15th Mar 2007 07:03
Soco International PLC15 March 2007 SOCO International plc ("SOCO" or "the Company") Preliminary Results For The Year Ended 31 December 2006 SOCO is an international oil and gas exploration and production company,headquartered in London, traded on the London Stock Exchange and a constituentof the FTSE 250 Index. The Company has interests in Vietnam, Yemen, Thailand,the Republic of Congo (Brazzaville) and the Democratic Republic of Congo(Kinshasa) with production operations in Yemen. The Company today announces its Preliminary Results for the year ended 31December 2006. Key Highlights • 20% increase in proven and probable reserves (greater than 40% increase in Vietnam and 30% in Yemen);• 34% increase in revenue to $76.5 million (2005 $57.2 million);• Increase of 43% in pre-tax profits to $48.2 million (2005 $33.7million);• 70% exploration and appraisal drilling success rate during the year;• 19% increase in production;• Pilot development plan approved on Block 9-2 in Vietnam with first oil expected in 2008;• Extensive pre-drill activity across the West Africa portfolio;• Convertible bonds issue netted the Group $243 million;• Acquisition of additional 2% working interest in Block 16-1 Vietnam;• Accelerated development in Thailand associated with farm-out. Ed Story, Chief Executive Officer, commented: "There is no question that 2006 was a banner year for the Company. However, the2007 drilling programme in Vietnam alone will expose the Company to unriskedrecoverable resource potential of 2.5 billion barrels of crude equivalent." 15 March 2007 Enquiries:SOCO International plc Tel : 020 7747 2000 Roger CagleExecutive VP, Deputy CEO and Chief Financial Officer Pelham PR Tel : 020 7743 6676James HendersonAlisdair Haythornthwaite CHAIRMAN'S AND CHIEF EXECUTIVE'S STATEMENT The past 12 months have been a watershed year for SOCO. Our hugely successfulVietnam project has evolved from pure exploration to development, appraisal andexploration; the potential of our Yemen project has been increasingly realisedthrough Basement development drilling and increased facilities capacity and ourWest Africa portfolio has been expanded to increase the potential to repeatthese successes. The Company has successfully de-risked its chances of long termsuccess whilst maintaining significant upside that offers plenty of opportunityfor exponential future growth. We have again been very successful with the drill bit with our exploration andappraisal drilling success in Vietnam exceeding 70%. This coupled with thesuccessful infill/injector drilling in Yemen has led to an increase in 2Preserves net to our working interest of 32.4 million barrels and 9.4 millionbarrels in Vietnam and Yemen, respectively. Before factoring in the reservereduction associated with farming out half of our Marine XI interest in theRepublic of Congo (Brazzaville), 2P reserves increased to 172.5 million barrelsin 2006. Following the farm-out, 2P reserves at the end of 2006 equalled 160.6million barrels. FINANCIAL AND OPERATING RESULTS After tax profit from continuing operations hit a record high of $29.1 millionin 2006 exceeding that of the previous year that totalled $20.3 million. Largelyas a result of the ongoing facilities expansion and infill drilling programme atthe Kharir field in Yemen, production net to the Company's working interestincreased, rising to 6,766 barrels of oil per day (BOPD) in 2006 from 5,684 BOPDthe prior year. The Group had its highest ever capital expenditures during the year with anextensive exploration/appraisal drilling programme in Vietnam, significantfacilities expansion and development drilling in Yemen and its initial 3Dseismic acquisition in Congo (Brazzaville). In order to bridge the period priorto translating its successes into operating cash flow, the Company guaranteed aconvertible bonds issue of $250 million in May. Capital expenditure onoperational activities rose to $114.3 million in 2006 from $76.2 million in2005. With net proceeds from the issue of convertible bonds equalling $243.0million and cash generated by operations of $53.0 million, the cash balance roseby $136.8 million to $187.8 million at year end 2006. 2006 OPERATIONS REVIEW VIETNAM The year got off to an impressive start when the second well drilled in the samefault block as the initial 2005 discovery well on the Te Giac Trang (TGT)structure, the TGT-2X, tested at a total combined flow rate of approximately17,500 barrels of oil equivalent per day (BOEPD) from the Miocene Lower Bach Ho5.2 (LBH 5.2) and Oligocene "C" intervals. The good news continued when the rigmoved to a location on the fourth fault block on the TGT structure and theTGT-3X tested at a combined maximum rate of 9,908 BOEPD. Buoyed by so much early success on the TGT structure, the rig movedapproximately 30 kilometres south of the TGT-3X discovery to spud the initialwell on the "L" prospect, the Te Giac Vang (TGV) 1X well. The TGV structure wasa priority not only because of an apparent large shallow structure with goodMiocene potential, but also because success here would hold the rights for theapparently even larger high potential Basement/Oligocene structure. Enthusiasmwas tempered by realism as the TGV-1X intersected poorly developed reservoirsands in the primary targeted Clastic sequence at the LBH 5.2 horizon. The welldid have good oil shows in several Oligocene sands when the well was deepened.However, after analysis of the logs, it appeared that these lacked sufficientpermeability. Following the TGV well, the rig was moved to drill the sidetrack to the Ca NguVang (CNV) 4X well on Block 9-2 that was temporarily suspended late in 2005after encountering unexpected high pressures in the Oligocene sequence above theBasement. We were back on track when the sidetrack of the appraisal well,CNV-4XST, tested at 7,050 BOEPD from Basement. This result provided finalconfirmation that CNV was ready to move into development. All regulatoryapprovals were received and the pilot development plan was approved in December2006. From that point forward, Petrovietnam has funded its full share of costson Block 9-2. With a new rig, activity once again focused on Block 16-1. The third 2006appraisal well on the TGT structure, the TGT-4X, was drilled on the H3 faultblock between the initial discovery well, TGT-1X, and the TGT-3X. The primarytarget, a lower Miocene trap, was breached due to late movement on a faultlocated south of the TGT-4X well. The Oligocene "D" interval, a new reservoir onthe TGT structure, flowed at a rate slightly over 600 BOPD on a short test. The rig then moved to drill the first exploration well on the Te Giac Xang (TGX)structure on Prospect "K", approximately 15 kilometres west of the TGTstructure. Although the TGX-1X encountered reservoir sands, it was abandonedafter initial analysis indicated that it was not drilled within structuralclosure. To close out the 2006 drilling campaign, the rig moved back to drill the fifthwell on the TGT structure as a final prelude to seeking a declaration ofcommerciality on the field. The TGT-5X had a total combined maximum flow rate ofapproximately 16,430 BOEPD from the LBH 5.2 and Oligocene "C" intervals. Thus, sandwiched between clear success with the TGT appraisal programme, therewere inconclusive results when looking for repeatability on the Clastics fairwayelsewhere on Block 16-1. The 3D seismic acquired during the year is expected tobe a critical tool in leading to drilling success in 2007 outside the proven TGTstructure. YEMEN During 2006, the East Shabwa Block 10 consortium continued its programme tofurther appraise the Kharir field and increase production capacity from theBlock. Drilling results and the addition of a self-contained production facilityenabled the fields to exceed all previous production records averaging more than40,000 BOPD. A number of successful development wells were drilled in the Kharir field (KHA)during 2006. These include the KHA-1-12 well in the western part of thestructure, the KHA-1-14 well in the southern flank of the structure, theKHA-1-07.G1 sidetrack, which was drilled as a water injection well but completedas a producer based on drilling results and the KHA-1-16 drilled on the last 3Dline on the eastern extension of the field. These wells are all connected to theproduction facilities and were tested at rates between 5,500 and 8,400 BOPD.Significantly, the highest rate was from the eastern extension well. Thisportends further extension of the field in that direction. The consortium also had a very active exploration programme in the northern partof the Block that yielded one discovery, but overall proved inconclusive as tothe additional potential in that area. WEST AFRICA The Group added to its West Africa portfolio when its 85% owned subsidiaryacquired an 85% working interest in the 800 square kilometre Nganzi Block,onshore the Democratic Republic of Congo (Kinshasa). As operator, the Groupcarried out a reconnaissance aeromagnetic and gravity survey over the onshoreextension of the coastal basin in order to delineate prospective areas forhydrocarbon generation and migration delineating several leads, interpreted aslarge horst blocks. In September, the Group's 85% owned subsidiary signed an agreement to farm-out a37.5% interest in the Marine XI Block, offshore the Republic of Congo(Brazzaville), whilst retaining a 37.5% working interest. As operator, the Groupbegan evaluation of the Marine XI Block when it acquired an approximate 1,200square kilometre 3D seismic programme in the fourth quarter of 2006. THAILAND In April, the Group's Thai subsidiary signed a Participation Agreement thatcould accelerate the development of the project in the Bualuang field in theGulf of Thailand and provide meaningful production as early as the first half of2008. The assignment of interest, predicated on meeting certain work requirements andsubject to the appropriate regulatory approval by the Government of Thailand,enables the Farmee to earn up to a 60% working interest, whilst allowing theGroup to focus resources on higher profile projects in Vietnam and Yemen. CORPORATE CONVERTIBLE BONDS Primarily to fund the impending development of its Vietnam projects, in May of2006, the Company was the guarantor of an offering of $250 million in guaranteedbonds convertible into preference shares of the issuing subsidiary (Bonds),which are exchangeable for fully paid ordinary shares of SOCO. The size of theoffering was increased from $200 million due to strong institutional demand, butwas still six times oversubscribed upon issue. The Bonds will pay a coupon of4.50% per annum and will initially be convertible into an aggregate ofapproximately 6.238 million ordinary shares. The initial conversion price is£21.847 per ordinary share, a premium of 42%. The Bonds will be repaid at 100%of their principal amount on 16 May 2013 unless previously converted orredeemed. INCREASE IN VIETNAM INTERESTS In June, the Group seized the opportunity to increase its interest in thepromising Clastics play in the Cuu Long Basin of Vietnam by acquiring OPECOVietnam Ltd., which holds a direct 2% interest in Block 16-1. The purchase pricewas $22 million. BOARD CHANGES In December, the Company's Non-Executive Chairman, Patrick Maugein, died after along illness. Patrick was a friend, a tireless worker on behalf of SOCO and achampion of the Company. The Company benefited significantly through itsrelationship with Patrick and he will be missed. At the December Directors'meeting, the Board voted unanimously to accept the Nominations Committeerecommendation to appoint Rui de Sousa to succeed Patrick. OUTLOOK As active as we were in 2006, we will be even busier on the operations front in2007. The development programme on Block 9-2 in Vietnam will be in full swingleading up to expected first oil in 2008. With only the rest of this year beforelicence expiry to explore Block 16-1 in Vietnam, barring an extension, we expectto drill up to eight exploration wells. We have prioritised an exploration wellon a TGT "look-a-like" structure, Prospect "S", identified from the 2006 3Dseismic programme. This is expected to be followed by a high potentialOligocene/Basement target in the deep "E" prospect that essentially underliesthe shallower "L" prospect. A declaration of commerciality on the TGT field isimminent. We should see the initial results from the water flooding that began last yearin the Kharir field in Yemen. The combination of the water flood, additionalinfill drilling and expanded production capacity should allow considerablegrowth in oil sales in Yemen, albeit after an early 2007 cutback due toadditional facilities installation. While evaluation of our West Africa portfolio is in its infancy, indeed, eventhe portfolio itself is evolving, 2007 will be a busy year in terms ofpre-drilling activity. We are processing and will soon be interpreting the 3Dseismic acquired last year on Marine XI offshore Republic of Congo(Brazzaville). It is conceivable that we could be ready to drill in the latterpart of the year, but more likely in 2008. We expect to be acquiring 2D seismicon the Democratic Republic of Congo (Kinshasa) Nganzi Block. We know that not every well drilled in 2007 will be a success. We understandthat even on the highly prospective Vietnam Block 16-1 Clastics play, thechances of drilling success are only in the 25% range. However, we have positiveindications for further good news from the Vietnam exploration programme. Therecertainly will be an abundance of news. We trust that you share our enthusiasmfor what is in store. Rui de Sousa Chairman Ed Story President and Chief Executive REVIEW OF OPERATIONS The high impact drilling programme in Vietnam continued apace throughout 2006whilst production in Yemen experienced a major uplift and significant progresswas made in the development of the Kharir field. The drilling success ratio inVietnam exceeded 70% as five of seven exploration/appraisal wells werediscoveries. Results from the Yemen appraisal programme and production capacity expansiontranslated into an immediate economic impact as production net to the Group'sworking interest was up approximately 20% averaging 6,766 barrels of oil per day(BOPD) versus 5,684 BOPD in 2005. VIETNAM SOCO holds its interests in Vietnam, all in the Cuu Long Basin offshore, throughits 80% owned subsidiary SOCO Vietnam Ltd. (SOCO Vietnam) and through its 100%ownership of OPECO, Inc. SOCO Vietnam holds a 25% working interest in Block 9-2,which is operated by the Hoan Vu Joint Operating Company (HVJOC) and holds a28.5% working interest in Block 16-1, which is operated by the Hoang Long JointOperating Company (HLJOC). OPECO, Inc. holds a 2% interest in Block 16-1. Both Blocks are on trend with several major Basement and Tertiary discoveries inthe Cuu Long Basin. Both are also contiguous to the Bach Ho field, where 2006production reportedly averaged approximately 191,000 BOPD and 150 million cubicfeet of gas per day (MMCFD), and the Rang Dong field, where productionreportedly averaged approximately 42,000 BOPD, primarily from the Basement. Review of 2006 activities Block 16-1 In March 2006, the TGT-2X appraisal well on the Te Giac Trang (TGT) structure,an up-dip follow-up well to the previous year's TGT-1X discovery well, testedwith a total combined flow rate of approximately 17,500 BOEPD from the MioceneLower Bach Ho 5.2 (LBH 5.2) and Oligocene "C" intervals. Two main pay zones were tested within the LBH 5.2 interval, one between 2,763and 2,817 metres and the other between 2,666 and 2,726 metres. A total of 89metres of pay was confirmed by log analysis in this reservoir horizon. The combined stabilised flow rate from the two Miocene zones was 14,053 BOEPDcomprising 12,615 BOPD of 38 degree API gravity crude and approximately 8.63MMCFD through a one inch choke size. Flow rates were limited due to mechanicalrestrictions in the surface separation equipment. The drill stem test over the Oligocene "C" interval tested water-free at astabilised rate of 3,300 BOPD of 37.5 degree API gravity crude and approximately0.88 MMCFD through a 52/64 inch choke size. As was expected from the log analysis, water was produced from the lower set ofperforations in the Miocene. The approximate 8% water cut provided evidence ofthe presence of an aquifer, which will be factored into plans for the field'sdepletion management. A third reservoir horizon, the LBH 5.1 which is considered to be oil-bearing andproductive, was also identified, but not tested as this would limit the abilityto retain the well as a future producer, as originally designed. This horizonhad 18 metres of net pay and, from the analysis of logs and oil samples fromwireline formation tests, is considered to be oil-bearing and productive. Following the temporary suspension of the TGT-2X well, the rig moved immediatelyto drill a follow-up appraisal well, the TGT-3X, approximately 10 kilometres tothe south on a separate fault block on the structure. A drill stem test wasconducted in the LBH 5.2. The tested interval, perforated between 2,827 and2,887 metres, flowed at a combined maximum rate of 9,908 BOEPD comprising 9,008BOPD of 40.5 degree API gravity crude and approximately 5.4 MMCFD through an 88/64 inch choke size. Log analysis of the well indicated approximately 68 metres of net pay werepresent in the LBH 5.2. Additionally, approximately six metres of net pay in theLower Oligocene "C" interval were also identified but not tested. The LBH 5.2 reservoir sands encountered in the TGT-3X well are the same as thosetested in the TGT-1X and TGT-2X wells. This proved the presence of a laterallyextensive reservoir sand in the Block, further reducing the risk of the otherprospects and leads along the play fairway. The third well drilled on Block 16-1 during 2006 was the first exploration wellon the "L" prospect approximately 30 kilometres south of the TGT-3X discovery.The Te Giac Vang 1X (TGV-1X) spudded on 2 May and reached a total measured depth(MD) of 3,926 metres in the Upper Oligocene. The well was deepened from itsoriginal prognosis due to the presence of encouraging hydrocarbon showscontinuing below the original target depth. It was primarily positioned to testa closure at the LBH 5.2 level, the main productive horizon at the TGTdiscoveries. The well intersected a clastic sequence at the LBH 5.2 horizon, however thereservoir sands were poorly developed at the location and no pay wasencountered. The sediments encountered suggested that the well was locatedoutside the LBH 5.2 play fairway and that this fairway is to the north and westof the TGV-1X location. The well was also drilled into the Oligocene, however the location was down-dipon the flank of the structure. Despite being in a flank position, good oil showswere encountered in several sands. After analysis of the logs, although thesands were confirmed to be hydrocarbon bearing, it appeared that these lackedsufficient permeability to produce at commercial rates and were therefore nottested. These overall encouraging well results are being evaluated and the seismicre-interpreted prior to drilling a follow-up well to fully test the Oligocene ina more prospective up-dip position. The well also penetrated the source rocksection at the top of the Oligocene validating the geological interpretation andconfirming the potential of the deep Oligocene and Basement prospect underlyingthe shallower closures. The 2006 drilling campaign continued on the Block 16-1 play fairway when theTransocean Trident 9 jack-up rig spudded the TGT-4X well on the "H3" fault blockin the TGT structure on 31 August. This third appraisal well on the TGTstructure, was drilled on a separate fault block between the initial discoverywell, TGT-1X and the TGT-3X. The well intersected the hydrocarbon bearing LowerMiocene reservoir interval as predicted. However, the trap had been breached andonly residual oil was encountered. The well also encountered hydrocarbons in theOligocene "D" interval, a new reservoir on the Block, and flowed at a rateslightly over 600 BOPD on a short test. Subsequent detailed review of the seismic identified that the breaching of theLower Miocene trap was due to late movement on a fault located south of theTGT-4X well. This appears to be the only such fault on the TGT field and theeffect is considered to be local to this well. The following well, in October, was a test of Prospect "K", a subtle closure tothe west of the higher amplitude TGT structure. After encountering reservoirsands, the first exploration well on the Te Giac Xang (TGX) structure onProspect "K" was plugged and abandoned when initial analysis indicated that itwas not drilled within structural closure. Located in a previously untestedportion of the Clastics fairway on Block 16-1, the TGX-1X well was drilled to adepth of 3,506 metres. Finding reservoir is the main risk in drilling in thisfairway, so the presence of reservoir in TGX-1X is a positive indicator forfuture success as drilling locations step out from the initial TGT discovery.The seismic over the area is being reprocessed and remapped to better define thestructure for a possible second well. The final well drilled in 2006 and the fifth appraisal well on the TGT structurewas drilled on the "H2" fault block. The TGT-5X had a total combined maximumflow rate of approximately 16,430 BOEPD from the LBH 5.2 and Oligocene "C"intervals. The first drill stem test, over the 32 metre Oligocene "C" interval, testedwater-free at a maximum rate of 7,098 BOPD of 36.5 degree API gravity crude andapproximately 2.07 MMCFD through an 80/64 inch choke size. The most prolificinterval in the other successful wells drilled on TGT, the LBH 5.2 pay zone, wasperforated and tested separately between 2,841 and 2,866 metres with a maximumflow rate of 8,987 BOEPD comprising 8,104 BOPD of 41 degree API gravity crudeand approximately 5.3 MMCFD through an 80/64 inch choke size. On the TGT structure, only the southern most fault block in the five fault blockstructure remains to be drilled. The LBH 5.2 and Oligocene "C" reservoirsencountered in the TGT-5X well appear to be the same as those tested in theprevious TGT wells. With an 80% drilling success rate on the TGT structure andtests ranging from approximately 9,000 BOEPD to approximately 17,500 BOEPD,activities are now focussed on early approval for development of the field. The rig was moved to Block 9-2 to drill the initial Clastics well on the Ca OngDoi (COD) structure after a long delay due to inclement weather. Block 9-2 Drilling operations recommenced on 5 June 2006 into the "D" fault block of theCa Na Vang (CNV) structure to drill the sidetrack to the CNV-4X well on Block9-2 that was temporarily suspended in 2005 after encountering unexpected highpressures in the Oligocene sequence above the Basement. The re-entry andsidetrack of the appraisal well, CNV-4XST, tested at a maximum combined rate ofapproximately 7,050 BOEPD comprised of approximately 5,333 BOPD andapproximately 10.3 MMCFD. The open hole test was conducted over a 13 hour periodfrom a Basement interval of approximately 1,350 metres. Log analysis of the Oligocene "E", penetrated by this well, indicated that theinterval lacked permeability. The CNV-4X ST was drilled to a MD of 6,330 metresmaking it the longest MD well to be drilled in Vietnam, exceeding the previousrecord set by the HVJOC when it drilled the CNV-3X appraisal well in 2005. Thewell was suspended as a producer. Preparations for development of the CNV field picked up momentum in April of2006 following the unanimous approval of the Declaration of Commerciality on thefield by the shareholders of the HVJOC. Petrovietnam officially approved thePilot Development Plan in December. Subsequent to this approval, Petrovietnamhas become a full paying participant in its 50% interest in Block 9-2. Vietnam has become a participant in the World Trade Organisation (WTO).Following its admission into the WTO, portions of the state operatedenterprises, including Petrovietnam, are expected to be privatised. Thisportends a change in negotiating certain aspects of the development programme,particularly a gas sales agreement as the gas group is expected to be an earlycandidate for privatisation. However, discussions on the sales agreement for theassociated gas produced from the CNV field have continued. Equipment andmaterials are being ordered and fabrication of various structures will beginsoon in anticipation of having first oil in the first half of 2008. The rig, which had been conducting the Group's Vietnam drilling programme sincethe beginning of 2005, moved out of Vietnamese waters after completion of theCNV-4XST. However, the drilling campaign continued uninterrupted with theTrident 9 drilling rig, which the JOCs had contracted in 2005, commencingoperations back on Block 16-1. A further two rigs were put under contract duringthe year to conduct an even more extensive 2007 drilling programme. Subsequent events and 2007 outlook The drilling rig that began operations on Block 16-1 in the third quarter of2006 was delayed from moving to a Block 9-2 drilling location on the CODstructure after completing the TGT-5X well due to inclement weather thatprevented the rig from being safely towed. Accordingly, the COD-2X Clasticstarget well did not spud until 16 February 2007. Although the well encounteredsands in the Oligocene and Lower Miocene, there was no significant oil payencountered and the well was subsequently plugged and abandoned and the rigmoved back to Block 16-1. Although the rig currently working is only available into the second quarter ofthis year, the JOCs have already contracted two other rigs - one of which isexpected to be available late in the first quarter or early in the secondquarter and the other later in the second quarter. The prognosed drillingprogramme calls for eight wells on Block 16-1 and three to five developmentinjector/producer wells on the Block 9-2 CNV field as it prepares for first oilin the first half of 2008. Efforts are underway to obtain a declaration of commerciality for the TGTstructure. The front-end work required to transition operations from theexploratory phase to the development phase is in progress with the hopes toallow first oil from Block 16-1 sometime in 2009. The exploration phase on both blocks is set to expire at the end of 2007 unlessfurther extended by agreement with the Vietnamese Government. Thus the 2007drilling campaign is extremely important in terms of fully evaluating the blocksand securing areas for longer term development. YEMEN Throughout the year, the East Shabwa Block 10 consortium continued its programmeto further appraise the Kharir field and to increase production capacity fromBlock 10. The East Shabwa Block 10 consortium comprises Comeco Petroleum, Inc.(28.57% interest), in which SOCO holds a 58.75% interest, TOTAL E&P Yemen(28.57% interest and operator), Occidental Yemen Ltd. (28.57% interest) andKuwait Foreign Petroleum Exploration Co. (14.29% interest). Drilling results and the addition of a self-contained production facility haveenabled the fields to exceed all previous production records. For the secondconsecutive year, production increases were significant-circa 40% and 22% for2005 and 2006, respectively. During the year, production exceeded 40,300 BOPD,up almost 7,400 BOPD from the 32,937 BOPD year average the previous year,despite having to curtail production due to safety and production managementreasons below the 45,000 BOPD plateau reached earlier in the year. Production from the East Shabwa Development Area (ESDA), approximately 80% ofwhich originates from the Kharir field, is transported by pipeline andcommingled with production from the neighbouring Masila Block beforetransportation by pipeline to the coastal Ash Shihr export terminal. SOCO'scrude entitlement is sold under a 12-month spot market contract. Review of 2006 activities A number of successful development wells were drilled in the Kharir field (KHA)during the first half of 2006. These include the KHA-1-12 well in the westernpart of the structure, the KHA-1-14 well in the southern flank of the structureand the KHA-1-07.G1 sidetrack, which was drilled as a water injection well butcompleted as a producer based on drilling results. These wells are all connectedto the production facilities and were tested at rates between 5,500 and 8,000BOPD. The KHA-1-16 well, drilled on the eastern most 3D seismic line as part of thecontinuing appraisal and development of the Basement reservoir in the Kharirfield, tested at over 8,400 BOPD. The implications of the results of this edgeof field are that the field could have a substantial eastward expansion. Most of the drilling activity in the Kharir field in the second half of 2006 wasspent on the drilling of water injection wells to provide pressure support forthe Basement production. These include the KHA-1-15, KHA-1-17, KHA-1-19 and theKHA-2-18 wells. In addition, the gas injection well, KHA-1-11 was completed withtwo open hole sections to maximise the injection capacity of the well. The appraisal of the Kharir North area has continued with the KHA-3-08 drilledto the very northwest of the mapped area of the structure. Testing operations onthis well are ongoing. Activity to enhance the recovery of the Biyad reservoir horizons at both Atufand Kharir are also ongoing. At Atuf the ANW-012 and ANW-013 infill productionwells encountered the reservoir horizons higher than expected. These haveprovided encouragement for more efficient reservoir recovery. The thrust of the exploration programme in 2006 was in the northern part ofBlock 10 in the Jathma/Wadi Taribah area. The first Jathma exploration well, theJAT-01 that tested early in the year over 1,900 BOPD, was placed on long termproduction in the third quarter of the year. The oil produced is trucked to theexisting Kharir facilities for processing and export. Two other exploration wells in the Jathma area, the JAT-02-ST and theexploration well on the eastern side of the Jathma area, JAT-04, encounteredsignificant oil columns, but did not flow commercial volumes of hydrocarbonswhen tested. An evaluation of the results of all the Jathma area wells drilledto date is underway. Subsequent events and 2007 outlook Drilling of development and injector wells in the Kharir field to increaseBasement productivity will continue throughout the year. In particular,delineation of the eastern end of the field will be a priority in 2007.Additionally, the KHA-1-20 and KHA-1-22 Biyad oil production wells are beingdrilled currently to accelerate and improve the recovery from the Clasticshorizon. The additional surface facilities required to provide injection capacity arebeing installed and the predrilled water injection wells will be connectedduring the middle of 2007. Currently, the final elements of the commissioning ofthe gas injection equipment are being completed prior to commencing gasinjection to provide pressure maintenance in the crestal area of the Basement. Production capacity is expected to continue to increase during the year asvarious initiatives progress. Together with adding water injection capability toimprove pressure maintenance in the Basement reservoir, considerable productivecapability should be added throughout the year, albeit after an early 2007cutback pending the installation of these facilities. Three drilling rigs are expected to continue operating throughout the year. Asat the date of this publication three rigs are under contract on Block 10 andare drilling in the Kharir field. One rig is expected to be used for exploratorydrilling in the southeast corner of the Block later in the year. REPUBLIC OF CONGO (BRAZZAVILLE) SOCO Exploration and Production Congo (SOCO EPC), the Company's 85% ownedsubsidiary was initially awarded a 75% interest in the Marine XI Block, offshorethe Republic of Congo (Brazzaville) in 2005. The terms of the Production SharingAgreement signed by the Societe Nationale des Petroles du Congo (SNPC) and SOCOEPC was approved during the Congolese Parliament and the Senate extraordinarysession in the first quarter of 2006. The law became effective 30 March whensigned by the President of the Republic. The Block, located in the Lower Congo Basin, is in shallow water adjacent to thecoast with water depths ranging up to 110 metres and covers approximately 1,400square kilometres. There has been previous exploration activity on the Blockresulting in four oil discoveries, the largest of which has initial recoverablereserves estimated to be in the 30 to 60 million barrel range. Review of 2006 activities In September, SOCO EPC entered into an agreement to farm-out an 18.75% interestin the Marine XI Block, offshore the Republic of Congo (Brazzaville), to each ofa subsidiary of Lundin Petroleum AB and to Raffia Oil SARL. SOCO EPC retainedoperatorship with a 37.5% working interest in the Block. The regulatoryauthorities of the Government of the Republic of Congo (Brazzaville) ratifiedthe farm-out on 4 January 2007. Acquisition of an approximate 1,200 square kilometre 3D seismic programme wascompleted in the fourth quarter. By employing the modern seismic techniques thatthe Company successfully applied in Vietnam to map the Basement reservoir, SOCOEPC expects to exploit the potential of the pre-salt section. Subsequent events and 2007 outlook Processing and interpreting the 3D seismic acquired in 2006 will be thepriority. Although it is possible that SOCO EPC could be ready to drill in thelatter half of this year, it is more likely that drilling will commence in thefirst half of 2008. DEMOCRATIC REPUBLIC OF CONGO (KINSHASA) In July, the Company's 85% owned subsidiary, SOCO DRC Limited (SOCO DRC), signedsubject to presidential decree, a Production Sharing Contract with theGovernment of the Democratic Republic of Congo (Kinshasa) and La Congolaise desHydrocarbures (Cohydro), the state owned oil company, wherein it acquired aninterest in the Nganzi Block. The Block, onshore the Democratic Republic ofCongo (Kinshasa), comprises an area of approximately 800 square kilometres. SOCOis the designated operator with an 85% working interest in the Block. Review of 2006 activities Most of the activity during the year was focused on detailed analysis of areconnaissance aeromagnetic and gravity survey over the onshore extension of thecoastal basin in order to delineate prospective areas for hydrocarbon generationand migration. The survey indicated the presence of a deep pre-salt sourcegraben in the northern part of the basin in the Nganzi Block. Regional mappingshows the graben to be on trend with the source basin for the M'Boundi field inthe southern part of the Republic of Congo (Brazzaville). Several leads,interpreted as large horst blocks, have been identified on the Block. Subsequent events and 2007 outlook Prior to acquiring a 2D seismic survey, the Company expects to conduct ageochemical survey to further define the prospectivity of various identifiedstructures. Initially, the plan is to acquire some 300 to 500 kilometres of 2Dseismic. Dependent upon the timing of the seismic acquisition, processing andinterpretation could be substantially completed this year. Any meaningful workprogramme is conditional upon obtaining the presidential decree. THAILAND SOCO's 99.93% owned Thailand subsidiary, SOCO Exploration (Thailand) Co. Ltd.(SOCO Thai), holds a 100% interest in Block B8/38 located offshore in the Gulfof Thailand. An application and development plan was approved in 2006 by theThailand Department of Mineral Fuels to convert the concession into a productionlicence on the Bualuang discovery on the Block. Review of 2006 activities Upon securing approval from the Thailand Department of Mineral Fuels to convertthe field from an exploration to a production licence in the first quarter of2006, SOCO Thai signed an agreement to allow a two group consortium to earn upto a 60% working interest in the licence. If the earn-in terms of the agreementare fulfilled, SOCO Thai would retain a 40% working interest in the field. Theassignment of interests in the agreement is subject to approval of theappropriate regulatory authorities of the Government of Thailand. During the year, the farmee's efforts were directed toward the planning andcontracting of several frontend activities precluding the start-up ofdevelopment operations in 2007. Subsequent events and 2007 outlook In January, the farmee group was consolidated with GFI Oil and Gas Corporation(GFI) becoming the sole farmee. GFI expects to conclude a high resolution 100kilometre 2D seismic programme during the second quarter of 2007 in preparationfor drilling the initial commitment well and completing the milestone to earn a20% interest in the Bualuang field. Further, GFI has already entered into a contract with a floating production,storage, and offloading vessel with the expectation of concluding the workprogramme to earn an additional 40% interest by funding 92% of the costs to takethe project to first oil. GFI estimates first production would be achieved inthe first half of 2008. OTHER AREAS OF INTEREST CABINDA In October, the Company was informed by Sonangol, the national oil company ofAngola, that it would have a participating interest in the contractor group ofthe Cabinda Onshore North Petroleum Concession. The Group anticipates formalcompletion of the assignment in the first half of 2007. Preparation has begunfor the acquisition of a high resolution aeromagnetic and gravity survey overthe Block. LIBYA The Group maintains its shareholding in the ODEX Exploration Limited (ODEX)joint venture. The ODEX shareholding comprises SOCO North Africa Ltd. (34%), andsubsidiaries of Oilinvest (Netherlands) B.V. (46%) and Joint Stock Bank of theGas Industry Gazprombank (20%). From SOCO's standpoint, the niche for ODEX wasto participate with one or more indigenous Libyan companies in exploitingexisting but problematic development opportunities. While the focus in the pasttwo years of the Libyan National Oil Company has been on open exploration bidrounds, it announced in late 2006 an initiative to negotiate for participationin production and development projects. Accordingly, the Group will continue to assess its participation in theconsortium in light of reasonable expectations of success. It is anticipatedthat ODEX will continue to be the vehicle through which the Group will explorevarious opportunities that may arise in Libya and certain parts of Africa as theconsortium is well placed to take advantage of its strong regionalrelationships. Consolidated income statementfor the year to 31 December 2006 2006 2005 Notes $000's $000's Continuing operationsRevenue 3 76,476 57,160Cost of sales (21,162) (19,588) Gross profit 55,314 37,572Administrative expenses (8,772) (5,295)Other operating expenses (231) (1,013) Operating profit from continuing operations 3 46,311 31,264 Investment revenue 9,292 2,042Other gains and losses 690 853Finance costs (8,136) (497) Profit before tax from continuing operations 48,157 33,662 Tax 4 (19,094) (13,366) Profit for the year from continuing operations 29,063 20,296 Profit for the year from discontinued operations 3 - 181 Profit for the year 29,063 20,477 Earnings per share (cents) 5BasicFrom continuing operations 41.3 29.0From discontinued operations - 0.3From continuing and discontinued operations 41.3 29.3 DilutedFrom continuing operations 36.9 25.6From discontinued operations - 0.2From continuing and discontinued operations 36.9 25.8 Balance sheetsas at 31 December 2006 Group Company 2006 2005 2006 2005 Notes $000's $000's $000's $000's Non-current assetsIntangible assets 146,954 151,213 - -Property, plant and equipment 159,472 29,988 680 737Investments - - 204,286 179,690Financial asset 32,571 31,882 - -Other receivable - 10,134 - -Deferred tax assets 1,530 2,591 - - 340,527 225,808 204,966 180,427 Current assetsInventories 88 310 - -Trade and other receivables 26,670 6,285 566 244Tax receivables 2,299 1,138 177 104Cash and cash equivalents 187,791 50,967 63 360 216,848 58,700 806 708 Total assets 3 557,375 284,508 205,772 181,135 Current liabilitiesTrade and other payables (35,029) (15,233) (22,161) (974)Tax payables (134) (446) (68) (446) (35,163) (15,679) (22,229) (1,420) Net current assets 181,685 43,021 (21,423) (712) Non-current liabilitiesConvertible bonds 6 (220,233) - - -Long term provisions (6,187) (2,590) - - (226,420) (2,590) - - Total liabilities 3 (261,583) (18,269) (22,229) (1,420) Net assets 295,792 266,239 183,543 179,715 EquityShare capital 23,532 23,479 23,532 23,479Share premium account 68,325 68,221 68,325 68,221Other reserves 54,406 54,259 (25,839) (658)Retained earnings 149,529 120,280 117,525 88,673 Total equity 7 295,792 266,239 183,543 179,715 Cash flow statementsfor the year to 31 December 2006 Group Company 2006 2005 2006 2005 Notes $000's $000's $000's $000's Net cash from (used in) operating 8 33,230 30,536 11,899 (5,409)activities Investing activitiesPurchase of intangible assets, net 3 (82,148) (65,268) - -Purchase of property, plant and (32,191) (10,907) (30) (150)equipmentPurchase of own shares into treasury (13,634) - (13,634) -Investment in subsidiary undertakings - - - (12,883)Dividends received from subsidiary - - 12,935 20,617undertakingsProceeds on disposal of subsidiary - 27,510 - -undertakingNet cash (used in) from investing (127,973) (48,665) (729) 7,584activities Financing activitiesShare-based payments (11,372) (1,837) (11,372) (1,837)Proceeds on issue of convertible bonds 242,966 - - -Proceeds on issue of ordinary share - 14 - 14capitalNet cash from (used in) financing 231,594 (1,823) (11,372) (1,823)activities Net increase (decrease) in cash and 136,851 (19,952) (202) 352cash equivalents Cash and cash equivalents at beginning 50,967 71,122 360 113of year Effect of foreign exchange rate changes (27) (203) (95) (105) Cash and cash equivalents at end of 187,791 50,967 63 360year Statements of recognised income and expensefor the year to 31 December 2006 Group Company 2006 2005 2006 2005 $000's $000's $000's $000's Profit for the year 29,063 20,477 4,350 15,372Unrealised currency translation 186 (363) 24,502 (20,351)differences Total recognised income (loss) for the 29,249 20,114 28,852 (4,979)year NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. General information The financial information for the years ended 31 December 2006 and 2005 does notconstitute statutory accounts as defined in Section 240 of the Companies Act1985 (Act), but is derived from those accounts. A copy of the statutoryaccounts for 2005 has been delivered to the Registrar of Companies and those for2006 will be delivered following the Company's annual general meeting. Theauditors' report on those accounts was unqualified and did not containstatements under Section 237(2) or (3) of the Act. Whilst the financialinformation included in this preliminary announcement has been computed inaccordance with International Financial Reporting Standards (IFRS), thisannouncement does not itself contain sufficient information to comply with IFRS.The Company expects to publish full financial statements that comply with IFRSin its Annual Report and Accounts 2006. The financial statements are presented in US dollars which is the functionalcurrency of each of the Company's subsidiary undertakings. The Directors do notrecommend the payment of a dividend. This preliminary announcement was approved by the Board on 14 March 2007. 2. Basis of preparation The financial information has been prepared in accordance with the recognitionand measurement criteria of International Financial Reporting Standards (IFRS)and with IFRSs adopted for use in the European Union. The financial informationhas been prepared under the historical cost basis. 3. SEGMENT INFORMATION Geographical segments Geographical segments form the basis on which the Group reports its primarysegment information. 2006 Continuing operations Discontinued operations 1 Middle East SE Asia West Unallocated Total Central Asia Group Africa $000's $000's $000's $000's $000's $000's $000'sOil sales 76,476 - - - 76,476 - 76,476Operating profit 55,113 - - (8,802) 46,311 - 46,311Assets 64,872 226,184 30,768 235,551 557,375 - 557,375Liabilities 8,384 10,605 12,398 230,196 261,583 - 261,583Capital 35,888 100,790 (2,050) 28 134,656 - 134,656additions, net 2Depletion and 9,318 - - 208 9,526 - 9,526depreciation 2005 Continuing operations Discontinued operations 1 Middle East SE Asia West Unallocated Total Central Asia Group Africa $000's $000's $000's $000's $000's $000's $000'sOil sales 57,160 - - - 57,160 1,498 58,658Operating profit 37,263 - - (5,999) 31,264 - 31,264Assets 39,950 125,346 28,225 90,987 284,508 - 284,508Liabilities 8,696 5,498 27 4,048 18,269 - 18,269Capital additions 11,845 41,825 28,067 183 81,920 (630) 81,290Depletion and 7,149 - - 176 7,325 - 7,325depreciation 1 In August 2005 the Group disposed of its Central Asia segment which comprisedits Mongolia interest. The results of this segment are therefore included indiscontinued operations. In 2005, the profit for the year from discontinuedoperations of $181,000 was the profit on disposal, net of other expenses, of theMongolia interest. 2 Capital additions, together with the related figures for purchases in the cashflow statements, are net of certain farm-out proceeds. Business segment The Group has one principal business activity being oil and gas exploration andproduction. Revenue by destination does not materially differ from revenue byorigin. There are no inter-segment sales. 4 Tax 2006 2005 $000's $000'sCurrent tax 18,033 13,839Deferred tax 1,061 (473) 19,094 13,366 UK corporation tax is calculated at 30% (2005 - 30%) of the estimated assessableprofit for the year. Taxation in other jurisdictions is calculated at the ratesprevailing in the respective jurisdictions. During 2005 and 2006 both currentand deferred taxation have arisen in overseas jurisdictions only. The charge for the year can be reconciled to the profit per the income statementas follows: 2006 2005 $000's $000'sProfit before tax on continuing operations 48,157 33,662Profit before tax on discontinued operations - 181 48,157 33,843 Profit before tax multiplied by standard rate of corporation tax 14,447 10,153in the UK of 30% (2005 - 30%) Effects of:Expenses not expected to be utilised as a tax loss 2,151 1,423Non taxable profit on disposal - (58)Higher tax rates on overseas earnings 2,456 1,906Adjustments to tax charge in respect of previous years 40 (58)Tax charge for the year 19,094 13,366 The tax charge in future periods may also be affected by these factors. TheGroup's overseas tax rates are higher than those in the UK, primarily becausethe profits earned in Yemen are taxed at a rate of 35%. 5. EARNINGS PER SHARE The calculation of the basic and diluted earnings per share is based on thefollowing data: 2006 2005 $000's $000'sEarnings from continuing operations 29,063 20,296Earnings from discontinued operations - 181 29,063 20,477 Number of shares 2006 2005Weighted average number of ordinary shares for the purpose of basic 70,338,272 70,003,067earnings per shareEffect of dilutive potential ordinary shares:Share options and warrants 6,021,356 7,010,483Ordinary shares of the Company held by the Group 2,300,800 2,423,300Weighted average number of ordinary shares for the purpose of 78,660,428 79,436,850diluted earnings per share The denominators used for the purposes of calculating earnings per share on bothcontinuing and discontinued operations are the same. At 31 December 2006 up to6,238,000 (2005 - nil) potential ordinary shares in the Company that areunderlying the Company's convertible bonds and that may dilute earnings pershare in the future have not been included in the calculation of dilutedearnings per share because they are antidilutive for the year to 31 December2006. 6. CONVERTIBLE BONDS In May 2006, the Group issued bonds at a par value of $250 million which will beconvertible into ordinary shares of the Company at any time from June 2006 untilsix days before their maturity date of 16 May 2013. At the initial conversionprice of £21.847 per share there are 6,238,000 ordinary shares of the Companyunderlying the bonds. If the bonds have not been previously purchased andcancelled, redeemed or converted, they will be redeemed at par value on 16 May2013. Interest of 4.5% per annum will be paid semi-annually up to that date. $000'sNominal value of convertible bonds issued net of issue costs 242,966Equity component (25,037)Liability component at date of issue 217,929Interest charged 9,359Interest paid (5,625)Total liability component as at 31 December 2006 221,663 Reported in:Interest payable in current liabilities 1,430Non-current liabilities 220,233Total liability component as at 31 December 2006 221,663 7. Reconciliation of movements in Group total equity 2006 2005 $000's $000'sAs at 1 January 266,239 247,187New shares issued 157 475Treasury shares purchased (13,634) -Share-based payments (10,969) (1,773)Equity component of bonds issue 25,037 -Unrealised currency translation differences (101) (127)Retained profit for the year 29,063 20,477As at 31 December 295,792 266,239 8. Reconciliation of operating profit to operating cash flows Group Company 2006 2005 2006 2005 $000's $000's $000's $000'sOperating profit 46,311 31,264 (8,598) (5,150)Share-based payments 560 521 560 521Depletion and depreciation 9,526 7,325 182 148 Operating cash flows before movements in 56,397 39,110 (7,856) (4,481)working capitalDecrease (increase) in inventories 221 (172) - -Increase in receivables (1,395) (710) (321) (140)(Decrease) increase in payables (2,269) 4,754 20,055 (681)Cash generated by operations 52,954 42,982 11,878 (5,302) Interest received 4,944 1,943 38 12Interest paid (5,925) (460) (17) (119)Income taxes paid (18,743) (13,929) - -Net cash from operating activities 33,230 30,536 11,899 (5,409) Cash is generated from continuing operating activities only. Cash and cash equivalents (which are presented as a single class of asset on thebalance sheet) comprise cash at bank and other short term highly liquidinvestments that are readily convertible to a known amount of cash and which aresubject to an insignificant risk of change in value. 9. Preliminary results announced Copies of the announcement will be available from the Company's head office, StJames's House, 23 King Street, London, SW1Y 6QY. The Annual Report and Accounts2006 will be posted to shareholders in due course. Reserve statisticsunaudited, net working interest (mmboe) Net proven oil and gas reserves Total Thailand Vietnam 1 Congo 1, 2 Yemen 3 Reserves as at 31 59.7 5.0 30.0 9.5 15.2 December 2005 Changes in the year Additions - - - - - Revision to 23.5 - 17.5 - 6.0 previous estimates Purchase of 1.1 - 1.1 - - reserves Change of interest (4.7) - - (4.7) - Sale of reserves - - - - Production (2.5) - - - (2.5) Reserves as at 31 77.1 5.0 48.6 4.8 18.7 December 2006 Net proven and probable oil and gas reserves Total Thailand Vietnam 1 Congo 1, 2 Yemen 3 Reserves as at 31 133.2 18.4 68.3 23.8 22.7 December 2005 Changes in the year Additions - - - - - Revision to 38.8 - 29.4 - 9.4 previous estimates Purchase of 3.0 - 3.0 - - reserves Change of interest (11.9) - - (11.9) - Sale of reserves - - - - Production (2.5) - - - (2.5) Reserves as at 31 160.6 18.4 100.7 11.9 29.6 December 2006 Net proven and probable oil and gas reserves yearly comparison 2006 2005 2004 2003 2002 Reserves as at 1 133.2 90.7 92.5 75.4 77.0 January Changes in the year Additions - 68.3 - - - Revision to 38.8 8.5 6.0 9.9 0.6 previous estimates Purchase of 3.0 23.8 - - - reserves Change of interest (11.9) - - 9.2 - Sale of reserves - (56.0) (5.8) - - Production (2.5) (2.1) (2.0) (2.0) (2.2) Reserves as at 31 160.6 133.2 90.7 92.5 75.4 December Note: mmboe denotes millions of barrels of oil equivalent 1 Reserves are shown before deductions for minority interests which are fundedby the Group. The Group is entitled to receive 100% of the cash flows until ithas recovered its funding of the minority interest plus accrued interest fromthe minority interests pro rata portion of those cash flows. 2 During 2006 the Group farmed out 50% of its working interest in Congo(Brazzaville). 3 The Group provides for depletion and depreciation on its Yemen reserves on anentitlement basis. On an entitlement basis as at 31 December 2006 provenreserves were 7.3 mmboe (2005 - 6.1 mmboe) and proven and probable reserves were10.1 mmboe (2005 - 8.4 mmboe). This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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