30th Nov 2007 07:01
Victoria Oil & Gas PLC30 November 2007 Victoria Oil & Gas Plc 30 November 2007 Victoria Oil & Gas Plc (AIM: VOG) Preliminary Announcement of Results for year ended 31 May 2007 Highlights • Testing of Well 103 at West Medvezhye gas and gas condensate asset in Siberia, Russia, nearing completion • Steady production of around 400 barrels of oil per day from Kemerkol oil field in Kazakhstan • Appointment of Renaissance Capital, the renowned emerging markets investment bank, as financial advisors to the Company as part of a comprehensive internal review • Focus for 2008 to include strengthening management, improving drilling success rate at all operations and acquisition of at least two value enhancing projects with proven reserves and production For further information please contact:Kevin Foo / George Donne Jonathan Charles / Ed PortmanVictoria Oil & Gas Plc Conduit PR+44 (0)207 921 8820 +44 (0)207 429 6607 +44 (0) 7733 363 501 Toby Hayward / Oliver GriffithsJefferies International+44 (0)207 618 3500 Chairman's Statement Dear Shareholder, Since the Company listed on AIM in July 2004 we have seen many changes in themarkets and in our FSU operating environment. In this period our key successeshave been the acquisition of the potentially very large West Medvezhye gas andgas condensate project in Russia and the Kemerkol oil project in Kazakhstan. At West Medvezhye we have completed three exploration wells and are currentlyworking on the fourth, number 103. This has shown modest condensate and lightoil flows, which may or may not be economic. Importantly, our technical teamdemonstrated its ability to drill and complete successfully its first deep wellto depths below 3,800 metres. At Kemerkol, we have completed five out of our original six well drillingprogramme and current production is a steady 400 barrels per day. We hope toincrease Kemerkol production in 2008 with the eventual goal of covering allCompany overheads by income from this property. Early in 2007 we appointed Tony Porter as Chief Executive Officer and hisdetailed report is attached. Tony was tasked with cutting costs and increasingrevenue and he has successfully achieved this in a short time. Tony intends tofinish up at the end of the year once his contract expires as he wishes to focuson his consulting business. We have already had discussions with a number ofhigh-quality candidates for the role of CEO and I look forward to unveilingTony's successor to you shortly. Review Recently, the Board undertook a fundamental internal review of the Company andwe have reached several important conclusions that I wish to share with you: • Drilling success rates at West Medvezhye and Kemerkol, whilst not below industry averages, have not met the strike rate that the Company expected and hoped for. Non-commercial wells not only cost millions of dollars, they also erode confidence in a company and the share price suffers. While we strive to achieve our drilling plans as efficiently as possible, there are no shortcuts to success and if further evaluation is needed we will do so, as can now be witnessed at Kemerkol • There has been pressure on the Company to drill wells as fast as possible, usually to meet weather windows, to test structures and potential hydrocarbon flows whereas more considered evaluation of seismic and geological data may have improved the strike rate • Operating in the FSU had become more difficult, with major challenges involving weather, local and federal politics, but our teams have met these challenges well and as a net result we feel that Victoria is more "battle hardened" than before • Financing of the Company, via a $38 million convertible bond in late 2006 was a welcome contribution, but it is in the long term interests of the Company to re-organise this component of our financial structure to more traditional equity • Despite reviewing dozens of projects we have not succeeded in making any appropriate acquisitions. The reasons for this often involved the poor quality of data and projects, unrealistic expectations of vendors and the failure of projects to stand up to due diligence investigations • Full time executive management and a strengthened technical group is needed to ensure focus, attention to detail and a better ability to support our acquisition teams So, what is the Company doing about these issues? We are actively solving themand your Company is now undergoing a "top to bottom" review which involvesassessment of all of our physical and human assets, the major challengesconfronting us now and how we can improve our success rate in drilling andincreasing production and new deal flow. To assist us in this review, we have appointed the internationally renownedemerging markets investment bank Renaissance Capital as our financial advisorsas we investigate all elements of the Company. Renaissance is a premier Russianfinancial advisory house and leads the market in equity and debt capital markettransactions as well as having unsurpassed experience in mergers andacquisitions not only in Russia, but also in the FSU as well as other highopportunity emerging markets. We are committed to ensure that the development strategy which emerges from thisreview will have the greatest chance of enhancing value for you and that anyfinancing for our prospective activity during the coming year will be closelytailored to shareholders interests. Outlook I would remind shareholders that Victoria's prospective resource base remains inexcess of one billion barrels of oil equivalent. It also has C1 and C2 provenand probable reserves totalling over 35 million barrels of oil. However thispotential has not yet been realised so I see 2008 as a critical "turnaround"period for us. Our objectives for 2008 are to: • Restructure and strengthen Executive and Technical management, who are tasked with turning this potential into reality • Re-finance the Company by changing existing financial arrangements and attracting appropriate strategic and industry investors that can ensure our financial strength under all market conditions • Focus on improving our drilling strike rate at West Medvezhye and Kemerkol • Use our hard-earned FSU project acquisition, operating and management experience to better advantage • Acquire at least two value enhancing projects that will add production and reserves and not greater exploration risk • Strengthen the Board with high quality non- executive independent directors • Improve our investor relations skills and build our profile to attract more investors I would like to extend my thanks to all of our employees and my fellow Directorsfor their endeavour this year and also thank you, our shareholders, for youpatient support. Kevin FooChairman Operating Review Dear Shareholder, It is my pleasure to report to you for the second time on the development of ourassets in Russia and Kazakhstan. I would like to share with you the significantevents that have occurred since my last report and explain the strategies whichunderpin them and will determine our future operations. Much of our work during 2007 has been geared towards streamlining theorganisation, reducing our operating costs and developing a stable cash flowstream from our Kemerkol oil field in Kazakhstan from both production drillingand the increase of our reserve base through exploration. The purpose of ourincreased focus on Kemerkol has been to allow us to finance the development ofour West Medvezhye gas and gas condensate project in Siberia. I would like toclarify, however, that whilst the oil revenues from Kemerkol will prove vital inthe short-term, West Medvezhye still holds the most significant potential forthe future of our company and its successful development remains a priority. West Medvezhye Presently, our activities remain centred on the testing of the two identifiedhydrocarbon-bearing formations at Well 103. These formations are the J2(Jurassic) formation located at a depth between 3,794 - 3,799 metres and theBazhenov formation between 3,718 - 3,741 metres. It should be noted that theBazhenov shale is the source-rock for the entire Western Siberian Basin, one ofthe largest sedimentary basins in the world extending over two million squarekilometres. A test of the J2 horizon performed early this year utilised the standardpractice of filling the well-bore with technical water to stabilise thedown-hole pressures and control hydrocarbon flow. Unfortunately, not all of thiswater was able to be removed from the well during the test. Without being ableto conclusively assess the potential impact that the residual water may have hadon flow rates, our technical team recommended that the well be retested. I can confirm that after major technical challenges, due to operating at thesedepths, all the technical water has now been displaced from the well using a gascondensate flush and the testing of the J2 and Bazhenov horizons is underway. Oncompletion, the results from these tests will be submitted to the RussianMinistry of Natural Resources, as stipulated in our licence conditions, forcalculation of reserves and the data will also be passed on to DeGolyer &MacNaughton, our independent reserve auditors, for revision of their resourceestimate for the project. The submission of the test data and reserve calculation are vital for theextension of our exploration licence and our Siberian management are already indiscussions with the authorities on this process. We have worked closely withthe local geological institute (a branch of the Ministry) and they support ourintended testing strategy and proposed procedure for licence extension. The work undertaken at Well 103 has been thorough, as is befitting the firstexploration well of this depth in the licence area. Most of the main targets inthe 1,200 square kilometre area are of similar depths to 103 and so thecompilation of comprehensive subsurface data is vital not just for thislocation, but for the project as a whole. Given the importance of the projectand this well we firmly believe that accuracy and detail should not besacrificed for speed. Well 105 remains our next exploration target and preparations for drilling willcommence as soon as climatic conditions allow. Access to the well-site for heavyequipment must be via 'winter roads' composed of compacted ice and so we mustwait for sufficiently low temperatures before we can re-establish a landconnection. However, as soon as the ground starts to freeze we are planning toundertake a geochemical survey of the Well 105 location area to further refineour drill point. Kemerkol As mentioned earlier, our strategy for Kemerkol was founded on the principle ofmatching the exploitation of our existing reserve base with the addition ofreserves from exploration in the greenfield locations in the east of the licencearea. Oil production commenced from Kemerkol in late May and so far this yearover 45,000 barrels of oil has been extracted from Wells 73 and 20. Development was initiated with a six-well drill campaign, which began in Aprilwith the success of Well 73. This well was drilled into the proven structure inthe south-western section of the licence area and flowed at a rate of 450barrels of oil per day on a 12 millimetre choke. Since then we have undertaken athorough testing regime on the well to determine the exact reservoircharacteristic for efficiency of future extraction and production during whichproduction was limited to between 200 and 300 barrels of oil per day. Withinitial results obtained at stable operation we are now implementing plannedincreases through a gradual ramp up of production through the use of 'down hole'pumping. Approximately 115 metres from 73 and targeting the same structure, work-overoperations have been completed at our first producing well, Well 20. During lastyear we witnessed an increase in water-cut at Well 20 and consequently shut thewell in for inspection and repair. With the well still likely to produce water,the decision was taken to recommission an old well, 45, as a re-injection wellto allow the disposal of any produced water at very low cost. With Well 45 fullyoperational, Well 20 has been reactivated and with the planned installation of alarger pump production will be increased from the current rate of 50 barrels perday to in excess of 100 barrels. All production from these two wells is currently piped to our gatheringfacility, where water and salt is separated and the oil sold to a local trader.Following the approval by the Ministry of Energy and Mineral Resources of ourProduction Project for these wells, we are preparing to install a basicprocessing and certification facility to improve the quality of our saleable oiland improve the price achieved by up to 30%. The approval also means that ourpermitted production period for the wells has increased from three months tothree years, by which time we aim to have achieved the necessary productioncapacity to enter the production phase of our licence agreement and secure the25 year production period for all wells. With the completion of Well 66 we have taken the opportunity to pause in ourdrilling campaign and reinterpret thoroughly the subsurface information with thedata provided by the new drilling. Hydrocarbons have been encountered in eachnew exploration well and now we have the chance to augment our existing 2D and3D seismic studies with down-hole sample data and re-examine the subsurfaceinterpretation, focusing on migration, seal and trapping. The review willanalyse potential leads on the basis of hydrocarbon prospectivity and certaintyof trap and seal with the best structures then to be proposed for drilling,probably during the first quarter of next year. Despite the significant challenges of this year we have successfully added toour commercial production output in Kemerkol and utilising the hard earned datafrom each of our exploration wells in both Kemerkol and West Med we look forwardto even better results in 2008. The effort of all of our staff in the fieldand in the offices in facing these challenges has been unwavering and on yourbehalf I would like to thank them for all their loyalty, commitment and shearhard work. Finally, I should like to thank everyone for their support in myposition over the last year and as mentioned in the Chairman's letter, I amleaving Victoria to focus on my consulting business, but I shall be available tosupport the Company on an as required basis. Tony PorterChief Executive Officer Consolidated Profit and Loss AccountYear ended 31 May 2007 2007 2006 $000 $000 Turnover 373 166Cost of sales (199) (133) Gross profit 174 33 Administrative expenses (3,513) (1,851)Realised foreign exchange (losses)/gains (760) 338 Operating loss (4,099) (1,480) Provision against fair value adjustment to the assets of deconsolidated subsidiary (2,293) -Costs of issuing debentures during the year (1,071)Interest payable (982) (1)Interest receivable 151 335Loss on ordinary activities before taxation (8,294) (1,146) Taxation - -Loss on ordinary activities after taxation (8,294) (1,146) Retained loss for the year (8,294) (1,146) Cents Cents Group loss per share (7.06) (1.21) Group loss per share - diluted (7.06) (1.21) The profit and loss account has been prepared on the basis that all operationsare continuing operations. Consolidated Statement of Recognised Gains and LossesYear ended 31 May, 2007 2007 2006 $000 $000 Loss for the financial year (8,294) (1,146) Value of shares vested in beneficiaries by Victoria Oil & Gas Plc ESOP Trust 1,840 -Transfer from share premium account relating to costs of issue of convertible loan 1,071 - Total recognised losses for the financial year (5,383) (1,146) Balance SheetAs at 31 May 2007 Consolidated Company 2007 2006 2007 2006 $000 $000 $000 $000 Fixed Assets Intangible fixed assets 93,708 67,178 - -Tangible fixed assets 874 614 10 10Financial assets - - 33,682 37,364 94,582 67,792 33,692 37,374 Current AssetsStocks - 16 - -Debtors 1,442 1,215 56,310 27,941Cash at bank and in hand 9,924 2,380 9,215 2,168 11,366 3,611 65,525 30,109 CreditorsAmounts falling due within one year (5,702) (4,598) (757) (676) Net current (liabilities)/assets 5,664 (987) 64,768 29,433 Creditors: amounts falling due in more than one year (31,241) - (31,241) - Net assets 69,005 66,805 67,219 66,807 Capital and reservesCalled up share capital 1,129 1,044 1,129 1,044Share premium account 71,935 68,153 71,935 68,153Equity component of convertible loan 3,716 - 3,716 - Profit and loss account (7,775) (2,392) (9,561) (2,390) Shareholders' funds - equity 69,005 66,805 67,219 66,807 Consolidated Cash Flow StatementYear ended 31 May 2007 2007 2006 $000 $000Cash flow from operating activitiesOperating loss (4,099) (1,480)Deprecation 187 96Stocks decrease 16 2Debtors increase (227) (372)Creditors increase 826 4,112Currency translation adjustment (608) (325)Provision against debt due from deconsolidated subsidiary 282 -Value of shares vested by Victoria Oil & Gas Plc ESOP Trust 750 -Net cash (outflow)/inflow from operating activities (2,873) 2,033 Returns on investments and debt service costsInterest received 151 335Interest paid (704) (1) Net cash inflow from returns on investments and servicing of finance (553) 334 Tax paid - - Capital expenditure and financial investmentAcquisition of intangible fixed assets net of value of shares vested by (27,441) (23,086)Victoria Oil & Gas Plc ESOP TrustAcquisition of tangible fixed assets (413) (452)Acquisition of shares in subsidiaries - (11,069) Net cash outflow from capital expenditure (27,854) (34,607) Net cash outflow before financing (31,280) (32,240) FinancingIssue of ordinary shares 1,724 23,136Issue of convertible loan note 37,100 - Net cash inflow from financing 38,824 23,136 Increase/(decrease) in cash in the year 7,544 (9,104) Analysis of net cash 31 May 2006 Cash flow 31 May 2007 $000 $000 $000 Cash at bank and in hand 2,380 7,544 9,924 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
VOG.L