5th Sep 2006 07:04
Cairn Energy PLC05 September 2006 EMBARGOED FOR RELEASE AT 07:00 5 SEPTEMBER 2006 CAIRN ENERGY PLC INTERIM RESULTS ANNOUNCEMENT Corporate •The partial Initial Public Offering (IPO) for Cairn India on the Bombay Stock Exchange (BSE) and National Stock Exchange of India (NSE) in December 2006 is on track•Cairn India Board established with three prominent Indian nationals appointed as independent non-executive directors•Cairn India Board to be chaired by Cairn Chief Executive, Sir Bill Gammell•Cairn Energy PLC to be a holding company for two businesses: •Cairn India: an Indian exploration, development and production business A UK head-quartered exploration focused business •IPO proceeds to be used both to return cash to shareholders and to fund the continuing businesses Operations - Rajasthan •DeGolyer and McNaughton (D&M) independent assessment estimates 3.4 billion barrels of oil equivalent (boe) in place in Rajasthan •Cairn estimates 3.6 billion boe in place in Rajasthan of which 2.2 billion boe in place are currently under active development planning and 1.4 billion boe in place identified in other fields under review •Cairn estimates proven plus probable (2P) gross reserves plus contingent resource estimates for those fields currently under active development planning total 864 million barrels of oil equivalent (mmboe) •Initial results from hydraulic fracture programme indicate potential for new reserves from low permeability reservoirs •Detailed design work on Mangala processing facilities now well advanced •Review of potential midstream and upstream integration, discussions ongoing with the Government of India (GoI) and third parties •Assessment ongoing to investigate possible integration with the midstream in line with the continued growth in the Rajasthan reserves and resource base •First oil at Mangala now rescheduled to 2009 •First oil from southern fields is anticipated Q4 2006 Operations - Rest of South Asia •Bids in sixth Indian bid round (NELP-VI) to be submitted by 15 September 2006 •Sustained oil production from Gauri highlights potential for Lakshmi oil production •Infill drilling due to start in Ravva Q3 2006 •New drilling programme to commence in Bangladesh Q4 2006 Financial •$1 billion revolving credit facility signed June 2006 with 14 international banks •Net cash at 30 June 2006 of $19.5m (H1 2005 restated: $152.7m) •Average entitlement production 27,346 barrels of oil equivalent per day (boepd) (H1 2005: 27,909 boepd) •Profit before tax (pre exceptional items) of $12.7m (H1 2005 restated: $48.5m) •Cash generated from operations $72.5m (H1 2005 restated: $71.5m) Sir Bill Gammell, Chief Executive said: "I am pleased that we are both on track to proceed with a partial IPO of theIndian business in December 2006 and that the scale and size of the Rajasthandiscoveries has been supported by independent estimates. The Rajasthan project continues to grow and we are actively exploring whatoptions are available with the Government of India and third parties to assesswhether there are long term benefits to Cairn through integration with themidstream. As we create a new Indian business, I am delighted to announce the appointmentsof Naresh Chandra, Aman Mehta and Dr Omkar Goswami, whose combined talentssignificantly strengthen the Cairn India Board." Enquiries to: Cairn Energy PLC: Tel: 0131 475 3000Analysts/Investors Bill Gammell Chief Executive Kevin Hart Finance Director Mike Watts Exploration DirectorMedia David Nisbet Head of Group Communications Brunswick Group LLP: Tel: 0207 404 5959 Patrick Handley, Mark Antelme Interview with Sir Bill Gammell An interview with Sir Bill Gammell, Chief Executive in video/audio and text isnow available on http://www.cairn-energy.plc.uk/ and on http://www.cantos.com/ Cairn Energy Live Audio Webcast The webcast of the 2006 Interim results presentation will be available at 09:00hrs (UK time) on Tuesday, 5 September 2006. This will be available on the Cairn Energy PLC website:http://www.cairn-energy.plc.uk An on demand version of the webcast will be available in the afternoon. Notes: This summary is qualified by, and should be read in conjunction with, thefollowing pages of this Interim Results Announcement. These materials are not an offer to sell, or a solicitation of offers topurchase, the shares to be offered in the IPO (the "Shares") in anyjurisdiction. No action will be taken to permit the Shares to be sold in apublic offer in any jurisdiction outside India. In particular, no offer to thepublic will be made in any Member State of the European Economic Area or in theUnited States. The Shares have not been and will not be registered under the USSecurities Act of 1933, as amended. These materials contain forward-looking statements regarding Cairn, ourcorporate plans, future financial condition, future results of operations,future business plans and strategies. All such forward-looking statements arebased on our management's assumptions and beliefs in the light of informationavailable to them at this time. These forward-looking statements are, by theirnature, subject to significant risks and uncertainties and actual results,performance and achievements may be materially different from those expressed insuch statements. Factors that may cause actual results, performance orachievements to differ from expectations include, but are not limited to,regulatory changes, future levels of industry product supply, demand andpricing, weather and weather related impacts, wars and acts of terrorism,development and use of technology, acts of competitors and other changes tobusiness conditions. Cairn undertakes no obligation to revise any suchforward-looking statements to reflect any changes in Cairn's expectations withregard thereto or any change in circumstances or events after the date hereof. CHAIRMAN'S STATEMENT Overview The Company's business in South Asia continues to experience substantial growth,driven principally by Cairn's ongoing success in Rajasthan. Three years ago we estimated that the reserves potential of Rajasthan, after sixwells and three oil discoveries, was 30-500 plus million barrels. Today after130 wells, 18 discoveries and 21 separate oil and gas accumulations we estimatea discovered 3.6 billion boe in place with an associated ultimate reservespotential of around 1 billion boe. We still have wells to drill. As a result of this transformational change, we can confidently look forward toa step change in oil production, and the associated cash flow, once the fieldsin this world class basin are brought on stream. With the continued growth of the Rajasthan project, Cairn and the GoI havestarted discussions to consider Cairn's involvement in the midstream. Cairnviews this as a possible opportunity to secure the value of the project andpotentially gain further benefit through integration and schedule control. Thisis discussed more fully in the Chief Executive's Review. The growth of Cairn is set against a background of economic expansion in India,which itself is driving an escalating demand for energy. The Cairn operatedRajasthan production is expected to result in a significant reduction in India'scurrent oil supply-demand imbalance. Cairn's existing acreage base, combined with its cash flow, which will besignificantly enhanced when the Rajasthan fields come on stream, place it in anexcellent position to take advantage of the many opportunities being created inIndia. Cairn has made good progress in the Rajasthan upstream project with GoI andJoint Venture (JV) approvals being obtained for the Mangala, Aishwariya,Saraswati, Raageshwari Oil and Raageshwari Deep Gas Field Development Plans(FDPs) and associated budgets. The detailed engineering design for the upstreamdevelopment is well advanced and we are ready to order long lead items onceCairn has finalised the midstream strategy and sanctioned the main part of theexpenditure. A $1 billion facility has been arranged with a syndicate of 14 internationalbanks, with the bulk of the funds earmarked for the first phase of the Rajasthandevelopment. IPO As previously announced, the Cairn Board has decided to reorganise its Indianbusiness. This is being done via a proposed partial IPO of the Company's Indianbusiness on the BSE and NSE. To this end significant progress has been madesince our initial statement in March. The Cairn India Board is now constituted. The executive team is led by RahulDhir, Chief Executive Officer and comprises Laurie Smyth, Chief OperatingOfficer and Jann Brown, Acting Chief Financial Officer with the appointment of apermanent Chief Financial Officer imminent. The non-executive Cairn directorscomprise Sir Bill Gammell, Chairman; myself as Deputy Chairman and HamishGrossart. I am also delighted to announce that we have now made the following independentnon-executive appointments to the Cairn India Board: •Naresh Chandra, who was previously the Chairman of the GoI Committee on Corporate Governance, the Indian Ambassador to the United States, Advisor to the Indian Prime Minister, Cabinet Secretary and Chief Secretary of the State of Rajasthan; he currently sits on a number of boards as a non-executive director; •Aman Mehta, who until 2003 was the Chief Executive Officer of HSBC Asia Pacific; he currently sits as a non-executive director on the boards of Jet Airways, Tata Consultancy Services and Vedanta Resources plc; and •Dr Omkar Goswami, who was previously Chief Economist for the Confederation of Indian Industry and the Editor of Business India. He founded his own consultancy giving advice to companies on corporate governance, investor relations, business restructuring and economic research. Dr Goswami is currently a non-executive director on a number of boards including Infosys Technologies Ltd. Work on meeting the IPO schedule of listing in December 2006, assumingfavourable market conditions, is currently on track subject to all regulatoryapprovals being obtained. The partial IPO is also subject to Cairn shareholderapproval and the current timetable envisages that an Extraordinary GeneralMeeting (EGM) of shareholders will be held in late October 2006 for thispurpose. We have created the structure and have set up the mechanism to develop two worldclass businesses; an Indian exploration development and production business, runfrom Gurgaon in India and the other, managed from Scotland and more highlygeared to exploration. We have made excellent progress in our efforts to achievethis. Staff I would like to thank all Cairn staff, in particular those in both our CB/OS-2and Rajasthan operations for their efforts and commitment during recent floodingin Gujarat and Rajasthan. In CB/OS-2 we continued to supply gas to our customersfrom our processing facility, while in Rajasthan our efforts in the reliefoperations showed the continuing commitment of Cairn to the communities in whichwe operate. I appreciate this has been a time of change for everybody in our business, butCairn is making good progress in shaping the organisation for the changes thatit is facing. The business is always evolving and as part of that evolutionpeople are moving on to new opportunities both internally and externally. I would like personally to thank all of those who have been part of the Cairngrowth story over the past decade, in particular our Finance Director, KevinHart, who, on the current timetable, will move to a new role as Chief Executiveat another oil and gas exploration company, following the shareholders' EGM. Norman MurrayChairman, 5 September 2006 CHIEF EXECUTIVE'S REVIEW Overview The proposed partial IPO of the Indian business is a natural evolution of ourbusiness, building on the decade of success and achievement that Cairn has hadin South Asia. I will take an active role in this process and will remain asGroup Chief Executive as we change the structure of the Group, whilst alsotaking on the role of non-executive chairman of Cairn India. The Cairn Group is being restructured to create two separate sub-groups: oneunder Cairn India and the other under a new exploration subsidiary company.Following the IPO, Cairn India is intended to be a majority owned subsidiary ofCairn listed in India. The new exploration company already exists as a whollyowned subsidiary. The Cairn India sub-group will hold all of the producing development andexploration interests in India (including Rajasthan) except the threeexploration blocks in the Ganga Valley, which will be shared with the newexploration company, that will also hold the Bangladesh assets and theexploration blocks in Nepal. Rajasthan Upstream Cairn is making good progress in the Rajasthan upstream project. Our belief inthe Rajasthan block has received a further boost with D&M independentlyestimating the hydrocarbons in place for the existing discoveries at around 3.4billion boe, while Cairn's own estimate is 3.6 billion boe. Our estimate of the Rajasthan reserves base for the three main northern fields,Mangala, Bhagyam and Aishwariya has grown significantly since the initialestimates at the time of each discovery. Ongoing work is highlighting thepotential to raise the recovery rates by applying enhanced oil recovery (EOR)techniques particularly from Mangala, the biggest of the Rajasthan fields. The upstream picture in Rajasthan continues to evolve. The 2P hydrocarbons inplace and reserves plus contingent resources of the three main fields (Mangala,Bhagyam and Aishwariya) plus those of the three small fields (Saraswati,Raageshwari Oil and Raageshwari Gas) which are currently under developmentplanning, total 2.2 billion boe and 864 mmboe respectively. The additional smaller and/or low permeability fields and reservoirs have anestimated 2P hydrocarbons in place volume of more than 1.4 billion boe. Anongoing technical challenge over the coming years will be to convert as much ofthis contingent resource base into reserves as is possible. Some of thesesmaller fields with good quality Fatehgarh reservoir will be developed once themajor infrastructure is established. In addition, the hydraulic fractureprogramme that is underway has highlighted the potential for new reserves to besecured from the low permeability reservoirs. The evaluation of many of theseother fields continues and currently reserves have only been booked for theMangala, Raageshwari and Saraswati fields. The FDPs for the Mangala, Aishwariya, Saraswati and Raageshwari fields have beenagreed by the GoI and the funding is now in place for the initial upstreamdevelopment. The detailed engineering design team for the Mangala development consists ofmore than a hundred people in Houston, comprising Cairn personnel workingalongside colleagues from Mustang Engineering. In the south of the Rajasthan block, first commercial production by truckingfrom the Saraswati field will begin as soon as the oil sales mechanism has beenfinalised with the GoI, currently anticipated by the end of this year. Firstcommercial production from the Raageshwari oil field will start approximatelythree months after Saraswati. We are also aiming to submit the FDPs to GoI for the second largest field,Bhagyam along with Shakti early next year. The impact of the severe recent flooding in Rajasthan on field developmentactivities is currently being assessed. Detailed surveys of our existing andplanned sites are being conducted. Taking into account the current worldwide highly competitive market forresourcing and procurement and the possible integrated approach to the upstreamand midstream, Cairn now believes that first oil from Mangala can be deliveredduring 2009. Rajasthan Midstream In order that Cairn can ensure efficient offtake of crude oil from the Rajasthanblock and given the continued growth of the business in Rajasthan, the Companyand the GoI have started discussions to consider Cairn's involvement in themidstream. Under the terms of the Rajasthan Block Production Sharing Contract (PSC), theGoI through its nominee is responsible for the purchase of crude oil and thetransportation of the crude oil produced from the delivery point at the fieldfacilities to the refinery (midstream activities). Transportation entails theconstruction of a pipeline downstream of the delivery point to handle theexpected volumes of crude oil. Through third party discussions and Cairn led studies relating to the evacuationof the crude, Cairn is building up a comprehensive understanding of the likelyconstruction timescale for the pipeline and the associated technical andcommercial issues involved. In the light of that understanding, Cairn, whilst cognisant of the obligationson the GoI under the PSC, believes that it is appropriate to look at ways tomitigate the risks to the upstream development associated with the midstreamschedule and to assess the potential to benefit from exposure to the wholeproduction and oil sales chain. Accordingly, Cairn has now decided toinvestigate the possibility of becoming directly involved in the midstreamdevelopment to ensure the proper integration of upstream and transport-relatedproject activities. It is believed that, if suitable commercial arrangements canbe agreed with the GoI and potentially third parties, such involvement wouldmitigate scheduling and operational risk and may provide greater flexibility onmaximum off-take. Results and Financial Performance Cairn's underlying financial strength, including its recently completedUS$1billion syndicated revolving credit facility provides the flexibility tofund its initial share of Rajasthan upstream development. Key statistics H1 2006 H1 2005** % Increase/ (Decrease)Production (boepd)* 27,346 27,909 (2)Average price per boe ($) 31.03 24.39 27Turnover ($m) 153.9 123.4 25Average production costs per boe ($) 6.29 4.66 35Average production costs per boe ($) *** 5.56 5.20 7Profit before tax (pre-exceptional items)($m) 12.7 48.5 (74)(Loss)/profit after tax ($m) (5.8) 55.4 (110)Cash generated from operations ($m) 72.5 71.5 1Net assets ($m) 742.7 737.4 1Net cash ($m) 19.5 152.7 (87) *on an entitlement interest basis ** restated (where applicable) following mandatory implementation ofInternational Financial Reporting Standards (IFRS) in 2005, adoption ofsuccessful efforts based accounting policies and US$ reporting. *** excluding stock adjustments and pre-exploration costs PROFIT AND LOSS Turnover Average production on a working interest basis has increased by 10% to 42,150boepd (H1 2005: 38,481 boepd). This is principally due to increased gas, oil andcondensate production from the Lakshmi and Gauri fields. Production for the period has decreased by 2% to 27,346 boepd (H1 2005: 27,909boepd), on an entitlement interest basis primarily due to lower entitlement atSangu following a reduction in development expenditure incurred in H1 2006. Thishas been offset by increased entitlement at CBOS/2 following improved fieldproduction. The Group's production mix continues to be gas biased (circa 75%). This,combined with the contractual gas price caps, results in an average pricerealised by the Group for the period of $31.03 per boe (H1 2005: $24.39 perboe). Cairn's exposure to world oil prices will increase significantly whenproduction commences from Rajasthan. Revenue for the period was $153.9m (H1 2005restated: $123.4m). Gross Profit Cost of sales for the period was $104.7m (H1 2005 restated: $76.2m). Cost ofsales includes the write-off of unsuccessful exploration costs of $28.2m (H12005 restated: $11.8m) arising following the Group's adoption of successfulefforts based accounting policies and US$ reporting at the end of 2005. Production costs for the period were $31.1m (H1 2005 restated: $23.5m). Theseinclude pre-exploration costs now expensed under IFRS6 and stock movements.Excluding these adjustments production costs per barrel remain relativelyunchanged at $5.56 for H1 2006 compared to $5.20 in H1 2005. The average Group rate for depletion and decommissioning has increased by 13% to$9.16 per boe (H1 2005: $8.08 per boe). This arises from changes in field mixand individual rates as depletion is now calculated on a field basis. The Sangudepletion rate has increased as a consequence of the reserves revision at theend of 2005 and the Lakshmi/Gauri field depletion has decreased due to theeffect of the ONGC farm out in 2005. The Group generated a gross profit of $49.2m (H1 2005 restated: $47.3m). Profit for the Year Administrative expenses for the period were $22.8m (H1 2005 restated: $18.9m).This includes a charge of $6.1m (H1 2005 restated: $3.9m) for share basedpayments and associated National Insurance Contributions in accordance withIFRS2. Net finance costs for the period were $13.6m (H1 2005 restated: net financeincome $20.1m), including a foreign currency exchange loss of $10.0m (H1 2005restated: gain $18.3m). Realised exchange rate movements in 2006 arose primarilydue to the weakening of the US$ against Sterling in the period and were alsoimpacted by the recognition of exchange differences on intergroup funding underIFRS. Profit before tax and pre exceptional items was $12.7m (H1 2005 restated: profit$48.5m). The majority of the $12.8m tax charge (H1 2005 restated: $8.3m) ariseson profits in India. The effective tax rate is high as potential deferred taxassets in 2006 of $4.7m in the UK have not been recognised. Exceptional items The exceptional oil and gas write down of $5.7m relates to impairment on Sanguarising under IAS 36 due to a rephasing of future expenditure and production.The prior period exceptional gain of $15.3m relates to the gain arising on saleof assets to ONGC. The Group made a loss for the period of $5.8m (H1 2005 restated: profit $55.4m). BALANCE SHEET Capital expenditure Capital expenditure during the period was $128.7m (H1 2005 restated: $132.0m),comprising $88.8m on exploration/appraisal activities, $33.5m on developmentactivities and $6.4m on other fixed assets. The exploration/appraisalexpenditure during the period relates principally to the continued drillingprogramme in Rajasthan. The majority of the development expenditure waspre-development expenditure in Rajasthan. CASH FLOW Cash flows from operating activities Cash generated from group operations has increased to $72.5m (H1 2005 restated:$71.5m). Tax payments during 2006 were $3.1m (H1 2005 restated: $3.5m). Cash flows from investing activities Cash outflow from capital expenditure during the period was $124.7m, comprising$91.0m exploration/appraisal expenditure, $30.6m development expenditure and$3.1m other expenditure. (H1 2005: $175.7m - $101.5m exploration/appraisal,$71.9m development and $2.3m other). Net assets/net cash Net assets at 30 June 2006 were $742.7m (H1 2005: restated $737.4m). At the yearend the Group had net cash of $19.5m (H1 2005: $152.7m). The Group signed aUS$1billion syndicated revolving credit facility on 27 June 2006 principally tofinance development activities in Rajasthan. Discussions are taking place withthe banks for Cairn India to adapt this facility to accommodate the proposed IPO. Outlook The scale of the finds in Rajasthan continues to evolve. The increases in thereserves and resource base and the progress made on the development project forthe northern fields are all encouraging. It is in the best interest of bothIndia and Cairn that production commences as soon as possible from these fields. The IPO planning for Cairn India is well underway, as is the planning for thenew exploration orientated company. The opportunities for both of thesebusinesses are substantial and will form the next stage of the continued growthstory at Cairn. India continues to offer excellent growth opportunities and Cairn intends totake an active part in the forthcoming NELP-VI bid round where 55 blocks, 25onshore and 30 offshore, are on offer. The GoI Minister for Petroleum and Natural Gas said recently "what has been goodfor Cairn has also been good for India!": I believe this will continue to be thecase. Sir Bill GammellChief Executive, 5 September 2006 OPERATIONAL REVIEW Cairn's gross operated production across South Asia during the first half of2006 was 111,700 boepd (net entitlement 27,346 boepd). The majority of Cairn's operational activity has been focused on the explorationand appraisal of its Rajasthan block in North West India. This effort hasresulted in 18 discoveries including the world class Mangala and Bhagyam oilfields in the northern part of the block. The independent firm, D&M, in August2006 estimated 3.4 billion boe oil in place in Rajasthan. Five fields comprising Mangala, Aishwariya, Saraswati, Raageshwari Oil andRaageshwari Deep Gas have GoI development approval while work on approvals fordevelopment of other discoveries, in particular Bhagyam and Shakti, is ongoing.The remaining discoveries require further appraisal or evaluation. RAJASTHAN BASIN - North West India Development Area (Cairn 70% (Operator); ONGC 30%) The Company has made good progress on the proposed development of the Mangalaand Raageshwari Deep Gas fields. All of the required regulatory clearances havebeen obtained, the land for the process facilities and the majority of thedrilling sites have been acquired and the detailed engineering has progressed toa point where ordering of long lead equipment can begin once Cairn has finalisedthe midstream strategy and sanctioned the main part of the expenditure. The main focus remains to bring Mangala on stream at the earliest opportunity,followed by Bhagyam and then Aishwariya. Following further evaluation the estimated 2P oil in place for Bhagyam hasincreased from 408 million barrels of oil (mmbbls) to 468 mmbbls. Work toestimate the associated reserves is still ongoing. As part of the Mangala development work, a new 120 km2 high density threedimensional (3D) survey over the field commenced acquisition on 5 August 2006. This new 3D will enable detailed reservoir characterisation studies andimproved structural interpretation as well as providing the basis for improveddevelopment well planning for the field. All the required regulatory consents have been secured and the engineering workcompleted to enable first commercial production from the Saraswati andRaageshwari fields once the oil sales mechanism has been finalised with the GoI. Northern Appraisal Area (Cairn 100%) In June 2005, Cairn was granted an 18 month extension to complete its activitiesin the northern appraisal area to the north and west of the Development Area. A 524 km2 3D seismic programme was completed on 5 August 2006. The dataprocessing has been fast tracked and new prospects are emerging from theinterpretation of the 3D dataset. Up to 5 wells are planned in the area priorto possible relinquishment on 14 November 2006. An application has beensubmitted to the government for a 6 month extension of the Northern AppraisalArea to enable full evaluation of the area and retention of discoveries prior toany relinquishment. Reservoir Stimulation Programme A programme of hydraulic fracture stimulation on various lower permeabilityreservoirs is now complete. The hydraulic fracture programme has highlighted thepotential for new reserves to be secured from the low permeability reservoirs.The in place volumes associated with these reservoirs is more than 1 billionbbls. The test results from the two Barmer Hill wells (Aishwariya-4 & Mangala-6) werereported previously and highlight the potential to unlock material oil resourcesin this reservoir at two of the main three fields. Additional work is needed toquantify the potential and will be addressed during the development drillingprogramme at Mangala & Aishwariya. Results on the Raageshwari deep gas field from a single tested zone inRaageshwari 5 indicated a two-fold increase in productivity. Testing onRaageshwari 7 is on-going following a three stage fracture stimulationtreatment, with a stabilised rate of approximately 4mmscf/d. A two stagehydraulic fracture treatment has also been completed on Raageshwari-4z. Thewell is currently being tested. Gas from the Raageshwari wells will be utilised as fuel for the Mangaladevelopment and subsequent northern area developments. The Vijaya, Vandana, N-R and southern fields are also potential candidates forfuture fracture stimulation to access new reserves or accelerate production. CAMBAY BASIN - Western India Block CB/OS-2: Lakshmi and Gauri Gas Fields (Cairn 40% (Operator)) Lakshmi and Gauri production for the half year is up from 15,211 boepd to 24,754boepd gross, due to increased gas, oil and condensate production. Gross oil andcondensate production averaged 3,783 barrels of oil per day (bopd) for the 6month period. Gas deliverability is set to decline in the second half due tonatural depletion and water production in one of the gas wells. In view of the encouraging oil production from the Gauri GA-3 well, furtherevaluation of the oil play is planned and a Lakshmi Oil Development Plan hasbeen submitted to the JV for approval with implementation planned for early nextyear. Studies are underway to review alternative ways of exporting the produced oilfrom the oil storage facilities on a long term basis and to examine increasingthe oil handling facilities at the plant to 9,000 bopd. The small Ambe gas field is being considered as a potential future satellitedevelopment to Lakshmi, particularly in the light of present high local gasprices. The small CB-X field is being developed and first gas is anticipated in 2007. CB-ONN-2001/1 (Cairn 30%; ONGC (Operator)) The Vanthvali-1 exploration well was drilled in 2005 and suspended for furtherworkover. The Utarsanda-1 well was completed Q2 2006 and was also suspended. Onefurther exploration well is planned in the second half of 2006. CB-ONN-2002/1 (Cairn 30%; ONGC (Operator)) The second phase of 3D seismic acquisition on the block has been completed. TheOperator is preparing to drill two exploration wells in the second half of 2006. KRISHNA-GODAVARI (KG) BASIN - Eastern India Ravva (Cairn 22.5% (Operator)) The Ravva field has remained at a plateau rate of approximately 50,000 bopd inthe first half of 2006. Gas production is approximately 70 million standardcubic feet of gas per day (mmscfd). The offshore drilling programme of 6 infill wells and 1 or 2 exploration well isscheduled to commence from mid September 2006. An exploration well (RX-9),spudded in June 2006 has now been plugged and abandoned after a test confirmedlow volumes of gas and a negligible quantity of high viscous oil. KG-DWN-98/2 (Cairn 10%, ONGC (Operator)) Four exploratory wells were drilled in this block between the third quarter of2005 and the second quarter of 2006. A fifth well will be completed in thesecond half of 2006. One well encountered gas-bearing sands and the other threeflowed gas during testing. Almost 1,100 km2 of 3D Q-marine seismic data wereacquired during the first half of 2006. Two further wells are planned fordrilling in the second half of 2006. One of these wells will be drilled in anuntested part of the basin on a high impact structure in approximately 3,000mwater depth in the south of the contract area. HIMALAYAN FORELAND BASIN - Nepal & Northern India Nepal Blocks 1,2,4,6 & 7 (Cairn 100% (Operator)) The Company continues to monitor security developments in Nepal with a view tocommencing field operations at the earliest opportunity. In the meantime thecontracts remain under force majeure. Northern India - GV-ONN-2002/1 (Cairn 100% (Operator)) An airborne geophysical survey is planned over this acreage in Q4 2006. A twodimensional (2D) seismic acquisition programme is planned to commence in fourthquarter of 2006 or first quarter of 2007. Northern India - GV-ONN-97/1 (Cairn 30%; ONGC (Operator)) The first exploration well in the Himalayan Foreland Basin in which Cairn isparticipating, Tisua-1, is currently operating. NELP-VI The sixth Indian Government exploration bidding round, NELP-VI, closes 15September 2006. Cairn intends to be an active participant in bidding in thisround. BENGAL BASIN - Bangladesh Development and Production Sangu (Cairn 75% (Operator)) The Sangu gas plant continues to perform well and gas sales from the field haveaveraged 145 mmscfd during the first half of 2006. The demand pattern isvariable depending on the power and fertiliser sector, but the underlying demandin the southern region of Bangladesh is expected to increase steadily. The Sangufield is in natural decline and the next phase of development drilling isscheduled to start in December 2006 with the objective of increasing theproduction potential. Exploration and Appraisal Cairn signed an agreement with Government of Bangladesh extending its rights todrill exploration prospects in parts of Block 16 outwith the Sangu DevelopmentArea in 2005. This agreement has now been ratified by Cairn's JV partner and theHatia prospect, 10 kilometres north west of Sangu, will be included in thedrilling campaign. Subject to the duration of the drilling weather window andpartner approval, Cairn intends to drill either a further exploration well onthe non-Sangu areas or an appraisal of a Sangu satellite field, South Sangu. Blocks 5 (Cairn 90% (Operator) & 10 (Cairn 90% (Operator)). Additional seismic is being planned for the 2006/2007 field season based on theencouraging findings of an initial seismic programme acquired in 2004. In Block 10 the objective is to delineate the limits of an onshore prospectwhich could be considered for drilling in late 2007. Block 7 (Cairn 45%) The Operator Chevron has recently completed a 1,075 km 2D seismic survey on theblock. Group Production The Group entitlement production for the first six months of 2006 was 27,346boepd net to Cairn (H1 2005: 27,909 boepd). Production (approximate boepd) Ravva Sangu Lakshmi & Gauri Total(H1 2006)Gross field 62,700 24,200 24,800 111,700Working interest 14,100 18,100 9,900 42,100Entitlement interest 6,400 10,300 10,600 27,300 Due to the Group's current production mix being heavily gas biased and theexistence of contractual caps on the price received for this gas, the averageprice realised for the six months to 30 June 2006 was $31.03 (H1 2005: $24.39). Group Reserves Reserves at Produced Additions Disposals Revisions Reserves at 31/12/05 in 2006 in 2006 in 2006 in 2006 30/06/06 mmboe mmboe mmboe mmboe mmboe mmboe South 237.9 (4.9) 0.1 - 3.5 236.6Asia The table above shows the Group's estimated reserves information at the end ofJune 2006 on an entitlement basis for the Group (at $20 / bbl). The Rajasthan component of these reserves currently only comprises estimatescontained in the Mangala, Raageshwari and Saraswati field FDPs taken out to theyear 2020. The Company's estimated entitlement to reserves at 30 June 2006 is 216.4 mmboe(at $30 / bbl) and 119.6 mmboe (at $40 / bbl). On a direct working interest basis, reserves at 30 June 2006 totalled 268.5mmboe (31 December 2005: 275.7 mmboe). Group Income Statement For the six months to 30 June 2006 ----------------------- ------ -------- -------- --------- Notes Six months Six months Year ended to 30 June to 30 June 31 December 2006 2005 2005 (unaudited) (restated) (audited) $'000 (unaudited) $'000 $'000 ----------------------- ------ -------- -------- --------- Revenue 153,861 123,427 262,562 Cost of salesProduction costs (31,115) (23,544) (50,235)Unsuccessful exploration (28,238) (11,777) (26,867)costsDepletion and decommissioningcharge (45,347) (40,839) (91,740)----------------------- ------ -------- -------- ---------Gross profit 49,161 47,267 93,720Administrative expenses (22,833) (18,878) (38,088)Exceptional write down of oiland gas assets (5,710) - -Exceptional gain on sale ofoil - 15,272 15,272and gas assets ------ -------- -------- --------------------------------Operating profit 20,618 43,661 70,904Finance income 1,525 21,224 32,543Finance costs (15,156) (1,152) (2,236)----------------------- ------ -------- -------- ---------Profit before taxation 6,987 63,733 101,211----------------------- ------ -------- -------- ---------Taxation on profit 4,448 - (4,386) - UK (17,229) (8,295) (17,753) - Overseas ----------------------- ------ -------- -------- ---------(Loss)/profit for the periodattributable to equity (5,794) 55,438 79,072holders ------ -------- -------- --------------------------------Earnings per ordinary share -basic (cents) 1 (3.68) 35.35 50.37Earnings per ordinary share -diluted (cents) 2 (3.68) 35.17 50.10----------------------- ------ -------- -------- --------- Notes: 1. The basic earnings per ordinary share is calculated on a loss of$5,794,000 (H1 2005: profit of $55,438,000) on a weighted average of 157,538,718(H1 2005: 156,806,174) ordinary shares. 2. In respect of the six months to 30 June 2006, 835,055 potentialordinary shares were anti-dilutive. In respect of the six months to 30 June2005, the diluted earnings per ordinary share is calculated on a profit of$55,438,000 on 157,628,121 ordinary shares, being the basic weighted average of156,806,174 ordinary shares and the dilutive potential ordinary shares of821,947 ordinary shares relating to share options. 3. No dividend has been declared (2005: nil). Group Statement of Changes in Equity For the six months to 30 June 2006 Six months Six months Year ended 31 to 30 June to 30 June December 2006 2005 2005 (unaudited) (restated) (audited) $'000 (unaudited) $'000 $'000 Opening equity 757,598 711,197 711,197 Currency translationdifferences 8,769 (16,576) (23,893)---------------------------- --------- -------- ---------Total income/(expense)recognised direct in equity 8,769 (16,576) (23,893) (Loss)/profit for theperiod (5,794) 55,438 79,072---------------------------- --------- -------- ---------Total recognised expenseand income for the period 2,975 38,862 55,179---------------------------- --------- -------- --------- New shares issued inrespect of employee shareoptions 1,681 2,570 3,782Cost of share basedpayments 2,722 1,883 4,592Cost of shares purchased (22,294) (17,152) (17,152)---------------------------- --------- -------- ---------Closing equity attributableto the equity holders 742,682 737,360 757,598---------------------------- --------- -------- --------- Group Balance Sheet As at 30 June 2006Note As at 30 June As at 30 June As at 2006 2005 31 December (unaudited) (restated) 2005 $'000 (unaudited) (audited) $'000 $'000 Non-current assetsIntangible exploration/appraisalassets 380,871 346,053 321,855Property, plant & equipment -development/producing assets 445,194 387,666 456,929Property, plant and equipment - other 6,738 2,355 4,158Intangible assets - other 3,295 2,092 2,601Investments 96 96 96Deferred tax assets 6,784 7,866 2,606------------------------------ ---------- --------- -------- 842,978 746,128 788,245 ------------------------------ ---------- --------- -------- Current assetsInventory 3,728 5,046 5,533Trade and other receivables 2 164,317 140,196 124,725Current tax debtor 5,938 - -Bank deposits - 20,000 20,000Cash and cash equivalents 44,476 132,667 75,509------------------------------ ---------- --------- -------- 218,459 297,909 225,767 ------------------------------ ---------- --------- --------Total assets 1,061,437 1,044,037 1,014,012------------------------------ ---------- --------- --------Current liabilitiesTrade and other payables 105,445 113,527 94,736Obligations under finance leases 1,101 - -Income tax liabilities 15,164 12,673 7,550------------------------------ ---------- --------- -------- 121,710 126,200 102,286 ------------------------------ ---------- --------- --------Non-current liabilitiesDeferred tax liabilities 147,893 126,750 136,672Bank loans 25,000 - -Obligations under finance leases 3,546 - -Provisions 20,606 53,727 17,456------------------------------ ---------- --------- -------- 197,045 180,477 154,128 ------------------------------ ---------- --------- --------Total liabilities 318,755 306,677 256,414------------------------------ ---------- --------- --------Net assets 742,682 737,360 757,598------------------------------ ---------- --------- --------EquityCalled-up share capital 25,824 25,737 25,775Share premium 199,527 196,721 197,895Shares held by the ESOP Trust (54,792) (40,776) (37,311)Foreign currency translation 842 (563) (7,927)Other reserves 37,284 37,284 37,284Capital reserves - non-distributable 45,331 45,331 45,331Capital reserves - distributable 178,429 178,429 178,429Retained earnings 310,237 295,197 318,122------------------------------ ---------- --------- --------Total equity attributable to theequity holders 742,682 737,360 757,598------------------------------ ---------- --------- -------- Group Statement of Cash Flows For the six months to 30 June 2006 Six months Six months Year ended to 30 June to 30 June 31 December 2006 2005 2005 (unaudited) (restated) (audited) $'000 (unaudited) $'000 $'000 Cash flows from operating activitiesCash generated from operations 72,477 71,481 139,621Interest paid (1,510) (617) (1,201)Income tax paid (3,148) (3,548) (6,563)--------------------------- --------- -------- --------Net cash generated from operatingactivities 67,819 67,316 131,857--------------------------- --------- -------- -------- Cash flows from investing activitiesExpenditure on exploration/appraisalassets (91,003) (101,513) (218,324)Expenditure on development/producingassets (30,580) (71,895) (64,921)Purchase of property, plant andequipment - other (821) (801) (4,079)Purchase of intangible assets - other (2,295) (1,497) (3,623)Proceeds on disposal ofexploration/appraisal assets - 91,930 91,930Proceeds on disposal ofdevelopment/producing assets - 45,257 35,574Proceeds on disposal of property,plant 43 6 95and equipment - otherMovement in funds on bank deposit 20,000 (5,656) (5,656)Interest received 2,824 1,787 4,378--------------------------- --------- -------- --------Net cash used in investing activities (101,832) (42,382) (164,626)--------------------------- --------- -------- --------Cash flows from financing activitiesProceeds from issue of shares 1,681 2,570 3,782Payment of finance lease liabilities (607) - -Purchase of own shares (22,294) (17,152) (17,152)Drawdown of loan facilities 25,000 - ---------------------------- --------- -------- --------Net cash flows from/(used in)financing 3,780 (14,582) (13,370)activities --------- -------- -----------------------------------Net (decrease)/increase in cash andcash equivalents (30,233) 10,352 (46,139)Opening cash and cash equivalents atbeginning of period 75,509 122,961 122,961Exchange (losses) on cash and cashequivalents (800) (646) (1,313)--------------------------- --------- -------- --------Closing cash and cash equivalents 44,476 132,667 75,509--------------------------- --------- -------- -------- Reconciliation of operating profit to net cash inflow from operating activities For the six months to 30 June 2006 Six months Six months Year ended to 30 June to 30 June 31 December 2006 2005 2005 (unaudited) (restated) (audited) $'000 (unaudited) $'000 $'000 Operating profit 20,618 43,661 70,904 Depletion, depreciation,decommissioning and amortisation 48,590 42,703 96,680Share based payments 2,722 1,883 4,592Inventory movement 1,805 (2,885) (3,373)Debtors movement (28,300) (14,795) (16,590)Creditors movement (5,287) 8,407 14,551Movement on other provisions (1,605) (3,323) (39,048)Exceptional gain on sale of oil andgas - (15,272) (15,272)assetsExceptional write down of oil and gasassets 5,710 - -Gain on sale of other fixed assets (2) (6) (41)Unsuccessful exploration costs 28,238 11,777 26,867Foreign exchange differences (12) (669) 351 ---------- ----------- ----------- Net cash inflow from operatingactivities 72,477 71,481 139,621 ---------- ----------- ----------- Net Funds As at 30 June 2006 At 1 January Cash flow New Finance Exchange At 30 June 2006 Leases movements 2006 $'000 $'000 $'000 $'000 $'000 Bank 20,000 (20,000) - - -deposits ---------- --------- --------- -------- -------Bank 20,000 (20,000) - - -deposits ---------- --------- --------- -------- -------Cash at 15,831 6,985 - (1,046) 21,770bankShort termdeposits 59,678 (37,218) - 246 22,706 ---------- --------- --------- -------- -------Cash andcash 75,509 (30,233) - (800) 44,476equivalents ---------- --------- --------- -------- -------Finance - 607 (5,318) 64 (4,647)leasesBank loans - (25,000) - - (25,000) ---------- --------- --------- -------- -------Net funds 95,509 (74,626) (5,318) (736) 14,829 ---------- --------- --------- -------- ------- Notes to the Accounts For the six months to 30 June 2006 1. Accounting Policies Basis of Preparation This Interim Report has been prepared on a basis consistent with the accountingpolicies expected to be applied for the year ended 31 December 2006, and whichis also consistent with the accounting policies applied for the year ended 31December 2005. The disclosed figures are not statutory accounts in terms ofsection 240 of the Companies Act 1985. Statutory accounts for the year ended 31December 2005, on which the auditors gave an unqualified report, have been filedwith the Registrar of Companies. Comparative information for the six months to 30 June 2005 Comparative information for the 6 months to 30 June 2005 has been restated tocomply with the IFRS accounting policies applied in the Group's Annual Reportand Accounts for the year ended 31 December 2005. a) Change in Oil and Gas Accounting policy In preparing the accounts for the six months to 30 June 2005, Cairn followed thefull cost method of accounting for oil and gas assets. Under this method, allexpenditure incurred in connection with and directly attributable to theacquisition, exploration, appraisal and development of oil and gas assets werecapitalised in the South Asia cost pool. Following guidance from InternationalFinancial Reporting Interpretations Committee (IFRIC) in November 2005 it is nolonger permissible to continue this treatment for development/producing assets.Cairn therefore decided to change accounting policies for both exploration/appraisal and development/producing assets to a successful efforts based policy,effective from the year ended 31 December 2005. The comparative information forthe 6 months to 30 June 2005 has been restated accordingly. The impact on therestated 30 June 2005 Group Income Statement as a result of implementing thisaccounting policy is the recognition of an additional charge for unsuccessfulexploration costs of $11.8 million, an increase in depletion of $8.5 million anda reduction in the tax charge of $5.3 million. b) Change in Presentational Currency The functional currency of Cairn Energy PLC, the ultimate parent company of theGroup, is Sterling. These accounts have been presented in $, the functionalcurrency of most companies within the Group. This is a change from 30 June 2005when the accounts were presented in the functional currency of the parent. It isdeemed to be more appropriate to present the financial statements in line withthe functional currency of the majority of the Group. 2. Trade and Other Receivables Included within the Trade and Other Debtors balance are outstanding and overduecash calls of $47 million receivable from the Rajasthan JV partner ONGC (Oil andNatural Gas Corporation). Management is currently pursuing payment of theoutstanding amount. 3. Contingent Liabilities Ravva Arbitration Cairn continues to maintain their challenge in the Malaysian Courts to the GoI'sappeal against the arbitration award of October 2004. It is expected that thisappeal will be heard sometime during 2007. Further details of this dispute arelocated in the Contingent Liabilities note of the 2005 Annual Report. In a quite separate and unrelated dispute in relation to the profit petroleumcalculations under the Ravva PSC, Cairn, which holds a 22.5% participatinginterest share in the Ravva Joint Venture has received a claim from theDirectorate General of Hydrocarbons (DGH) in India for the sum of US$37,441,281net to Cairn of additional Profit Petroleum and interest for late payment of$6,882,811 net to Cairn, which the DGH believe is due to the GoI, from theRavva oil and gas field. Cairn's view, and that of the other JV parties, is that such a claim isunsustainable under the terms of the contract and, even if upheld, the DGH havegrossly miscalculated the sums that would be due to the GoI in suchcircumstances. Cairn, has together with the other JV parties, strongly refuted the claim. Notes to Editors: •Unless otherwise stated, the reserves and resource numbers within this announcement represent the views of Cairn, and do not represent the views of any other party, including the GoI. •Cairn focuses its activities on the geographic region of South Asia. The Group holds material exploration and production positions in west India, east India and Bangladesh along with new exploration rights in India and Nepal. • This focus on South Asia has already resulted in a significant number of oil and gas discoveries. In particular, the Company made a major oil discovery (Mangala) in Rajasthan in the north west of India at the beginning of 2004. Cairn has now made 18 discoveries in Rajasthan block RJ-ON-90/1. •Cairn operates Block RJ-ON-90/1 under a PSC signed on 15 May 1995. The Development Area (1,858 km2), which includes Mangala, Aishwariya, Saraswati and Raageshwari, is shared between Cairn and ONGC, with Cairn holding 70% and ONGC having exercised their back in right for 30%. •The terms upstream and midstream are used in the following sense: + •Upstream - all activities from the reservoir through to the outlet flange of the Mangala field storage facilities + •Midstream - all activities from the outlet flange of the Mangala field storage facilities to a refinery or ultimate distribution point •India currently imports approximately 2,000,000 bopd. It produces approximately 650,000 bopd itself of which 50,000 bopd comes from the Cairn operated Ravva field on the east coast of India. •Cairn has recently opened a new Indian headquarters at Gurgaon on the outskirts of Delhi to provide improved support for the Rajasthan project team and to manage the Company's business interests in India. •Cairn was advised on the appointment of the non-executive directors to the Indian Board by Ridgeway Partners. •"Cairn" where referred to in this release means Cairn Energy PLC and/or its subsidiaries, as appropriate. • Unless otherwise stated any reference to reserves refers to gross life of field 2P reserves. Any reference to resource base refers to gross 2P reserves plus contingent resources. For further information regarding Cairn see www.cairn-energy.plc.uk These materials are not an offer to sell, or a solicitation of offers topurchase, the shares to be offering in the IPO (the "Shares") in anyjurisdiction. No action will be taken to permit the Shares to be sold in apublic offer in any jurisdiction outside India. In particular, no offer to thepublic will be made in any Member State of the European Economic Area or in theUnited States. The Shares have not been and will not be registered under the USSecurities Act of 1933, as amended. These materials contain forward-looking statements regarding Cairn, ourcorporate plans, future financial condition, future results of operations,future business plans and strategies. All such forward-looking statements arebased on our management's assumptions and beliefs in the light of informationavailable to them at this time. These forward-looking statements are, by theirnature, subject to significant risks and uncertainties and actual results,performance and achievements may be materially different from those expressed insuch statements. Factors that may cause actual results, performance orachievements to differ from expectations include, but are not limited to,regulatory changes, future levels of industry product supply, demand andpricing, weather and weather related impacts, wars and acts of terrorism,development and use of technology, acts of competitors and other changes tobusiness conditions. Cairn undertakes no obligation to revise any suchforward-looking statements to reflect any changes in Cairn's expectations withregard thereto or any change in circumstances or events after the date hereof. Glossary of Terms The following are the main terms and abbreviations used in this announcement:Corporate2P proven plus probableBoard the Board of Directors of Cairn Energy PLCBSE Bombay Stock ExchangeCairn the Company and/or its subsidiaries as appropriateCompany Cairn Energy PLCD&M DeGolyer & MacNaughtonDGH Directorate General of HydrocarbonsEGM Extraordinary General MeetingGoI Government of IndiaGroup the Company and/or its subsidiaries as appropriateIPO Initial public offeringJV Joint VentureKG Krishna-GodavariNELP-V 5th New Exploration Licensing PolicyNELP-VI 6th New Exploration Licensing PolicyNSE National Stock Exchange of IndiaONGC Oil and Natural Gas Corporation Ltd and/or its subsidiaries as appropriateTechnical2D / 3D two dimensional / three dimensional boepd barrels of oil equivalent per daybopd barrels of oil per dayEOR enhanced oil recoveryFDP field development planmmbbls million barrels of oilmmscfd million standard cubic feet of gas per dayPSC production sharing contractAccountingESOP Trust Employee Share Ownership Plan TrustIFRIC International Financial Reporting Interpretations CommitteeIFRS International Financial Reporting StandardsIFRS2 International Financial Reporting Standard 2 "Share-based Payment"IFRS6 International Financial Reporting Standard 6 "Exploration for and Evaluation of Mineral Resources"IAS 36 International Accounting Standard 36 "Impairment of Assets"$ / US$ United States Dollars This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Capricorn Energy PLC