Final Results

RNS Number : 2157F

Island Oil and Gas PLC

07 October 2008

 



ISLAND OIL & GAS PLC

PRELIMINARY RESULTS FOR THE YEAR ENDED 31 JULY 2008

 
Island Oil & Gas PLC ('Island', the 'Company' or the 'Group') (LSE:IOG), today announces its preliminary results for the year ended 31 July 2008. The Board considers the period to be the most significant in Island's history, successfully completing a major transaction, strengthening the Company's financial position by discharging all bank debt, advancing operations and successfully demonstrating our business model.

FINANCIAL HIGHLIGHTS:

• Profit before tax of Stg£ 12.414 million,(year ended 31 July 2007: loss before tax Stg£ 4.998 million)

• Increase in turnover from operations of 28% to Stg£ 2.25 million (2007: Stg£ 1.76 million)

• Basic earnings per share Stg£ 0.1082 (2007: loss per share Stg£ 0.0613)

• Current cash balance: Stg£ 3.407 million

• RMB bank debt fully discharged

Irish Operations: Preparing for production, new territory; crystallising value through farm out:

Further Progress in Celtic Sea with near-term opportunity to monetise

• Successful production testing at the Schull gas field. Gas flowed at 21 million standard cubic feet per day. Suspended as a potential gas producer

• 2-D seismic survey to evaluate exploration potential and new drilling locations at Schull and Old Head

• These fields have the potential to extend the life of the Marathon - operated Kinsale facilities - thereby creating significant value for numerous parties. They also have the potential to be used as an independent gas storage facility - vital in today's energy environment

• Awarded 30% equity in the Barryroe Licensing Option, formerly known as Seven Heads Oil, which lies directly beneath the Seven Heads Gas Field and close to the Kinsale infrastructure 

• Consolidation and preliminary monetisation of Atlantic Margin Portfolio

• Execution of Asset Swap Agreement with OMV giving Island 50% and Operatorship of the Durresi Block offshore Albania and bringing OMV into Island's Killala Licence in the Irish Atlantic Margin as a 50% partner

• Supernova paid Stg£ 4.5 million to acquire a 20% equity interest in Frontier Exploration Licence 1/04 and 3.75 million shares in Island, placed at a premium to market price

• Award of Tír na nÓg Frontier Exploration Licence in the Atlantic Margin offshore Ireland to Island (Operator with 50% equity) and Supernova Energy

  International Operations: Highly profitable asset trading; new territories and licences

Highly profitable disposal of Dutch assets realises Business Model objectives

• Sale of Dutch Assets to Delta Hydrocarbons for US$ 25 million plus future overriding royalty payments based on gross production

• US$ 10 million advance of future royalties granted to Island by Delta Hydrocarbons. The consideration represents a considerable return on investment for shareholders

• Expansion into new regions and licences 

• Acquisition of an additional equity interest in the Durresi Block in offshore Albania. Agreement reached with Beach Petroleum of Australia to farm out 25% in the Durresi Block with an option to increase to 45% on a promoted basis by paying 55% of the well costs

• Exclusive option to acquire upstream and downstream assets in Moldova signed with Valiexchimp S.R.L. and to participate on a 50/50 basis for future opportunities in the Former Soviet Union

• Seven exploration permits signed in the Layounne-Tarfaya Basin in Morocco. Island will act as operator of the acreage with 40% equity

• Netherland Sewell and Associates (Houston) provided the Competent Persons' Report for San Leon Energy PLC's ('San Leon') post year end (September 2008) AIM listing. It confirms 15 onshore leads in the Tarfaya Exploration Permits with 711.3 million barrels of oil equivalent ('mmboe') best estimate, unrisked, prospective resources (192.9 mmboe net to San Leon) and high estimate, and unrisked, prospective resources of 3.8 billion barrels of oil equivalent ('boe') (1.0 billion boe net to San Leon). San Leon has a 30% equity stake in the Tarfaya Licence whilst Island is the operator with a 40% equity stake. San Leon's market capitalisation on AIM admission at 37 pence per share was Stg£ 100.04 million, with by far the largest percentage of the value being attributed to its interest in the Tarfaya acreage in Morocco

Post Year-End: Continued operational and corporate development

• Positive Moldova update, European Bank for Reconstruction and Development ('EBRD') mandate letter signed

• Appointment of Adrian Doull as a non-executive Director

• Appointment of Carl Kindinger as Chief Financial Officer

Paul Griffiths, CEO commented:

'This has been a transformational year, driven by the significant profit generated by the disposal of the Company's Dutch assets and the resultant positive rebalancing of our financial position. We see this as a validation of the Island business model; low cost entry, adding value through technical expertise and operating capability, thereby bringing forward the value of our projects whether that is by production, or through an equity solution.

The announcement by Marathon during 2008 to initiate a process to dispose of its assets offshore Ireland creates an opportunity for Island to monetise its undeveloped Celtic Sea gas fields and Atlantic Margin gas prospects adjacent to the Kinsale and Corrib infrastructure. We see these as vital assets in the regional play, both for extending production in the Celtic Sea, but also as a potential basis for an independent Irish energy storage facility.

Island has a successful development model which it has profitably applied across its portfolio, delivering considerable value to shareholders. With this model and the team we have in place, the Board can look to the future with confidence as it continues to successfully develop the global portfolio.'

Further information: 

Island Oil and Gas PLC Paul Griffiths / Karl Prenderville www.islandoilandgas.com	Tel: [phone]
Davy (NOMAD and broker) Anthony Farrell	Tel: [phone]
Landsbanki (UK broker) Simon Robinson	Tel: [phone]
College Hill (Financial PR) Paddy Blewer / Nick Elwes	Tel: [phone]

  ISLAND OIL & GAS PLC
PRELIMINARY RESULTS FOR THE YEAR ENDED 31 JULY 2008

CHAIRMAN'S STATEMENT

I am pleased to report the year under review has seen Island Oil & Gas PLC ('Island' or 'the Company') transformed through the creation of a profit of Stg£ 12.414 million. This largely results from the sale in May 2008 of one of our Dutch subsidiary companies, Island Netherlands BV, which owned the Q13a Production Lease, containing the undeveloped Amstel oil field, and the Q13b Exploration Licence which was awarded to Island in April 2008 and contains the Zaan oil discovery. Through this transaction Island has established a track record for delivering its stated business model: low cost entry; value enhancement through the application of our technical expertise and operating capability; and bringing forward the realisation of potential asset values through sale or farm out when prudent to do so.

The Board considered carefully the offer from Delta Hydrocarbons of a USD$ 35 million cash payment together with royalty payments from future Amstel production, augmented by several satellite tie-backs to the Amstel facilities, should these come on stream. The Board acted in a decisive manner taking into consideration the deteriorating financial markets and the confidence senior management had in the ability of Delta Hydrocarbons to finance and deliver its development strategy for the Amstel oil field.

As a result of this transaction, Island was able to completely discharge the outstanding RMB corporate debt facility and to create the potential for future royalty revenues from production without the need for further expensive capital investment. This was a considerable achievement for the Island executive management team and I congratulate them on delivering this important transaction for the Company and its shareholders at a time of volatile activity in the financial markets.

Island continues to seek new ground floor opportunities offshore the Netherlands where it can add value to any new licences using the tried and tested Island business model.

Celtic Sea Forward Strategy

At the beginning of the period Island tested 21 million cubic feet ('mmcf') per day of dry gas in the 57/2-3 gas appraisal well at Schull, which was the culmination of a four well Celtic Sea drilling programme spread over 2006 and 2007. This programme delivered four successful gas wells and cemented Island's position as the most successful operator offshore Ireland in recent years.

During the year under review Island has been involved in a detailed reservoir engineering study for the Old Head and Schull gas fields. We have also acquired new high resolution 2D seismic data over both gas fields. Preliminary indications are that the proven limit of the Old Head gas field may extend further to the southeast than has previously been interpreted. Information from our West Seven Heads 48/23-3 gas well has proved invaluable to the understanding of potential production behaviour for the extended area of the Old Head gas field. 

Scoping production profiles for Old Head and Schull indicate conducive conditions  for conversion to gas storage projects relatively early in field life, a situation which would materially contribute to the debate on Ireland's security of supply issue and to the provision of additional strategic gas storage capacity for Ireland. Several low risk exploration leads have also been matured in the Old Head and Schull licences.

During the year Island was also awarded the Barryroe Licensing Option, which includes a 30% stake in the undeveloped Seven Heads oil accumulations. Island has consistently maintained that the potential oil and wet gas reservoirs in the Lower Cretaceous, which have flowed light, waxy oil at rates between 1,300 and 1,600 barrels per day ('bpd'), may ultimately be developed and may contribute to prolonging the life of the Seven Heads and Kinsale infrastructure.

As part of our core area Celtic Sea strategy to 'hoover up' proven, probable and possible oil and gas accumulations around a wasting infrastructure, Island has embarked upon a reservoir modelling study in the West Seven Heads area to determine the level of gas-in-place with greater certainty in the area tested by our 48/23-3 appraisal well. Potential unperforated gas sand intervals below the main producing horizons are also being targeted by this study. The results from this work will be used by Island to pursue discussions with Marathon on a way forward to unitise interests in the West Seven Heads area tested by the 48/23-3 and 48/24-6 gas wells.

The announcement by Marathon during 2008 of the initiation of a sales process to dispose of its assets in Ireland means that Island is well-placed to avail of any near-term opportunity to realise value and consolidate its Celtic Sea assets as these have the potential to extend the projected current economic life of the Kinsale field by several years, thereby adding additional value to the infrastructure for the owners of the facilities. This objective is compatible with a desire to maintain security of supply by fully developing Ireland's indigenous gas resources in a timely manner in addition to the opportunity of increasing gas storage capacity. Island has available the 'cushion gas' required to establish a new commercially viable gas storage project in the Celtic Sea. Given the recent rise in wholesale gas prices this represents a potentially valuable asset for the Company which justifies our timely investment in our Celtic Sea drilling programme during 2006 and 2007 and puts Island in a unique position to monetise its gas assets at the earliest opportunity.

Atlantic Margin Strategy

In the Irish Atlantic Margin the Company began the longer term process of gradually monetising exploration portfolio with the sale of a 20% stake in the North Porcupine Basin Frontier Exploration Licence 1/04, containing the undeveloped Connemara oil field, to Supernova Energy, a wholly owned subsidiary of the Bluewater Group and one of the world's leading providers of floating production storage and offloading facilities for a cash consideration and an investment in Island shares at a significant premium to market price. During the year, Island has identified and developed a new Lower Cretaceous stratigraphic trap, with multi-billion barrel oil potential, in a previously over-looked area of the Licence. This is an important addition to Island's growing portfolio of prospective structures in its Atlantic Margin acreage.

Island has expanded its area under licence on the Atlantic Margin, which we consider to be a vital area for future long-term exploration activity as this region is a very much under-explored part of the 'Atlantic Basin' hydrocarbon province relative to offshore West Africa, Norway, eastern Canada, UK-Faeroes, Gulf of Mexico and Brazil, with the award of the Tír na nÓg Frontier Exploration Licence in the South Porcupine Basin. Island operates the Licence, with a 50% stake, in joint venture partnership with Supernova Energy. The Licence contains a large Triassic prospect overlain by an early Tertiary deep sea fan which is considered even at this early, immature stage in evaluation to have multi-billion barrel oil potential.

In our Rockall Basin Licence, geological and geophysical studies have identified the Kingfisher Triassic gas prospect which, together with the neighbouring multi-TCF Killala Triassic gas prospect, makes this acreage potentially even more attractive to companies wishing to exploit the proximity of these sizeable prospects to Shell's Corrib gas field development.

Our Slyne Licence also contains a sizeable Triassic oil prospect which provides Island with a balanced portfolio of Triassic oil and gas prospects in an area with a proven active hydrocarbon system.

The Atlantic Margin is a hostile deep water environment where access to deep water rigs is costly and difficult, mainly due to Ireland's poor record of drilling activity relative to other Atlantic Basin oil and gas provinces. Island's portfolio-building concept is designed to create a materially significant package of diverse exploration prospects that may prove attractive to a large multi-national oil company or utility company seeking access to new Northwest European sources of potential energy supplies. Island will seek to monetise these assets at an early stage through a sale of equity in the licence portfolio whilst retaining exposure to drilling success through a royalty arrangement on any future production revenues. 

International Expansion Strategy

Our successful track record as an operator offshore Ireland enables us to create exciting new opportunities in Northwest Africa and Central and Southeast Europe. Both are strategic regions for exploiting expanding indigenous energy markets and for the creation of new alternative gas export supplies into the lucrative west European gas market to address issues of long term security of European supply. The Island business model is to identify strategically important, energy-deficient countries and to use our proven operating capability and deal-making expertise to create: basin-dominant licence positions in under-explored regions with proven hydrocarbon systems (onshore southern Morocco); re-appraisal opportunities of oil and gas discoveries made at a time of low oil price (offshore Albania); and oil and gas field rehabilitation opportunities (Moldova).

Island has implemented this strategy during the year under review with the addition of new exploration licence interests (seven exploration permits) in southern Morocco in the Laayoune - Tarfaya Basin. This basin is prospective for Triassic and Jurassic oil and there are a number of existing discoveries in the region. In Albania we acquired OMV's and Lundin's entire interest in the offshore Durresi Block, where plans to eventually appraise the A4-1x gas/condensate discovery and deeper Jurassic and Lower Cretaceous targets, not reached in the original discovery well drilled in 1993 but oil-bearing to the west in Italian waters, are being assessed. Island has subsequently agreed farm out terms with the Australian company Beach Petroleum whereby Beach can increase its stake from 25% up to 45% in the Durresi Block by promoting Island in a well. 

We continue to make progress in Moldova towards acquiring upstream and downstream assets. Post year end Island has executed a mandate letter with the European Bank for Reconstruction and Development ('EBRD') regarding the financing of plans to increase the level of production from the Valeni oil field in Moldova. Island will be commissioning an Environmental Impact Study and a new independent Petroleum Engineer's Resources Report for the Valeni field as part of the due diligence effort required to assist with EBRD's internal process for approving the financing of the rehabilitation of the field to optimise production output.  

The Board was further strengthened with the appointment of Karl Prenderville as Commercial Director in August 2007. Post year end Adrian Doull has been appointed as a Non-executive Director and Carl Kindinger as Chief Financial Officer.

Financial Review

The Group recorded a profit before taxation and finance income and finance expense of Stg£ 13.115 million for the current year compared to a loss of Stg£ 4.445 million in the year ended 31 July 2007. The profit relates mainly to the sale of Island Netherlands BV, a wholly owned subsidiary, and to the sale of a 10% interest in the Amstel oil field development in the Netherlands to Encore Oil. In addition to the cash sales price of US$ 25 million for the sale of Island Netherlands B.V. to Delta Hydrocarbons, Island also received a US$10 million advance on future royalty payments. Island also received a cash payment from Encore of Stg£ 1.5 million for the sale of a 10% interest in the Amstel oil field development.

Supernova Energy Ireland BV ('Supernova') bought 3,750,000 Ordinary shares in Island at an issue price of Stg£ 0.60 in December 2007. At the same time Supernova acquired a 10% interest in Frontier Exploration Licence 1/04 in the North Porcupine Basin, in the prospective Atlantic Margin off the west coast of Ireland, and an option to acquire an additional 10% interest for a cash price of Stg£2.25 million. Supernova exercised their option in March 2008 by paying Island Stg£ 2.25 million in cash.

Gross revenue from our interest in the Seven Heads gas field was Stg£ 2.251 million compared to 

Stg£ 1.762 million in the previous year. Gas revenue improved for the third year in succession and represented a 28% increase year on year.

Cost of sales at Stg£ 1.143 million, compared to Stg£ 0.902 million, represents a 27% increase over the previous accounting year and was mainly related to pipeline maintenance work during this year. Gross profit of Stg£ 1.108 million compared to Stg£ 0.860 million in the previous year. The field has produced at rates in excess of 10 million standard cubic feet ('mmscf') per day. Although it is anticipated that production next year will reduce, recent high prices will continue and revenue may be maintained close to the current level. Estimated gross remaining gas resources for the Seven Heads gas field, based on the operator, Marathon's, estimates from 1 January 2008, have been revised upwards to 9.3 billion cubic feet ('bcf') or 1.163 bcf net to Island , up from 8.6 bcf or 1.075 bcf net to Island based on the previous estimates of Marathon.

Administration costs were Stg£ 2.306 million compared to Stg£ 1.174 million in the previous year, representing a 96% increase year on year. This reflects increased staffing and larger premises to progress our current portfolio of near-development assets generated by the highly successful 2006 and 2007 drilling programmes. A significant contribution to Island's overheads is made by the Company's joint venture partners in our various licences of which Island is the operator. 

In October 2007, Island secured an additional Stg£ 4.5 million short term loan facility ('facility') from RMB Resources ('RMB') increasing the overall debt facility to Stg£ 12 million. In December 2007 RMB extended the loan repayment date and at the same time surrendered their right to 5,759,631 warrants at an exercise price of Stg£ 0.7813 per ordinary share in exchange for 1,000,000 fully paid up shares. The retained earnings reserve was increased by Stg£ 0.261 million to reflect the net effect of surrendering the warrants and issuing the fully paid up shares. In May 2008 Island repaid in full the Stg£ 12 million short term debt facility with RMB Resources.

RMB have provided a Stg£ 5 million project debt facility none of which has been utilised to date.

Cash balances at the year end amounted to Stg£ 3.407 million. It is anticipated that farmout and asset sale transactions will continue to be generated and these may result in further cash payments to the Company over the next twelve months.

There were no major write-offs during the year.

The financial results for the current accounting year have been prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted by the EU. In accordance with IFRS6, 'Exploration for and Evaluation of Mineral Resources', costs incurred prior to the award of exploration licences have not been capitalised. Stg£ 0.129 million in the current year and Stg£ 0.152 million in the prior year has been written off in accordance with IFRS6.

Also in accordance with International Accounting Standards ('IAS') 23 'Borrowing Costs', borrowing costs directly attributable to the acquisition and construction of qualifying assets have been added to the cost of these assets. This amounted to Stg£ 0.668 million in the current year. Stg£ 0.338 million of borrowing costs in the prior year have been capitalised in accordance with IAS 23.

In accordance with IFRS 2 'Share based payment' share options awarded during the year to key personnel have been independently valued. The fair value of share options granted during the year is Stg£ 0.530 million compared to Stg£ 0.315 million in the previous year.

Post year end the appointment of Carl Kindinger as Chief Financial Officer will set in motion a fundamental review of administration, staff and consultant costs to ensure that in the prevailing market conditions that Island's shareholders are receiving full value for money spent on administrative overhead in relation to the efficient management of it's licences and the execution of it's work programmes.

Outlook and Prospects

The sale of Island's Dutch assets to Delta Hydrocarbons for cash and royalties has brought forward the potential for generating cash flow from production revenues. Post year end, the execution of a mandate letter with the European Bank for Reconstruction and Development enhances our ability to close and finance the transaction with Valiexchimp to acquire downstream and upstream assets in Moldova which could generate additional cash flow for Island from producing properties in 2009.

Having engineered a massive upside from the sale of its Dutch assets during 2008 Island is now focused on monetising its Celtic Sea assets, either through an asset sale for cash and future royalties, or through a part equity sale to finance the development of the Old Head and/or Schull satellite gas fields. The Marathon sales process creates the opportunity for Island to demonstrate to a wider audience the value of our Celtic Sea assets, in potentially maintaining and extending the life of the Kinsale facilities and to contributing, therefore, to the security of supply and increased strategic gas storage capacity issues.

In the Atlantic Margin our portfolio of large oil and gas prospects is attracting widespread industry attention as we seek to crystallise the value of these assets in a timely manner through farmout and asset sales. The exploration, appraisal and development cycle in the deep water Atlantic Margin hydrocarbon province is spread out over an extended period. Therefore Island must consider its options to monetise early whilst retaining its exposure to exploration success and future cash flow through a royalty arrangement. Cash from any successful farmout and equity sale transaction will be prudently managed to take into account the new financial climate that will result from a resolution of the 'Banking Crisis'. Investment in producing assets and oil and gas field rehabilitation projects will be a key focus of the Company to increase cash flow from oil and gas operations.

Gaining revenue from some of our international exploration and appraisal assets in Morocco and Albania will also be a key consideration for the Company as we attempt to recreate our highly successful Amstel transaction.

Particular attention will be given by the Board to cost savings and effective use of personnel resources as we enter a period of volatility in the world's financial markets. Oil prices are likely to remain high relative to historical prices, whilst forward gas prices have strengthened considerably over the past twelve months and we believe will remain strong in the near future given the security of supply issues that Europe is now facing. These factors will drive oil and gas transactions between Exploration and Production companies as they seek access to a dwindling number of mature oil and gas projects. Island is well-placed with its large portfolio of oil and gas assets to take advantage of this trend.

On behalf of the Board of Directors I would like to thank our shareholders for your continued support, loyalty and understanding in what are very difficult times for the World's financial system. I look forward to reporting on the Company's achievements during the year under review at the next Annual General Meeting. 

Consolidated Income Statement	Year Ended	Year Ended
For the year ended 31 July 2008	31 July 2008	31July 2007
	Stg£'000	Stg£'000
		(As restated)
Revenue	2,251	1,762
Cost of sales	(1,143)	(902)
Gross profit	1,108	860
Disposal of subsidiary	11,001	-
Disposal of licence	3,465	-
Administration expenses	(2,306)	(1,174)
Exploration costs written off	(153)	(4,537)
Other income	-	401
Operating profit/(loss)	13,115	(4,450)
Finance income	115	181
Finance expense	(816)	(729)
Profit/(loss) before taxation	12,414	(4,998)
Income tax expense	-	-
Profit/(loss) for the year attributable to equity holders of the parent	12,414	(4,998)
Earnings/(loss) per share (Stg£)
Basic	0.1082	(0.0613)
Diluted	0.1082	(0.0613)

Consolidated Balance Sheet	Year Ended	Year Ended
At 31 July 2008	31 July 2008	31July 2007
	Stg£'000	Stg£'000
		(As restated)
Assets
Non current assets
Intangible exploration and evaluation assets	61,212	55,096
Property, plant and equipment	1,403	1,761
	62,615	56,857
Current assets
Other receivables	1,159	2,612
Cash and cash equivalents	3,407	11,602
	4,566	14,214
Total assets	67,181	71,071
movement in finance debtor
Equity and liabilities
Equity attributable to equity holders of the parent
Called up share capital	798	762
Share premium	51,167	48,571
Shares to be issued	238	-
Share warrants reserve	-	447
Share based payment reserve	1,185	655
Unrealised revenue reserve	47	47
Retained earnings	6,705	(5,971)
Total equity	60,140	44,511
Non current liabilities
Loan	5,178	-
Provisions	704	675
	5,882	675
Current liabilities
Trade and other payables	1,159	18,385
Interest bearing loans and borrowings	-	7,500
	1,159	25,885
movement in finance creditor
Total liabilities	7,041	26,560
Total equity and liabilities	67,1811	71,071

Consolidated Cashflow Statement	Year Ended	Year Ended
For the year ended 31 July 2008	31 July 2008	31July 2007
	Stg£'000	Stg£'000
		(As restated)
Cash flows from operating activities
Profit/(loss) before taxation	12,414	(4,998)
Finance income	(115)	(181)
Finance expense	816	729
Operating profit/(loss)	13,115	(4,450)
Adjusted for:
Depreciation	402	396
Gain on disposal of licence	(3,465)	-
Gain on disposal of subsidiary	(11,001)	-
Exploration costs written off	153	4,537
Cost of share awards	530	315
Foreign exchange loss/(gain)	156	(44)
	(110)	754
Decrease/(increase) in trade and other receivables	1,458	(156)
(Decrease)/increase in trade and other payables	881	307
Net cash from operating activities	2,229	905
Cash flows from investing activities
Disposal of oil and gas assets	3,764	3,617
Disposal of subsidiary	12,654	-
Expenditure on intangible exploration and evaluation assets	(26,818)	(41,366)
Contribution from partners for exploration and evaluation assets	1,042	16,742
Purchase of property, plant and equipment	(44)	(10)
Finance income	56	181
Net cash from investing activities	(9,346)	(20,836)
Cash flows from financing activities
Loan	5,178	-
Net proceeds from issue of share capital	2,243	19,142
Debt arrangement fees	(344)	(590)
Drawdown of bank loan	4,500	7,500
Repayment of bank loan	(12,000)	-
Finance expenses	(655)	(590)
Net cash from by financing activities	(1,078)	25,462
Net (decrease)/increase in cash and cash equivalents	(8,195)	5,531
Cash and cash equivalents at beginning of year	11,602	6,071
Cash and cash equivalents at end of year	3,407	11,602

 

END

 

 

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