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ROGTEC Magazine - Russian Oil & Gas Technologies - News, Reviews & Articles

Exillon Energy Interim Results for the First Six Months of 2011 and Recent Drilling Update

Monday, August 29th, 2011

Exillon Energy plc, a British listed independent oil producer with assets in two oil-rich regions of northern Russia, Timan-Pechora and West Siberia, today issues its interim results for the first six months to 30 June 2011, and an update on recent drilling results. The financial and production data are for the period from 1 January 2011 to 30 June 2011 and all other information, including details on operations covers the period to 25 August 2011.

Group highlights

Financial – profitable and well-funded

· Net profit of $11.2 million for the first six months of 2011 compared to net loss of $8.7 million for the same period of 2010

· Strong balance sheet with $152.7 million of cash and cash equivalents as at 30 June 2011 with $48.5 million of debt

· New share issuance in April 2011 resulted in net cash proceeds of $146.1 million

· Total crude oil revenues amounted to $88.4 million, a y-o-y increase of 222%

Production – new record levels

· In June 2011, the Company reached a new record average monthly production level of 9,161 bbl/day, an increase of 37% over December 2010 level (6,686 bbl/day)

· In the first half of 2011, average production reached c. 7,860 bbl/day, an increase of 146% over the same period in 2010 (3,195 bbl/day)

Regional highlights

Exillon WS

· Successful drilling program continued; 15 wells drilled in 2011 (one exploration, three appraisal and eleven development wells)

· Acquired 250 sq.km of 3D seismic and 440 sq. km of gravimetric and magnetic data. Interpretation is underway

· Successfully completed the first stage of oil processing facility on the EWS II field

· Obtained regulatory approvals for construction of entry point to Transneft pipeline system; subcontractors have been appointed and construction has begun

· Average monthly oilproduction in June 2011 reached 5,880 bbl/day

Exillon TP

· Started construction of oil treatment unit. This will permit on-site preparation of 100% of produced volumes to commercial quality

· Infrastructure completed for water injection system: water well drilled and connected by 3.6 km high-pressure pipeline to an injection well (Well #1VV); water injection has started

· Average monthly oil production in June 2011 reached 3,281 bbl/day

Dear Shareholders,

The first six months of 2011 witnessed rapid growth at Exillon, with production increasing 146% compared to the equivalent period in 2010, and a net profit for the period of $11.2 million (in accordance with IFRS, this includes an element of foreign exchange translation gain). This growth was a result of continuing investment in our surface infrastructure and the ongoing success of our drilling programme. 15 wells have been drilled to date since January 2011 and extensive drilling program is underway for 2011 and 2012.

The company is well funded thanks to the support of its shareholders in the April 2011 placing, and we intend to continue our expansion in a rapid but prudent manner. We will continue to adapt carefully our drilling and other investment plans, as we develop our understanding of the characteristics of our oil fields. As production and revenue increase, our growing output will increasingly fund the cost of exploration.

The construction of our direct entry point to the Transneft pipeline at Exillon WS has been delayed from the second quarter to the fourth quarter of 2011. This was caused by the longer than expected time taken to obtain regulatory approvals for construction of the facility. All necessary approvals have now been obtained, and construction is underway. When completed, the entry point will significantly reduce our transportation costs at Exillon WS.

As a result of well completion issues, initial production from three wells on the EWS I field (#8, #38 and #371) did not meet our expectations because of problems with water intrusion. Remedial steps have been taken to repair these wells, and to minimise the chances of a recurrence. It is likely that our overall production by the end of 2011 will reach approximately 11,000 barrels per day, compared to 14,000 barrels per day as we had previously expected.

A review of our reserves and resources will be carried out later this year, overseen by our new Chief Geoscientist, John Krupa. This review will make use of the data collected by our 2011 drilling programme, as well as our newly acquired 3D seismic, gravimetic and magnetic data.

We have entered the second half of 2011 in a strong financial position and we see considerable potential for further profitable growth by continuing to increase production and enhancing our operational efficiency. We continue to make additional hires in Moscow, Urai and Usinsk to support the growth of our business, including significant appointments to our senior management and Board of Directors.

Mark Martin

Chief Executive Officer

MATERIAL EVENTS AND TRANSACTIONS

Drilling Update

Note: the following drilling update includes drilling results for one appraisal and four production wells that have been completed recently and haven’t been previously announced.

Exploration Drilling Programme

· Exploration well 4 (EWS-10274) was spudded on 8 May 2011 and was designed to test an area between the EWS I and EWS II fields. Preliminary results of wire logging confirmed the presence of 6.7 meters of effective net oil pay in the Jurassic formation and expanded the management’s understanding of the outline of the EWS fields in a manner which may support further reserve growth. The Group also studied the well deeper to a level of 2,620 meters but did not encounter hydrocarbons below the Jurassic formation. Analysis of the core results is continuing to assess the characteristics of the deeper horizons. The well is currently being prepared for production.

Appraisal Drilling Programme

· Appraisal well EWS II – 111, which was spudded on 2 July 2011, was drilled on the southern margin of the EWS II field as an off-structure flank position. The well was designed to test the presence of hydrocarbons on the southern margin of the EWS II field, and also to test a stratigraphic development concept. The well encountered Jurassic J2-4 formation with an effective net oil pay of 16.4 meters, which both increases the EWS II field area and suggests that further stratigraphic plays should be pursued in order to develop the field most efficiently.

The following appraisal results have been previously announced during the course of 2011:

· Appraisal Well 5 (Well 50P) – the well encountered 12.4 meters on net oil pay of the Jurassic P reservoir on a northern extension to the East EWS I field which contained pre-drill estimates of 13.3 million barrels of possible reserves.

· Appraisal Well 3 (Well 139) – successfully tested a western extension to the EWS II field by confirming the presence of 28.1 meters of effective net oil pay in an area that is currently mapped as a zero net pay zone.

Development Drilling Programme

Exillon WS drilled eleven wells in the period, extending a perfect drilling success rate to 29 wells since 2006. The development wells were drilled on a turnkey basis with an average drilling cost of $ 1.1 million.

The Group is pleased to announce successful completion of the following wells:

· The EWS I – 19 well, which was spudded on 8 May 2011, was drilled on the southern part of the EWS I field. The well encountered the Jurassic P reservoir at 1,938 meters, confirming the presence of 13.6 meters of effective net oil pay within the Jurassic. The well was drilled directionally 0.5 km north-west from the existing well-pad 4.The well will be used in a pilot water-injection program that will begin in Q3 2011.

· The EWS II – 142 well, which was spudded on 18 May 2011, was drilled on north-central part of EWS II field. The well encountered Jurassic J2-4 interval at 1,955 meters, confirming the presence of effective net oil pay of 10.9 meters within the Jurassic. The well was drilled directionally 0.85 km south-west from the existing well pad 2.

· The EWS I – 14 well, which was spudded on 27 May 2011, was drilled on the southern margin of the EWS I field. The well flowed water-free oil with a flow rate of 280 bbl/day. The well encountered Jurassic P formation at 1,821 meters, confirming effective net oil pay of 10.7 meters. The well was drilled directionally 1.4 km west from the existing well pad 4.

· The EWS I – 45 well, which was spudded on 8 June 2011, was drilled on the southern part of the East EWS I field. The well flowed oil at a rate of 550 bbl/day. The well encountered Jurassic P formation at 1,833 meters, confirming the presence of effective net oil pay of 16.2 meters within the Jurassic. The well was drilled directionally 0.8 km west of the existing well pad 32.

The following drilling results were previously announced during the course of 2011:

· The EWS I -16 well, which was spudded on 25 December 2010, was drilled on the northern extension of the EWS I field. The well flowed water-free oil with a flow rate of 370 bbl/day and was drilled in 19 days on a turn-key contract. The well reached target depth within the Jurassic P reservoir at 1,824 meters, confirming the presence of 16.6 meters of effective net oil pay within the Jurassic. In addition the well encountered 6.5 meters of effective net oil pay within the Pre-Jurassic at a depth of 1,869 meters, making the total effective net oil pay encountered by the well of 23.1 meters. The well was drilled directionally 1.0 km to the north from the existing well pad.

· The EWS I – 391 well, which was spudded on 25 December 2010, was drilled in 19 days on the north-western part of the East EWS I field. The well encountered the producing Jurassic P reservoir at 1,862 meters, confirming the presence of 4 meters of effective net oil pay. The well was drilled directionally 1.0 km to the north-west from the existing well pad 30, and will be connected to existing production facilities upon completion of testing.

· The EWS I – 38 well, which was spudded on 2 March 2011, was drilled in 17 days on the eastern part of the East EWS I field. The well encountered the producing Jurassic P reservoir at 1,858 meters, confirming the presence of at least 9.0 meters of effective net oil pay within the Jurassic. The well was drilled directionally 1.1 km to the north-east from the existing well pad. On completion of testing the well will be connected up to existing production facilities.

· The EWS I – 20 well, which was spudded on 13 April 2011, was drilled in 24 days on the eastern part of the East EWS I field. The well flowed water-free oil naturally to the surface with a flow rate of 625 bbl/day on an 8 mm choke. The well encountered the Jurassic P reservoir at 1,809 meters, confirming 14.6 meters of effective net oil pay within the Jurassic. The well was drilled directionally 0.9 km to the north-west from the existing well pad.

· The EWS I – 33 well, which was spudded on 20 March 2011, was drilled in 15 days on the eastern part of the East EWS I field. The well encountered the Jurassic P reservoir at 1,845 meters, confirming the presence of 7.5 meters of effective net oil pay within the Jurassic. The well was drilled directionally 0.5 km to the east from the existing well pad.

· The EWS I – 371 well, which was spudded on 5 April 2011, was drilled in 19 days on the eastern part of the East EWS I field. The well encountered the Jurassic P reservoir at 1,864 meters, confirming the presence of 13.8 meters of effective net oil pay within the Jurassic. The well was drilled directionally 1.5 km to the east from the existing well pad. On completion of testing the well will be connected up to existing production facilities.

· The EWS I – 36 well, which was spudded on 26 April 2011, was drilled in 21 days on the eastern part of the East EWS I field. The well encountered the Jurassic P reservoir at 1,849 meters, confirming the presence of 5.4 meters of net oil pay within the Jurassic. The well was drilled directionally 1.2 km to the south-east from the existing well pad. On completion of testing the well will be connected up to existing production facilities.

Production

· In June 2011, the Group reached a record monthly average production rate of 9,161 bbl/day, of which 3,281 bbl/day and 5,880 bbl/day were contributed by Exillon TP and Exillon WS, respectively.

· For the six months ending 30 June 2011, the Group achieved an average gross production rate of 7,860 bbl/day representing a 146% increase over production levels of 3,195 bbl/day for the comparable period in 2010.

· Total crude oil revenues amounted to $88.4 million, an increase of 222% over the comparable period in 2010 ($27.5 million). Exillon TP and Exillon WS generated crude oil revenues of $34.0 million and $54.4 million, respectively.

Placement of Shares

· The Group placed 23,438,000 new ordinary shares to institutional investors. The price per share was 400 pence, resulting in net proceeds to the Company of $ 146.1 million.

Prospecting Programme

The Group successfully completed its 2011 prospecting programme, which included:

· Acquisition of 250 square km of 3D seismic – results of seismic interpretation will be ready in Q4 2011

· Acquisition of 440 square km of gravimetric and magnetic survey – preliminary results of magnetic survey support the Group’s hypothesis that EWS II and EWS III fields are in communication

· Acquisition of 840 geochemical samples – results detected hydrocarbon shows in areas targeted by the Group

Board and senior management structure

In April 2011, Exillon appointed David Herbert as a Non-Executive Chairman of the Board. David has more than 20 years experience in investment banking, including most recently as Managing Director and Head of International Corporate Finance at ING Bank N.V. David also has considerable experience in the oil and gas industry, having worked for more than 10 years at BP, where he served in a variety of senior management positions.

In June 2011, Exillon appointed Mark Martin as Chief Executive Officer and Member of the Board of Directors. Mark has more than 20 years experience in investment banking. He has significant oil and gas experience, including in Central and Eastern Europe and the FSU, and has advised on numerous high-profile and successful M&A and capital raising initiatives on behalf of oil and gas clients in the region. Mark will be permanently based in Moscow.

Field infrastructure development

The Group has completed the following infrastructure projects during the reporting period:

· Construction of the first stage of oil processing facility on the EWS II field
· 18.7 km of electricity lines that will allow the Group to save on diesel costs upon installation of gas power generating units in Q3 2011
· 10.8 km of infield pipelines enabling production from isolated well pads

· 17.5 km of all season roads allowing for year-round access to major fields in Exillon WS

· Construction of well pads 2, 4, 32 and enlargement of well pads 1, 3 and 30 for further development drilling in Exillon WS

· Infrastructurefor a water injection system at Exillon TP: water well drilled and connected by a 3.6 km high-pressure pipeline to an injection well (Well #1VV)

In addition, the Group has obtained regulatory approvals for construction of entry point to the Transneft pipeline system; subcontractors have been appointed and construction has begun. The Group has also begun the construction of an oil treatment unit at Exillon TP, and is completing installation of gas power generators with 3MW capacity in Exillon WS.

FINANCIAL REVIEW

The interim condensed consolidated financial information of Exillon Energy plc for the six month period ended 30 June 2011 has been prepared in accordance with IAS 34 “Interim Financial Statements”. The condensed consolidated financial information and notes on pages 10 through to 27 should be read in conjunction with this review which has been included to assist in the understanding of the Group’s financial position at 30 June 2011.

Summary

The Group maintained a healthy financial position due to its issuance of new shares in 2011 and its increasing production volumes. In April 2011, the Group issued 23,438,000 of new shares with total gross proceeds of $153.4 million. Costs related to the issuance of new shares amounting to $7.3 million were recorded in the share premium account as directly attributable to the equity cost.

Income statement

The Group’s revenue for the six months ended 30 June 2011 comprised revenue from the sale of crude oil and amounted to $88.4 million (2010: $27.5 million), of which $52.5 million or 59% came from export sales and $35.9 million or 41% came from domestic sales. The increase in revenue was driven by the acceleration of production: a 7.7% increase to 563,104 bbl (2010: 522,660 bbl) in Exillon TP production following our well optimisation programme in the six months ended 30 June 2011 and a 1,317% increase to 860,172 bbl (2010: 60,712 bbl) in production of Exillon WS. The Group achieved an average oil price of $107/bbl (2010: $71/bbl) for export sales and $42/bbl (2010: $28/bbl) for domestic sales, reflecting the general increase in crude oil prices during the period.

Cost of sales, net of depreciation, depletion and amortisation increased to $35.5 million or 40% of the Group’s revenue (2010: $12.2 million or 44% of the Group’s revenue) due to an increase in production of 144% to 1,423,276 bbl (2010: 583,372 bbl).

The Group’s depreciation, depletion and amortisation costs primarily relate to the depreciation of proven and probable reserves and other production and non-production assets. These costs totalled $5.8 million (2010: $3.3 million) or 6.6% of the Group’s revenue (2010: 12%). The increase in DD&A costs is driven by higher production volumes.

Selling expenses for the six months ended 30 June 2011 were $36.5 million (2010: $13.1 million) or 41% of the Group’s revenue (2010: 48%), comprised of export duties of $27.5 million (2010: $10.3 million), which represented 52% of the Group’s export sales (2010: 53%); transportation services of $8.1 million (2010: $1.7 million); and other selling expenses of $0.9 million (2010: $1.1 million). Export duty rates increased from the beginning of the period by 40%, from $317.5 per tonne to $445.1 per tonne reflecting the increase in crude oil prices.

Administrative expenses totalled $8.7 million (2010: $7.0 million) amounting to 10% of the Group’s revenues (2010: 26%). The change is primarily attributable to an increase in salaries and consulting costs.

As a result of the above, the Group reported a profit after tax of $11.2 million compared to a loss of $8.7 million for the six months ended 30 June 2010.

It should be noted that – in accordance with IFRS – an element of foreign exchange gain has been included in the net income of the company resulting from the translation of foreign currency monetary items using the closing rate at the reporting date. A larger foreign exchange gain has been applied directly to the consolidated statement of financial position as the part of translation reserve being the result of the translation of a reporting entity’s net investment in the foreign operations.

Financial position

In April 2011, the Group issued 23,438,000 ordinary shares at a value of $146.1 million net of transaction fees to fund exploration and development activity. The cash proceeds will be used to finance drilling and infrastructure related projects in Exillon WS and Exillon TP. With the Group’s profit for the six months period of $11.2 million, the Group equity attributable to shareholders increased by $182.7 million (45%) to $590.7 million.

The Group ended the period in a strong financial position with $152.7 million of cash and cash equivalents (2010: $56.3 million) with outstanding borrowings of $48.5 million, equivalent to a net cash position of $104.2 million.

In May 2011, as part of its ongoing treasury and cash management operations, the Group purchased AAA-rated (S&P) Eurobonds issued by EBRD for a total consideration of $15.4 million. These bonds have a nominal value of RUR 410 million, annual coupon rate of 6.00%, and maturity date in February 2012.

The increase in the cost of property, plant and equipment has been driven by the drilling of wells and extensive field developments in Exillon WS, and by the strengthening of the Russian Rouble against the US Dollar.

Principal risks and uncertainties

The principal risks and uncertainties affecting the business activities of the Group are set out on pages 24 to 25 of the Directors’ Report section of the Annual Report for the year ended 31 December 2010, a copy of which is available on the Company’s website at www.exillonenergy.com. The Board continually assesses and monitors the key risks of the business. The principal risks and uncertainties that could have a material impact on the Group’s performance over the remainder of the financial year have not changed from those which are set out in the Group’s 2010 Annual Report.

In accordance with DRT 4.2.7, we summarise below the principal risks that could have a material impact on our business for the remaining six months of the year:

· The Group may be adversely affected by a substantial or extended decline in the prices for crude oil.

· The Group’s business depends on exploration and production licences issued by the Russian authorities, which could be suspended, restricted, terminated or not extended.

· Leases relating to some of the Group’s oil wells have expired, which may result in a potential inability to operate these wells.

· Fluctuations in currency exchange rates may materially and adversely affect the Group’s financial results and condition.

· The Group relies on the services of third party providers.

· Most of the crude oil produced by the Group is transported via a single pipeline system operated by an external provider.

· The Group could be subject to claims and liabilities under environmental, health, safety and other laws and regulations.

· The Group faces drilling, exploration and production risks,which may prevent it from realising profits and may result in substantial losses.

· The Group does not carry the types of insurance normally carried by a business of its size and nature.

· The Company will be subject to restrictions on foreign ownership in future.

· There are high levels of inflation in Russia.

· Russian tax law and practice are not fully developed and are subject to frequent changes.

Source www.exillonenergy.com

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