between the Brent oil price and the underlying realized price of ROC's sales. Consequently, it became inappropriate for ROC to hedge account under the technical requirements of the Australian accounting standards. This situation has impacted on the Company's Income Statement with a reported $16.5 million net hedging loss, despite the Company's hedges providing a real cash flow benefit of $5 million during the period and remaining economically effective. In this context, it is important to emphasize that in terms of volume hedged the Company's hedging policy continues to be conservative with only about 16% of the Company's proved and probable reserves being hedged.
- Thirdly, ROC has also experienced a one-off, non-cash, tax benefit of $26.5 million due to the Chinese Government announcing that the corporate tax rates would change from 33% to 25%, effective 1 January 2008 - despite the fact that the cash benefit of these adjustments are yet to be realized.
In relative ROC terms, the numbers referred to above are big. Therefore, it is particularly important for shareholders and potential investors to be aware of the underlying accounting rationale that generated them and the fact that the Company's exploration and hedging accounting treatments will continue to deliver volatility to future Income Statements. An example of this volatility is that if the accounts were presented as of late August 2007 instead of 30 June 2007, the marked to market position of ROC's hedge book would have improved by approximately $7.0 million.
Perhaps, the most important point to highlight from the sum of the above, is that shareholders and potential investors might be well advised to look through the 1H2007 profit and loss details and focus on the real value of the Company as expressed in terms of its cash flow, asset value and exploration success: a 1H2007 $59 million Cash Flow from operating activities; a $45 million Trading Profit and three new exploration discoveries which merit further appraisal. On this basis, ROC has clearly had a reasonable six months."
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