IGas Interim Report and Caithness Oil
26th November 2013
IGas Energy plc (\"IGas\" or \"the Company\") published its 6 month results to 30th September 2013 today on 26th Novermber 2013.
The Caithness interset in IGas cames from its acqusitiion of Caithness Oil and the relevant paragraph in the report is -
Acquisition of Caithness Oil Limited
Further to the announcement on 9 September 2013, we have now signed the sale and purchase agreement to acquire Caithness Oil (which includes a 100% interest in the Lybster field), a subsidiary of Caithness Petroleum Limited, a privately-owned British independent oil and gas exploration and production company. Total consideration amounts to ca. £8.5million, with completion expected to take place imminently.
The Lybster field was discovered in 1996 by Premier Oil and was put into production in May 2012. Prior to being temporarily shut-in for a routine workover, it was producing approximately 200 bopd gross. The oil is currently transported and sold to facilities at Nigg. As well as increasing our current production, the acquisition offers us additional upside through the potential utilisation of significant existing tax losses and the monetisation of 2 mmscf/d of associated gas.
This acquisition represents a good opportunity to increase our existing production and one that offers significant upside potential through gas monetisation. The transaction is in line with our strategy to grow our production base in order to fund our exploration activities and to take advantage of synergistic acquisition opportunities.
The report shows -
Interim Results for the six months ended 30 September 2013
IGas, one of the leading producers of onshore hydrocarbons in the UK, is pleased to announce its interim results for the six months ended 30 September 2013.
Operational Highlights
· Exploration drilling programme at Barton site underway in line with plans following extensive community engagement
· Good progress on Chase the Barrels initiative with September production rate net to IGas at 2,874 boepd
· Acquisition of Caithness Oil Limited anticipated to complete imminently
Financial Highlights
· Revenue £36.2m (2012: £33.4m)
· Gross profit £16.4m (2012: £16.0m)
· EBITDA1 £17.3m (2012: £17.6m)
· Underlying profit before tax2 £6.1m (2012: £7.7m)
· Net back to IGas3 averaged US$57.47 per barrel in the period (2012: $61.84/bbl)
· Cash and cash equivalents £15.4m (31 March 2013: £9.8m)
· Net debt4 of £81.3m (31 March 2013: £77.4m)
· Successful listing of Bond on Oslo main market
Interim Statement - six months ended 30 September 2013
Operational Review
The six months ended 30 September 2013 has been another productive period for IGas in all areas of our business. We are making good progress on the development of our assets with exploration work now underway at Barton in the North West. The results of this activity will provide us with data to help us further understand the potential of this area. As we announced in June, we have estimated the volume of Gas Initially In-Place (GIIP) associated with the shales in the North West, including the Bowland Shale, at up to 170 Tcf.
We have also made good progress with our Chase the Barrels initiative as well as identifying further appraisal potential from our existing producing assets.
We are imminently due to complete the acquisition of Caithness Oil Limited (Caithness Oil), a producing asset in Scotland, with upside potential through the monetisation of associated gas.
Production and Progress on Chase the Barrels initiative
The average net production in the six months to 30 September 2013 was 2,704 boepd (2012: 2,513 boepd).
We have made good progress on our Chase the Barrels initiative and are now seeing the benefits of our investment with average net production in September at 2,874 boepd.
During the period, the technical team has investigated a number of opportunities to increase oil production through relatively low cost well intervention and production enhancement operations. Comprehensive subsurface studies were carried out to identify and rank the most attractive short term well entry opportunities, including for example re-perforation, water shut off and recompletions.
We have enjoyed success at a number of locations. A typical example of our initiatives included a workover at Scampton North B1. The well had been identified as a good candidate for a workover having been shut-in for a considerable period of time. The well was worked over and re-completed using a beam pump. It now produces 20 bopd. At Welton B22, the objective was to return a suspended well to production. Post workover, we realised an additional production of 28 bopd and 60,000 scf/d of gas for gas generation. A workover at WB-30 at Welton was carried out and an increase of 10 bopd has been achieved there.
We re-instated a shut-in well, GO3 at Goodworth. The well had been shut-in due to downhole mechanical issues, and production prior to shut-in had been ca. 30 bopd. The well was worked over and re-completed and production has resumed at ca. 50 bopd.
The total direct cost of the work on these four initiatives was ca. £500,000, with a payback period of less than three months.
A campaign of similar opportunities is now being pursued. We are also trialling the installation of a wax reduction tool in a number of wells and, if successful, this will increase well up-time and reduce the need for costly workovers.
Over the summer, we undertook a programme of work for the installation of technology to optimise rod pumping wells using Rod Pump Off Controllers (RPOC). To date we have installed nine systems and so far this has led to a reduction in well down time due to rod wear, as well as enabling remote monitoring of well conditions. The reduction in rod breakages will result in greater uptime of the wells and reduced operating expenditure due to a reduction in well interventions as well as power savings of up to 30%. Due to the success of the initial installations, we are looking to extend this across the portfolio where appropriate and the phase I installation of up to 50 units is proceeding according to plan, with completion expected in the Spring of 2014.
There are a number of stranded gas monetisation projects that are being evaluated including Albury. Planning permission was granted earlier this year for a change of use for the Albury site, including the installation of a Liquefied Natural Gas (LNG) plant. This will allow natural gas production from the site to be compressed into LNG for transportation off-site. There are many uses for LNG, including use as an alternative road fuel. Advanced commercial negotiations are currently under way for the offtake of the LNG from the site. The potential for using this mini LNG technology elsewhere in the portfolio as a means of monetising stranded gas is something we are actively pursuing and evaluating.
A number of field development studies are in progress aimed at increasing ultimate recovery and reserves and identifying infill well drilling opportunities.
Acquisition of Caithness Oil Limited
Further to the announcement on 9 September 2013, we have now signed the sale and purchase agreement to acquire Caithness Oil (which includes a 100% interest in the Lybster field), a subsidiary of Caithness Petroleum Limited, a privately-owned British independent oil and gas exploration and production company. Total consideration amounts to ca. £8.5million, with completion expected to take place imminently.
The Lybster field was discovered in 1996 by Premier Oil and was put into production in May 2012. Prior to being temporarily shut-in for a routine workover, it was producing approximately 200 bopd gross. The oil is currently transported and sold to facilities at Nigg. As well as increasing our current production, the acquisition offers us additional upside through the potential utilisation of significant existing tax losses and the monetisation of 2 mmscf/d of associated gas.
This acquisition represents a good opportunity to increase our existing production and one that offers significant upside potential through gas monetisation. The transaction is in line with our strategy to grow our production base in order to fund our exploration activities and to take advantage of synergistic acquisition opportunities.
Industry and Regulatory backdrop
During the period, IGas, alongside the industry and Government have made significant progress in developing the regulatory and associated framework to support shale gas development. The Government has now put its full support behind shale gas and there is a broad cross party consensus in favour of its development in Britain.
Confidence in UK shale has been demonstrated by Centrica\'s investment into Cuadrilla\'s acreage, which is situated close to our licences in the North West, and most recently by GDF Suez\' farm-in transaction with Dart Energy, whose acreage is located immediately to the South of our acreage in the North and adjacent to our licences in the East Midlands.
At the time of the Budget, the Government announced a package of measures including community incentives, guidelines on permitting and planning and it launched a consultation on taxation.
In June, the Department for Energy and Climate Change (DECC) announced a benefits package for communities near new shale gas drilling sites. Under the proposals operators will offer local communities £100,000 per hydraulically fractured well at the exploratory stage, as well as one per cent. of revenues once sites become commercial.
In June, the United Kingdom Onshore Operators Group (UKOOG), the representative body for UK onshore oil and gas companies, published a binding industry charter for its members covering the minimum standards of engagement required with local communities alongside a community benefits scheme designed for the next phase of shale oil and gas exploration and production. The Charter sets out the minimum standards that communities should expect from operators that display the UKOOG logo. The Charter covers how operators will communicate and engage and also makes commitments with respect to local logistics, adherence to health and safety, compliance with environmental regulation and local needs, including jobs. This is in addition to the UKOOG Shale Gas Guidelines for Exploration Drilling that lays out the best practice to be adopted by UK operators. IGas fully supports these initiatives and is a signatory to the Charter.
The Environment Agency has published draft technical guidance for onshore oil and gas exploration drilling, covering both conventional and unconventional targets. This consultation closed on 23 October 2013. The Environment Agency has announced that it will develop a single application pack for all Environmental Permit Regulators including mining waste and NORM (naturally occurring radioactive materials), to streamline the existing processes.
The tax consultation, to which we have contributed, continues, with further clarity expected as part of the Autumn Statement. In September, the Government published the Mackay Stone report compiled by Professor David MacKay, chief scientific advisor at DECC, and Dr Tim Stone, Special Advisor to the Secretary of State, into the subject of greenhouse gas emissions from shale gas operations. The report concluded that, with the right safeguards in place, the net effect on greenhouse gas emissions from shale gas production in the UK will be relatively small and is likely to have a greenhouse gas footprint similar to other fossil fuels that society currently depends on.
Following the period end, Public Health England released a report on the potential public health risks from shale gas production. The report states that properly run and regulated shale gas extraction represents a low risk to public health.
IGas in the Community
Communicating with our neighbours is an essential part of our everyday operations. Accordingly, we have been working with a community liaison group in the Barton area since we were originally granted planning permission back in 2010. We have put in place a comprehensive relationship programme including a community information day in September and the launch of a microsite www.igas-barton.co.uk to ensure that as many people as possible can understand the work that we are carrying out in the area. We believe the onus is on operators to ensure that the public are informed as to the safe extraction of oil and gas resources. During the exploration project at Barton we continue to inform and educate with regular newsletters, updates to the microsite and a drop-in community Q&A surgery session.
In addition, we have now launched the 2014 round of our IGas Energy Community Fund. This independently administered fund was established to help local communities located close to the oil and gas exploration and production sites where we operate.
Current Trading
As part of our drilling programme, in the North West, operations have commenced at our exploration site at Barton. This vertical exploration well is designed to evaluate the gas bearing potential of the formations by taking both core samples and wireline logs which will enable us to gather geological data to establish what hydrocarbons are present. Equipped with this data we will be able to better determine what lies beneath the surface and refine the resource potential in the underlying rock formations. The exploration drilling process is expected to be completed in Q1, 2014 with analysis of the core and log data beginning thereafter. Full analysis of the geological cores is likely to take up to six months to complete with early results expected by fiscal year end. We are also working towards the permitting of our second appraisal well.
We continue to implement and evaluate further projects under the Chase the Barrels initiative and following completion of the acquisition of Caithness Oil, look forward to working with the team there and to exploring further potential on that asset, including monetising the gas.
Financial Review
IGas\' financial results and the strengthening of its financial position in the period come from its strong operational activity, as explained above, and through the successful refinancing of Macquarie debt through the completion of the US$165m five year term bond in April 2013. Prior to the half year end, the bonds were listed on the Oslo stock exchange.
Income statement
The Group recorded revenues of £36.2m in the period (2012: £33.4m). Group production in the period was 475,118 barrels of oil, with ca. 9,400 Mwh of electricity sold, which together represents an average of 2,704 boepd (2012: 2,513 boepd). Revenues for the period also included £3.4m (2012: £2.4m) relating to the sale of third party\'s oil, the bulk of which is processed through our gathering centre at Holybourne in the Weald Basin.
The realised price per barrel (pre-hedge) averaged £67.4 (US$104.2) (2012: £67.56 (US$106.93)) per barrel with narrow discounts to Brent crude prices achieved. After taking into account the cash cost of acquiring hedging instruments for production in the period, which equated to US$2.90/barrel, the realised price per barrel averaged £65.6 (US$101.3) (2012: £60.40 (US$95.60)).
Cost of sales of £19.8m (2012: £17.4m) includes depreciation, depletion and amortisation (D,D&A) of £4.9m (2012: £5.0m), and operating costs of £14.9m (2012: £12.4m). Operating costs include a £3.3m charge (2012: £2.3m) in relation to processing third party oil, an increase of £1.0m from the comparative period due to the increased number of barrels purchased and processed by us from third parties. The contribution received from processing this third party oil was £0.1m in line with prior periods. Operating costs also increased due to a £1.1m cost in the period for Singleton, acquired on 28 February 2013, of which ca. £0.3m was incurred due to a two week planned shut down for maintenance at that site.
Operating costs per barrel of oil equivalent were £21.8 per barrel, excluding the third party costs (2012: £20.4/bbl).
EBITDA in the period was £17.3m (2012: £17.6m), before the loss on oil price derivatives £1.6m (2012: gain £6.3m). Gross profit of £16.4m was recognised in the period (2012: £16.0m). Administrative costs increased by £0.7m to £4.1m (2012: £3.4m) principally due to the investment we have made in our subsurface team.
The net back to IGas, being revenues less operating costs and administrative costs averaged US$57.47 per barrel in the period (2012: $61.84/bbl).
Net finance costs were £6.2m in the period (2012: £8.7m), including interest on borrowings of £5.9m (2012: £4.7m), loss on fair value of warrants £5.3m (2012: £3.9m) and net foreign exchange gains of £5.4m (2012: £0.3m).
The effective tax rate for the period was 112.8% (2012: 98%). This effective rate continues to be impacted by the blend of the Group\'s activities between those which are subject to the combined tax rate of ring fence corporation tax and supplementary charge in the UK (62%) and those subject to corporation tax only (23%). The extent to which the Group\'s taxable income and deductible expenses are impacted by respective rates directly affects the Group\'s effective tax rate. It is anticipated that the Group\'s effective tax rate will reduce as the Group\'s profits increase in the future.
Cash flow
Net cash generated from operating activities in the period amounted to £9.3m (2012: £15.5m). The current period amount is after a payment of taxation of £3.0m which related to tax payable for the Star group for the period to 31 December 2011. The Group expended £4.3m across its asset base in the period (2012: £2.2m), of which ca. £3.0m was invested in the conventional assets, where we are now starting to see the benefits of this investment in our current production levels. During the period, IGas acquired hedging instruments for ca.1m barrels of oil at US$90 per barrel (or sterling equivalent) for the period from May 2013 to June 2014 at a total cost of ca. £2.0m.
IGas repaid £2.7m (US$4.1m) of principal on borrowings to bondholders in the period in accordance with the terms of the bonds (2012: £8.9m (USD$14.0m)). This represents a repayment of 2.5% of the original principal amount of the bonds and paid £5.5m (US$8.3m) in interest. Cash and cash equivalents were £15.4m at the period end (31 March 2013: £9.8m).
Balance sheet
The Group\'s balance sheet has been strengthened during the period. Net assets increased by £10.6m to £69.7m (31 March 2013: £59.1m) and non-current assets remained broadly constant at £230.7m compared to 31 March 2013. Net current assets improved by £13.2m to £5.1m, which continues to include, for technical accounting reasons under IAS39, a current liability of £6.1m (31 March 2013: £8.2m) in relation to the Company\'s outstanding warrants which if exercised would result in a nil or positive cash impact for the Company.
Net debt at the period end amounted to £81.3m (31 March 2013: £77.4m).
For the full report see -
http://ir1.euroinvestor.com/asp/ir/IGas/NewsRead.aspx?storyid=12594860&ishtml=1
