Serica Posts Financial, Operating Results for 2008
Serica Energy has announced its financial results for the three months and twelve months ending December 31, 2008.
Serica has strengthened its financial position and risk profile during 2008 against a challenging market backdrop. Substantial capital has been raised through an active asset management programme enabling the Company to pursue its strategy aimed at increasing shareholder value though exploration and field development. This year marks a significant stage in development of the Company with first revenues expected from the Company's Indonesian operations and drilling commencing on material exploration prospects in Ireland, Vietnam and the UK.
- 48% increase in Serica's Proven and Probable (2P) Reserves
- Now 28.5 mmboe (2007 19.3 mmboe) despite partial Kambuna sale
- Kambuna development nears production
- Gross Kambuna field 2P Reserves increased to 39.3 mmboe with 3P assessed as 62.5 mmboe (Serica interest is 50%)
- Development wells completed and tested at 114 mmscfd
- Platform topsides installed and pipeline laid
- Gas contracts finalised
- First production scheduled for mid year
- Columbus on track for development
- Gross Columbus field 2P Reserves assessed as 17.7 mmboe with 3P assessed as 42.3 mmboe (Serica interest is 50%)
- Field Development Programme submitted for approval
- Expected to benefit from UK Chancellor's recent budget
- New acreage added to existing core areas
- 5,864 sq km East Seruway PSC, adjacent to Kambuna, offshore Sumatra
- UK North Sea: 3 UK part blocks awarded in 25th Round
- 2009 exploration drilling has potential to add material value
- Bandon prospect in Ireland to be drilled in May
- Tuong Vi prospect in Vietnam to be drilled May/June
- Conan prospect in the East Irish Sea planned for 2H 2009
- Substantial financial contribution from asset disposal and licence farm-out
- US$52 million cash received from disposal of 15% of Kambuna TAC
- Chablis farm-out raised 56% of well cost (Serica retains 65%)
- Vietnam farm-out raised 33% of 3 well programme (Serica retains 10%)
- Bandon farm-out raised 100% of well cost (Serica retains 50%)
- Contingent payment on first Bream field production (Norway)
- US$36.6 million profit on sale of 15% of Kambuna field
- 2008 net loss of US$1.0 million (US$13.6 million in 2007) including asset impairments of US$24.0 million
- Solid net cash position at 31 December 2008 - US$56.8 million of cash and US$32.1 million of debt
- Bank facility extended by 1 year
Serica's Chief Executive, Paul Ellis, commented, "2008 was a year of solid progress, with reserves increased by 48% and with our finances strengthened with a profitable asset sale and a number of exploration farm-outs. We now look forward to our first production revenue from the Kambuna field in Indonesia and to the results of our forthcoming exploration wells in Ireland and Vietnam."
CHIEF EXECUTIVE OFFICER'S REPORT -- 2008
Despite the economic extremes of 2008, Serica was able to continue the development of the Kambuna field towards first revenue, to increase its reserves significantly, and to improve its financial position by selling a small stake in the Kambuna field in July. Serica also extended its senior debt facility for Kambuna by one year through to November 2009, by which time the field will have been on production for several months. In addition the Company has negotiated farm-out arrangements that will contain the cost of its drilling programme and will enable Serica to drill its exploration prospects in Ireland and Vietnam in 2009 at little cost to the Company.
Serica made significant progress towards its goals in 2008, especially in the development of the Kambuna field in the Glagah-Kambuna Technical Assistance Contract offshore North Sumatra ("the TAC") in which Serica holds a 50% interest. The three Kambuna development wells were completed and tested at production rates which exceeded expectations. However, it is disappointing to note that it proved difficult to obtain timely governmental approvals for construction of the onshore gas facility, contributing to a delay to first gas production of about six months - to mid 2009.
Gas sales contracts have been finalised for the sale of a total of 40 mmscfd at an average price of $4.90 per million BTU ("mmbtu") (approximately $5.85 per mcf), escalating at 3% per year. It is planned to sell a further 10 mmscfd to bring the gross field gas sales to an average of 50 mmscfd. At full production we expect that the initial average realised gas price will be around $6 per mcf.
The condensate produced with the gas is expected to provide an initial gross liquid production of around 3,000 to 4,000 bpd to be sold at a price close to that of crude oil. The cost recovery provisions of the TAC provide a natural hedge against oil prices, because Serica can claim a larger share of oil production to cover its costs if the oil price falls.
Following the completion of the development wells, RPS Energy has estimated that the gross Proved and Probable Reserves of the Kambuna field have increased to 39.3 million barrels of oil equivalent ("mmboe"). There is still a considerable upside to these reserves and RPS estimates the gross Proved, Probable and Possible Reserves of the field to be 62.5 mmboe.
In July 2008 Serica's sale of a 15% interest in the TAC to Salamander Energy plc for US$52.7 million implied a value for Serica's retained 50% interest of US$175 million. On the basis of RPS' forecast of oil price and a discount factor of 10%, RPS has estimated the post-tax net present value of Serica's 50% interest in the Kambuna field to be US$160 million at 31 December 2008, indicating the limited impact of the fall in oil price in the second half of the year.
This sale also provided the opportunity for Serica to transfer the Kambuna development operatorship to Salamander, allowing Serica to concentrate its resources on its core business of exploration where the greater potential exists for significant increases in shareholder value.
Progress was made during 2008 with the Columbus gas field and Serica submitted a Field Development Programme ("FDP") to the UK authorities in October. Serica completed the drilling of the Columbus appraisal wells 23/16f-12 and its sidetrack well 23/16f-12z in late 2007. From the time that Serica discovered the Columbus field in December 2006, it had been considered possible that the field might extend to the south into Block 23/21, operated by BG Group ("BG"). However, with BG having no apparent plan to drill in Block 23/21 to establish the presence of an extension, the 23/16f partners submitted the FDP without the involvement of the Block 23/21 group.
However, late in 2008 BG Group drilled the 23/21-7 well in block 23/21, approximately three kilometers south of the 23/16f-11 Columbus discovery well. Well 23/21-7 comprised a total of four penetrations of the Forties sand reservoir and the data obtained are currently under evaluation.
Netherland Sewell & Associates ("NSA") has estimated that the gross Proved and Probable Reserves of the Columbus field located in Block 23/16f are 17.7 mmboe, with gross Proved and Probable and Possible Reserves of 42.3 mmboe, indicating the considerable upside remaining in the block. Serica holds a 50% interest in Columbus.
Fundamental to Serica's exploration strategy is its ability to find prospects of such quality that, even when the industry's exploration budgets are being curtailed, we are able to find partners to fund a large proportion of the costs of the wildcat drilling.
Initially our exploration efforts in 2008 were focused on securing farm-in partners for the wells to be drilled by Serica on two of its 100% owned licences: the Block 48/16b Chablis appraisal well in the UK southern North Sea and the Bandon exploration well in the Slyne Basin Licence PEL 01/06 off the west coast of Ireland. These efforts were successful and the Company agreed terms with Hansa Hydrocarbons Limited with respect to Chablis and with RWE-DEA AG with respect to Bandon.
We commenced drilling the Chablis appraisal well 48/16b-3 in December and completed the operation in January 2009. Although the well encountered gas-bearing Rotliegendes sands of good reservoir quality the gas bearing interval was thin and the well was plugged and abandoned. The commercial potential of the Chablis accumulation and the remaining adjacent prospects is still unproven and no reserves can be attributed to the area at this time.
We planned to drill the Bandon well offshore Ireland in the summer of 2008, but were not able to acquire the required site survey data at the drilling location early enough for the drilling weather window, due to the poor Atlantic weather experienced in April. However, the survey was acquired later in the year and a rig has been contracted to drill the well in May 2009.
We were also successful in attracting a farminee for the Tuong Vi prospect in Vietnam, and this well is expected to be spudded in June 2009. In keeping with our strategy, further farm-outs are planned for the Conan exploration well in the East Irish Sea and for the wells to be drilled in 2010 in the Kutai PSC.
Serica continues to develop its exploration portfolio on a selective basis and during 2008 was awarded a large Production Sharing Contract offshore Indonesia, the East Seruway PSC, which lies adjacent to the Glagah-Kambuna TAC. We also added new acreage offshore UK with three licence awards in the 25th Licensing Round.
Following the recent announcement of the results of the Chablis appraisal well, we have reviewed the level of costs held in our accounts relating to the asset. Although there may be commercial potential in Serica's Chablis licence areas, in the present economic climate we have decided that no further funds should be committed at this stage. In two other areas no further significant expenditure is planned: UK Block 54/1b (the Oak discovery) and the Spanish Permits. In Block 54/1b the presence of inert gases in the test production from the Oak discovery makes commercial exploitation of this small gas accumulation unlikely in the short term. In Spain, we have obtained a one year suspension of the Permits while we seek a farminee to drill one of the gas prospects identified by Serica following its seismic programme, as the Company has prioritised other exploration activities. In both of these cases we currently plan no significant expenditure and have therefore written off the exploration and evaluation costs incurred to date.
In Norway, Serica completed the disposal of its 20% interest in Licences PL406 and PL407 which included the undeveloped Bream oil field, since Serica considered that due to the high cost of E&P activity in Norway it would not be possible for it to build a particularly profitable business. The Company retains the benefit of a contingent cash payment related to the oil price at the time that the Bream field is brought onto production.
The achievements of 2008, including a 48% increase in booked Proven and Probable Reserves to a total of 28.5 mmboe, were made against a challenging global and industry backdrop and provide a strong testimony for Serica's team and its business approach.
Serica's priorities for 2009 are to achieve first production from the Kambuna field and we plan to drill three exploration prospects which could result in material value to the Company, without incurring significant cost. We will also add further exploration acreage in areas where our knowledge and expertise can add value. In parallel, efforts will be directed towards the successful refinancing of the Company's debt facility on acceptable terms. Serica looks forward to the coming year with enthusiasm and anticipation. 2009 will be the year that Serica matures from its formative years as a pure exploration company and becomes a better balanced company with both exploration and production assets.
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