18th Apr 2006 07:01
Dragon Oil PLC18 April 2006 DRAGON OIL PLC ("DRAGON" or the "Company") PRELIMINARY RESULTS FOR YEAR ENDED 31 DECEMBER 2005 Dragon, an independent oil and gas development and production company whoseassets are located in the Cheleken Contract Area, Caspian Sea, Turkmenistan,today announces its preliminary results for the year ended 31 December 2005. These preliminary results are prepared under International Financial ReportingStandards ("IFRS"). All comparatives are based on an IFRS restatement of IrishGAAP financial information for 2004, a reconciliation of which is included inthis statement. HIGHLIGHTS • Highlight financial results for 2005 compared with 2004 are: Revenue US$248.8 million +156.3%Operating profit US$162.9 million +194.2%Profit for the year US$106.4 million +113.9%Cash provided by operating activities US$194.6 million +187.8%Earnings per share (Basic) 22.58cents +83.4% • Dragon's average gross production from the Cheleken Contract Area, offshore Turkmenistan, for the year was 19,426 barrels of oil per day ("bopd") with 14,008 bopd attributable to Dragon • Post tax profits increased to US$106.4 million (2004: US$49.7 million) as a result of higher crude oil prices and increased production over the previous year. • An equity funding to part finance a long term field development plan for the Cheleken Contract Area, by way of a private placement and open offer, raised net proceeds of US$156.1 million. • Cash and bank balances on hand at the year-end amounted to US$245 million (2004: US$34.9 million). Having achieved a strong cash position this year, Dragon considered it prudent to prepay in full the outstanding amount of US$27.6 million of the EBRD loan facility. • As of 31st December 2005, remaining recoverable proved and probable reserves in the Cheleken Contract Area, is 651 million barrels of oil and condensate and 3.5 trillion cubic feet of gross contingent gas resources. Dragon's entitlement amounts to 323 million barrels of oil and condensate as of 31st December 2005 • The drilling campaign on the LAM 10 platform is in progress and three development wells were completed in 2005. In March 2006, well 10/113 was completed as a dual producer. The jack-up rig is now drilling the fifth LAM 10 well, 10/114. • Seven wells worked over during 2005 yielded excellent results and these wells are now contributing significantly to production. The workover programme has been extended by the employment of two hydraulic workover units in the Zhdanov field. • Dragon is in the process of securing a second jack-up drilling rig in 2006 and is also considering plans to refurbish and mobilise its platform rig for operation in 2007. Mr Hussain M. Sultan, Chairman, commented: "I am pleased to be able to report on a very successful year for Dragon, whichdelivered record results. The significant progress we have made on all fronts in2005 clearly bodes well for the continuing growth of our business. While we are confident of the long term potential and value of our existingasset, our plans for the future also include looking at other acreage to expandand diversify Dragon's asset base. The development and commercialisation of gasresources from the Cheleken Contract Area remains a major priority anddiscussions with the Turkmenistan government and other international operatorsconcerning a joint gas export scheme will continue. Our successful track record to date, our technical and commercial expertise, thestrength of our balance sheet, the underlying trends for oil prices andoperating costs all point to a positive future for Dragon and its shareholders." Enquiries: Dragon Oil plc +353 1 676 6693Hussain M. Sultan, Chairman & CEO Citigate Dewe Rogerson +44 020 7638 9571Martin Jackson Disclaimer This statement contains certain forward-looking statements that are subject tothe usual risk factors and uncertainties associated with the oil and gasexploration and production business. Whilst Dragon believes the expectationsreflected herein to be reasonable in light of the information available to themat this time, the actual outcome may be materially different owing to factorsbeyond the Company's control or within the Company's control where, for example,the Company decides on a change of plan or strategy. Accordingly no reliance maybe placed on the figures contained in such forward-looking statements. Chairman's Statement Dear Shareholder, I am pleased to be able to report on a very successful year for Dragon, whichdelivered record results. The significant progress we have made on all fronts in2005 clearly bodes well for the continuing growth of our business. Private placement and open offer In May 2005, we successfully raised equity funding to support our long termfield development plan of the Cheleken Contract Area, Turkmenistan through aprivate placement and open offer of 99,564,661 Ordinary Shares at a price of£0.88 each, raising a net amount of US$156.1 million. Part of the proceeds ofthe equity issue was used to fully repay the US$40 million loan facility withEmirates National Oil Company Limited (ENOC) LLC. 2005 Financial Results Dragon's turnover increased to US$248.8 million (2004: US$97.1 million). As aresult of higher crude oil prices and increased production over the previousyear, we saw an increase of post-tax profits to US$106.4 million (2004: US$49.7million). Dragon benefited from the stronger oil market and production increases, andconsequently generated a net operating cash inflow of US$194.6 million (2004:US$67.6 million) resulting in a year-end cash balance of US$245 million (2004:US$34.9 million). Financing Dragon has enjoyed a good banking relationship with the European Bank ofReconstruction and Development ("EBRD") over the past 6 years and we would liketo thank them for their support. Having achieved a strong cash position thisyear, we considered it prudent to prepay in full the outstanding amount ofUS$27.6 million of the EBRD loan facility. This is a positive step forward inour plans to develop the Cheleken Contract Area. Reserves Underlying data in respect of proved and probable reserves remains encouraging.The Board's assessment of remaining recoverable proved and probable reserves inthe Cheleken Contract Area, offshore Turkmenistan comprising two fields,Dzheitun ("LAM") and Dzhygalybeg ("Zhdanov"), as of 31 December 2005, stands at651 million barrels of oil and condensate. Dragon's entitlement barrels underthe Production Sharing Agreement ("PSA") amounts to 323 million barrels of oiland condensate. The Board's best estimate for contingent gross gas resources for the ChelekenContract Area is 3.5 trillion cubic feet. Production The total field production for 2005 was 7.1 million barrels of oil and theaverage gross production for the year was 19,426 barrels of oil per day ("bopd")with 14,008 bopd attributable to Dragon. This compares to 4.9 million barrels ofoil produced in 2004 with a total gross production of 13,264 bopd, of which8,630 bopd was attributable to Dragon. There are difficulties in transporting oil production through the existingfacilities and we are therefore upgrading the infrastructure to overcome theseissues. We experienced a temporary blockage in one of our feeder pipelines inJanuary 2006. As a result, operations on the LAM 22 platform were temporarilysuspended resulting in a short term loss of production of approximately 5,600bopd. Production from the LAM 22 platform was restored with the commissioning ofa new feeder pipeline in April 2006. Development The main activities for 2005 included completion of three wells from theupgraded LAM 10 platform using a jack up rig, and workover of 7 wells from 3other platforms. Well 10/110 was the first of six wells to be drilled from the LAM 10 platform aspart of Dragon's continuous drilling programme. The second and third wells, 10/111 and 10/112 were completed in 2005 as dual producers. These wells marked thefirst successful application of dual completion technology in the LAM Fieldenabling two reservoir intervals at different pressures to producesimultaneously. In March 2006, well 10/113 was also completed as a dual producer. The jack-uprig is now drilling the fifth LAM 10 well, 10/114, with a planned depth of 5,030metres. A total of seven workovers were conducted in 2005. Four were rigless and threewere executed with a hydraulic workover unit. The workover programme iscontinuing with the employment of two hydraulic workover units in the Zhdanovfield. 3D seismic Dragon successfully completed a marine 3D seismic survey in the ChelekenContract Area in 2005. Processing of the full seismic data was completed inAugust 2005. We expect interpretation and re-mapping of the LAM Field to becompleted in 2006. Several undrilled structures have already been identified on the 3D seismic,which will be targeted by appraisal drilling. This will also support are-evaluation of oil and gas reserves alongside an updated field developmentplan. Facilities Significant progress has been made on two major Engineering, Procurement andConstruction contracts. One is the new build LAM 'A' wellhead and productionplatform and the other a new onshore process facility that will enableprocessing of up to 50,000 barrels of oil per day. Engineering work is also progressing on additional wellhead and productionplatforms, refurbishment of the crude oil offloading jetty, refurbishment ofexisting platforms for drilling and the installation of new in-field flow lines. Outlook Dragon's continuous drilling programme is on target through the use of acontracted jack-up drilling rig. We are in the process of securing a secondjack-up drilling rig in 2006. We are also considering plans to refurbish andmobilise our own platform rig in 2007. In summary, our overall objectives are toaccelerate development of the field and improve production. While we are confident of the long term potential and value of our existingasset, our plans for the future also include looking at other acreage to expandand diversify Dragon's asset base. The development and commercialisation of gasresources from the Cheleken Contract Area remains a major priority anddiscussions with the Turkmenistan government and other international operatorsconcerning a joint gas export scheme will continue. In everything we do, we are guided by a clear strategy and can rely on the fullcommitment and support of our staff to meet the challenges ahead. Our successful track record to date, our technical and commercial expertise, thestrength of our balance sheet and the underlying trend for oil prices all pointto a positive future for Dragon and its shareholders. Hussain M. Sultan Chairman & CEO Operations Review Dragon holds a 100% interest in, and is operator of, the Production SharingAgreement ("PSA") for the Cheleken Contract Area located in the Caspian Sea,offshore Turkmenistan. The Cheleken Contract Area contains two producing oil andgas fields being LAM and Zhdanov. Development in the Cheleken Contract Areaunder the PSA commenced in May 2000 and will take place over a 25-year baseterm. There is an exclusive right to negotiate an extension to the PSA for afurther period of not less than 10 years. Drilling Well 10/110 was spudded on 26 December 2004 and was the first of up to six wellsto be drilled from the LAM 10 platform as part of the continuous drillingprogramme in the field development plan. The well was drilled to a depth of4,875m. Zone CH9, tested at 523 bopd and eventually completed in zones CH4 and5. This interval tested at 1,080 bopd. Deeper reservoir zones, CH11 and 12,tested water due to the down-dip location of the well. Despite this, we areconfident that significant oil potential exists in zones CH11 and 12 and theywill be further evaluated at an up-dip location as part of our drillingprogramme for 2006. The second well, 10/111 was spudded on 17 July, 2005 and was drilled to a depthof 3,544m. The well was completed as a dual producer and tested at a rate of1,080 bopd from the upper reservoirs and 1,506 bopd from the lower reservoirs.This well marked our first successful application of innovative dual completiontechnology in the LAM field, thereby enabling two reservoir intervals atdifferent pressures to produce simultaneously. The third well, 10/112 was spudded on 12 October 2005 and was drilled to a depthof 3,629m. The well was also completed as a dual producer and upper reservoirstested at a rate of 2,087 bopd and the lower reservoirs tested at a rate of 863bopd. The fourth well, 10/113, was spudded on 12 December 2005 and drilled to a depthof 3,753m. The well was completed as a dual producer and tested at 2,774 bopdfor the upper reservoirs and 679 bopd for the lower reservoirs. In addition tozones CH4, 5 and 6, this well encountered producible oil in zone CH3 for thefirst time in the LAM 10 sector of the field. The jack-up rig is now drilling the fifth LAM 10 well, 10/114, which was spuddedon 13 March 2006. We plan to drill this well to a total depth of around 5,030m. Workovers A total of seven workovers were conducted in 2005 on the LAM Field. Three wellswere worked over with a hydraulic workover unit. These were: well 21/107 inApril, well 63/55 in August and well 75/75 in September 2005. Rigless workoverswere conducted on four wells 21/108, 63/64, 63/65 and 63/85. The total initialincremental production from all seven workovers conducted in 2005 was 4,275 bopdand the workover programme is being continued through the employment of twohydraulic workover units in the Zhdanov field. Production Total field production for 2005 was 7.1 million barrels of oil. The averagegross production from the Cheleken Contract Area for the year was 19,426 bopdwith 14,008 bopd attributable to Dragon. This compares to 4.9 million barrels ofoil in 2004 with a total gross production of 13,264 bopd, of which 8,630 bopdwas attributable to Dragon. Reserves Based on the latest certification by an independent energy consultant, the totalremaining recoverable proved and probable reserves (in two fields LAM andZhdanov), as of 31 December 2005, are 651 million barrels (2004, 661 millionbarrels) of oil and condensate. Dragon's entitlement under the PSA amounts to323 million barrels of oil as of 31 December 2005 (2004: 315 million barrels).The certification of reserves is based on additional well information obtainedfrom the new development wells and workover wells. Increase in Dragon'sentitlement was mainly due to an upward revision in the forecast of capitalexpenditure for field development. In the calculation of Dragon's share of proven and probable reserves, severalassumptions are made including extension of the PSA for a period of 10 yearsbeyond the initial period of 25 years. Other assumptions include forecasts ofa long term oil price of US$35 per barrel, cost and timing for capitalexpenditure and the oil production profile. Any changes to such assumptionswould alter the calculation of Dragon's share of production under the PSA. In addition, the best estimate for the field's contingent gross gas resources is3.5 trillion cubic feet. 3D Seismic Acquisition of the marine 3D seismic survey was completed over the ChelekenContract Area in April 2005. Full processing of the seismic data wassubsequently completed in the UK. Interpretation of this data is ongoing and itsfindings are being utilised to update Dragon's drilling plans. Several undrilledareas have been identified outside the main field area. Dragon intends toaggressively pursue appraisal drilling of these structures, the first of whichis LAM West. This structure is on trend with the main LAM field and will bespud in late 2006, subject to rig availability. Engineering & Construction During the year, Dragon completed substantial engineering projects in the LAMfield as part of the field development plan. The LAM 10 platform was also refurbished to accommodate the jack-up rig anddrill further wells including a sub-sea pipeline to ensure the continuity andfree flow of production to shore. Other major projects initiated include the engineering and construction of a LAM'A' wellhead, production platform and onshore processing facilities. Theprocessing facility is being located onshore and shall have the capacity toprocess up to 50,000 bopd from the offshore LAM field. Both the platform and theprocessing facility are planned to be commissioned in 2006. Engineering work is also progressing on additional wellhead and productionplatforms, refurbishment of the crude oil off-loading jetty, refurbishment ofexisting platforms for drilling and workovers and the installation of newin-field flow lines. Marketing Dragon has the unrestricted right to market and export its share of oil underthe PSA. The principal goal is to ensure the smooth, safe and uninterruptedtransportation of crude oil to international markets and to achieve best netbacksales prices for Dragon's share of production. Since 1998, Dragon has marketed its oil production through a crude oil swapagreement with the National Iranian Oil Company. Under the terms of thisagreement, Dragon transfers its crude oil at Hazar, Turkmenistan, and ships itto the Caspian port of Neka in northern Iran. Dragon then receives an equalvolume of Iranian crude oil from Kharg Island in southern Iran for on-selling tointernational third parties. In December 2001, additional marketing routes wereestablished on the basis of transportation tenders. These are through Baku,Azerbaijan and via the port of Makhachkala, Russian Federation. Dragon is constantly seeking out ways to further reduce the per barrel cost ofmoving crude oil from the Caspian Sea to international markets to achievefavourable netback sales prices. In 2005, Dragon sold a total of 5.1 million entitlement barrels under the PSA ofwhich 2.7 million barrels (2004, 1.6 million barrels) were sold at Kharg Islandin the South of Iran under its swap agreement and 2.4 million barrels (2004, 1.2million barrels) at Baku. Health Safety & Environment ("HSE") Dragon maintains its commitment to the highest HSE industry standards in allsectors of our operations by dedicating additional manpower and materialresources to risk management focused on continually enhancing quality andeffectiveness of the support provided. Dragon's training programmes are crucial to its HSE regime. They are designed tomaintain and update staff awareness of the importance of safety issues,regulations and procedures. A commitment to the environment is one of Dragon's key objectives and itsenvironmental obligations are pursued rigorously in accordance with the fielddevelopment plan. Once again Dragon can report substantial progress with, forexample, the satisfactory completion of the air quality monitoring campaign forLAM 22 in 2005. In addition, an Environment Impact Assessment and action planswere developed and put into operation for LAM 10 in 2005. Financial Report International Financial Reporting Standards The consolidated financial statements and notes contain additional informationand should be referred to in conjunction with this financial review. Thefinancial information presented in this Report has been prepared in accordancewith the accounting policies of Dragon Oil plc (the "Company" or "Group") underInternational Financial Reporting Standards ("IFRS"). The transition date forimplementation of IFRS by Dragon was 1 January 2004. The financial statementsfor the year ended 31 December 2004, prepared in accordance with accountingpractice generally accepted in the Republic of Ireland, have been restated underIFRS with effect from the transition date. Turnover Turnover in 2005 was US$248.8 million compared with US$97.1 million for 2004.The increase of US$151.7 million is attributable to the higher average salesprice of US$48.8 per barrel (2004: US$34.7 per barrel) realised during the year,together with a higher sales volume of 5.1 million (2004: 2.8 million). Cost of sales During 2005 operating and production costs increased to US$34 million fromUS$20.2 million in 2004. This increase of US$13.8 million was primarily due toan increase in swap fees, transportation costs, abandonment charge and otherfield operating expenditure resulting from larger production and sales volumesduring the year. Following the revision in the Depreciation Depletion and Amortisation ("DD&A")rate due to an increase in the long-term oil price forecast applied by the Boardin the calculation of reserves under the PSA, the increased forecast of thefield development expenditure and the increase in Dragon's share of production,the DD&A charge for the year 2005 was US$43.7 million (2004: US$16.7 million). Administration costs were US$9.7 million in 2005 compared to US$5.4 million in2004, primarily due to increased costs and recognition of employee compensationcost with respect to share-based payments in accordance with IFRS 2. Other income increased to US$1.4 million during the year (2004: US$0.4 million),following the conversion of redeemable convertible preference shares held byDragon in Celtic Resources (Holdings) Plc into ordinary shares on 30 June 2005. Finance costs increased to US$8.6 million from US$6 million in 2004, primarilydue to the exchange loss on sterling receipts, partly reduced by lower interestand costs on the Emirates National Oil Company Limited (ENOC) LLC ("ENOC") loanthat was repaid in May 2005. Finance income increased to US$5 million fromUS$0.4 million in 2004 due to higher interest income on deposits earned duringthe year. Profits and earnings per share An operating profit of US$162.9 million was recorded compared with US$55.4million for 2004. During the year, the Group recognised an income tax charge of US$5.3 millionbased on the current year's profits after offsetting the unrecovered losses asat 31 December 2004. In addition, the Group has recognised a net deferred taxliability of US$47.6 million (2004: nil) due to timing differences between thecharges to the Group's income statement and those computed under the tax laws ofTurkmenistan. Dragon made a post tax profit of US$106.4 million in 2005 compared to a post taxprofit of US49.7 million in 2004. The basic earnings per share amounted to22.58 cents compared to earnings of 12.31 cents per share in 2004. In view of the implementation of the field development plan and future cashrequirements including current commitments, the Directors do not recommend thepayment of a dividend for the year. Cash flow and capital expenditure In May 2005, Dragon successfully raised equity funding to support its long termfield development plan of the Cheleken Contract Area, Turkmenistan through aprivate placement and open offer of 99,564,661 ordinary shares at a price of Stg0.88 each, raising a net amount of US$156.1 million. Part of the proceeds of theequity issue was used to fully repay the US$40 million ENOC loan facility. Afurther amount of US$1.7 million was raised by the company following theexercise of share options. The net cash inflow from operating activities during 2005 was US$194.6 million(2004: US$67.6 million). The increase in cash inflow from operating activitieswas a direct result of increased sales revenue generated in the year throughhigher oil prices and increased volumes. During the year, US96.2 million (2004: US$76.1 million) was spent in acquiringtangible fixed assets, mainly attributable to the drilling and other engineeringprojects. Net cash, after reducing debt, was US$218.2 million (2004: Net debt US$36.4million). Balance Sheet and debt The Group Balance Sheet showed an increase in total shareholders' equity fromUS$294.2 million at the end of 2004 to US$561 million at the end of 2005. Theincrease was due to the proceeds from the issue of ordinary shares following aprivate placing and open offer yielding a net amount of US$ 156.1 million,US$1.7 million received pursuant to exercise of share options, the creation of afair value reserve of US$2.5 million in respect of share-based payments and the2005 retained profit of US$106.4 million. Fixed assets increased by US$56.7 million from US$342 million in 2004 toUS$398.7 million at the close of 2005. The increase was due to the drillingprogramme and other engineering projects. The increase in tangible fixed assetsof US$100.4 million is largely offset by the DD&A charge of US$43.7million forthe year. Held for trading financial assets include 330,000 ordinary shares in CelticResources (Holdings) Plc, following the conversion of 1.65 million preferenceshares on 30 June 2005. This investment has been fair-valued at the year-end. Debtors increased by US$16.3 million from US$5.6 million at the end of 2004 toUS$21.9 million at the close of 2005. Cash and bank balances increased by US$210.1 million from US$34.9 million at theend of 2004 to US$245 million at the close of 2005. This increase reflectsproceeds from the issue of the equity in May 2005, together with higheroperating cash flows, notwithstanding the capital expenditure and the repaymentof loans during the year. At the year-end, total debt amounted to US$27.6 million (2004: US$73.5 million)before deducting financing costs of US$0.7 million. There were no furtherdrawdowns during the year under the European Bank for Reconstruction andDevelopment ("EBRD") loan facility. While Dragon continued to utilise the loanfacility provided by EBRD, which was due for repayment in full by 2008, anamount of US$5.9 million of the facility was repaid to EBRD in 2005. Interest ischarged on outstanding amounts at LIBOR plus 325 basis points. Subsequent to theyear end in February 2006, the outstanding amount under the EBRD facility wasprepaid in full and is accordingly reclassified as amounts due within one year. Creditors falling due after more than one year were nil (2004: US$26.5 million)following the re-classification of the net amount outstanding as amounts duewithin one year. Commercial Risks The main commercial risks Dragon is exposed to are oil price, counterparty,exchange rate, interest rate and liquidity risks in its operations. In line with managements' strategy to hedge the oil price, Dragon entered intoan oil put option contract at a strike price of US$28 per barrel for anestimated 60 per cent of its entitlement barrels for 2005. Given strong crudeoil prices and Dragon's current financial resources, the Group has to date nothedged its production for 2006. Counterparty risks are minimised through short-term crude oil sale contracts andprepayments that are generally received for the cargoes moving west to Baku.Receipts for crude oil sales and expenditures for the development programme aremainly in US dollars which minimise the exchange rate risks. Exchange rateexposures relate to sterling receipts and expenditures. Interest rate exposureson loans taken on floating rates have not been hedged, since these have beensubsequently prepaid in full. Dragon also seeks to retain sufficient liquidity,either in the form of cash or maturing deposits in US$, to manage its ongoingdevelopment. Consolidated income statement Notes Year ended Year ended 31 Dec 2005 31 Dec 2004 US$'000 US$'000 Revenue 248,813 97,074 Cost of salesOperating and production costs (33,981) (20,151)Depletion 4 (43,610) (16,596) --------------- --------------Gross profit 171,222 60,327 Administrative expenses (9,726) (5,383)Other income 1,371 418 --------------- -------------- Operating profit 162,867 55,362 Finance costs (8,557) (6,005)Finance income 5,005 388 --------------- --------------Profit before income tax 159,315 49,745 Income tax expense 5 (52,894) - --------------- --------------Profit for the year 106,421 49,745 =============== ==============Earnings per share 7Basic 22.58c 12.31cDiluted 22.46c 12.17c =============== ============== Consolidated balance sheet Notes As at As at 31 December 31 December 2005 2004 US$'000 US$'000ASSETSNon-current assetsProperty, plant and equipment - oil and gas 398,681 341,853interestsProperty, plant and equipment - others 50 121 --------------- --------------- 398,731 341,974 --------------- ---------------Current assetsInventories 9,731 13,538Held for trading financial asset 895 -Trade and other receivables 21,909 5,551Cash at bank and in hand 245,019 34,910 --------------- --------------- 277,554 53,999 --------------- ---------------Total assets 676,285 395,973 =============== ============== EQUITYCapital and reserves attributable to the Company'sequity shareholdersShare capital 8 79,937 66,335Share premium account 216,928 72,688Capital redemption reserve 77,150 77,150Other reserve 2,509 -Retained earnings 184,488 78,067 --------------- ---------------Total equity 561,012 294,240 --------------- ---------------LIABILITIESNon-current liabilitiesBorrowings 9 - 26,547Provision for deferred income tax 47,628 - --------------- --------------- 47,628 26,547 --------------- ---------------Current liabilitiesTrade and other payables 35,518 30,453Current income tax liability 5,266 -Borrowings 9 26,861 44,733 --------------- --------------- 67,645 75,186 --------------- ---------------Total liabilities 115,273 101,733 --------------- ---------------Total equity and liabilities 676,285 395,973 =============== ============== Group and Company statements of changes in shareholders' equity Retained Notes Capital earnings/ Share Share premium redemption Other (Accumulated capital reserve reserve losses) Total US$'000 US$'000 US$'000 US$'000 US$'000 US$'000Group At 1 66,274 72,646 77,150 - 28,322 244,392January 2004 Shares 61 42 - - - 103issued during the year Profit - - - - 49,745 49,745for the year ---------------- ---------------- ---------------- ---------------- ---------------- -----------------At 31 66,335 72,688 77,150 - 78,067 294,240December 2004 Shares 8 13,602 154,016 - - - 167,618issued during the year Share 8 - (9,776) - - - (9,776)issue expenses Profit - - - - 106,421 106,421for the year Employee share option scheme: - value - - - 2,509 - 2,509of services provided ---------------- ---------------- ---------------- ---------------- ---------------- -----------------At 31 79,937 216,928 77,150 2,509 184,488 561,012December 2005 ================= ================ ================ ================ ================ ================= Company At 1 66,274 72,646 77,150 - (3,101) 212,969January 2004 Shares 61 42 - - - 103issued during the year Loss for - - - - (1,194) (1,194)the year ---------------- ---------------- ---------------- ---------------- ---------------- -----------------At 31 66,335 72,688 77,150 - (4,295) 211,878December 2004 Adoption - - - - (52,731) (52,731)of IAS 32 and IAS 39 ---------------- ---------------- ---------------- ---------------- ---------------- -----------------At 1 66,335 72,688 77,150 - (57,026) 159,147January 2005 Shares 13,602 154,016 - - - 167,618issued during the year Share - (9,776) - - - (9,776)issue expenses Loss for - - - - (24,673) (24,673)the year Employee share option scheme: - value - - - 2,509 - 2,509of services provided ---------------- ---------------- ---------------- ---------------- ---------------- -----------------At 31 79,937 216,928 77,150 2,509 (81,699) 294,825December 2005 ================= ================ ================ ================ ================ ================= Consolidated cash flow statement Year ended Year ended 31 December 31 December Notes 2005 2004 US$'000 US$'000 Profit before income tax 159,315 49,745Adjustments for:Depletion and depreciation 4 43,681 16,716Provision for slow moving inventories 1,900 379Employee share options - value of services provided 2,509 -Net gain on recognition of held for trading financial (1,251) -assetLoss on disposal of held for trading financial asset 210 -Interest expense and loan issue costs 4,689 7,314Interest received on bank deposits (5,005) (388) ------------------- -------------------Operating cash flow before changes in working capital 206,048 73,766Changes in working capital:-inventories before movement in provision 1,907 (9,184)-trade and other receivables (16,358) 205-trade and other payables 3,040 2,849 ------------------- -------------------Cash provided by operating activities 194,637 67,636 ------------------- -------------------Investing activitiesAdditions to property, plant and equipment - oil and (96,217) (76,054)gas interestsInterest received on bank deposits 5,005 388Amounts placed on deposit in interest collateral (5,756) (7)accountProceeds from sale of held for trading financial 146 -asset ------------------ ------------------Net cash used in investing activities (96,822) (75,673) ------------------ ------------------Financing activitiesProceeds from issue of share capital 8 167,618 103Share issue expenses 8 (9,776) -Debt repayments 9 (45,900) (1,700)Interest paid (5,404) (7,673) ------------------ ------------------Net cash provided by/(used in) financing activities 106,538 (9,270) ------------------ ------------------Net increase/(decrease) in cash and cash equivalents 204,353 (17,307) Cash and cash equivalents at the beginning of the 34,097 51,404year ------------------ ------------------Cash and cash equivalents at the end of the year 238,450 34,097 ================== ================== Dragon Oil plc Notes to the Consolidated Financial Statements for the year ended 31 December2005 1. General information Dragon Oil plc ("the Company") and its subsidiaries ("the Group") areengaged in upstream oil and gas development and production activities primarilyin Turkmenistan. The Company is a public limited company and was incorporated in Ireland inSeptember 1971. The address of its registered office is 7 Fitzwilliam Square,Dublin 2, Ireland and the Company is managed from Dubai, United Arab Emirates.The registration number is 35228. The Company's ordinary shares are listed onthe official lists of the Irish and London Stock Exchanges. These consolidated financial statements have been approved for issue bythe Board of Directors on 16th April 2006. The results for the year ended 31 December 2005 do not constitute fullaccounts within the meaning of Section 3 of the Companies (Amendment) Act, 1987.Statutory accounts for 2004 have been delivered to the Registrar of Companiesand those for 2005 will be delivered following the company's annual generalmeeting. The auditors have reported on those accounts; their reports wereunqualified and did not contain statements under s. 237(2) or (3) Companies Act1985. 2. Basis of preparation These financial statements have been prepared in accordance withInternational Financial Reporting Standards ("IFRS") and International FinancialReporting Interpretations Committee ("IFRIC") interpretations as adopted by theEuropean Union (EU) and with those parts of the Companies Act, 1963 to 2005applicable to companies reporting under IFRS. The financial statements have beenprepared under the historical cost convention as modified for financial assetscarried at fair value. A summary of the more important Group accounting policiesis set out below, together with an explanation of where changes have been madeto previous policies on the adoption of new accounting standards in the year. The preparation of financial statements in conformity with generallyaccepted accounting principles requires the use of estimates and assumptionsthat affect the reported amounts of assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Although these estimates are based on management's bestknowledge of the amount, event or actions, actual results ultimately may differfrom those estimates. Approved IFRS Dragon's accounting policies under IFRS are based on the FinancialReporting Standards and Interpretations issued by the International AccountingStandards Board ("IASB") and on International Accounting Standards ("IAS") andStanding Interpretations Committee Interpretations approved by the predecessorInternational Accounting Standards Committee that have been subsequentlyauthorised by the IASB and remain in effect. The majority of the IASs / IFRSs have been approved by the EuropeanCommission. However, a number of IASs / IFRSs remain to be approved at the dateof publication of this document, and failure to approve these outstandingstandards in time for 2005 financial reporting could lead to changes in thebasis of accounting or in the basis of presentation of certain financialinformation from that adopted for the purposes of this report. The following new standards, amendments and interpretations to existingstandards have been published that are mandatory for the Group's accountingperiods beginning on or after 1 January 2006 or later periods but which theGroup has not early adopted: New standards: IFRS 7 (New standard), Financial Instruments: Disclosures and acomplimentary amendment to IAS 1, Presentation of financial statements - CapitalDisclosures (effective from 1 January 2007). The Group will apply the newrequirements as may be applicable from annual periods beginning 1 January 2007. Amendments: IAS 19 (Amendment), Employee Benefits (effective from 1 January 2006). Theamendments are not expected to affect the Company's financial statements. IAS 39 (Amendment), Cash flow hedge accounting for forecast intragrouptransactions and the fair value option (effective from 1 January 2006). Thisamendment is not applicable to the Group's operations. IAS 39 and IFRS 4 (Amendment), Financial guarantee contracts (effectivefrom 1 January 2006). This amendment is not expected to affect the Group'sfinancial statements. IFRS 1 (Amendment), First adoption of International Financial ReportingStandards (effective from 1 January 2006). This amendment is not applicable tothe Group's operations. Interpretations: IFRIC 4, Determining whether an arrangement contains a lease (effectivefrom 1 January 2006). The Group is currently assessing the impact of IFRIC 4 onits operations. IFRIC 5, Rights to interests arising from decommissioning, restoration andenvironmental and rehabilitation funds (effective from 1 January 2006). Thisamendment is not expected to affect the Group's financial statements. IFRIC 6, Liabilities arising from participating in a specified market -waste, electrical and electronic equipment (effective from 1 January 2006).IFRIC 6 is not applicable to the Group's operations. Accounting policies The accounting policies used are consistent with those set out in theaudited Annual Report for the year ended 31 December 2004 which is available onDragon's website www.dragonoil.com, except for the following: • As part of Dragon's adoption of IFRS, an election was made under IFRS1 First-time Adoption of International Financial Reporting Standards as at 1January 2004 in respect of IFRS 2 Share - Based Payment that has only beenapplied to options issued after 7 November 2002 and not vested by 1 January2005. • Cash and cash equivalents comprise cash on hand together with demanddeposits. Deposits repayable on demand are defined as short-term, highly liquidinvestments that are readily convertible to known amounts of cash and which aresubject to an insignificant risk of changes in value. 3. The Group operates a single class of business being oil production and related activities within a single geographical area. 4. The Group's share of proven and probable oil reserves, at 31 December 2005 is 323million barrels (2004: 315 million barrels) of a total field reserves of 650.9 million barrels (2004: 661 million barrels). In arriving at the Group's share of reserves and, consequently, the depletion charge, significant assumptions have been made in the following areas and any material change to the underlying assumptions will have a material effect on the Group's share of oil reserves and therefore the annual depletion charge: • management's long term view of the crude oil price for the next 30 years. • timing of the capital expenditure spend. • crude oil production profile for the next 30 years; and • cost estimates for capital and non-capital expenditure and production costs. • availability of rigs • flow rates The Group revised its long-term view of oil prices from US$25 per barrel toUS$30 per barrel effective from 1 January 2005, and to US$35 per barreleffective from 1 July 2005. The effect of an upward revision in the long-termoil price is to lower the number of attributable reserves to the Group and thisconsequently increases the depletion charge per barrel. Based on assessment byindependent petroleum consultants the Group has revised its cost estimates forfield development and these revisions have resulted in an increase in thedepletion charge for the year of US$14.2 million. 5. At 31 December 2005, the Group has estimated unrecovered tax losses of US$ nil (2004: US$ 138.4 million), under the terms of the Production Sharing Agreement ("PSA"). Under the PSA, no tax is payable until all unrecovered losses are recouped. During the year, the Group recognised an income tax charge of US$5.3 million based on current year's profits after offsetting the unrecovered losses as at 31 December 2004. In addition, the Group has recognised a deferred tax liability of US$48 million (2004: nil) due to the timing differences between the charges to the income statement and those computed under the tax laws of Turkmenistan. 31 December 2005 31 December 2004 US$'000 US$'000Analysis of income tax expense:Current tax 5,266 -Deferred tax 47,628 - -------------------- ---------------- 52,894 - ==================== ================ The tax on Group's profit before tax differs from the theoretical amount thatwould arise using the weighted average tax rate applicable to profits of theconsolidated companies as follows: 31 December 2005 31 December 2004 US$'000 US$'000 Profit before tax 159,315 49,745 -------------------- ----------------Tax calculated at domestic ratesapplicable to profits in the respectivecountries (20% (2004: 25%)) 31,863 12,436Utilisation of unrecovered losses (27,685) (12,436)Deferred tax liability attributable to 47,628 -accelerated tax depletionExpenses not deductible for tax purposes 2,297 -Income not subject to tax (1,209) - -------------------- ---------------- 52,894 - ==================== ================ Analysis of the deferred tax liability: to be recovered after more than 12 47,628 -monthsto be recovered within 12 months - - -------------------- ---------------- 47,628 - ==================== ================ The average effective tax rate was 33% (2004: 25%). The Group has recognised anexceptional charge for deferred tax of US$23 million following the acceptance ofprior years' income tax returns by the Government of Turkmenistan and consequentclarification of the value of oil and gas interests eligible for write offagainst taxation, under the tax laws of Turkmenistan. 6. The Directors do not propose a dividend for the year. 7. Earnings per share 31 December 2005 31 December 2004 US$'000 US$'000 The calculations of earnings per share are based onthe following profit and numbers of shares:Profit for the year 106,421 49,745 Weighted average number of shares:Basic 471,211,553 404,146,357Diluted 473,898,102 408,705,476 Earnings per shareBasic 22.58c 12.31cDiluted 22.46c 12.17c Basic earnings per share is calculated by dividing the earnings attributable toordinary shareholders by the weighted average number of ordinary shares in issueduring the year. For diluted earnings per share, the weighted average number of ordinary sharesin issue is adjusted to assume conversion of all potential dilutive options overordinary shares. Options for 2.5 million ordinary shares granted at Stg 181pduring the year are non-dilutive. 8. In May 2005, the Company, to part finance its field development plan, issued 99,564,661 ordinary shares of Euro 0.10 at Stg 88p per share pursuant to a private placing and open offer. Costs associated with the issue of these shares were US$9.8million. Emirates National Oil Company Limited (ENOC) LLC ("ENOC") subscribed fully to its entitlement of 23,849,866 ordinary shares of Euro 0.10 each under the open offer, the proceeds of which were utilised in May 2005 to repay the loan of US$40 million due to ENOC. 9. Borrowings- analysis of debt maturity: Group 2005 2004 US$'000 US$'000 Bank and other borrowings 26,861 71,280 --------------- ---------------Current liabilities - Within one year or on demand 26,861 44,733 --------------- ---------------Non-current liabilities - Between one and two years - 10,800 - Between two and five years - 15,747 --------------- --------------- - 26,547 =============== =============== The US$40 million loan facility provided by ENOC to Dragon Oil Plc for a periodof one year, bearing interest at LIBOR plus 325 basis points, was repaid on 24May 2005 (Note 17). The loan carried an arrangement fee of US$3.25 million and afacility fee of US$0.25 million. The financing costs directly attributable tothis loan were deducted, in accordance with the Group's stated accountingpolicy, from the loan amount and charged to the income statement over the lifeof the debt instrument at a constant rate in relation to the carrying amount. The EBRD loan facility has a term of 7 years commencing from 29 December 2000.This loan is secured in favour of EBRD by the pledge of the shares of thefollowing subsidiaries of Dragon Oil Plc: Dragon (Holdings) Ltd., Tampimex OilTrading Ltd., D&M Drilling Ltd. and Dragon Oil (Turkmenistan) Ltd. Thesesubsidiaries own substantially all the assets of the Group. The Group's rightsand benefits under certain agreements, in particular the PSA agreement, havealso been assigned to EBRD and the agreement includes certain other conditionsand covenants. There were no further drawdown's during the period under the EBRD loan facility.During the year, US$5.9 million was repaid. The net proceeds of the loan at 31 December 2005 were US$26.9 million afterdeducting financing costs of US$0.7 million. Interest is charged on outstandingamounts at LIBOR plus 325 basis points. During the year management took a decision to repay the EBRD loan in 2006 thus,the amount of US$ 26.9 million is classified as a current liability. This loanwas repaid in full on 6 February 2006 under the terms of the loan facility.These amounts are accordingly reclassified at the year-end as amounts fallingdue within one year. The above analysis includes issue costs of US$ nil (2004: US$1.2 million) andUS$ 0.7 million (2004: US$1.1 million) relating to the ENOC and EBRD loansrespectively which have been deducted from the loan proceeds. Total debt, at 31December 2005, exclusive of issue costs is US$27.6 million (2004: US$73.5million). The effective interest rates at the balance sheet date were as follows: Group 2005 2004 US$'000 US$'000 Bank borrowings 7.2% 4.7%Other borrowings 7.4% 4.9% 10. During the year, Dragon has issued an irrevocable stand-by letter of credit in favour of the jack-up rig contractor in an amount of US$2.5 million as security for payments in connection with rental of the jack-up rig and relevant equipment and services under the contract. The stand-by letter of credit is valid until 14 May 2007. 11. Reconciliations between Irish GAAP and IFRS Dragon Oil plc previously reported under Irish GAAP in its previously publishedfinancial statements for the year ended 31 December 2004. The analysis belowshows a reconciliation of net assets and profit as reported under Irish GAAP asat 31 December 2004 to the revised net assets and profit under IFRS as reportedin these financial statements. In addition, there is a reconciliation of netassets under Irish GAAP at the transition date for this Company, being 1 January2004. a) Reconciliation of equity at 1 January 2004 and 31 December 2004 There was no difference between the equity as at 1 January 2004 and 31 December2004 measured under Irish GAAP and IFRS. b) Reconciliation of cash flows for the year ended 31 December 2004 Irish GAAP Effect of IFRS transition to IFRS US$'000 US$'000 US$'000 Net cash provided in operating activities 67,636 - 67,636 --------------- --------------- ---------------Investing ActivitiesAdditions to oil and gas interests (76,054) - (76,054)Interest received on bank deposits 388 - 388Net funds deposited into cash collateral (7) - (7)accountNet funds withdrawn from term deposits 251 (251) - --------------- --------------- --------------- (75,422) (251) (75,673)Financing Activities --------------- --------------- ---------------Proceeds from equity issue 103 - 103Debt repayments (1,700) - (1,700)Interest paid (7,673) - (7,673) --------------- --------------- --------------- (9,270) - (9,270) --------------- --------------- --------------- Net decrease in cash and cash equivalents (17,056) (251) (17,307)Cash and cash equivalents at the 51,404 - 51,404beginning of the year --------------- --------------- ---------------Cash and cash equivalents at the end of 34,348 (251) 34,097the year --------------- --------------- --------------- The effect of transition to IFRS represents total term deposits with a maturityof over 24 hours are not considered as cash and cash equivalents under IrishGAAP. Under IFRS, term deposits with a maturity of three months or less areconsidered as cash and cash equivalents. 12. Further information regarding Dragon is available on the Company'swebsite, www.dragonoil.com This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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