Rocksource Rides High in Q2 with Positive Profits, Production
The second quarter 2008 marked a milestone for the Rocksource Group, where profit before tax, as well as cash from operations, were positive in the period. This was driven by higher stable production, supported by record high oil and gas prices. In addition to a maturing license portfolio, specially focused on the Breiflabb prospect on NCS, exploration activity remains high with applications submitted for the UK 25th round and preparations for upcoming licensing rounds in Norway. Focus remains on NCS activities, as well as further inorganic international growth.
Higher production realized at record oil and gas prices:
Turnover in the second quarter marks another record, reflecting further production increases based on completion and tie-in of wells in the second drilling program in the US. Oil and gas prices achieved in the
quarter were at record levels, yielding a total turnover in the quarter of NOK 90.0m, compared to NOK 14.0m in second quarter 2007, and a 50% increase from NOK 59.9m in first quarter 2008.
A 3D seismic acquisition on the Breiflabb prospect on license PL416 was successfully completed in the quarter. This contributed to the high level of exploration expenses of NOK 36.6m in the quarter, up from NOK
23.0m first quarter 2008. In addition to the costs of maturing owned licenses, the exploration focus has been on participation in and preparations for licensing rounds on UKCS as well as NCS. Further considerable effort has been put into pursuing inorganic growth opportunities. Total exploration cost, including internal cost, was NOK
52.3m in the second quarter.
EBITDA in the quarter was NOK 30.0m, showing that the strategy of supporting offshore exploration with onshore production has been a success. The profit of NOK 10.0m before the tax refund in the quarter gives the Group a significant base to support its growth ambitions. Production is now expected to stabilise around the current levels, but going forward the EBITDA is expected to fluctuate with variations in exchange rates, oil and gas prices, and exploration activity levels.
Income tax relates to the tax refund on NCS exploration. The income tax in second quarter this year was NOK 32.5m, up from NOK 21.4m last quarter. The income tax relates mainly to the Breiflabb 3D seismic acquisition and to the EM processing undertaken, as well as a continued focus on NCS due to APA 2008 and 20th Round preparations. The processing of EM surveys has been undertaken in the 100% owned subsidiary Rocksource Geotech AS. Rocksource ASA has unique access to the subsidiary`s proprietary software and processing skills, which are vital to the Group's exploration program.
Profit in the quarter:
The net profit for the quarter was NOK 42.4m. At the current onshore production and price levels, the cash generation will cover the running cost of the Group and will also contribute towards financing offshore exploration activities. Going forward, the Group will initiate the third onshore drilling campaign with an aim to increase the production to 5,000 boepd.
Cash flow from operations was NOK 26.4m, an increase from negative NOK 6.6m in first quarter. Investments, mainly related to the onshore production, were NOK 19.1m, giving the Group an overall positive cash flow impact of NOK 7.7m in the quarter. Cash balance at the end of the quarter was NOK 163.0m.
The Group`s working capital at the end of the quarter was NOK 213.5m, up NOK 9.5m from the previous quarter. Equity was NOK 435.8m, up NOK 43.0m from the previous quarter, giving the Group an equity ratio of 53.3%, up from 52.0% previous quarter.
Following the MoU signed between ONGC and Rocksource on January 23, 2008, Rocksource announced on August 4th that negotiations with ONGC have matured to an advanced stage.
The average production in the quarter was 2 551 barrels of oil equivalents per day (boepd), bringing the average for the 1st half of 2008 to 2 353 boepd. Rocksource has increased the target to an average production of 2 500 boepd for 2008, and aims to grow the production to 5,000 boepd by 2010.
Licensing round status:
The Royal Ministry of Oil and Energy announced the opening of the Norwegian 20th Round on the June 27, 2008, a round that offers opportunities to explore prospects with a significantly larger potential than commonly found in APA areas. The proprietary knowledge, largely based on an extensive EM survey undertaken in 2007, will now be utilized to high grade applications and designing attractive work programs that will lead to cost effective and fast track exploration programs. Rocksource is confident that it can submit high quality, competitive applications that will secure the best acreage for drilling CSEM based wells in the forthcoming years. Awards are expected in 2009.
In May, Rocksource submitted applications for the UKCS 25th Seaward Licensing Round. The company's applications target areas that build on its current UK position and where its proprietary CSEM technology is a
suitable tool for de-risking the identified prospectively. Applications were made both on an independent basis and with AMI partner groups. Awards are expected in Q4 2008.
The major activity in the second quarter was the acquisition of 250km2 of 3D seismic data over the Breiflabb prospect on PL416 on NCS, where Rocksource holds 35% equity. The data is currently being analysed and
will be integrated with the EM data, as well as G&G data to allow the partnership to make a drill or drop decision.
Rocksource will, in Q3 2008, run an EM survey to test the "Cyclops" prospect on the wholly owned license PL 456. The prospect is estimated to contain 100 million barrels of recoverable oil.
On the UK license, P1067 - block 211/22b, the operator DNO completed interpretation of the license potential based on re-evaluation of well 211/22-2 data. Based on full re-evaluation of available log and core data, as well as correlation with neighbouring wells, the well is considered to be a discovery of a 20 million oil column within the Brent Group. This has been identified as the Mulle discovery, estimated to contain gross recoverable reserves between 4mmboe (low) and 36mmboe (high), with a mid case of 17mmboe within the P1067 licence. Rocksource has 10% equity in this license. The licence group will now focus on maturing the discovery further including a possible appraisal well. The objective will be to develop the discovery as a sub-sea tie-in to
neighbouring infrastructure, existing or planned.
In August 2008, the Group has entered into a rig consortium and secured rig capacity for a total of 92 days. Together with 5 other oil companies, Rocksource secured a contract for the semi-submersible drilling rig, Borgland Dolphin, for operations on the Norwegian Continental Shelf. The estimated contract value between Dolphin AS, a subsidiary of Fred Olsen Energy ASA, and the consortium is around US $602 million for a period of 3 years. Rocksource is in the process of building up a drilling campaign both in Norway and internationally. This rig capacity enables the Group to drill exploration wells on the Norwegian Continental Shelf. At the same time, it will also strengthen future applications for new licenses in Norway, as it gives us the tool needed to mature the portfolio as an Operator.
The second quarter was again a quarter with high activity levels across the Group's growing portfolio of projects. The second quarter 2008 has been a very important quarter where important groundwork has been done in the Company's business development activities and exploration efforts, at the same time as the production has been brought up to a stable plateau with significant onshore production driving financial results. Increased production target, positive portfolio developments, and strong progress towards accessing high impact, short-term drilling opportunities has been realized due to the good work done in the quarter.