18th Apr 2006 07:32
Emerald Energy PLC18 April 2006 EMERALD ENERGY Plc 18 April 2006 Final results EMERALD ENERGY Plc, a United Kingdom based company engaged in exploration andproduction of hydrocarbons in South America and the Middle East, announces itsfinal results for the year ended 31 December 2005. Highlights for 2005 • Added five new production wells, achieving 100% drilling success rate;• Achieved gross production of 1.2 million barrels, 149% higher than in 2004;• Achieved 199% reserves replacement ratio;• Generated profit before tax of $8 million, 267% higher than in 2004;• Purchased 50% interest in Block 26, Syria. Chairman's statement 2005 was another important year for Emerald and its shareholders. The Group hascontinued its growth in Colombia and purchased new interests in the Middle East. Colombia During 2005, Emerald added five new production wells to its productionportfolio, achieving a 100% drilling success rate since resumption of drillingin 2004. Successful drilling at the Vigia field has added 2.4 million barrels ofProved plus Probable reserves, achieving a reserves replacement ratio of 199%. Emerald has constructed new and enlarged facilites at the Vigia and Campo Ricofields to gather, process and dispatch the increasing volumes of crude from theadditional production wells. As the fields mature these facilities will bealtered to handle the increasing volumes of water production in order to sustainthe oil production rates at the highest possible level. The upturn seen in the oil and gas industry in the last 12 months has had anadverse effect on rig availability as well as supplier costs and on theirability to deliver and meet schedules; Emerald's Colombian management and staffhave handled these additional pressures very well, implementing alternativedrilling and production solutions, minimising delays and fulfilling theCompany's capital programme as planned. Successful development of the Campo Rico field in the Campo Rico block resultedin the grant of commerciality status to the field by Ecopetrol, the Colombianstate oil company, in December 2005. A similar decision on the status of theVigia field is expected in the near future. Under the terms of the Campo RicoAssociation Contract, once commerciality status is granted, Ecopetrolparticipates in the exploitation phase of the project, reimbursing Emerald 50%of the allowable past costs from its share of production and sharing withEmerald ongoing costs and production on a 50/50 basis with Emerald. Utilising the results of the 3D seismic survey acquired in 2005, covering some172 sq km or one third of the Campo Rico block, Emerald is planning to drill atleast five new wells in 2006; including exploration wells on at least two newprospects, Centauro Sur and Las Acacias. Centauro Sur #1, spud in March 2006,has been drilled to a total depth of 11,265 feet using Pride Rig 14. The welllogs identified a zone with potential hydrocarbons; and production casing isbeing run so that a flow test of the zone can be conducted. Saxon Rig 223 isrigging up on the location for Las Acacias #1 and the well will spud at the endof April or in early May. In December 2005,the Gigante #1A well developed a tubing leak after producingtwo million barrels of crude oil over a five-year period. A workover rig wasmobilised in early 2006 and, simultaneously with the tubing repair, the fieldstaff installed an electric submersible pump to replace the smaller capacityhydraulic jet pump. Following an initial clean-up period, the well produces inexcess of 900 bopd (2005 average of 676 bopd) with the potential to increaseproduction rate further when a larger electric generator is fully commissioned. The exploitation phase of the Gigante field started on 1 February 2003 under thesole risk provision of the Matambo Association Contract. Once the sole risksstatus was granted, Emerald became entitled to 100% of production (beforeroyalties) from the Gigante field for as long as it had a balance ofreimbursable costs outstanding in its favour. In March 2006, Ecopetrol exercisedits right to participate in the exploitation of the Gigante field. Jointoperation of the Gigante field may create an opportunity to drill a second wellat Gigante jointly with Ecopetrol, sharing the associated costs and risks, ifthe required agreement with Ecopetrol is reached. However, the drilling of theGigante #2 well will not take place earlier than 2007. The Silfide #1 exploration well, drilled on the Fortuna block in October 2005,discovered hydrocarbons that are currently being produced at an average dailyrate of some 30 bopd. In addition to the potential of the Silfide discovery,Emerald is evaluating the feasibility to drill a horizontal well to produce thereserves of the Totumal field, also situated in the Fortuna block. The Totumalfield, which is deeper than the Lisama reservoir, targeted by the Silfide #1well, was produced by Ecopetrol until 1993, when it was abandoned afterproducing over 800,000 barrels of oil. Ecopetrol has granted Emerald athree-month extension to the current exploration period to evaluate the optionsbefore Emerald either commits to drilling a further well on the block, appliesfor commerciality for Silfide, or returns the block to Ecopetrol. The Agueda #1 exploration well, drilled on the El Algarrobo block in March 2006,recovered no hydrocarbons during a flow test and was plugged and abandoned. AsAgueda was the only prospect identified on the block, the Company expects toreturn the block to Ecopetrol and terminate the Association Contract. In the reporting period, all of Emerald's production came from the Campo Ricoblock (the Campo Rico and the Vigia fields) and the Matambo block (the Gigantefield) in Colombia. In 2005, Emerald achieved an average gross production rateof 3,301 bopd, a 150% increase on 1,322 bopd achieved in 2004. On theentitlement basis, in 2005, Emerald achieved 2,293 bopd compared to 1,128 bopdachieved in 2004. In the first quarter of 2006, Emerald's gross production averaged 4,336 bopd,compared to 4,451 bopd achieved in the fourth quarter of 2005. This 2.5% declinein production is a result of failures of the rented hydraulic pumping equipmentat the Campo Rico and Vigia fields as well as constrained production from theGigante #1A well in the period leading up to, during and immediately after itsworkover. As the surface facilities at the producing fields are upgraded, higherproduction levels will be achieved. Syria In November 2005, Emerald purchased a 50% participating interest in the contractto explore and produce hydrocarbons from Block 26, Syria; the consideration was$7.2 million, plus the issue of 3.5 million ordinary shares, deferred to May2007. Gulfsands Petroleum Plc ("Gulfsands") is the operator and holder of theremaining 50% participating interest in the block. The block is situated in thenortheast of Syria in a proven hydrocarbon system evidenced by existingdiscovered fields within the blocks boundaries, some of which have beendeveloped and currently produce in excess of 100,000 bopd. In January 2006, a 2D seismic acquisition programme covering 1,155 km in theblock was completed. Once the newly acquired seismic data is processed andintegrated with the older existing seismic data, it will be interpreted andsubsequently used to enhance the understanding of the many leads and prospectsthat have been identified in the block. Emerald and Gulfsands are on track to exceed the minimum work obligations underthe Block 26 contract of drilling four wells by August 2007. In April 2006 tworigs were contracted to drill three wells with options to drill a further twowells. Two prospects have been selected to commence the drilling programme: •Souedieh North prospect is a Cretaceous target situated within the northeast part of the block, located between the existing Souedieh and Karatchok fields. It is planned to spud the North Souedieh #1 exploration well in the second quarter of 2006. •Tigris structure is also located in the northeast part of the block and is directly underlying the Souedieh oil field that produces from the shallower Cretaceous reservoirs. Using data from a well drilled into the structure in 1994 and the extensive 3D seismic data available for the Souedieh field, Ryder Scott Company LP has prepared an independent reserves study for the Tigris structure, the details of which can be found in the Review of Operations. The Ryder Scott study has concluded that there are potentially productive zones contained within Palaeozoic age reservoirs penetrated by the earlier well bore. It is planned to spud the Tigris #1 exploration well in third quarter of 2006 with the primary objectives being a series of Carboniferous and Devonian sandstone reservoirs. Russia In 2005, Emerald terminated the conditional Sale and Purchase Agreement,announced on 11 November 2004, to acquire a 25% interest in JSCKrasnoyarskgazprom. The termination was without penalty and resulted fromEmerald being unable to fully satisfy itself with regard to the security of thetitle to the exploration and production licenses held by JSC Krasnoyarskgazprom. Financial results The results for the year ended 31 December 2005 show a profit before tax of $8.0million achieved on the revenue of $32.1 million compared with a profit beforetax of $2.2 million achieved on the revenue of $12.5 million in the year ended31 December 2004. Through continued production growth and helped by furtherstrengthening of the oil prices, in the reporting period, Emerald generated anadjusted EBITDA* of $16.7 million compared to $3.8 million achieved in 2004(adjusted EBITDA is earnings before interest, tax, depreciation, depletion,amortisation and write-offs of oil & gas assets, excluding other income,non-operating items and cost recovery adjustments). Cash at 31 December 2005totalled $20.7 million compared with $23.6 million at 31 December 2004. TheCompany does not propose to declare a dividend for 2005 as it intends to use itscash reserves and strong cash flow to finance the growth of the Group and itsoperations. Outlook Emerald's objectives are to grow its reserve base and increase its netproduction through exploration and development of existing and new acreage. The five-well drilling programme in Colombia will explore for, and add to,reserves and production. The drilling programme for 2006 in Syria, whichcontinues into 2007, is designed for exploration and will test the potential ofsome substantial prospects; success on any one of which will greatly enhanceEmerald's reserve base. The exploration department in Colombia has been strengthened and given a widerremit to look both in Colombia and in the surrounding countries of SouthAmerica. At the same time, UK based management and staff are reviewing furtheropportunities to acquire new exploration acreage, farm-in to existing acreagewith established partners and acquire established assets in new internationallocations. The Company's year-on-year production growth and the current world oil pricewill continue to generate strong positive cashflow, which with the Company'scurrent cash resources, will be used to explore to create a substantial reservebase. Alastair BeardsallChairman 18 April 2006 Review of operations Emerald is engaged in exploration and production of hydrocarbons in SouthAmerica and the Middle East. In South America, Emerald is participating inassociation contracts with Ecopetrol, the Colombian state oil company, and isactively seeking new exploration opportunities in Colombia and in othercountries of South America. In the Middle East, Emerald is involved inexploration of Block 26 in Syria. Colombia Campo Rico Association Contract • Area of 503 sq km;• Contract awarded in May 2002 with an exploration period of up to six years and an exploitation period of up to 22 years;• During exploration period, Emerald conducts all activities at its own risk;• During exploitation period, Ecopetrol and Emerald participate on a 50/50 basis, subject to recovery by Emerald of reimbursable costs from Ecopetrol's share of production. The Campo Rico block is in the Llanos basin. Emerald currently operates twofields in the block: the Campo Rico field and the Vigia field. In addition,having completed the acquisition of a 3D seismic survey totalling 172 sq km,Emerald has identified opportunities for exploration drilling outside of theCampo Rico and the Vigia fields. Campo Rico field The Campo Rico field was discovered in March 2004 and the cumulative oilproduction from the field at the end of 2005 was 1,068,000 barrels. The Campo Rico #1 discovery well was drilled to a depth of 11,795 ft in March2004. The well was brought on production in May 2004. The Campo Rico #2 and #3development wells were drilled directionally from the site of the Campo Rico #1well to measured depths of 11,354 ft and 11,287 ft, respectively. The field wasbrought on full production in July 2005, after remedial cementation wasperformed on the Campo Rico #2 and #3 wells to resolve the problem of excessivewater production. The field produces 16degrees API crude oil from Mirador sands.The average production rate achieved by the field in 2005 was 2,317 bopd. In the first quarter of 2006, the Campo Rico field experienced reducedproduction rates resulting from the failures of surface hydraulic pumps, poorlymaintained by the contractor. New surface pumps are being purchased to replacethe rented ones. In addition, the wells are being evaluated for production withlarger electrical submersible pumps (ESPs), and, if found suitable, the firstESPs should be installed and operational by the end of the third quarter of2006. In the first quarter of 2006, the Campo Rico field was produced at anaverage rate of 2,578 bopd. On 28 December 2005, Ecopetrol granted the Campo Rico field commercialitystatus; Ecopetrol now participate with Emerald in commercial exploitation of thefield. Under the terms of the Campo Rico Association Contract, Emerald has theright to recovery of reimbursable costs from 50% of Ecopetrol's share ofproduction. Once the recovery of reimbursable costs is complete, production andcosts associated with the operation of the field will be shared equally betweenEmerald and Ecopetrol. As at 31 December 2005, the Campo Rico field was estimated by the Company tocontain 7.6 million barrels of Proved plus Probable plus Possible reserves ofoil. Vigia field The Vigia field was discovered in April 2005 and the cumulative oil productionfrom this new field at the end of 2005 was 112,000 barrels. The Vigia #1 discovery well was drilled to a depth of 11,120 ft in April 2005and brought on production in July 2005. The Vigia #2 and #3 appraisal wells weredrilled directionally from the site of the Vigia #1 well to measured depths of11,680 ft and 11,070 ft, respectively. The field produces 16degrees API crude oil from the Une and Lower Gacheta sands.In the period from 1 July to 31 December 2005, the field was produced at anaverage rate of 611 bopd. In 2005, production was restricted by the limitedcapacity of the early production facilities in the field, particularly withrespect to water handling. In the first quarter of 2006, the field was producedat an average rate of 1,179 bopd. The Vigia field is currently being produced under the production test provisionof the Campo Rico Association Contract. Emerald has applied for commercialitystatus for the Vigia field and expects Ecopetrol to grant it shortly. Ongranting the Vigia field a commerciality status, Ecopetrol will join Emerald incommercial exploitation of the field. Under the terms of the AssociationContract, Emerald has the right to recovery of reimbursable costs from 50% ofEcopetrol's share of production. Once the recovery of reimbursable costs iscomplete, production and costs associated with the operation of the field willbe shared equally between Emerald and Ecopetrol. As at 31 December 2005, the Vigia field was estimated by the Company to contain4.9 million barrels of Proved plus Probable plus Possible reserves of oil. Exploration opportunities in the Campo Rico block In the second half of 2005, Emerald completed the processing and interpretationof the 3D seismic data acquired over some 172 sq km of the Campo Rico block. Inaddition to appraising the development potential of the existing fields, thesurvey was designed to identify new prospects in the block. As a result of thisprogramme, Emerald has identified two prospects for immediate drilling: CentauroSur and Las Acacias. The Centauro Sur prospect lies to the southwest of Campo Rico field. TheCentauro Sur #1 exploration well was spud on 14 March 2006 and at the date ofthis report has reached its total depth of 11,265 feet. The well has been loggedand casing run in order to flow test a potential hydrocarbon zone identified bythe logs. The Las Acacias prospect lies to the southwest of Vigia field. The Acacias #1exploration well will be spud by the end of April or in early May. Matambo Association Contract • Area of 69 sq km;• Exploration and exploitation rights extend to November 2024;• During exploration period, Emerald conducts all activities at its own risk;• During exploitation period, Ecopetrol and Emerald participate on a 50/50 basis, subject to recovery by Emerald of reimbursable costs from Ecopetrol's share of production. The Matambo block, located in the Upper Magdalena valley, contains the Gigantefield. The Gigante field is operated with a single well, Gigante #1A. Thecumulative oil production from the Gigante field at the end of 2005 was2,053,000 barrels. Emerald has operated the Gigante field on a "sole risk" basis from 1 February2003. Under the sole risk provision of the Matambo Association Contract, Emeraldis entitled to recover the reimbursable costs incurred during exploration andsole risk periods. A reserved zone of up to 5 km around the sole risk area hasbeen established; Emerald retains exclusive exploration rights within this zonewithout any additional work obligations. The Gigante #1A well continued to produce 32degrees API gravity crude oil at anaverage rate of 676 bopd during 2005, compared to 715 bopd achieved in 2004. Thedecline in the productivity of the well was caused by a hole in the productiontubing that occurred in the last quarter of 2005. The well continued productionat a restricted rate until the workover was completed in February 2006. As partof the workover, the downhole hydraulic jet pump has been replaced with a largercapacity electric submersible pump (ESP). As at 31 December 2005, the Gigante field was estimated by the Company tocontain 17.9 million barrels of Proved plus Probable plus Possible reserves ofoil. Fortuna Association Contract • Area of 219 sq km;• Contract awarded in December 2003, exploration period of up to six years and exploitation period of up to 22 years;• During exploration period, the associate (Emerald 90%, Geoadinpro S.A. 10%, with Emerald carrying Geoadinpro's share of the costs) conducts all activities at is own risk;• During exploitation period, Ecopetrol and the associate participate on a 20/80 basis, subject to recovery by the associate of reimbursable costs from Ecopetrol's share of production. The Fortuna block lies in the Middle Magdalena basin. The contract area includesthe Totumal oil field, produced by Ecopetrol until it was abandoned in 1993after producing over 800,000 barrels of oil. The principal exploration prospectsbeing developed by Emerald are in the shallower Lisama sands that flank theTotumal field high. Three oil fields that have produced from the Lisama sandslie just to the south of the Fortuna block. The Silfide #1 exploration well was drilled in October 2005 to a measured depthof 5,114 ft and discovered oil producing sandstones. The well was put on testproduction in late December 2005 and is currently producing about 30 bopd.Analysis of seismic, drilling and logging data indicates that the well haspenetrated a secondary target and not the primary Lisama target. Ecopetrolgranted Emerald a three-month extension to the current exploration period toevaluate the Silfide discovery before the Company either commits to drilling afurther well on the block, applies for commerciality for Silfide, or returns theblock to Ecopetrol. El Algarrobo Association Contract The Agueda #1 exploration well was drilled in March 2006 to a depth of 9,980 ft.The well was tested but no hydrocarbons were recovered and the well was pluggedand abandoned. As Agueda was the only prospect identified in the block, anddrilling of Agueda #1 satisfied the minimum work obligations under the contract,the Company now plans to terminate the association contract. Currently, Emeraldhas a 50% non-operating interest in the El Algarrobo Association Contract. Technical Evaluation Agreements (TEAs)The Company has completed its evaluation of the Mantecal and Altamira studyareas granted under the respective TEAs and elected not to apply for explorationcontracts within the two areas. The Company continues to evaluate possible leadsin the Cachama and Las Brisas TEA areas and has until June 2006 to complete itsstudy and apply for and negotiate exploration contracts over any parts of thestudy areas. ProductionIn the reporting period, all of Emerald's production came from the Campo Ricoblock (the Campo Rico and the Vigia fields) and the Matambo block (the Gigantefield). In 2005, Emerald achieved an average gross production rate of 3,301bopd, 150% increase on 1,322 bopd achieved in 2004. On the entitlement basis, in2005, Emerald achieved 2,293 bopd compared to 1,128 bopd achieved in 2004. Producing fields -------------------- Campo Rico Vigia Gigante Total mbbl mbbl mbbl mbbl -------- ------- -------- ------- -------- -------Gross attributable production 846 112 247 1,205Royalty petroleum (68) (9) (49) (126)Ecopetrol entitlement production (242) -- -- (242)-------------------- -------- ------- -------- --- -------Emerald entitlement production 536 104 198 837-------------------- -------- ------- -------- --- ------- In the first quarter of 2006, Emerald's gross production averaged 4,336 bopd,compared to 4,451 bopd achieved in the fourth quarter of 2005. This 2.5% declinein production is a result of failures of the rented surface equipment at theCampo Rico and Vigia fields as well as constrained production from the Gigante #1A well in the period leading up to, during and immediately after its workover.As the surface facilities at the producing fields are upgraded, higherproduction levels will be achieved. Syria Block 26 Production Sharing Contract • Area of 11,000 sq km;• Production Sharing Contract (PSC) awarded in May 2003, initial exploration period of 4 years, with options to extend for a further 3 years and then 2 years and exploitation period of up to 25 years;• Emerald has 50% non-operating working interest in the contract;• Royalty of 12.5%; cost recovery allowance with profit oil share reducing on a sliding scale basis. Block 26 is situated in northeast Syria and its boundaries surround existingdiscovered fields, some of which have been developed and currently produce inexcess of 100,000 bopd, including the Souedieh field, the largest oil field inSyria. Production from these fields is from mid-Cretaceous limestone reservoirsthat produce medium gravity 20-26degrees API crude oil. These existing fieldsare excluded from the PSC but the deeper stratigraphic levels below them arenot. To date, 31 leads and prospects have been identified in the block. Twodrilling rigs have been contracted to drill three firm wells with options todrill a further two wells. Two prospects have been selected to commence thedrilling programme in 2006: Souedieh North and Tigris. Souedieh North prospect Souedieh North is a Cretaceous target situated within the northeast part of theblock, located between the existing Souedieh and Karatchok fields. NorthSouedieh #1, a vertical exploration well, will be drilled to an approximatedepth of 7,200 ft. The well is planned to be spud in the second quarter of 2006. Tigris prospect The second prospect, Tigris, is also located in the northeast part of the block.The Tigris structure is directly underlying the Souedieh oil field. Ryder ScottCompany LP ("Ryder Scott") has prepared an independent reserves study for theTigris structure. The data used for the study includes the wireline logs from awell drilled into the structure in 1994 and the extensive 3D seismic dataavailable for the Souedieh field. The Ryder Scott study has concluded that thereare nine potentially productive zones contained within Palaeozoic age reservoirspenetrated by the earlier well bore. Due to the limited nature of the availabledata, Ryder Scott was unable to determine the expected type of hydrocarbonscontained within the structure. Addressing this uncertainty, Ryder Scottdeveloped two cases for their evaluation: • If Tigris is a natural gas accumulation, it is estimated to contain 442 bcf of Probable Reserves; a further 442 bcf of Possible Reserves; and a further 3,447 bcf of Prospective Resources. • If Tigris is an oil accumulation, it is estimated to contain 104 mmbbl of oil and 64 bcf of gas as Possible Reserves and further 408 mmbbl of oil and 245 bcf of gas as Prospective Resources. Tigris #1, a vertical exploration well, will be drilled to an approximate depthof 14,700 ft with the primary objectives being a series of Carboniferous andDevonian sandstone reservoirs. The well is planned to be spud in the thirdquarter of 2006. New ventures During 2005, Emerald evaluated several new ventures, some in great detail,including the purchase of its 50% working interest in Block 26 in Syria. In thesecond half of 2005, the exploration department in Colombia has beenstrengthened with a wider remit to look both in Colombia and in the surroundingcountries of South America. Emerald's objectives remain to grow its reserve baseand to increase its net production through exploration and acquisition ofassets. Proved plus Probable reserves Colombia The table below summarises the gross attributable Proved plus Probable reservesin Colombia as at 31 December 2005. Gross attributable reserves are defined astotal field reserves, including royalty oil and any Ecopetrol's entitlements,but excluding participation of other parties forming the Associate under theterms of the association contracts with Ecopetrol. Producing fields -------------------- Campo Rico Vigia Gigante TotalProved plus Probable reserves of mbbl mbbl mbbl mbbloil: -------- ------- -------- ------- -------- -------As at 31 December 2004(1) 5,328 -- 7,954 13,282Revisions(2) -- 2,395 -- 2,395Production (846) (113) (247) (1,205)-------------------- -------- ------- -------- --- -------As at 31 December 2005 4,482 2,282 7,707 14,472-------------------- -------- ------- -------- --- -------(1) Source: Reserves Evaluation of the Gigante and Campo Rico fields, by RPS Energy (formerly, RPS Troy-Ikoda), dated 17 March 2005.(2) Source: Evaluation of Vigia field, by RPS Energy, dated 2 March 2006. SyriaThe table below summarises Emerald's 50% interest Proved plus Probable reservesin Syria as at 31 December 2005, under the assumption that the Tigris field is agas accumulation. Oil Gas ------------- ------------ Proved plus Probable reserves: mbbl bcf ------------- ------------ As at 31 December 2004 -- --Revisions(3) -- 221Production -- ------------------------- ------------- ------------As at 31 December 2005 -- 221----------------------- ------------- ------------(3) Source: Estimated Reserves and Prospective Resources Attributable to TigrisField Syria, by Ryder Scott Company LP, dated 27 January 2006. If the Tigris field is an oil accumulation, it is estimated to contain 104million barrel of oil and 64 bcf of gas Possible reserves (62 million barrels ofoil and 32 bcf of gas net to Emerald). Alastair Beardsall Chief Executive 18 April 2006 Financial review 1. Adoption of IFRS and successful efforts based accounting method Emerald has adopted International Financial Reporting Standards ("IFRS") inpreparing its financial statements from 1 January 2005. As part of IFRSadoption, Emerald has restated the opening balances and comparative figuresrepresenting 2004 financial results. In addition to adopting IFRS, Emerald hasadopted a successful efforts based method of accounting. The key impacts ofadoption of IFRS and successful efforts based accounting method can besummarised as follows: • Costs associated with efforts that do not result in finding commercially producible reserves of hydrocarbons are expensed in the income statement in the period these efforts are determined unsuccessful. • G&G costs incurred prior to acquisition of E&P licenses are now expensed. • Reviews for impairment are now performed and depletion charges calculated on a field-by-field basis. 2. Comparative financial results and key statistics 2005 2004 mbbl mbbl --------- ---------- Attributable gross production (a) 1,205 484 Entitlement production (b) 837 413 --------- ---------- Comparative financial results in the table below exclude non-operating items and tax charges. 2005 2004 $ '000 $ '000 --------- --------- Revenue 32,079 12,529 Production costs (c) (9,640) (4,555) Expensed exploration costs (d) (1,098) (122) General and administrative expenses (e) (4,632) (4,010) --------- --------- Adjusted EBITDA* 16,709 3,842 --------- --------- Other income, including finance income 786 313 Depletion and depreciation of oil & gas assets (f) (4,959) (1,813) Write-offs of unsuccessful exploration costs (g) (687) -- Cost recovery (h) (3,826) (1,421) --------- --------- Profit before tax and exceptional items 8,023 921 --------- --------- 2005 2004 $/bbl $/bbl --------- --------- Production cost per barrel of attributable gross production (8.0) (9.4) --------- --------- Revenue per barrel of entitlement production (b) 38.3 30.3 Production cost per barrel of entitlement (c) (11.5) (11.0) production --------- --------- -------------------------- 26.8 19.3 --------- --------- (*) Adjusted EBITDA is earnings before interest, tax, depreciation, depletion, amortisation and write-offs of oil & gas assets, excluding other income, non-operating items and cost recovery adjustments. 2.a Attributable gross production Attributable gross production is total field production, including royalty petroleum and participation of Ecopetrol, Colombian state oil company, but excluding participation of other parties forming the Associate under the terms of the association contracts. In the reporting period, Emerald had 100% participation in all of its producing association contracts. 2.b Entitlement production Entitlement production is production to which Emerald is entitled in any given period. Entitlement production excludes royalty petroleum and any other production that belongs to Ecopetrol and other parties forming the Associate under the terms of the association contracts. In 2005, Emerald was entitled to 80% of production from the Gigante field (2004: 80%); 92% of production from the Vigia field (2004: no production) and to 64% of production from the Campo Rico field (2004: 92%). On 28 December 2005, Ecopetrol granted the Campo Rico field the commerciality status. Upon grant of the commerciality status, Emerald's entitlement to production from the Campo Rico field has changed to 69% (75% before royalty). This entitlement will continue until Emerald has recovered the allowable reimbursable costs, whereupon Emerald will become entitled to 46% (50% before royalty) of production from the Campo Rico field. 2.c Production costs Production costs are direct costs incurred to produce and deliver hydrocarbons to the point of sale. In 2005, on the attributable gross production basis, production costs were $8.0 per barrel of oil production, compared to $9.4 per barrel of oil production in 2004. On the entitlement basis, production costs were $11.5 per barrel of oil production, compared to $11.0 per barrel of oil production in 2004 - this increase is explained by the fact that, in 2005, Ecopetrol commenced its participation in sharing of the Campo Rico field production without contributing towards field production costs. Under the terms of the Campo Rico Association Contract, Ecopetrol starts contributing its share of field production costs only after the grant of commerciality status (awarded on 28 December 2005). The production costs associated with Ecopetrol's entitlement to production from the Campo Rico field in 2005 will be reimbursed to Emerald as part of the cost recovery process taking place pursuant to the grant of the commerciality status to the Campo Rico field. 2.d Expensed exploration costs Expensed exploration costs include exploration expenditures incurred prior to grant of exploration and production licenses comprised of $1.098 (2004: $0.122 million) million associated with the works performed under the Mantecal, Altamira, Cachama and Las Brisas technical evaluation agreements with ANH in 2005. 2.e General and administrative expenses General and administrative expenses in 2005 include a charge of $599,000 relating to the grant of share options under Emerald Energy Plc Discretionary Share Option Scheme (2004: $855,000). Increase in general and administrative expenses reflects increased level of activity, particularly relating to exploration (drilling and G&G) and production in Colombia. 2.f Depletion and depreciation charges On the entitlement basis, depletion and depreciation of oil and gas assets in the reporting period was $5.91 per barrel of oil production (2004: $4.39 per barrel). This increase has been driven by the effective change in the entitlement reserves in the Gigante field, where Ecopetrol has exercised their right to participate in exploitation of the field and where completion of the cost recovery period under the sole risk provision of the association contract is expected to take place in 2006. In addition, higher than expected oil prices have also contributed to the decrease in expected entitlement reserves. 2.g Write-offs of unsuccessful exploration costs Write-offs of unsuccessful exploration costs represent expenditures associated with unsuccessful efforts to find commercial reserves of hydrocarbons. $0.687 million charge in 2005 (2004: nil) represents the exploration costs incurred by 31 December 2005 in the El Algarrobo block, where efforts to find commercial reserves of hydrocarbons were unsuccessful. 2.h Cost recovery Cost recovery charge of $3.826 million (2004: $1.421 million) represents the recovery of reimbursable costs under the Campo Rico Association Contract achieved in 2005. 3. Profit for the year 2005 2004 $ '000 $ '000 --------- --------- Profit before tax and non-operating items 8,023 921 Non-operating items (a) -- 1,266 Profit before tax 8,023 2,187 --------- --------- Tax charge for the period (b) (1,641) (290) Recognition of deferred tax assets (b) -- 3,158 Deferred tax resulting from utilisation of tax losses (b) (2,329) -- Deferred tax resulting from temporary timing differences (b) 186 (45) -------------------------- ----- --------- --- --------- Profit for the period 4,239 5,010 -------------------------- ----- --------- --- --------- 3.a Non-operating item In 2004, the balance of the insurance claim relating to the accident at the site of the Gigante #1A well in 2000 was settled with the insurers. $1.266 million represents the amount received by Emerald net of legal costs. 3.b Tax charge for the period Colombian local tax charges of $1.641 million in 2005 and $0.290 million in 2004 represent the minimum tax charge payable by Emerald after utilisation of available tax losses, namely the presumptive income tax. In Colombia, profit tax is charged on the higher of "fiscal profit before tax" and "presumptive income", calculated as 6% of "fiscal equity". Historical tax losses can be utilised to reduce the level of the fiscal profit before tax to the level of presumptive income. In 2004, Emerald recognised the deferred tax asset of $3.158 million resulting from the available tax losses, as at 31 December 2004. In 2005, Emerald utilised $2.329 million of this deferred tax asset as well as recognised a $0.186 million decrease of deferred tax liability associated with the temporary differences between the balance sheet values and tax values of fixed assets in Colombia. 4. Capital expenditure Colombia Syria Total $ '000 $ '000 $ '000 --------- --------- --------- --------- --------- --------- Investment in tangible oil & (a) 19,100 -- 19,100 gas assets Investment in intangible oil & gas (b) 5,415 17,406 22,821 assets Investment in other fixed assets 118 -- 118 -------------------- --------- --- --------- --- --------- Total capital investment 24,634 17,406 42,039 -------------------- --------- --- --------- --- --------- 4.a Investment in tangible oil & gas assets Investment in tangible oil and gas assets represents capital costs relating to the development of the Campo Rico and Gigante fields and capital costs associated with exploration and development of the Vigia field. 4.b Investment in intangible oil & gas assets In Colombia, investment in intangible oil and gas assets represents exploration and development expenditures associated with unevaluated fields, such as the Silfide field in the Fortuna block, and exploration costs relating to prospects that will be drilled in the future. In Syria, investment in intangible oil and gas assets includes $17.390 million associated with the purchase of a 50% participating interest in Block 26. This amount is comprised of $7.260 million cash payment made to purchase SNG Overseas Limited ("SNGO"), an investment vehicle holding a 50% interest in Block 26, and a charge of $10.130 million, representing the value of Emerald shares that will be issued to Soyuzneftegas Limited, the former parent of SNGO, pursuant to the SNGO Share Purchase Agreement. 5. Share capital In November 2005, through a placing of 5,090,000 ordinary shares with certain institutional investors, Emerald raised $13.980 million before expenses in connection with the purchase of a 50% participating interest in Block 26, Syria, resulting in a $1.134 million increase in issued share capital and a $13.306 million increase in share premium. In accordance with the SNGO Share Purchase Agreement, Emerald will issue 3,500,000 shares to Soyuzneftegas Limited on 18 May 2007. These shares were valued at the date of SNGO Share Purchase Agreement at $10.130 million - this amount is currently included in the current liabilities as at 31 December 2005. Edward Grace Finance Director 18 April 2006 Group income statement For the year ended 31 December 2005 2004 $ '000 $ '000 ----------------------------- ----- -------- -------- Revenue from oil sales 32,079 12,529 Cost of sales Production costs (9,640) (4,555) Expensed exploration costs (1,098) (122) Depletion and depreciation of oil and gas assets (4,959) (1,813) Write-offs of unsuccessful exploration costs (687) -- Cost recovery (3,826) (1,421) -------- -------- -------- Gross profit 11,869 4,618 Other income 304 63 General and administrative expenses (4,632) (4,010) -------- -------- Profit from operations before tax and finance income 7,541 671 Finance costs (7) -- Finance income 489 250 Non-operating item - settlement of insurance claim -- 1,266 -------- -------- Profit before tax 8,023 2,187 Current tax charge for the period (1,641) (290) Deferred tax (charge)/credi t for the period (2,143) 3,113 ----------------------------- ----- -------- -------- Profit for the period 4,239 5,010 ----------------------------- ----- -------- -------- Earnings per ordinary share 8.24c 11.29c Earnings per ordinary share on diluted basis 7.84c 10.80c ----------------------------- ----- -------- -------- Group and Company balance sheets As at 31 December Group Company ----------- ---------- ------ ------ 2005 2004 2005 2004 $ '000 $ '000 $ '000 $ '000 ------------------------ ------ ------ ------ ------ Non-current assets Property , plant & equipment - intangible oil and gas assets 23,146 1,683 5,740 1,683 - tangible oil and gas assets 32,472 21,590 32,472 21,590 Other assets 15 283 15 283 Investments -- - 17,406 - ------ ------ ------ ------ 55,633 23,556 55,633 23,556 ------ ------ ------ ------ Current assets Inventories 234 157 234 157 Trade and other receivables 5,568 1,751 5,584 1,751 Deferred tax 829 3,158 829 3,158 Corporation tax debtor -- 269 -- 269 Cash and short-term deposits 20,679 23,646 20,679 23,646 ------ ------ ------ ------ 27,310 28,981 27,326 28,981 ------------------------ ------ ------ ------ ------ Total assets 82,943 52,537 82,959 52,537 ------------------------ ------ ------ ------ ------ Current liabilities Trade and other payables 5,410 3,804 5,426 3,804 Accruals 1,014 1,190 1,014 1,190 Provisions 410 410 410 410 ------ ------ ------ ------ 6,834 5,404 6,850 5,404 ------ ------ ------ ------ Non-current liabilities Deferred tax 2,099 2,285 2,099 2,285 Other payables 10,130 -- 10,130 -- ------ ------ ------ ------ 12,229 2,285 12,229 2,285 ------ ------ ------ ------ Equity attributable to the shareholders Issued share capital 9,203 8,068 9,203 8,068 Share premium 40,784 27,479 40,784 27,479 Retained earnings and reserves 13,893 9,301 13,893 9,301 ------ ------ ------ ------ 63,880 44,848 63,880 44,848 ------------------------ ------ ------ ------ ------ Total liabilities and shareholders' 82,943 52,537 82,959 52,537 equity ------ ------ ------ ------ ------------------------ Group and Company cash flow statement For the year ended 31 December Group Company Group & Company -------- ------- -------- 2005 2005 2004 $ '000 $ '000 $ '000 ------------------------ -------- ------- -------- Cash flow from operating activities Profit from operations before tax and finance 7,541 7,541 672 income and costs Share based payments 599 599 855 Depletion and depreciation 4,815 4,815 1,919 Write-offs of unsuccessful exploration costs 687 687 -- Net cost recovery 2,306 2,306 1,421 -------- ------- -------- 15,948 15,948 4,866 -------- ------- -------- Movement in inventory (77) (77) (134) Movement in operating debtors (1,725) (1,725) (1,468) Movement in operating creditors 2,396 2,396 783 -------- ------- -------- Cash flow from operating activities 16,542 16,542 4,048 -------- ------- -------- Profit tax paid (1,384) (1,384) (559) ------------------------ -------- ------- -------- Net cash flow from operations 15,158 15,158 3,490 ------------------------ -------- ------- -------- Cash flow from non-operating activities -------- ------- -------- ------------------------ Settlement of insurance claim -- -- 1,266 -------- ------- -------- Cash flow from investing activities Capital investment in Colombia (25,623) (25,623) (6,326) Capital investment in Syria (16) -- -- Purchase of 50% interest in Block 26, Syria (7,260) (7,260) -- Investment in subsidiaries -- (16) -- Interest received 524 524 222 ------------------------ -------- ------- -------- (32,375) (32,375) (6,102) -------- ------- -------- Cash flow from financing activities ------------------------ -------- ------- -------- Net proceeds from issue of equity 14,440 14,440 15,924 -------- ------- -------- Net increase/(decrease) in cash and cash equivalents (2,777) (2,777) 14,577 -------- ------- -------- Cash at period start 23,646 23,646 8,951 Period cash flow (2,777) (2,777) 14,577 Currency translation (190) (190) 118 -------- ------- -------- Cash and cash equivalents at period 20,679 20,679 23,646 end -------- ------- -------- ------------------------ Group and Company statement of changes in equity For the year ended 31 December Share capital Retained earnings Translation reserve Total -------- -------- ------- -------- Balance at 31 December 2003 67,307 (44,277) -- 23,030 Cancellation of ordinary shares (21,091) 21,091 -- -- Reduction in share premium (26,593) 26,593 -- -- Issue of new share capital 15,924 -- -- 15,924 Profit for the period -- 5,010 -- 5,010 Translation differences -- -- 884 884 --------------------- -------- -------- ------- -------- Balance at 31 December 2004 35,547 8,417 884 44,848 --------------------- -------- -------- ------- -------- Issue of new share capital 14,440 -- -- 14,440 Profit for the period -- 4,239 -- 4,239 Translation differences -- -- 353 353 --------------------- -------- -------- ------- -------- Balance at 31 December 2005 49,987 12,656 1,237 63,880 --------------------- -------- -------- ------- -------- Notes to the financial statements 1. Basis of accounting The financial information contained in this statement does not constitute the Group's statutory accounts. The figures for the year ended 31 December 2005 have been extracted from the Group's audited statutory accounts, which were approved by the Board on 13 April 2006 and will be lodged with the registrar of companies in the Isle of Man. The report of the auditors on those accounts was unqualified. 2. Basis of preparation In 2005, the Group adopted the International Financial Reporting Standards ("IFRS") as the basis for preparation of its financial statements. These are the first financial statements of Emerald to have been prepared under IFRS and the disclosures required by IFRS1, 'First time adoption of IFRS', concerning the transition from UK GAAP to IFRS will be provided in the noted to the financial statements within 2005 Annual Report and Accounts. The financial statements are presented in US Dollars and all values are rounded to the nearest thousand dollars, except when otherwise indicated. 3. Oil and gas assets The Group has adopted the successful efforts based method of accounting for oil and gas operations. Under the successful efforts based method of accounting, costs are capitalised if they lead to or represent the development of the oil and gas assets that either have to be appraised or have been appraised as successful. If evaluation of the oil and gas asset leads to the conclusion that the asset is not economic, the costs incurred acquiring this asset are expensed through the income statement. If evaluation of the oil and gas asset leads to the conclusion that the asset has economic value but the costs incurred acquiring and developing this asset exceed this value, the excess costs are expensed through the income statement. The costs incurred to evaluate potential assets prior to grant of exploration and production ("E&P") licenses are expensed. Tangible oil and gas assets For evaluated properties with economic values exceeding the exploration and development costs incurred after the grant of the license, these costs, which may include geological and geophysical costs, costs of drilling exploration and development wells, costs of field production facilities, including commissioning and infrastructure costs, are capitalised. These expenditures are combined into asset groups reflecting the anticipated useful lives of individual assets and subsequently are depreciated over the expected economic lives of those asset groups. The expenditure within the asset group with a useful life equal to the producing life of the field is depleted on a unit-of-production basis. The assets formed by capitalisation of these costs are referred to as tangible oil and gas assets. Intangible oil and gas assets Intangible oil and gas assets represent costs that have been incurred after the grant of the license where the properties still have to be evaluated and where production of hydrocarbons has yet to commence. Costs related to such unevaluated properties are not amortised until such time as the related property has been appraised and put on production. Other fixed assts Other fixed assets are depreciated on a straight-line basis over their useful lives, at rates of between 10% and 20% per annum. Impairment review Impairment reviews of development and/or producing assets are carried on a field-by-field basis. At each reporting date, the net book values of the development and/or producing assets are compared to the net present values of expected future cash flows from the relevant fields. If the net book value is higher than the underlying economic value of the asset, then the difference is written off to the income statement as impairment. Expected future cash flows are calculated using production profiles and costs determined on a field-by-field basis by in-house engineers, using appropriate petroleum engineering techniques, and using oil price forecast developed by the Group for business planning purposes. Exploration and appraisal assets are regarded as intangible fixed assets until it has been established whether they are associated with commercially producible reserves of hydrocarbons or not. If the efforts associated with the costs of these assets are successful, these assets are reclassified into development and/or producing assets, which are subject to regular impairment reviews on a field-by-field basis. If the efforts associated with the costs of these assets are unsuccessful, the carrying cost of these assets is written off to the income statement in accordance with the successful efforts based accounting method. 4. Dividends The Group profit for the year, after taxation, amounted to $4,239,000 (2004: $5,010,000) and was transferred to reserves. The Directors do not recommend payment of an ordinary dividend. 5. Taxation Reconciliation of the total tax charge The expense in the income statement for the year is higher than the standard rate of corporation tax in the UK of 30% (2004: 30%). As an international business the company is exempt from paying Isle of Man tax. The company is UK resident therefore expects to incur tax at the UK corporation tax rate. The differences are reconciled below: 2005 2004 $ '000 $ '000 ------- ------- UK corporation tax -- -- Overseas corporation tax 1,641 290 ---------------------------------- ------- ------- Current income tax 1,641 290 ---------------------------------- ------- ------- Deferred tax: Colombian tax losses 2,329 (3,158) Origination and reversal of timing differences (186) 45 ---------------------------------- ------- ------- Total deferred tax 2,143 (3,113) ---------------------------------- ------- ------- 2005 2004 $ '000 $ '000 ---------------------------------- ------- ------- Profit before tax 8,023 2,187 Accounting profit multiplied by the UK standard rate of corporation tax of 30% 2,407 656 Expenses not deductible for tax purposes 918 789 Higher taxes on overseas earnings 942 409 Utilisation of Colombian tax losses -- (4,609) Temporary timing differences (185) 45 Colombian inflation adjustments and timing differences (298) (113) ---------------------------------- ------- ------- Total tax reported in the income statement 3,784 (2,823) ---------------------------------- ------- ------- Colombian taxation Although Emerald Energy Plc is subject to UK and Colombian taxation, the Company does not expect to pay any UK corporation tax in the foreseeable future for the following reasons: (a) Emerald does not have any revenue generating activities in the UK; (b) Effective corporation tax in Colombia, 38.5%, exceeds that in the UK; (c) Most of the costs incurred in the UK are not deductible in Colombia for tax purposes; (d) In the UK, as at the date of the last UK tax return, Emerald had losses brought forward and utilisable capital allowances of $52.4 million and these losses and allowances will continue to widen for reasons mentioned in points a, b and c above. At 31 December 2004, Emerald recognised $3.158 million of deferred tax asset, relating to the outstanding historical losses in Colombia of $8.203 million. In 2005, Emerald utilised most of the historical losses outstanding at 31 December 2004, reducing the deferred tax asset from $3.158 million to $0.829 million. This balance is shown in current assets and expected to be fully utilised in 2006. In addition to recognising the deferred tax asset and its utilisation, IFRS define deferred tax in relation to temporary differences between carrying values of fixed assets and their related tax base, necessitating adjustments to reflect the difference in the Colombian tax values and the Group carrying values. These temporary differences were $5.934 million and $5.452 million at 31 December 2004 was and 31 December 2005, respectively. This liability is recognised as a non-current liability. Historical Deferred tax 2005 deferred losses brought asset tax charges forward $ '000 $ '000 $ '000 --------- ------- -------- As at 31 December 2004 before utilisation of tax losses 11,971 -- Utilisation of tax losses in 2004 (3,768) -- As at 31 December 2004 after utilisation of tax losses 8,203 3,158 ---------------------- --------- ------- ------ -------- Utilisation of tax losses in 2005 (6,048) (2,329) (2,329) ---------------------- --------- ------- ------ -------- As at 31 December 2005 2,155 829 ---------------------- --------- ------- Temporary Deferred tax differences liability $ '000 $ '000 ---------------------- --------- ------- As at 31 December 2004 (5,934) (2,285) ---------------------- --------- ------- ------ -------- Movement in temporary differences in 2005 482 186 186 ---------------------- --------- ------- ------ -------- As at 31 December 2005 (5,452) (2,099) Total (2,143) ---------------------- --------- ------- ------ -------- 6. Earnings per ordinary share Basic earnings per share amounts are calculated by dividing profit for the period attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share amounts are calculated by dividing the profit for the period attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares. The following reflects the income and share data used in the basic and diluted earnings per share computations: 2005 2004 $ '000 $ '000 ------- ------- Net profit for the period attributable to equity holders 4,239 5,010 ------- ------- 2005 2004 ---------------------------------- ------- ------- Basic weighted average number of shares 51,475,647 44,367,265 Dilutive potential ordinary shares: Shares to be issued to Soyuzneftegas Limited 421,918 -- Employee share options 2,149,487 2,006,422 ---------------------------------- ------- ------- Diluted weighted average number of shares 54,047,052 46,373,687 ---------------------------------- ------- ------- There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and completion of these financial statements. 7. Annual Report and Accounts Copies of the annual report and accounts will be posted to shareholders in the near future and will be available from the Company's office: Emerald Energy Plc, 6th Floor, Kings House, 9/10 Haymarket, London SW1 4BP. The full text of the 2005 Annual Report and Accounts will be available on the Company's website www.emeraldenergy.com no later than 1 May 2006. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Emerald Energy