Nautical Makes Headway at Mariner, Kraken, Completes Farm-Out in 2008
Nautical Petroleum has announced its Interim Results for the six month period to December 31, 2008.
- Ocean Bottom Cable (OBC) seismic surveys completed over Mariner
- Acquired High Resolution 2D seismic over Scylla
- Drilled appraisal well on Kraken
- Awarded 7 new blocks in the 25th Licensing round in the North Sea and a new licence in France
- Strong cash position of £21.4 million at 31 December 2008
- Completed farmouts on Kraken, Hydra and Selkie for £11.5 million of cash and past cost contribution
- £7.5 million spent on portfolio development
- 23mmbo net proven and probable reserves
- 44mmbo net best estimate contingent resources
- 37mmbo net best estimate contingent resources
Commenting on the developments in the period, Steve Jenkins, Chief Executive of Nautical said, "The interim period to December 2008 marked further progress for Nautical, completing a highly successful farm-out program to minimize our cash outflows and further progressing our cornerstone assets, Kraken and Mariner.
Nautical is well positioned with excellent resource and reserve potential and sufficient cash to bring our cornerstone assets to field development plan submission."
Nautical is pleased to report another period of progress to its shareholders in what have been increasingly challenging global economic conditions. Against the backdrop of $40 to $50 oil, Nautical is on track to bring Mariner and Kraken to development and with cash of £21.4 million has the resources to do so.
Significant Progress in Challenging Times
During the period Nautical targeted the appraisal of its cornerstone assets by drilling an operated well on Kraken and participating in two seismic surveys over Mariner. On the exploration front, an operated seismic survey was acquired over the Scylla lead (Blocks 8/5 and 9/1). In the autumn a planned exploration well on the Hydra block encountered an extensive period of challenging weather conditions, resulting in the postponement of the well to the summer of 2009.
The period saw a drop of $105 per barrel in the Brent spot price, and the precipitous decline of world equity markets. Nautical was partially shielded, having preserved its cash (£21.4 million) and by farming out wells to mitigate the exposure to the high cost operating environment (especially rig rates), enabling us to maintain planned activity levels.
Nautical has sufficient funds to take both Kraken and Mariner to Field Development Plan (FDP) submission and to carry out planned activity on our other assets and remains well placed to realize value from the extensive and burgeoning asset base through sound portfolio and cash management.
Efficient Portfolio Management
Whilst the emphasis remains on the progression of Kraken and Mariner to FDP submission, the portfolio has a third leg of material appraisal and exploration opportunities, which has been supplemented by recently added production.
The combined portfolio, including recent awards in the 25th Seaward Licensing Round and new and pending awards in France, now totals 24 blocks (18 licenses), with Nautical operating 12 blocks (8 licenses). We aim to continue to secure attractive farm-ins at significant premiums enabling us to mitigate risk whilst maintaining a high level of seismic and drilling activity.
Mariner - high activity levels from a committed operator
During the period the joint ventures' energy was focused on characterizing and defining the areal distribution of the shallower Heimdal Sandstone reservoir and enhancing our already detailed characterization of the deeper, Paleocene Maureen Sandstone reservoir. This was achieved by acquiring two seismic surveys; firstly 151 square kilometers of 3D seismic data followed by an ocean bottom cable (OBC) survey. The 3D seismic is currently being processed and has shown an improvement in imaging both reservoirs and the fault fabric. Further significant enhancement has been evidenced by the initial processing of the OBC data.
The data from both surveys will be interpreted in summer 2009 and should markedly increase the joint ventures' understanding of both reservoirs, endorsing this proven methodology previously applied to the StatoilHydro ASA operated, Grane field in Norway.
Having successfully passed through a major decision gate in October 2008 the operator will interpret both surveys to further define, delineate and characterise both reservoirs. This substantial subsurface effort will be utilized in reservoir simulation prior to the concept selection stage and front end engineering and design (FEED) studies, leading to FDP submission which is now scheduled to be in 2011, although this could be accelerated in response to improving market conditions.
The resultant increase in definition of the Mariner discovery is expected to raise the best estimate contingent resources in the Heimdal reservoir from 180mmbo (44 mmbo net to Nautical within the block) whilst confirming the reserves volume in the Maureen Sandstone reservoir. No new drilling is required prior to project sanction since there is sufficient existing test data over both reservoirs.
Nautical's second operated appraisal well on the Kraken discovery was spudded on 21 September 2008. The well was drilled on the northern east flank, 3.3 km ENE of the successful 9/2b-2 well, and 5km from the original 9/2-1A discovery well. The well was designed to intersect the oil water contact and investigate the upside (P10) resources.
The Heimdal Sandstone proved to be absent. However, there are still substantial best estimate contingent resources (106 mmbo gross, 37 mmbo net) in the core south and west areas of Kraken. Efforts are now focused on defining the reservoir distribution over this large accumulation, mainly through the further re-processing and interpretation of the existing seismic data.
A recently acquired controlled source electromagnetic (CSEM) line will be interpreted to further increase our knowledge of the sand and hydrocarbon distribution. Dependent on the outcome of a series of subsurface studies further data (seismic, EM or drilling) may be acquired prior to submitting the FDP to the Department of Energy and Climate Change (DECC) at the end of 2009. The joint venture is considering a range of development options (including phased, subsea, and fixed platform) leading to anticipated first oil in 2012.
In order to mitigate risk Nautical farmed out a further gross 10% equity to Canamens Energy North Sea Limited in exchange for back costs and a carry on the September well. On FDP submission an additional cash bonus will be paid to Nautical. The combination of the farm-out to Canamens and the previously negotiated farm-out to Celtic Oil Limited reduced Nautical's financial exposure in the 9/2b-3 appraisal well to zero, whilst retaining operatorship and maintaining a significant interest in this large oil discovery.
Active in Both Exploration and Production
In addition to progressing Mariner and Kraken, Nautical carried out significant work on the existing portfolio, added 7 full/part blocks in the 25th Seaward Licensing Round, added to the French onshore portfolio and acquired a small interest in a UK onshore producing asset.
Nautical's position on the East Shetland Platform was strengthened with the award of 5 full / part blocks in the 25th Seaward Licensing Round. These new blocks are adjacent to or in close proximity to our existing cluster of assets consisting of the Mariner and Kraken discoveries, the Hydra prospect and the Scylla leads.
Operational activity during the period was concentrated on this area, specifically the acquisition of 725 km of high resolution 2D seismic over the Scylla leads and adjacent blocks. The data has been processed and will be interpreted prior to the initiation of a farm-out campaign.
Nautical started to drill a well on the Hydra Prospect (Block 3/27a) during November 2008. Unfortunately, very poor weather prevented the well from spudding. Due to the high standby costs that would have been incurred if the rig had been held until drilling could commence, the joint venture demobilized the rig, postponing the well until summer 2009. Our exposure for this upcoming well is expected to be less than £1 million due to our farm-outs.
Elsewhere, Nautical was awarded two further blocks in the 25th Seaward Licensing Round; 8/25b and 15/21g in the Moray Firth, the latter containing the Spaniards lead. Also, in the Moray Firth, the joint venture is conducting development studies over the Tudor Rose discovery (Block 14/30a).
Similarly, to the west of Britain in the East Irish Sea Basin, the seismic interpretation has confirmed the large Merrow prospect at both Triassic, Ormskirk and Permian Collyhurst levels. The joint venture may acquire further seismic data before deciding to drill a directional well from onshore.
At the end of 2008 Nautical purchased its first production (10% of the UK onshore Keddington Field PEDL 005) from Egdon Resources plc. We see considerable upside in this field and aim to boost production in 2009. To this end the joint venture has just completed a workover of the Keddington 2 well and may drill a sidetrack in the summer.
Onshore France, the Pontenx license (Aquitaine Basin) was awarded on 19 December 2008 (Nautical 20%) and we will commence marketing the large Audignon Ridge gas prospect (St Laurent Permit Nautical 22%) in 2009.
Nautical's strong cash management continued during the period, with £21.4 million of cash and deposits held in Nautical accounts and £2.4 million held in joint venture accounts at 31 December 2008. £11.5 million of cash and past cost contribution was received during the period from farm-outs, of which £7.5 million was spent on the continued exploration and evaluation of our assets.
The Company made a loss after taxation of £1.4 million for the six months to 31 December 2008, including a net tax credit of £0.4 million, finance income of £0.9 million, a £2.4 million impairment charge relating to the Extended Well Test equipment and a gain on disposal arising from farm-outs of £0.5 million.
Farm-outs were completed on 9/2b Kraken, 3/27 Hydra and 8/25 Selkie during the period with receipts in excess of the carrying value of the assets disposed of, resulting in a net gain of £0.4 million. The successful farm-outs have lead to both a £0.6 million taxable capital gain and a deferred tax credit of £1.0 million, resulting in the net credit of £0.4millon to the income statement.
Finance income of £0.9 million includes a non-cash credit of £0.4 million from an adjustment to the non-current conditional payments on the Mariner assets.
A concerted effort has been undertaken to utilize the Extended Well Test Equipment over the past two years, however this has not been successful. As a consequence the decision has been made to impair the asset with a £2.4 million non-cash charge to the income statement.
Managing the Current Challenging Market
Nautical is not immune to the global banking crisis and resultant recession, which have been major contributors to the falling oil price, weak equity markets and choking off credit availability. However, amongst our peers Nautical is well capitalized, having raised funds in 2007, preserved our cash through farm-outs and minimized our obligations.
Nautical is well placed to take advantage of falling costs, which have followed the oil price down. Semi submersible rig rates have already reduced from over $400,000 to less than $250,000 per day and have further to go when current contracts expire. Similarly, development costs are declining as steel prices fall and construction yards have gaps in their order book.
Nautical will seek to 'lock in' these lower costs in the development of both Mariner and Kraken, improving the margin when oil prices rise, in response to increased demand, as the world emerges from recession. Furthermore, the demand for UKCS heavy oil is relatively strong, narrowing or even eradicating the discount to Brent. Mariner and Kraken can meet this shortfall in supply and continue to be robust economic developments.
The Coming Years
Nautical plan to drill up to 4 wells in 2009 and a further 3 in 2010. The Company will continue to mitigate risk and share the upside with industry partners through farm-outs. Continuing strong cash management is a major objective to enable your company to increase production and provide value to shareholders. We will remain flexible on equity interests in development assets, depending on the availability of development funding. The Directors of Nautical feel confident that the markets will recognize the value of our reserves, resources and exploration portfolio, resulting in the rise in the market capitalization of Nautical Petroleum plc.