Exillon Energy: Preliminary Unaudited Results for the Year ended 31 December 2012
Exillon Energy plc, a London listed independent oil producer with assets in two oil-rich regions of northern Russia, Timan-Pechora and West Siberia, today issues its preliminary unaudited results for the year ended 31 December 2012.
From the Chief Executive
· Production up 45%, exceeding 16,000 bpd in December
· EBITDA up 136% to US$46.1 million (up from US$19.5 million in 2011)
· Net profit of US$12.1 million (up from a net loss of US$10.4 million in 2011)
· Completed oil treatment and power generation facilities in both Exillon TP and Exillon WS
· Commissioned own entry point into Transneft pipeline network in Exillon WS increasing EBITDA per barrel in H2 2012
Mark Martin, Chief Executive, said:
“Exillon made excellent operational and financial progress during a very busy 2012. Our drilling programme delivered annual production growth of 45%, and we also expect soon to announce an updated reserves report. We have completed a number of one off infrastructure projects in ETP and EWS which have materially increased our profitability per barrel.
Financially, we have a strong balance sheet with US$127.9 million of cash (as of yesterday), EBITDA up over 130% and a move into net profit. We will accelerate our development strategy in 2013 and realise further value for shareholders through ongoing growth in production, EBITDA and reserves.”
Dear Shareholders,
Exillon has enjoyed a very successful 2012, increasing oil production by 45% from 3.24 million to 4.69 million barrels. In order to build on this success in 2013 we intend to accelerate our drilling plans, targeting six new wells in 2013 in ETP from two well pads, and approximately fifteen new wells in EWS from four well pads.
Financial Performance
Our EBITDA increased 136% from US$19.5 million to US$46.1 million, with a net profit of US$12.1 million (compared to a net loss of US$10.4 million in 2011). Our revenue increased from US$203.0 million to US$301.9 million and netback (which we define as revenue less Mineral Extraction Tax, Export Duty and Transneft charges) rose 63% from US$63.6 million to US$103.5 million.
This strong growth in EBITDA was a result of our continuing investment in surface infrastructure, our ongoing drilling programme and slightly higher oil prices. During 2012 we completed our oil treatment and power generation facilities in both Exillon TP and Exillon WS, and in July we commissioned our own entry point into the Transneft pipeline network in Exillon WS. The completion of this entry point improved our EBITDA per barrel in the second half of 2012. It is also an important part of our strategy of owning our own infrastructure and controlling our sales routes.
For the full year 2012 our EBITDA was equivalent to US$9.9 / bbl compared to US$6.1 / bbl in 2011. EBITDA per barrel in H2 2012 was US$11.8 / bbl compared to US$7.5/ bbl in H1 2012. This continuing growth was a function of both the improvements to our infrastructure and to economies of scale as production increased.
75% of our oil production in 2012 was from Exillon WS and 25% from Exillon TP. Both units were profitable in 2012 although Exillon WS is currently larger and enjoys greater economies of scale than Exillon TP. EBITDA per barrel on an operating level (before central costs) was US$13.2 / bbl in Exillon WS (2011: US$9.3 / bbl) and US$9.5 / bbl in Exillon TP (2011: US$7.3 / bbl).
Our balance sheet remains strong with US$121.0 million of cash and cash equivalents as at 31 December 2012. We have a term loan from Credit Suisse of US$100 million which matures in 2017. This is our only debt. As at 31 December 2012 debt was US$100.2 million, so our net cash position at year end was US$20.8 million.
As at 7th March 2013 our cash balance had increased to US$127.9 million.
Operational Excellence
We have seen excellent results from our drilling programme this year. The greatest success was in Exillon WS from Pad 5 in the North East of our EWS I field. The high natural flow rates, achieved without any well stimulation, demonstrate that the newly developed areas of this reservoir are thick and of high quality. Pad 7, which is adjacent to Pad 5, will be developed during 2013.
All of our new wells are now being drilled at a 60 degree angle, exposing double the net pay compared to vertical wells. During the year our completion and cementing procedures were improved, and we have substantially increased our water injection rates to sustain the productivity of our fields.
Investor Relations and Corporate
To reinforce our investor relations efforts we appointed Investec to act as joint broker alongside Mirabaud. We also listed our shares on the Warsaw Stock Exchange to broaden the range of investors who are able to buy Exillon.
We have canvassed the views of our major investors about disclosure of production data and the consensus was that monthly disclosure was excessive. We will therefore publish quarterly production data in 2013.
During 2012 we also made progress in controlling our central overhead costs. For example we have reduced our financial audit costs by 23%.
Acquisitions and Reserves
We made two acquisitions in 2012, both in Timan Pechora. In January we announced the acquisition of the ETP VII licence which increased our contiguous licence area to 344km2. In September – November 2012 we have signed a number of preliminary agreements to process the acquisition of subsoil licences and certain other non-current assets of VenlockNeft LLC (“Venlock”) for a total consideration of US$2.7 million. This will add a further 1,075 km² of prospective areas, more than quadrupling the total area of Exillon TP to 1,419 km². We will continue to consider contiguous acquisitions in both Exillon WS and Exillon TP if and when these become available.
Our strategy is to invest in the development of our oil fields in order to increase 1) production 2) EBITDA and 3) reserves. In 2012 our oil production grew 45% and our EBITDA grew 136%. The third component of our strategy will be assessed by the independent reserves audit of our assets. This is currently under preparation by Miller & Lents in Houston, and we expect to release it shortly.
Mark Martin
Chief Executive Officer
OPERATIONAL REVIEW
Drilling
In 2012 we drilled 16 wells (twelve producers and four water injection wells). Details of this drilling programme were announced throughout 2012 via RNS, and all announcements can be found on www.exillonenergy.com.
Exillon TP
Exillon TP produced 1,185,557 bbl and generating revenue of US$51.9 million.
We successfully completed an oil processing facility and power generation facilities.
Exillon WS
Exillon WS produced 3,507,045 bbl and generated revenue of US$250.0 million.
In February 2010, we began construction of a Transneft oil terminal, which was successfully completed in 2012 and commissioned in July 2012.
Financial
US dollars account for approximately 83% of our cash with the remaining 17% held in Russian Roubles.
Capital expenditure for the period was US$86.5 million (2011: US$97.3 million). Of total capital expenditure, US$30.7 million was attributable to drilling (2011: US$22.9 million), US$45.7 million to infrastructure (2011: US$66.7 million), and US$10.1 million to seismic data acquisition and interpretation (2011: US$6.4 million). The infrastructure spend included completion of Exillon’s own entry point into the Transneft pipeline network, completion of an oil treatment and power generation facilities in both Exillon TP and Exillon WS, construction of infield camps, roads and pipelines.
FINANCIAL REVIEW
The Consolidated Financial Information and notes which follow should be read in conjunction with this review which has been included to assist in the understanding of our financial position as at 31 December 2012.
Summary
We maintained a strong financial position in 2012 due to rising production levels, improved efficiency and replacement of our existing loan facility.
EBITDA increased by 136% from US$19.5 million in 2011 to US$46.1 million in 2012.
Net profit for the year, which includes depreciation costs, foreign exchange translation effects, loss on write-off of non-current assets and share based compensation costs amounted to US$12.1 million compared to net loss of US$10.4 million in 2011.
Revenue
Our revenue for the year ended 31 December 2012 increased by 49% year-on-year, reaching US$301.9 million (2011: US$203.0 million), of which US$166.0 million or 55% came from export sales of crude oil and US$135.9 million or 45% came from domestic sales of crude oil. This increase in revenue is attributable to:
· An increase in production leading to a 47% increase in sales from 3,170,715 bbl in 2011 to 4,651,049 bbl; and
· An increase in average commodity prices: we achieved an average oil price of US$105/bbl (2011: US$102 / bbl) for export sales and US$44 / bbl (2011: US$41 / bbl) for domestic sales.
Operating Results
Operating costs excluding depreciation, depletion and amortisation increased to US$127.6 million (2011: US$80.4 million) following an increase in production of 45% to 4,692,602 bbl (2011: 3,242,503 bbl). The difference between the production volumes and sales volumes is due to the change in the oil inventory balance during the year. The increase in production costs is mainly related to the growth of mineral extraction tax from US$64.5 million in 2011 to US$99.8 million in 2012, as a result of both higher production volumes and increased average commodity prices in 2012 used in the calculation of the tax. Another cost driver leading to the growth in other taxes incurred was the increased rates of gas flaring penalties introduced in 2012.
Depreciation and depletion costs primarily relate to the depreciation of proved and probable reserves and other production and non-production assets. In 2012, these costs totalled US$20.5 million (2011: US$13.8 million). The increase in DD&A costs is driven by higher production volumes and by bringing into operation infield facilities once their construction was completed.
Selling expenses for 2012 of US$106.8 million (2011: US$84.1 million) is comprised of export duties of US$83.8 million (2011: US$65.6 million), transportation services of US$22.0 million (2011: US$16.9 million) and other selling expenses of US$1.0 million (2011: US$1.6 million). Transportation services include services provided by Transneft and transportation services from oil field to oil filling station. In 2012, the export duty rate fluctuated within the range from US$336.6 per tonne to US$460.7 per tonne following the changes in crude oil prices. Export duty is reviewed by the Russian government on a monthly basis and is based on a formula that takes into account the average Urals price prevailing in the market between the 15th and 15th of the two months prior to the month of delivering the crude.
Administrative expenses (excluding share-based compensation expenses, share issuance costs and depreciation and amortisation) totalled US$20.8 million (2011: US$18.6 million). In 2012, an increase in headcount led to an ensuing increase in salaries, while savings were achieved in business trip and office rent expenses.
In 2012, interest income increased to US$2.9 million (2011: US$1.3 million) resulting from surplus cash being held on short-term deposits and VTB credit-linked deposits.
In 2012, income tax expense of US$5.4 million (2011: US$2.9 million) comprised an income tax charge of US$6.9 million (2011: US$2.5 million) and a deferred tax credit of US$1.5 million (2011: deferred tax charge of US$0.4 million). The basic corporate income tax rate in the Russian Federation is 20%. The reduced rate of 17% was applied to Exillon WS in 2012 in compliance with local tax legislation (2011: 16%).
It should be noted that – in accordance with IFRS – a foreign exchange gain of US$3.4 million has been included in our net profit arising from the revaluation of foreign currency monetary items (cash and cash equivalents, accounts receivable and payable, other assets) using the closing rate at the reporting date. A larger foreign exchange gain of US$24.8 million has been applied directly to the consolidated statement of financial position as the part of translation reserve.
As a result of the above, we reported a profit after tax of US$12.1 million compared to a loss of US$10.4 million for the year ended 31 December 2011.
Financial Position
In February 2012 we received proceeds of US$14.3 million comprising the nominal value and accrued interest in relation to Eurobonds issued by EBRD.
In March 2012 we replaced our existing US$50 million loan facility with a US$100 million facility with a LIBOR plus 6% interest rate and a term of 5 years. The previous loan had an interest rate of LIBOR plus 7% and a term of 3.5 years.
We ended the period in a strong financial position with US$121.0 million of cash and cash equivalents (2011: US$117.6 million) with outstanding borrowings of US$100.2 million (2011: US$49.0 million), equivalent to a net cash position of US$20.8 million (2011: US$68.6 million).
The increase in the cost of property, plant and equipment has been driven by the drilling of wells and further development of field infrastructure in Exillon WS and the launch of drilling and extensive field development in Exillon TP.
Cash Flow
Net cash generated from operating activities in 2012 amounted to US$36.1 million, compared to a US$32.4 million inflow in 2011. Operating cash flow before working capital changes amounted to the inflow of US$46.8 million in 2012 compared to the inflow of US$19.4 million in 2011. The increase is driven by higher production and sales volumes. It was also positively affected by payment terms for tax payments to the Russian Government, offset by the timing gap for taxes receivable; a decrease in trade and other receivables due to the implementation of a prepayment scheme dealing with customers and an increase in interest income received from holding our cash surplus on deposits. The negative impact relates to the decrease in trade and other payables following payments to contractors for drilling work and the construction of infield infrastructure, an increase in inventory balances and an increase in income tax paid due to the further expansion of our operations in 2012.
Capital expenditure during the year was US$86.5 million (2011: US$97.3 million), including the drilling of wells and the development of infield infrastructure. During the year, we paid US$5.9 million of loan interest (2011: US$3.7 million), which was capitalised in full (2011: US$2.7 million). In September – November 2012 the Group has signed a number of preliminary agreements to process the acquisition of subsoil licences and certain other non-current assets of VenlockNeft LLC (“Venlock”) for a total consideration of US$2.7 million.
Cash flow from financing activities was US$47.3 million (2011: US$145.1 million). The inflow of US$49.8 million relates to the net proceeds from increasing the loan facility. The outflow of US$2.5 million represents the repayment of the loan principal amount before we replaced the loan facility.
