9th Mar 2006 07:03
Soco International PLC09 March 2006 SOCO International plc ("SOCO" or "the Company") Preliminary Results For The Year Ended 31 December 2005 SOCO (LSE:SIA), the international oil and gas exploration and productioncompany, headquartered in London, traded on the London Stock Exchange and aconstituent of the FTSE 250 Index, today announces its Preliminary Results forthe year ended 31 December 2005. In a separate announcement today, the Company released the initial results fromthe first of a multiple zone test of the TGT-2X appraisal well in Vietnam, whichdiscovered oil in the Oligocene formation with a stabilised rate of 3,300 BOPD.Additional flow tests will be conducted from Miocene intervals, one of whichflowed at 9,342 BOEPD in the TGT-1X discovery well drilled last year. Operating Highlights • 85% drilling success ratio with six of seven exploration / appraisal wells drilled in 2005 successful • 75 million barrels of oil added to Group reserves in Vietnam and Yemen driven by exploration success, increasing total Group reserves threefold post Mongolia disposal • Production, net to the Company's working interest, increased to 5,684 BOPD from 5,533 BOPD the previous year • Re-structured asset portfolio to focus on high impact projects: • Disposed of interests in Mongolia for consideration of up to approximately US$93 million • Established a new core area in West Africa with the signature of a PSA for a 75% stake in Marine XI Block in Republic of Congo (Brazzaville) Financial Highlights - from continuing operations • Revenue up over 90% year-on-year to US$57.2 million (2004 : US$29.4 million) • Operating profit increased over 120% year-on-year to US$31.3 million (2004 : US$14.2 million) • Profit before tax increased over 125% to US$33.7 million (2004 : US$14.9 million) Outlook • US$100 million development and exploration programme planned for 2006 • Further exploration/appraisal drilling within Vietnam and Yemen • Progression towards Vietnam production with declaration of commerciality targeted for 1H06 • 3D seismic programme in Congo planned for second half of the year Ed Story, Chief Executive Officer, commented: "2005 was a transformative year for SOCO with exploration success generating analmost 50% growth in reserves. Strategically we re-focused our portfolio toconcentrate on high impact projects; adding a new core area in Africa anddisposing of our assets in Mongolia. With further exploration success announced today and a US$100 millionexploration and development programme planned for the year ahead the outlook isextremely positive for continued reserve growth in 2006." 9 March 2006 Enquiries:SOCO International plc Tel : 020 7747 2000 Roger CagleExecutive VP, Deputy CEO and Chief Financial Officer Pelham PR Tel: 020 7743 6676James HendersonAlisdair Haythornthwaite CHAIRMAN'S AND CHIEF EXECUTIVE'S STATEMENT Simply stated, 2005 was a great year for SOCO. We had a 100% success ratio inour Basement drilling programme on Block 10 in Yemen and two wells drilled inthe Cuu Long Basin in Vietnam were significant discoveries. Even the third welldrilled in Vietnam, which was not classified as a discovery, came with a silverlining as it intersected oil in a previously non-productive interval on Block9-2. This operational success has led to an impressive addition of approximately75 million barrels of oil to the Group's net working interest proven andprobable reserves in Vietnam and Yemen, resulting in an increase in totalreserves of 47% over year end 2004 despite disposal of the Group's Mongoliainterest. The result is not only a real numerical increase, but an overallupgrade in terms of the more immediate impact to shareholders. This momentum hascarried into the first quarter of 2006 with successful tests reported in bothYemen and Vietnam. Coupled with the extraordinary drilling result, we reshaped the asset portfolioto focus on high impact, high quality projects and added capacity to ourfinancial capability by agreeing a US$45 million reserve-based lending facilitywith the International Finance Corporation (IFC). The importance of having thefinancial strength to add valuable upside to the portfolio of a smaller companycannot be over emphasised in the current industry environment where promisingprojects command a high premium for entry. FINANCIAL AND OPERATING RESULTS After tax profit for the year from continuing operations more than doubled,rising to US$20.3 million from US$8.2 million in 2004. After tax profitincluding discontinued operations fell, reflecting the 2004 disposal of ourTunisia interests that netted US$21.4 million. The non-current portion of theconsideration for the Group's disposal of its Mongolia interests in 2005 isclassified as a non-current financial asset. Production net to the Company's working interest increased, rising to 5,684barrels of oil per day (BOPD) in 2005 from 5,533 BOPD the prior year. Theincrease was achieved even though discontinued operations only contributed 155BOPD during the year from Mongolia, compared to 11 months of Tunisia production(1,237 BOPD) and a full year of Mongolia production (338 BOPD) in the 2004statistics. With full year drilling programmes in both Vietnam and Yemen, the Group had itslargest capital expenditure programme ever in 2005, with a cash spend of US$76.2million almost trebling the previous year's capital expenditures. The result isthat year on year cash balances declined from US$71.1 million at year end 2004to US$51.0 million at year end 2005. SIGNIFICANT EVENTS Consistent with the Company's stated strategy of rationalising its portfolio bymonetising non-core assets, SOCO sold the entities holding its Mongoliainterests to a subsidiary of PetroChina. The transaction, which closed in August2005, immediately added approximately US$30 million to the Group's cash positionwith an additional US$10 million receivable placed in escrow. Subsequentcompensation of up to approximately US$53 million associated with futureproduction from the interests sold would bring the total compensation toapproximately US$93 million. Importantly, this transaction allows us additionalflexibility in focusing on other projects that may have a greater near termimpact. The Company announced in August that its 85% owned subsidiary, SOCO Explorationand Production Congo (SOCO EPC), signed a production sharing contract withSociete Nationale des Petroles du Congo (SNPC) wherein it acquired an interestin the Marine XI Block, offshore the Republic of Congo (Brazzaville). Previousexploration on this Block led to several discoveries, one of which has beenpartially delineated with recoverable reserves of 20 to 60 million barrels.However, the full potential of the Block has not been previously explored asthere is a thick layer of salt which has impeded seismic interpretation. Application of newer seismic technology, such as that used in Vietnam, canunlock the potential of the Block. As an exploration led company, the ability tointroduce exciting new prospective areas such as Marine XI to the portfolio iskey to continuing the momentum resulting from our success in Vietnam and Yemen. 2005 OPERATIONS REVIEW Vietnam It would be hard to expect a much better scenario than the one that evolved inVietnam in 2005, but it could be just setting the stage for a better 2006. Lastyear got off to a resounding start with the Ca Ngu Vang (CNV) appraisal wellsuccess on Block 9-2, which tested at 13,040 barrels of oil equivalent per day(BOEPD). This success was followed by a discovery in the Tertiary sediments of anew play trend in a previously undrilled region of Block 16-1. The Te Giac Trang-1X (TGT-1X) tested at 9,432 BOEPD. TGT was the first structure tested in a newplay fairway that extends for some 80 kilometres along the eastern and southernregions of Block 16-1. The second appraisal well on the CNV structure on Block 9-2 offshore Vietnam,CNV-4X, encountered an oil and gas interval with unexpected high pressure in thesandstone sequence overlying the Basement objective, and had to be temporarilysuspended. The pressures encountered were significantly higher than those seenpreviously on the other CNV wells. The joint venture partners have redesigned the drilling plan for a re-entry intothis well in 2006. Yemen The Kharir field, where the majority of the consortium's crude oil production issourced in the East Shabwa Development Area on Block 10 in Yemen, was the focusof the Basement drilling programme for most of 2005. The consortium was rewardedwith wells, which extended the limits of the field, testing at rates rangingfrom 7,300 BOPD from the KHA 1-10 well, testing the eastern extension of thefield as then mapped, to 850 BOPD from the KHA 3- 07, which was on thepreviously undrilled Kharir North structure. In addition to Basement appraisal wells drilled in and around the Kharir field,the consortium initiated step-out exploration wells in the northern area ofBlock 10. The first of these wells, the Jathma-1 (JAT-01), tested at over 1,900BOPD, causing considerable optimism when considering that only relatively poorquality 2D seismic data were available and the well was essentially a verticalrather than highly deviated Basement well. The consortium expects to have threerigs working on the exploration/appraisal/development/injector drillingprogramme in 2006. The 2005/2006 programme for Block 10 in Yemen also involves de-bottlenecking andother production enhancement efforts. The end result of this is expected toexpand the consortium's export capability significantly, eventually reachingaround 70,000 BOPD by 2007. CORPORATE In August 2005, SOCO agreed a credit facility with the IFC, the private sectorarm of the World Bank. The US$45 million reserve-based, revolving creditfacility has a seven year tenor that will be made available to SOCO in twotranches. The first tranche of US$25 million is immediately accessible and thesecond tranche of US$20 million is a standby loan. We are pleased to have the involvement of the IFC as they not only bringexpertise in the oil and gas sector, but are also leaders on the environmentaland social sustainability front. The long term availability of the financingwill provide us with additional flexibility to finance our current projects andpursue future opportunities. The IFC is a strong ally in the countries in whichwe currently operate as well as those frontier countries in which we hope toinitiate projects in the future. OUTLOOK Operationally, 2006 will be a banner year for SOCO. The capital budget will bethe largest in the Group's history, with approximately US$100 million earmarked.Results from the drill bit will continue to dominate news flow in 2006. We areoff to a very good start to the year in Vietnam. The first drill stem test fromthe TGT-2X appraisal well flowed at 3,300 BOPD from the Oligocene "C" interval,which was non-productive in the discovery well. Testing operations continueamidst high expectations. Several analogous prospects and leads have beenmapped along the fairway and we expect that the success at TGT will be repeated.As we have more successful wells on Block 16-1, we would expect the risk profileof the drilling programme to be reduced as many of the subsurface questions areanswered. We expect 2006 to be a watershed year in Vietnam as we move towarddevelopment on our projects in the Cuu Long Basin. In Yemen, the explorationdrilling programme, of which an extension of the Kharir field eastward will be asignificant part, will give us a good indication of the upside remaining onBlock 10. As importantly, the production capacity upgrades will start to have asignificant impact as export capability should increase considerably throughoutthe year. Having established the presence of oil in the northern extension of Kharir, wewill now appraise and develop the pool with inclined wells, which should yieldhigher flow rates such as those seen in wells in the main part of the field.There were many positives in 2005 that largely resulted from forces beyond thecontrol of those who benefited the most. We think that external industryinfluences will remain fairly stable during 2006 and companies that are notpositioned to create their own good fortune will be hard pressed to top lastyear's performance. While SOCO also benefited to a degree from environmentalinfluences, as an exploration led company most of our success was due directlyto our own efforts. More importantly, we are well positioned to continue as wehave the portfolio in place and the resources to exploit it. Whilst we do not think such high drilling success ratios are sustainable in thelong term, we are definitely well placed again to enjoy substantial success in2006. We have the people, we have the portfolio and we have the materials andequipment under contract to ensure that this will again be a news driven year. Last year we spoke of streamlining our portfolio and refocusing our resources.Although the portfolio is in great shape, we would not hesitate to addadditional projects that offered material upside to our shareholders. We trustthat your confidence in our strategy of recognising opportunity, capturingpotential and realising value will again be confirmed throughout the year. Patrick Maugein Chairman Ed Story President and Chief Executive REVIEW OF OPERATIONS The long anticipated, high impact drilling programmes in Vietnam and Yemen didnot disappoint in 2005. Three wells were drilled in Vietnam, with the first twoyielding spectacular results. An appraisal well to the 2002 discovery on Block9-2 on the Ca Ngu Vang (CNV) structure tested at a daily rate of more than13,000 barrels of oil equivalent (BOEPD). This was followed by the firstexploration well to be drilled on the eastern part of Block 16-1, which testedthe Te Giac Trang (TGT) structure. The TGT-1X tested at more than 9,400 BOEPD.The third well had to be temporarily suspended after encountering hydrocarbonsin an unexpected high pressure environment. Results from the Yemen appraisal programme were equally impressive beginningwith the 6,500 barrels of oil per day (BOPD) test on the Kharir field well KHA1-09. This was followed by drilling successes at the KHA 2-16 (5,500 BOPD) andthe KHA 1-10 well (7,300 BOPD) yielding a 100% success ratio in the Yemendrilling programme. Yemen is now the only country in which the Company hasproduction following the 2005 disposal of its interests in Mongolia. Even withthe reliance on a sole producing asset since the August disposal, crude oilproduction net to the Group's working interest rose from 5,533 BOPD in 2004 to5,684 BOPD in 2005. VIETNAM SOCO holds its interests in Vietnam, all in the Cuu Long Basin offshore, throughits 80% owned subsidiary SOCO Vietnam Ltd (SOCO Vietnam). SOCO Vietnam holds a25% working interest in Block 9-2, which is operated by the Hoan Vu JointOperating Company and a 28.5% working interest in Block 16-1, which is operatedby the Hoang Long Joint Operating Company (together, JOCs). Both Blocks are ontrend with several major Basement and Tertiary discoveries in the Cuu LongBasin. Both are also contiguous to the Bach Ho field, where 2005 productionreportedly averaged approximately 200,000 BOPD and 200 million cubic feet of gasper day (MMCFD), and the Rang Dong field, where production reportedly averagedapproximately 48,000 BOPD, primarily from Basement. Review of 2005 activities After an almost three year drilling abeyance preparing for this extensiveexploration and appraisal programme, the Group resumed drilling in Vietnam withthe spudding of the CNV-3X appraisal well on Block 9-2 in January. This well wasdrilled to a measured depth (MD) of 6,123 metres making it the longest MD wellto be drilled in Vietnam. Reaching target depth on 16 April, the well had anextensive clean-up period before testing water-free at a maximum combined rateof 13,040 BOEPD comprising 9,010 BOPD and 22.6 MMCFD. Although the well wassuspended as a potential producer, it will more than likely be used as aninjector well following the drilling of other shallower development wells beforethe field goes into production. Following the CNV-3X test, the rig was towed to Block 16-1 where it spudded theinitial wildcat exploration well on the "H" prospect on 2 June. The TGT-1X wasdrilled to a total MD of 4,478 metres to test several Miocene and Oligoceneintervals in a previously undrilled part of Block 16-1. It was drilledsignificantly deeper than the original prognosis due to the continuing presenceof encouraging hydrocarbon shows, reaching target depth in August. A drill stemtest conducted from the Lower Bach Ho formation in the Miocene interval between2,701 metres and 2,760 metres yielded a combined maximum rate of 9,432 BOEPDcomprising 8,566 BOPD of 37 degree API gravity crude and approximately 4.86MMCFD through a 80/64 inch choke size. The calculated net pay was approximately31 metres over the test interval. An additional 33 metres of net pay intervalwere not perforated due to the limited equipment and materials available withinthe applicable time constraints. Based on the data from the well test, oilsamples from wireline formation tests and well logs, the untested interval isconsidered to be oil bearing and capable of production. A brief test wasconducted over a deeper Oligocene interval that also contained significant oilshows, but the formation was determined to be tight and thus unable to flowcommercial quantities of hydrocarbons. The rig was moved immediately back to Block 9-2 to spud the CNV-4X, a follow-upappraisal well to the CNV-3X discovery, on 31 August. The well encountered anoil and gas interval with unexpected high pressure, significantly higher thanthose seen previously on the other CNV wells, in the Oligocene "E" sequence, thesandstone sequence overlying the Basement objective. The well encountered a gross 370 metre vertical section of oil shows withattendant gas through the Oligocene "E" sandstone section, based on mud logs,drilling cuttings analysis and "logging while drilling" logs. The use of higherthan anticipated mud weights to control the encountered pressures led toproblems higher in the open hole section where the drill string becamedifferentially stuck while pulling out of the hole to run casing into the top ofBasement. Numerous attempts to fish the stuck drill string were unsuccessful. InDecember, the well was temporarily suspended following the loss of the121/4 inch hole section above the granitic Basement reservoir. Subsequent events and 2006 outlook An up-dip appraisal well to the 2005 discovery well on the TGT structure onBlock 16-1 spudded on 18 January 2006. It reached target depth of 3,436 metresin mid-February after intersecting hydrocarbons in the Miocene and Oligoceneintervals. The TGT-2X well flowed 3,300 BOPD from the first drill stem test inOligocene "C" interval, which failed to flow in the discovery well. At aminimum, additional flow tests will be conducted from two Miocene intervals, onewhich was not tested in the discovery well and the other that flowed at 9,342BOEPD. The discovery well on the TGT structure confirmed the presence of a highlyprospective Lower Miocene play fairway extending for some 80 kilometres acrossthe southern and eastern area of Block 16-1 where several prospects and leadshave been mapped. The success of the second TGT well now sets the stage to fasttrack the development of the field and adds significant upside to the remainingexploration potential. The Hoang Long JOC has contracted to acquire anadditional 3D seismic survey in order to evaluate several leads in the areabetween the initial 3D survey on the western portion of the Block and the 3Dsurvey conducted prior to exploratory operations on the eastern portion of theBlock. The rig currently working is available through July to continue drillingoperations in the Cuu Long Basin. It is expected that the majority of theremaining work programme for this rig will be conducted on Block 16-1. The JOCshave contracted the Transocean Triton 9 rig for a nine month period to continuedrilling operations on the Blocks after the current rig contract expires, withthe expectation that it will become available late in the third quarter of 2006. Efforts continue towards a declaration of commerciality for the CNV structure.The front-end work required to transition operations from the exploratory phaseto the development phase has been completed. Although the timing is uncertain,the CNV-4X will be re-entered in 2006 incorporating a different drilling fluidand casing design to enable the overpressured section to be redrilled safely. YEMEN The focus on targeting Basement exploration and appraisal has completelytransformed the East Shabwa Development Area (ESDA) from a rapidly decliningCretaceous producer to an asset with expectations of accelerated productionthrough the next several years. The success here has allowed the Company to relyon this asset in the short term as its sole contributor to operating cash flow.ESDA production averaged 32,937 BOPD for 2005 increasing almost 40% from 23,635BOPD the previous year. The Group is a 58.75% majority shareholder of Comeco Petroleum, Inc. (Comeco),which holds a 28.57% direct interest in the ESDA. A subsidiary of OccidentalPetroleum, which is also a co-venturer in the ESDA with a 28.57% interest, holdsthe remaining interest in Comeco. Total E&P Yemen, with an interest equal toComeco's, operates the concession and a subsidiary of Kufpec, the Kuwaitiforeign oil company, holds the remaining 14.29%. Production from the ESDA, whichcurrently originates primarily from the Kharir field, is transported by pipelineand commingled with production from the neighbouring Masila Block beforetransportation by pipeline to the coastal Ash Shihr export terminal. SOCO'scrude entitlement is sold under a 12-month spot market contract. Review of 2005 activities The successful drilling programme that began in 2004 featuring highly deviatedwells targeting Basement continued throughout 2005. The three part programme forthe year was designed to further appraise the Kharir Basement structure, toincrease reserves through exploration and to increase production. The consortiumenjoyed a 100% success ratio during the year. By the end of 2005, three drillingrigs were working in the ESDA. During the year, the consortium agreed a new welldesignation scheme proposed by the Yemeni government. Although the KHA 1-09 well (formerly KHA-403) spudded in December 2004, itwasn't tested until February 2005. The objectives of the well were to delineatethe Basement and evaluate reservoir development in the undrilled westernextension of the structure. The well reached a total depth of 3,383 metres andproduced over 6,500 BOPD when tested. A second delineation well, the KHA 2-16(formerly KHA-404), spudded in the northern extension of the Kharir structure on1 February 2005 and reached a total depth of 3,539 metres. It produced more than5,500 BOPD when tested in April. A well drilled to evaluate the easternextension of the Kharir field spudded at the end of March. The KHA 1-10 well(formerly KHA-405) reached a total depth of 3,755 metres and was tested in June.The test was limited by capacity restrictions in the main production facilitybut yielded more than 7,300 BOPD. The third Basement well spudded in the 2005 ESDA drilling programme, the KHA2-17 (formerly KHA-406), spudded on 11 June and was designed to be a waterinjection well for pressure maintenance of the reservoir. It was the source of awater injectivity test that began in September. The KHA 3-07 (formerly KHA-407) was the first well to target Basement on theKharir North prospect. It spudded at the end of August and reached a total depthof 3,472 metres. The well tested in mid-November and yielded more than 850 BOPDagainst a 26/64 inch choke. After primarily focusing on appraisal and step-outwells in and around the Kharir field, the rig was moved to drill the Jathmaexploration well (JAT-01) to test a new Basement prospect in the northern areaof Block 10. The well spudded on 22 October 2005 and reached a total depth of3,175 metres. The well tested over 1,900 BOPD against a 56/64 inch choke with anAPI gravity of 35 degrees. In December 2005, a second drilling rig was brought in to spud the JAT-02 wellat a location in the northern part of the Jathma prospect. A third drilling rigwas also commissioned during the month and on 12 December it commenced drillinga production well on the Atuf Northwest field located in the southern area ofBlock 10, which produces from the Cretaceous Biyad interval. During the year almost 70% of the production was sourced from the Basementalthough, historically, production was sourced from the Cretaceous clastic Biyadreservoir. The former has associated gas whilst the latter is characterised byhigh water cuts as are typical of wells producing from this reservoir in theregion. Accordingly, efforts are underway to deal with declining water disposalrequirements and increasing gas disposal capabilities. Work continued during theperiod on de-bottlenecking production facilities and increasing oil handlingcapacity. Subsequent events and 2006 outlook Although the JAT-02 well encountered a significant oil column, the well did notproduce when production tested, which indicated poor fracture development atthis location. Further evaluation of the results of this and the JAT-01 testwill be carried out to establish the most appropriate scenarios for appraisaland/or development. The JAT-03 well drilled on the eastern border of Block 10was plugged and abandoned in March after failing to encounter hydrocarbons inthe Basement. Three drilling rigs are expected to continue operating throughout the year. Asat the date of this publication, two rigs are drilling production and injectionwells in the Kharir field. A third rig is continuing the evaluation of theJathma/Wadi Taribah field. Additional short term production capacity was added on a temporary basis whenthe consortium leased a portable production unit from another area operator.This will serve to provide a production uplift whilst work continues onpermanently expanding current facilities. This, together with adding waterinjection capability to improve pressure maintenance in the Basement reservoir,should add considerable productive capability from the interval. CONGO (Brazzaville) The Company has spent more than three years targeting areas that would allow itto focus its expertise, yet provide large enough interests and significantupside to continue its highly successful exploration led strategy. West Africamet all the criteria. As industry exploration efforts in West Africa move intoever deeper waters, the application of new technology provides access tosignificant reserve potential in under-explored shallow water areas. Thusnegotiations began with the appropriate authorities in targeted countriesseveral years ago to establish a foothold in the region. Marine XI was asignificant first step, providing a cornerstone in the region. Review of 2005 activities The Company announced in August that its 85% owned subsidiary, SOCO Explorationand Production Congo (SOCO EPC), signed a production sharing contract withSociete Nationale des Petroles du Congo (SNPC) wherein it acquired an interestin the Marine XI Block, offshore the Republic of Congo (Brazzaville). SOCO EPC will be the operator with a 75% working interest in the Block that waslicenced to SNPC by presidential decree in July 2005. The exploration andproduction branch of SNPC (15%) and Africa Oil & Gas Corporation (10%) hold theremaining interests. The Block, located in the Lower Congo Basin, is in shallowwater adjacent to the coast with water depths ranging up to 110 metres andcovers approximately 1,400 square kilometres. There has been previousexploration activity on the Block resulting in four small oil discoveries, thelargest of which has initial recoverable reserves estimated to be in the 30million barrel range. The previous discoveries are located in the shallower horizons of thesedimentary section in Marine XI. The deeper section, productive onshore and ontrend to the south in Cabinda, has not been adequately evaluated as it could notbe accurately mapped using older seismic data. Subsequent events and 2006 outlook The Group has issued bid documents for a 3D seismic programme which it expectsto conduct in the second half of 2006. By employing the modern seismictechniques that the Company successfully applied in Vietnam to map the Basementreservoir, SOCO EPC expects to exploit the potential of the deeper section. Although the Group is in discussions with various parties to farm-out a portionof its interests in Marine XI, it would retain a significant portion of theBlock and operatorship. THAILAND SOCO's 99.93% owned Thailand subsidiary holds a 100% interest in Block B8/38located offshore in the Gulf of Thailand. The Group filed an application anddevelopment plan in 2005 with the Thailand Department of Mineral Fuels toconvert the concession to a production licence on the Bualuang (renamed fromPornsiri). The application was approved in March 2006. The preferred development scenario is for the Group to farm-out a portion of itsinterest to a third party with expertise in development in the region.Accordingly, the Group expects to conclude discussions with various interestedparties to begin development of the Bualuang field during 2006. OTHER AREAS OF INTEREST Libya The Group maintains its shareholding in the ODEX Exploration Limited (ODEX)joint venture. The ODEX shareholding comprises SOCO North Africa Ltd. (34%), andsubsidiaries of Oilinvest (Netherlands) B.V. (46%) and Joint Stock Bank of theGas Industry Gazprombank (20%). From SOCO's standpoint, the niche for ODEX wasto participate with one or more indigenous Libyan companies in exploitingexisting but problematic development opportunities. With the recent focus of theLibyan National Oil Company on open exploration bid rounds, significant progressin other areas is unlikely to be made in the near term. Accordingly, the Group will continue to assess its participation in theconsortium in light of reasonable expectations of success. It is anticipatedthat ODEX will continue to be the vehicle through which the Group will explorevarious opportunities that may arise in Libya and certain parts of Africa as theconsortium is well placed to take advantage of its strong regionalrelationships. West Africa The Group is interested in extending its holdings in West Africa beyond theRepublic of Congo (Brazzaville) and is in various stages of negotiations withother sovereignties in the region. Under a memorandum of understanding signedwith the Democratic Republic of Congo (Kinshasa), the Company carried out aninitial aeromagnetic gravity survey in 2005 to further delineate prospectivepotential in certain areas of the country. Work continues on interpreting theresults of the survey. Mongolia In April 2005, the Company entered into an agreement to sell the whole of itsMongolia interest to Daqing Oilfield Limited Company, a subsidiary ofPetroChina. The transaction was approved by SOCO shareholders at an EGM on 10May 2005 and was completed on 18 August 2005. CONSOLIDATED INCOME STATEMENTfor the year to 31 December 2005 Notes 2005 2004 $000s $000s Continuing operationsRevenue 3 57,160 29,386Cost of sales (19,588) (11,347) _______ _______Gross profit 37,572 18,039 Administrative expenses (5,295) (4,039)Exploration expenses (1,013) (1,946)Gain on disposal of exploration venture - 2,156 _______ _______Operating profit from continuing operations 3 31,264 14,210 Investment revenue 2,042 659Other gains and losses 853 113Finance costs (497) (95) _______ _______Profit before taxation from continuing operations 33,662 14,887 Tax 4 (13,366) (6,686) _______ _______Profit for the year from continuing operations 20,296 8,201 Discontinued operationsOperating profit from discontinued operations 3,5 - 9,261Other expenses from discontinued operations 5 (13) (249)Profit on disposal 5 194 15,856 _______ _______Profit before tax from discontinued operations 181 24,868 Tax 4 - (3,498) _______ _______Profit for the year from discontinued operations 181 21,370 _______ _______Profit for the year 20,477 29,571 Earnings per share (cents) 6BasicProfit from continuing operations 29.0 11.8Profit from discontinued operations 0.3 30.6 _______ _______Profit 29.3 42.4 DilutedProfit from continuing operations 25.6 10.4Profit from discontinued operations 0.2 27.1 _______ _______Profit 25.8 37.5 BALANCE SHEETSas at 31 December 2005 Group Company Notes 2005 2004 2005 2004 $000s $000s $000s $000sNon-current assetsIntangible assets 151,213 152,990 - -Property, plant and equipment 29,988 25,273 737 821Investments - - 179,690 187,555Financial asset 5 31,882 - - -Other receivable 5 10,134 - - -Deferred tax assets 2,591 2,118 - - _______ _______ _______ _______ 225,808 180,381 180,427 188,376Current assetsInventories 310 205 - -Trade and other receivables 6,285 8,327 244 204Tax receivables 1,138 999 104 58Cash and cash equivalents 50,967 71,122 360 113 _______ _______ _______ _______ 58,700 80,653 708 375 _______ _______ _______ _______Total assets 284,508 261,034 181,135 188,751 Current liabilitiesTrade and other payables (15,233) (10,588) (974) (2,210)Tax payables (446) (62) (446) (59) _______ _______ _______ _______ (15,679) (10,650) (1,420) (2,269) _______ _______ _______ _______Net current assets 43,021 70,003 (712) (1,894) Non-current liabilitiesLong-term provisions (2,590) (3,197) - - _______ _______ _______ _______Total liabilities (18,269) (13,847) (1,420) (2,269) Net assets 266,239 247,187 179,715 186,482 EquityShare capital 23,479 23,348 23,479 23,348Share premium account 68,221 67,877 68,221 67,877Other reserves 54,259 53,502 (658) (689)Retained earnings 120,280 102,460 88,673 95,946 _______ _______ _______ _______Total equity 7 266,239 247,187 179,715 186,482 CASH FLOW STATEMENTSfor the year to 31 December 2005 Group Company Notes 2005 2004 2005 2004 $000s $000s $000s $000sNet cash from (used in) operating activities 8 30,536 19,157 (5,409) (3,686) _______ _______ _______ _______ Investing activitiesPurchase of intangible assets (65,268) (19,572) - -Purchase of property, plant and equipment (10,907) (8,011) (150) (834)Investment in subsidiary undertakings - - (12,883) (37,845)Dividends received from subsidiary undertakings - - 20,617 20,833Proceeds on disposal of subsidiary undertaking 5 27,510 17,743 - 20,196Proceeds on disposal of exploration venture - 2,156 - - _______ _______ _______ _______Net cash (used in) from investing activities (48,665) (7,684) 7,584 2,350 Financing activitiesShare-based payments (1,837) - (1,837) -Proceeds on issue on ordinary share capital 14 660 14 660 _______ _______ _______ _______Net cash (used in) from financing activities (1,823) 660 (1,823) 660 Net (decrease)/increase in cash and cash (19,952) 12,133 352 (676)equivalentsCash and cash equivalents at beginning of year 71,122 58,893 113 693Effect of foreign exchange rate changes (203) 96 (105) 96 _______ _______ _______ _______Cash and cash equivalents at end of year 50,967 71,122 360 113 STATEMENTS OF RECOGNISED INCOME AND EXPENSEFor the year to 31 December 2005 Group Company 2005 2004 2005 2004 $000s $000s $000s $000s Profit for the year 20,477 29,571 15,372 44,915Unrealised currency translation differences (363) 341 (20,351) 9,969 _______ _______ _______ _______Total recognised income (loss) for the year 20,114 29,912 (4,979) 54,884 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. General information The information for the years ended 31 December 2005 and 2004 does notconstitute statutory accounts as defined in Section 240 of the Companies Act1985 (Act). A copy of the statutory accounts for 2004 has been delivered to theRegistrar of Companies and those for 2005 will be delivered following theCompany's annual general meeting. The auditors' report on those accounts wasunqualified and did not contain statements under Section 237(2) or (3) of theAct. Whilst the financial information included in this preliminary announcementhas been computed in accordance with International Financial Reporting Standards(IFRS), this announcement does not itself contain sufficient information tocomply with IFRS. The Company expects to publish full financial statements thatcomply with IFRS in its Annual Report and Accounts 2005. For the first time the financial statements are presented in US dollars which isthe functional currency of each of the Company's subsidiary undertakings. TheDirectors do not recommend the payment of a dividend. This preliminary announcement was approved by the Board on 8 March 2006. 2. Basis of preparation The financial statements have been prepared in accordance with InternationalFinancial Reporting Standards (IFRS) for the first time. The same accountingpolicies and methods of computation are followed in the financial statements aspublished by the Company on 23 September 2005 in its IFRS transition documentwhich is available on the Company's website at www.socointernational.co.uk.That document set out SOCO's comparative 2004 financial information for the yearended 31 December 2004, restated under IFRS in US dollars, includingreconciliations of the income statements, balance sheets and cash flowstatements between UK GAAP and IFRS. The document additionally sets out theGroup's balance sheet under IFRS at the transition date of 1 January 2004,including a reconciliation to the UK GAAP balance sheet at that date. The abovestatements and reconciliations will be included as a note to the 2005 AnnualReport and Accounts. The financial statements have also been prepared in accordance with IFRS adoptedfor use in the European Union and therefore comply with Article 4 of the EU IASRegulation and with those parts of the Act applicable to companies reportingunder IFRS. The financial statements have been prepared under the historicalcost basis. IFRS 6 Exploration for and Evaluation of Mineral Resources has been adoptedearly for 2005. At the date of approval of these financial statements the Grouphas not applied the following IFRS and International Financial ReportingInterpretations Committee (IFRIC) interpretations which are in issue but not yeteffective: • IFRS 7 Financial Instruments: Disclosures; and the relatedamendment to IAS 1 on capital disclosures • IFRIC 4 Determining whether an Arrangement contains aLease • IFRIC 5 Right to Interests Arising from Decommissioning,Restoration and Environmental Rehabilitation Funds NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. Basis of preparation (continued) • IFRIC 8 Scope of IFRS 2 The adoption of these IFRS and IFRICs in future periods is not expected to havea material impact on the financial statements of the Group. 3. Segment information Geographical segments Geographical segments form the basis on which the Group reports its primarysegment information. Continuing operations Discontinued 2005 operations1 Middle SE Unallocated Total Central North Group East Asia $000s $000s Asia Africa $000s $000s $000s $000s $000s Oil sales 57,160 - - 57,160 1,498 - 58,658Operating profit 37,263 - (5,999) 31,264 - - 31,264Assets 39,950 125,346 119,212 284,508 - - 284,508Liabilities 8,696 5,498 4,075 18,269 - - 18,269Capital additions 11,845 41,825 28,250 81,920 (630) - 81,290Depletion and 7,149 - 176 7,325 - - 7,325depreciation Continuing operations Discontinued 2004 operations1 Middle SE Unallocated Total Central North Group East Asia $000s $000s Asia Africa $000s $000s $000s $000s $000s Oil sales 29,386 - - 29,386 3,188 13,413 45,987Operating profit 17,815 - (3,605) 14,210 - 9,261 23,471Assets 33,323 84,170 71,277 188,770 72,264 - 261,034Liabilities 4,702 4 2,183 6,889 6,958 - 13,847Capital additions 4,912 8,613 931 14,456 6,614 2,592 23,662Depletion and 4,943 - 159 5,102 - 1,359 6,461depreciation 1In December 2004 the Group disposed of its North Africa segment which comprisedits Tunisia interest. In August 2005 the Group disposed of its Central Asiasegment which comprised its Mongolia interest (see Note 5). The results ofthese segments are therefore included in discontinued operations. Business segment The Group has one principal business activity being oil and gas exploration andproduction. Revenue by destination does not materially differ from revenue byorigin. There are no inter-segment sales. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 4. Tax Continuing operations Discontinued operations Group 2005 2004 2005 2004 2005 2004 $000s $000s $000s $000s $000s $000s Current tax 13,839 5,889 - 3,135 13,839 9,024Deferred tax (473) 797 - 363 (473) 1,160 _______ _______ _______ _______ _______ _______ 13,366 6,686 - 3,498 13,366 10,184 UK corporation tax is calculated at 30% (2004 - 30%) of the estimated assessableprofit for the year. Taxation in other jurisdictions is calculated at the ratesprevailing in the respective jurisdictions. During 2004 and 2005 both currentand deferred taxation have arisen in overseas jurisdictions only. The charge for the year can be reconciled to the profit per the income statementas follows: 2005 2004 $000s $000s Profit before tax on continuing operations 33,662 14,887Profit before tax on discontinued operations 181 24,868 _______ _______ 33,843 39,755 Profit before tax multiplied by standard rate of corporation 10,153 11,927tax in the UK of 30% (2004 - 30%) Effects of:Expenses not expected to be utilised as a tax loss 1,423 1,186Non taxable profit on disposal (58) (4,758)Utilisation of tax credits - (205)Higher tax rates on overseas earnings 1,906 2,469Adjustments to tax charge in respect of previous years (58) (435) _______ _______Tax charge for the year 13,366 10,184 The tax charge in future periods may also be affected by these factors. The Group's overseas tax rates are higher than those in the UK, primarilybecause the profits earned in Yemen are taxed at a rate of 35% and those earnedin Tunisia were taxed at a rate of 50%. 5. Disposal of Mongolia In April 2005 the Group entered into a Sale and Purchase Agreement (Agreement)with an economic effective date of 1 January 2005, to sell its 100% ownedsubsidiaries SOCO Tamtsag Mongolia, LLC (SOTAMO) and SOCO Mongolia Ltd (SOCOMongolia) to Daqing Oilfield Limited Company (Daqing), a subsidiary ofPetroChina. Together SOTAMO and SOCO Mongolia held the Group's Mongoliainterest. In August 2005 the Group completed the transaction. Under the termsof the Agreement the Group will receive consideration of up to approximatelyUS$93.0 million comprised of cash consideration of US$40.0 million plus asubsequent payment based on total crude oil produced from the Mongolia interestafter the effective date in excess of 27.8 million barrels of oil. The US$40.0 million cash consideration was payable in two tranches. The firstUS$30.0 million was paid, less applicable settlement adjustments of US$0.4 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. Disposal of Mongolia (continued) million, in August 2005 upon completion. The second tranche of US$10.0 millionwas paid into an interest bearing escrow account by Daqing upon completion to bereleased to the Group 18 months later upon the satisfaction of the conditionthat no material undisclosed additional liabilities are discovered and isdisclosed in the balance sheet under non-current assets as an other receivable.The remaining consideration is payable, once cumulative production reaches 27.8million barrels of oil as described above, at the rate of 20% of the averagemonthly posted marker price for Daqing crude multiplied by the aggregateproduction for that month, up to a total of approximately US$53.0 million basedon the estimated recoverable costs incurred to 31 December 2004, as approved bythe Mineral Resources and Petroleum Authority of Mongolia. The subsequent payment amount is included in non-current assets as a financialasset at fair value through profit or loss. The timescale for the production ofcrude oil in excess of 27.8 million barrels and the price of Daqing marker crudeoil are factors that cannot accurately be predicted. However, based upon theDirectors' current estimates of proven and probable reserves from the Mongoliainterests and the development scenarios as discussed with the buyer, theDirectors believe that the full subsequent payment amount will be payable. Thefair value of the subsequent payment amount was determined using a valuationtechnique as there is no active market against which direct comparisons can bemade. Assumptions made in calculating the fair value include the factorsmentioned above, risked as appropriate, with the resultant cash flows discountedat a commercial risk free interest rate. The fair value of the financial assetat the date of completion of the sale was US$31.5 million. As at 31 December2005 the fair value was US$31.9 million after accounting for the unwinding ofthe discount. As the Group's Mongolia asset is now classed as a discontinued operation therevenue and cost of sales have been removed from continuing operations. There isno impact on operating profit as revenue arose from test production during anappraisal programme and an amount was charged from appraisal costs to cost ofsales so as to reflect a zero net margin. Revenue attributable to the Mongoliainterest up to the date of completion was US$1.5 million (2004 - US$3.2million). Immediately prior to the sale the Group's share of net assets held bythe Mongolia interest was US$68.8 million (2004 - US$65.4 million) comprisingintangible assets of US$71.0 million (2004 - US$71.6 million), current assets ofUS$ nil (2004 - US$0.7 million), current liabilities of US$0.4 million (2004 -US$5.2 million) and long-term provisions of US$1.8 million (2004 - US$1.7million). Immediately after the completion of the sale the Group recognisedcash inflow of US$29.6 million, other receivables of US$10.0 million, a gain ofUS$0.2 million based on the fair value of the financial asset of US$31.5 million(see above) and transaction costs of US$2.1 million. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 6. Earnings per share The calculation of the basic and diluted earnings per share is based on thefollowing data: 2005 2004 $000s $000s Earnings from continuing operations 20,296 8,201Earnings from discontinued operations 181 21,370 _______ _______ 20,477 29,571 Number of shares 2005 2004Weighted average number of ordinary shares for the purpose of 70,003,067 69,740,521basic earnings per share _______ _______Effect of dilutive potential ordinary shares:Share options and warrants 7,010,483 6,597,168Ordinary shares of the Company held by the Group 2,423,300 2,475,000 _______ _______Weighted average number of ordinary shares for the purpose of 79,436,850 78,812,689diluted earnings per share The denominators used for the purposes of calculating earnings per share on bothcontinuing and discontinued operations are the same. 7. Reconciliation of movements in Group total equity 2005 2004 $000s $000s As at 1 January 247,187 216,722New shares issued 475 661Share-based payments (1,773) 55Unrealised currency translation differences (127) 178Retained profit for the year 20,477 29,571 _______ _______As at 31 December 266,239 247,187 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. Reconciliation of operating profit to operating cash flows Group Company 2005 2004 2005 2004 $000s $000s $000s $000s Operating profit (loss) from continuing 31,264 14,210 (5,150) (3,866)operationsOperating profit from discontinued operations - 9,261 - - _______ _______ _______ _______ 31,264 23,471 (5,150) (3,866)Share-based payments 521 55 521 55Depletion and depreciation 7,325 6,461 148 122Gain on disposal of exploration venture - (2,156) - - _______ _______ _______ _______Operating cash flows before movements in working 39,110 27,831 (4,481) (3,689)capitalIncrease in inventories (172) (599) - -(Increase) decrease in receivables (710) (649) (140) 73Increase (decrease) in payables 4,754 (1,886) (681) (111) _______ _______ _______ _______Cash generated by operations 42,982 24,697 (5,302) (3,727) Interest received 1,943 653 12 50Interest paid (460) (52) (119) (9)Income taxes paid (13,929) (6,141) - - _______ _______ _______ _______Net cash from operating activities 30,536 19,157 (5,409) (3,686) Cash generated from operating activitiescomprises:Continuing operating activities 30,536 9,663 (5,409) (3,686)Discontinued operating activities - 9,494 - - _______ _______ _______ _______ 30,536 19,157 (5,409) (3,686) Cash and cash equivalents (which are presented as a single class of asset on thebalance sheet) comprise cash at bank and other short term highly liquidinvestments with a maturity of three months or less. 9. Preliminary results announced Copies of the announcement will be available from the Company's head office, StJames's House, 23 King Street, London, SW1Y 6QY. The Annual Report and Accounts2005 will be posted to shareholders in due course. RESERVE STATISTICSUnaudited, net working interest (mmboe) Net proven oil and gas reserves Total Mongolia1 Thailand Vietnam2 Congo2 Yemen3Reserves as at 31 December 2004 53.6 37.1 5.0 - - 11.5Changes in the yearAdditions 30.0 - - 30.0 - -Revision to previous estimates 5.7 - - - - 5.7Purchase of reserves 9.5 - - - 9.5 -Change of interest - - - - - -Sales of reserves (37.0) (37.0) - - - -Production (2.1) (0.1) - - - (2.0) _______ _______ _______ _______ _______ _______Reserves as at 31 December 2005 59.7 - 5.0 30.0 9.5 15.2 Net proven and probable oil and gas reserves Total Mongolia1 Thailand Vietnam2 Congo2 Yemen3Reserves as at 31 December 2004 90.7 56.1 18.4 - - 16.2Changes in the yearAdditions 68.3 - - 68.3 - -Revision to previous estimates 8.5 - - - - 8.5Purchase of reserves 23.8 - - - 23.8 -Change of interest - - - - - -Sales of reserves (56.0) (56.0) - - - -Production (2.1) (0.1) - - - (2.0) _______ _______ _______ _______ _______ _______Reserves as at 31 December 2005 133.2 - 18.4 68.3 23.8 22.7 Net proven and probable oil and gas reserves year comparison 2005 2004 2003 2002 2001 Reserves as at 31 December 90.7 92.5 75.4 77.0 88.4Changes in the yearAdditions 68.3 - - - -Revision to previous estimates 8.5 6.0 9.9 0.6 40.6Purchase of reserves 23.8 - - - -Change of interest - - 9.2 - -Sales of reserves (56.0) (5.8) - - (48.8)Production (2.1) (2.0) (2.0) (2.2) (3.2) _______ _______ _______ _______ _______Reserves as at 31 December 133.2 90.7 92.5 75.4 77.0 Note: mmboe denotes millions of barrels of oil equivalent 1 Mongolia reserves were previously shown on an entitlement basis. On anentitlement basis at 31 December 2004 proven reserves were 27.7 mmboe and provenand probable reserves were 41.9 mmboe. 2 Reserves are shown before deductions for minority interests which are fundedby the Group. The Group is entitled to recieve 100% of the cashflows until ithas recovered its funding of the minority interest plus accrued interest fromthe minority interests' pro rata portion of those cashflows. 3 Yemen reserves were previously shown on an entitlement basis. On anentitlement basis at 31 December 2005 proven reserves were 6.1 mmboe (2004 - 5.4mmboe) and proven and probable reserves were 8.4 mmboe (2004 - 6.8 mmboe).Entitlement volumes are used as the basis for calculating depletion on the unitof production method. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Pharos Energy