5th Sep 2005 07:01
Star Energy Group PLC05 September 2005 Star Energy Interim results for the six months to 30 June 2005 Strategy Star Energy's primary focus is to build a significant multi-site gas storagebusiness. We aim to consolidate our existing oil and gas production business toprovide the depleted reservoirs that form the basis of future gas stores. Wewill exploit our expertise in operating onshore oil and gas fields safely andresponsibly in environmentally sensitive areas. Star Energy will take advantageof opportunities to expand its asset base in the UK and potentially continentalEurope. Highlights • Construction of the Humbly Grove gas storage project continues to progress well and remains on schedule for commercial operations commencing in October 2005. Cost estimates to completion are running marginally over budget. • Although further delays were experienced in the Welton gas storage project planning application assessment, significant progress has been achieved in accelerating the Group's other gas storage projects. • The Group further consolidated its position as a leading operator of onshore UK oil and gas fields through the acquisition of Pentex Management Limited and its subsidiary companies on 8 August 2005. The acquisition adds 13 oil and gas fields, and the Group now operates 26 fields. • Oil production averaged 2,794 bopd (2004: 3,041 bopd). • Turnover of £8.0 million (2004: £8.8 million). • EBITDA of £2.2 million (2004: £1.1 million after one-off costs of £1.9 million). • Loss before tax of £0.4 million (2004: £2.1 million loss after one-off costs of £2.2 million). • Loss after tax of £0.7 million (2004: £3.1 million loss after one-off costs of £2.2 million). • Earnings per share is a loss of 1.12 pence per ordinary share (2004: 7.47 pence loss per ordinary share). Humbly Grove Gas Storage Humbly Grove, near Alton in Hampshire, is the location of the Group's first gasstore. The facility has a design capacity of 10 billion cubic feet (bcf) of gasand incorporates a 27 km 24" diameter pipeline linking the gas store to theTransco National Transmission System at Barton Stacey. With four new dedicatedgas storage wells, gas processing and 15 MW of power generation and compression,the facility is on schedule for commercial operation in October 2005. Currentfinal cost estimates are running marginally over budget. Humbly Grove's entire capacity has been contracted to Vitol SA, a major oil andgas trading company, for a firm period of 3.5 years with options to extend. With winter / summer gas price differentials having reached record levels, theHumbly Grove gas store will be a welcome addition to the UK's existing storagecapacity. Chairman's and Chief Executive's Statement The first half of 2005 was dominated by the construction activities associatedwith the Group's first gas storage project, the 10 bcf Humbly Grove gas store.In addition, work continued to accelerate the other storage projects,particularly Albury and Bletchingley to offset continued delays at Welton.Subsequent to the end of the period, a step-change in the Group's business wasachieved with the acquisition of the UK onshore producer, Pentex ManagementLimited and its subsidiary companies. Financial Results The Group reports a loss on ordinary activities after taxation for the half yearto 30 June 2005 of £0.7 million (2004: £3.1 million loss after taxation andafter one off costs of £2.2 million). Lower than anticipated production levels have held back crude oil sales for theperiod at £7.5 million (2004: £7.9 million), with an average oil production ratefor the Group of 2,794 bopd (2004: 3,041 bopd). The forward sale of 3,000 bopdat approximately $25.00 for the period 1 January 2005 to 31 March 2005 wasreplaced with 2,000 bopd at $29.00 for the period 1 April 2005 to 31 December2005. These forward sale contracts were established in May 2004 to comply withthe terms of the Group's senior debt facility. The change during the period inthe forward sale price and volume, combined with the high market prices,increased the Group's effective average oil price for the period to $28.76(2004: $25.50). Additional forward sale contracts were established in May 2004 to comply withthe terms of the senior debt facility as follows: 1,800 bopd for calendar year2006 at $27.50 per barrel; 1,600 bopd for calendar year 2007 at $27.00 perbarrel. In addition, the Group has purchased a put option on 600 bopd for the2006 calendar year at $35.00 per barrel at a premium of $0.83 per barrel. TheGroup has entered into a currency hedging contract to sell $1.75 million percalendar month for 2005 at an average rate of $1.8671. Electricity sales of £0.5 million (2004: £0.9 million) were lower than expectedas a result of reduced gas production in both the Weald Basin and East Midlandsoperations. The Group made an operating profit of £0.1 million (2004: £1.1 million operatingloss after one-off costs of £1.9 million). Cost of sales, at £4.4 million (2004:£4.5 million), and the non-cash depletion charge of £2.1 million (2004: £2.1million) were in line with expectations. Administrative expenses amounted to £1.6 million (2004: £3.3 million afterone-off costs of £1.9 million), due principally to the impact of Group overheadsfor all of the current period (2004: 12 May 2004 to 30 June 2004 only). Otherincome of £0.1 million (2004: nil) was achieved in respect of unutilised creditsunder the EU Emissions Trading Scheme. The net interest charge for the period was £0.5 million (2004: £0.9 million),comprising interest receivable of £0.2 million (2004: £0.1 million) and interestpayable of £0.7 million (2004: £1.0 million). The reduction in the net interestcharge is principally as a result of the first draw down against the Group's£57.5 million senior debt facility not occurring until late March 2005. TheGroup has entered into a contract to fix the interest rate at 7.535% for 75% ofthe debt outstanding under the senior debt facility of £57.5 million during theperiod to 31 December 2008. The tax charge of £0.3 million (2004: £0.4 million charge) comprises corporationtax of £0.1 million (2004: £0.1 million) deferred tax of £0.2 million (2004:£0.3 million). The loss per share for the period is 1.12 pence (2004: 7.47 pence loss pershare). The cash flow for the period is dominated by capital expenditure of £35.0million (2004: £2.4 million), principally on the Humbly Grove gas storageproject. Funding for the project has been provided by the Group's £57.5 millionsenior debt facility, which as at 30 June 2005 was drawn down by £37.7 million. Movements in the Group's consolidated balance sheet as at 30 June 2005 reflectthe increase in tangible assets resulting from the Humbly Grove gas storageconstruction, and the increase in current and long-term creditors as a result ofthe senior debt facility draw down. Review of Activities Gas Storage Humbly Grove The construction of the gas storage scheme at Humbly Grove in Hampshirecontinued to make excellent progress. The 27 km 24" diameter pipeline was installed slightly ahead of schedule due tobenign weather conditions. The four new gas storage wells were completed successfully, albeit at higherthan budgeted cost due to drilling difficulties on the first two wells. All of the equipment required to complete the above ground installation facilityat Humbly Grove has been delivered to the site and the remaining activities arecentred on surface pipelines installation, electrical control equipmentinstallation and plant commissioning. Project costs are currently forecast to be marginally over budget. With the winter / summer gas price differentials reaching record levels, theStar Energy board elected to make additional incentives available to theEngineering, Procurement and Construction contractor, AMEC, in order to completethe facility as early as possible. Welton The Group has experienced continued delays from Lincolnshire County Council inthe assessment of the planning application for the Welton gas storage project inthe East Midlands. The last firm revised date for the assessment of 29 July 2005was cancelled and we have received a verbal indication that the application willbe assessed during September 2005. The original planning application wassubmitted in November 2003. As a result of these delays, the schedule forcommercial operations at Welton has been put back to 2008. Albury Phase 1 The Albury storage project has been the subject of intensive engineering andplanning activity with a view to establishing commercial operations for AlburyPhase 1 in 2007. The first phase of this project is a high performance 6 bcf gasstore using the existing producing reservoir. Negotiations are under way to tiein the gas store to the local gas distribution network operated by Scottish andSouthern. A 3D seismic survey was conducted during Q1 2005 and the results have aided inbetter defining the reservoir extent. Albury Phase 2 and Bletchingley Albury Phase 2 is projected to use formations adjacent to the existing producingsandstone for storage purposes. The prognosis is for an additional 24 bcf of gasstorage capacity. The 3D seismic survey has provided valuable additionalinformation but the viability of this project is to be determined by theappraisal well planned for the beginning of 2006. Similarly, the 30 bcfBletchingley storage project will benefit from the appraisal well planned for Q22006. Permitting and planning activities for both projects are under way inparallel. Oil and electricity production Oil production continued below expected levels due to numerous unrelated wellproblems. The incremental oil production programme produced mixed results. Thetwo well sidetracks resulted in forecasted incremental production but there-perforation programme failed to increase production. Average production forthe period was 3,056 boepd. For Q2, profitability benefited from the expiry of a$25.00/barrel oil price hedge and favourable US dollar to sterling exchangerates. The Group plans to drill at least two new wells in the second half of theyear and one sidetrack. Coupled to the improved underlying economics, theforecast for the second half of the year is very promising. Acquisition of Pentex The Group has added to its reserve base and oil production by the acquisition ofonshore UK producer Pentex Management Limited and its subsidiary companies on 8August 2005. As a result of the acquisition, the Group has increased its provenand probable oil reserves from 14.7 mmbbl to 31.1 mmbbl. The acquisition costof approximately £45 million was funded by an additional £20 million of seniordebt provided by the Group's existing bank syndicate led by ABN Amro Bank NV. Inaddition, a share placing to raise an additional £35 million was successfullyundertaken. The acquisition cost of approximately $4.80 per barrel (proven and probablereserves) is viewed by the Group as very competitive. The acquisition will beearnings enhancing in the first full year and the Star Energy and Pentexorganisations have an excellent fit, operating in the same geographic locations. In addition to the benefits of increased production and oil reserves, theacquisition adds at least one new potential gas storage project at Gainsboroughin the East Midlands and the potential to add to the portfolio of storageprojects as the Group's technical team assesses the fields that have beenacquired. The Group now owns and operates some two thirds of all of the provenand producing oil and gas reservoirs onshore UK and has further consolidated itsability to establish a significant multi-site gas storage business in thefuture. Outlook The value of seasonal gas storage has continued to increase as the awareness ofthe future value of underground gas storage in depleted reservoirs increases.This has been largely driven by the UK's future dependency on imported naturalgas and the need to replace the gas supply "swing" historically provided by theUK's indigenous gas production from the rapidly declining southern North Sea gasfields. The Group believes that gas stores based on depleted reservoirs provide the mostcost-effective route to adding significant additional gas storage capacity inthe near future. Our business model of acquiring oil and gas reservoirs usingthe intrinsic value of hydrocarbon production to finance acquisitions and thenconverting suitable fields to gas stores fits well with rising oil and gasprices and increasing storage values. We look forward to establishing our reputation as a storage operator after theHumbly Grove gas store commences commercial operations in October 2005 andthereafter realising the potential of our future gas storage projects.Meanwhile, the oil production from our producing reservoirs is providingincreased profitability due to the high prevailing oil prices. The acquisitionof Pentex has added to our oil production and reserves, and will contributepositively to earnings. We look forward to the future with confidence andenthusiasm. Consolidated profit and loss accountfor the 6 months to 30 June 2005 Unaudited Restated Audited Six months Unaudited Twelve months to 30 June Six months to 31 December 2005 to 30 June 2004 2004 £000 £000 £000 Turnover 8,039 8,834 17,144Cost of sales (4,365) (4,549) (9,342)Depletion (2,060) (2,130) (4,166) Gross profit 1,614 2,155 3,636 Corporate AIM admission and restructuring costs - (1,422) (1,452)Other administrative expenses (1,639) (1,862) (3,547) Total administrative expenses (1,639) (3,284) (4,999)Other income 105 11 15 Operating profit/(loss) 80 (1,118) (1,348) Loss on sale of fixed assets (10) - - Profit/(loss) on ordinary activities before interest 70 (1,118) (1,348) Other interest receivable and similar income 187 76 700Interest payable and similar charges (644) (1,023) (1,460) Loss on ordinary activities before taxation (387) (2,065) (2,108) Tax charge on loss on ordinary activities (285) (424) (742) Loss for the financial period (672) (2,489) (2,850)Finance costs on non-equity shares - (658) (658) Retained loss for the financial period (672) (3,147) (3,508) Basic and diluted loss per share (pence)Ordinary shares (1.12) (7.47) (6.85) Consolidated balance sheetat 30 June 2005 Unaudited Unaudited Audited 30 June 2005 30 June 31 December 2004 2004 £000 £000 £000Fixed assetsIntangible assets 375 - -Tangible assets 87,940 43,479 53,298 88,315 43,479 53,298Current assetsStocks 410 323 297Debtors 6,130 4,819 6,390Other current assets 1,196 - -Cash at bank and in hand 15,345 20,741 12,357 23,081 25,883 19,044Creditors: amounts falling due within one year (16,337) (5,827) (9,344) Net current assets 6,744 20,056 9,700 Total assets less current liabilities 95,059 63,535 62,998 Creditors: amounts falling due aftermore than one year (32,835) (916) (413)Provisions for liabilities and charges (6,123) (5,478) (5,812) Net assets 56,101 57,141 56,773 Capital and reservesCalled up share capital 6,025 6,025 6,025Share premium account 94,604 94,611 94,604Merger reserve (45,093) (45,093) (45,093)Profit and loss account 565 1,598 1,237 56,101 57,141 56,773 Consolidated cash flow statementfor the six months to 30 June 2005 Unaudited Restated Audited Six months Unaudited Twelve months to 30 June Six months to 31 2005 to 30 June December 2004 2004 £000 £000 £000 Cash flow from operating activities 1,411 1,782 2,013Returns on investments and servicing offinance Interest received 187 76 392 Interest paid (655) (528) (710) Interest element of finance lease rental payments (44) (72) (129) (512) (524) (447) Taxation - - (163) Capital expenditure and financial investment Purchase of tangible fixed assets (34,969) (2,373) (10,716) Cash outflow before management ofliquid resources and financing (34,070) (1,115) (9,313) Financing Issue of ordinary share capital - 78,250 78,250 Issue costs of equity shares - (4,799) (4,806) Redemption of equity - (32,948) (32,948) Debt due within one year 4,169 - - Debt due after more than one year: Drawdown/(repayment) of debt 33,561 (17,638) (17,638) Debt arrangement fee - (863) (863) Capital element of finance lease rental (487) (450) (921) payments Increase in cash in the period 3,173 20,437 11,761 Reconciliation of movements in shareholders' fundsfor the six months ended 30 June 2005 Unaudited Restated Audited Six months Unaudited Twelve months to 30 June Six months to 31 December 2005 to 30 June 2004 2004 £000 £000 £000 Retained loss for the financial period (672) (3,147) (3,508)Add back undeclared dividends on non-equity shares - 494 494Add back premium paid on redemption of redeemable - 164 164preference 10p sharesIssue of shares - 78,250 78,250Share issue costs - (4,799) (4,806)Redemption of 'B' Ordinary shares - (16,781) (16,781)Redemption of preference 10p shares - (16,167) (16,167) Net (decrease)/increase in shareholders' funds (672) 38,014 37,646Opening shareholders' funds 56,773 19,127 19,127 Closing shareholders' funds 56,101 57,141 56,773 Notes i. Basis of preparation The interim financial information set out on pages 7 to 13 has been prepared onthe same basis and using the same accounting policies as were applied in drawingup the Group's statutory financial statements for the year ended 31 December2004. The financial information for the six months ended 30 June 2005 and 30 June 2004is unaudited. In the opinion of the directors the financial information forthese periods present fairly the financial position, results of operations andcash flows for the periods in conformity with generally accepted accountingprinciples consistently applied. These interim financial statements do not constitute statutory accounts withinthe meaning of section 240 of the Companies Act 1985. The comparative figuresfor the financial year ended 31 December 2004 are not the Group's statutoryaccounts for that financial year. Those accounts have been reported on by theGroup's auditors and delivered to the Registrar of Companies. The auditors'report on those accounts was unqualified and did not contain any statement undersection 237(2) or (3) of the Companies Act 1985 ii. Turnover Turnover is derived from sales of oil and electricity to third party customers.All turnover comes from UK based operations. Forward contracts are used by theGroup to hedge the price at which oil is sold and associated US dollar revenueswhich are exchanged into the reporting currency. In such circumstances turnoveris recorded at the actual hedged amount. iii. Taxation For the period to 30 June 2005 the Group suffered an effective tax rate of 74%of the loss before tax, which exceeds the expected statutory tax rate of 40%mainly due to permanent differences in the period. The tax for the period hasbeen calculated using actual results for the half year, taking into accountpermanent differences. iv. Earnings per share The calculation of earnings per share is based on the weighted average number ofshares outstanding of 60,248,762 (six months to 30 June 2004: 42,129,999, twelvemonths to 31 December 2004: 51,219,990). v. Dividend The directors do not recommend the payment of a dividend. vi. Reconciliation of operating loss to operating cash flows Unaudited Unaudited Audited Six months Six months Twelve months to 30 June to 30 June to 31 December 2005 2004 2004 £000 £000 £000 Operating profit/(loss) 80 (1,118) (1,348)Depreciation, amortisation and impairment charges 2,138 2,217 4,331(Increase)/decrease in stocks (112) 95 120Non cash write offs - 120 118Non cash emissions income (102) - -(Increase)/decrease in debtors (99) 342 (1,260)(Decrease)/increase in creditors (494) 126 52 Net cash inflow from operating activities 1,411 1,782 2,013 vii. Analysis of net debt (unaudited) At At beginning Other non cash Exchange end of 30 of year Cash flow changes movement June £000 £000 £000 £000 £000 Cash in hand and at bank 12,357 3,173 - (185) 15,345 12,357 3,173 - (185) 15,345Debt due within one year - (4,169) - - (4,169)Debt due after one year - (33,561) 737 - (32,824)Obligations under finance leases and HPcontracts (1,384) 487 - - (897) Total 10,973 (34,070) 737 (185) (22,545) viii. Reconciliation of net cash flow to movement in net debt Unaudited Inaudited Audited Twelve Six months Six months months to 31 to 30 June to 30 June December 2005 2004 2004 £000 £000 £000 Increase in cash in the six month period 3,173 20,437 11,761Cash (inflow)/outflow from (increase)/decrease in debtfinancing (37,243) 18,088 18,559 Change in net debt resulting from cash flows (34,070) 38,525 30,320New finance leases - (48) (48)Mezzanine loan interest - (72) (72)Exchange movement (185) 25 317Debt fees prepaid 737 - - Movement in net debt in the period (33,518) 38,430 30,517Net debt at the start of the year 10,973 (19,544) (19,544) Net (debt)/cash at the end of the period (22,545) 18,886 10,973 ix. Restatement of results for six months to 30 June 2004 Loan arrangement fees amounting to £0.3 million have been reclassified fromadministrative expenses to interest payable and similar charges, and acorresponding adjustment has been made in the cash flow statement. Thisadjustment has no impact on the loss retained in the period to 30 June 2004. Earnings per share for 30 June 2004 have been adjusted to reflect A and Bordinary shares as a single class of ordinary shares prior to conversion and /orredemption, with this treatment being consistent with that adopted in thefinancial statements for the year ended 31 December 2004. Previously in theinterim report for the period ended 30 June 2004 earnings per share for A and Bordinary shares were calculated separately. x. Subsequent events: On 8 August 2005, the following took place: • The Group placed a further 19,125,684 Ordinary shares for a gross consideration of £35.0 million. These shares rank pari passu with those already in issue. • The Group extended its senior debt facility by £20.0 million. • The Group acquired 100% of the share capital of Pentex Management Limited, a company incorporated in the United Kingdom whose principal activity is that of oil and gas exploration, development and production in the United Kingdom. The company and its subsidiaries were acquired for an initial consideration of £38.0 million with a further £5.1 million payment contingent on planning permission being granted in respect of a gas storage project at Gainsborough. Independent review report by KPMG Audit Plc to Star Energy Group plc Introduction We have been engaged by the company to review the financial information set outon pages 7 to 13 and we have read the other information contained in the interimreport and considered whether it contains any apparent misstatements or materialinconsistencies with the financial information. This report is made solely to the company in accordance with the terms of ourengagement. Our review has been undertaken so that we might state to the companythose matters we are required to state to it in this report and for no otherpurpose. To the fullest extent permitted by law, we do not accept or assumeresponsibility to anyone other than the company for our review work, for thisreport, or for the conclusions we have reached. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the interim report in accordance with the AIMRules which require that the interim report must be presented and prepared in aform consistent with that which will be adopted in the company's annual accountshaving regard to the accounting standards applicable to such annual accounts. Review work performed We conducted our review having regard to the guidance contained in Bulletin 1999/4: Review of interim financial information issued by the Auditing PracticesBoard for use in the United Kingdom. A review consists principally of makingenquiries of management and applying analytical procedures to the financialinformation and underlying financial data and, based thereon, assessing whetherthe accounting policies and presentation have been consistently applied unlessotherwise disclosed. A review is substantially less in scope than an auditperformed in accordance with Auditing Standards and therefore provides a lowerlevel of assurance than an audit. Accordingly we do not express an auditopinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2005. KPMG Audit PlcChartered AccountantsLondon This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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